The prices we pay for drugs today send signals to investors and innovator

NOTHING ELSE MATTERS

I do not know how to fix the US healthcare system, but I do know it’s full of people working to make the world a better place. A career in the healthcare industry is different than a career in other industries. People who choose a career in the healthcare industry do so for a reason—and that reason is typically personal. That reason stays in the back of our mind and drives the path we take and the work we do. 

I have been fortunate to hear different perspectives from people in the industry:  innovators, investors, researchers, decision makers, patients, providers, value assessors, administrators, caregivers, etc. The perspectives differ. The goals differ. But one thing is the same—an underlying drive to make a difference. 

In my current job, I celebrate healthcare innovations. I have felt conflicted with this. Because although I fully believe healthcare innovations are something to celebrate, I also understand the perspective that prices can be “high” and opportunity costs exist.

As I was reflecting on those tradeoffs last week, I saw a post on LinkedIn about an investor panel at a Glioblastoma Drug Development Summit. My chest tightened and my eyes watered. 

That’s because my mother-in-law has glioblastoma, and this is a particularly hard week for our family. This week marks 12 months since she was diagnosed with a disease that has a median survival of 12 months for unmethylated patients. 

Glioblastoma is a terrible cancer with very few treatment options. Here are quotes from a recent BioSpace article on glioblastoma: “the past two decades have been a wasteland of clinical failures” and “there have been no truly successful new therapeutics for the indication since Merck’s temozolomide was approved in 1999”.

My mother-in-law battling a condition that so badly needs innovation is my reason why I do what I do. It’s currently the thing that stays in the back of my mind and drives the path I take and the work I do.

I saw that LinkedIn post and I was filled with gratitude for the innovators and investors who have not given up on glioblastoma despite the “decades of failure” and who are willing to take an enormous risk in an effort to make the world a better place.

Why would someone invest in something with such a low probability of success? The answer is simple. First, the returns generated by the rare few that do get approved must be high enough to cover the losses of the majority that do not get approved. This isn’t specific to glioblastoma but across the entire ecosystem. The few drugs that get approved and can be commercialized must make a lot of money over their patent protection period. Without a high return, the investment risk becomes too large. Second, the market has previously shown its willingness to pay for innovations, which then sends signals to investors and innovators to support more research and development and more innovation. 

Drug prices can be “high”, especially over the patent protection period. But these high prices provide high returns (for the select drugs that get approved and are commercial successes)—providing justification and funding for future high-risk investments in healthcare.

SAD BUT TRUE

Not everything that counts can be counted. I said this at the end of a podcast episode we released last week. Although I am an economic modeler and enjoy living behind a computer and in an Excel spreadsheet, we must remember that healthcare innovations impact real people with real experiences and we must keep them in mind and at the forefront of decision making. 

I had the pleasure of talking with Holly Krasa, CEO of Blue Persimmon Group and board member of the Schizophrenia & Psychosis Action Alliance. I encourage you all to listen to the episode during which we talked about the experience of people living with schizophrenia and the importance of innovation in schizophrenia. If you only have a few minutes, please listen to minutes 13:00 to 17:42. 

Although we do briefly discuss our previous CPE Exclusive, that is not the point of the podcast. The point is that we need to listen to the experience of the people living with a condition and the people working to help them. The point is that we need innovation, and that healthcare innovation is worth celebrating because it can change lives. 

It’s true that a single healthcare innovation will not address all the challenges faced by people living with a condition, but the prices that are paid for innovations send signals to investors and innovators and inform subsequent priorities and decisions.

TURN THE PAGE

Dr. Joey Mattingly and I published a paper with an evidence-based approach to estimate a drug’s price post-loss of exclusivity. Our paper titled “Estimating a Drug’s Price After Loss of Exclusivity as a Function of its Cost of Goods Sold” was published in Applied Health Economics and Health Policy last month. 

Unless you are new here, you know I advocate for incorporating future genericization in economic models. However, to do that, we need evidence on what the price of the drug might be after loss of exclusivity. This paper fills this evidence gap.

In this project, we first tried to figure out how generic drugs are priced. 

Through stakeholder engagement, we discovered that the prices of generic drugs are typically a function of the cost of goods sold rather than a function of the branded drug’s price. The first filer of the generic small molecule drug may price their generic product as a function of the price of the branded drug during the brief duopoly period, but once subsequent filers enter, the cost of goods sold (with a relative profit margin) is the primary consideration. 

After reviewing literature and manufacturer financial statements, we discovered that an average profit margin for a generic small molecule drug is around 50%, so on average, a generic drug might be priced as two times its cost of goods sold. 

From this, we could estimate the price of a drug after exclusivity as two times its cost of goods sold…if only we knew how much the cost of goods sold were. 

To estimate the cost of goods sold, which we heard from stakeholders could vary by drug form, we used the extremely transparent and freely available price list from the Mark Cuban Cost Plus Drug Company. We assumed the manufacturer price from the price list would be two times its cost of goods sold (based on a 50% profit margin), so we divided the manufacturer price by two to estimate the cost of goods sold for each drug form. Check out Table 2 in our paper for estimates of the cost of goods sold for available drug forms. 

Finally, we wanted to test an approach of estimating a post-loss of exclusivity price using our estimates of the cost of goods sold and assuming a 50% profit margin. For a few selected drugs, we estimated the generic price using this approach and compared our estimates to real-world generic prices of those drugs. For the case studies we looked at, our estimates approximated the real-world price quite well.   

Importantly, using estimates of cost of goods sold that vary by drug form can capture drug form-specific attributes that influence pricing but would not be detected if a uniform discount off the branded price was used to estimate the price post-loss of exclusivity. 

Read the full paper for more detail and discussion around how to implement the approach and the importance of assigning and assessing uncertainty around these parameters just as we do with other model parameters.