Drug Sector Needs Better Oversight

Awash in negative headlines, public condemnation and government scrutiny, the pharmaceutical industry faces a public relations problem that, left untreated, could bring new regulations or sanctions either from governments or the courts. At the same time, though, the recent scandals over price gouging could offer an opportunity for responsible, research-based companies to distance themselves from the profiteers.

As a physician who trained in the 1990s, I am in awe of the recent breakthroughs. Immuno-oncology drugs like Keytruda (pembrolizumab) and Opdivo (nivolumab) offer hope for patients with previously untreatable cancers. Entresto (sacubitril/valsartan) – the first novel treatment in over a decade for congestive heart failure, a condition deadlier than most cancers – was approved this year.  

At the same time, some in the industry have been seeking to tackle the image problems. Overeager sales representatives are being reined in. Financial ties to physicians and clinical trial data are being disclosed. The main industry bodies in the United States, PhRMA and BIO, disowned Turing Pharmaceuticals, the company behind the notorious 5,000% price increase for Daraprim.

But more needs to be done and, in my opinion, the challenge is that most large companies are still being ruled by executives who are laser-focused on quarterly numbers and short-term profit and lawyers who instinctively prefer established business strategy because its risks are known and manageable. This combination creates a blind spot for the coming tectonic shift in the healthcare system from fee-for-service to pay-for-value. This shift will radically change how healthcare is organized and financed over the next decade, and the industry will only get to help shape its future operating environment if it is seen as a responsible partner. 

An important step would be for the “research-based” companies, that truly innovate, to distance themselves from companies that operate like hedge funds, seeking out investment opportunities rather than focusing on research. The hedge fund business model focuses on generic but essential drugs that are only made by one or two manufacturers, because the market is so small, or because they are costly to manufacture relative to their price, such as some intravenous drugs.

Companies buy up those assets and then raise prices substantially. Customers have little choice but to accept the new prices, because those drugs are essential and because the weak manufacturing base makes finding alternative suppliers hard. 

Even notoriously skeptical institutions have come to accept the high price of newly developed drugs. The U.K.’s health technology assessment body, the National Institute for Health Care and Excellence, endorsed Sovaldi, albeit at a discount to the $1,000 per pill list price. The feared Institute for Clinical and Economic Review, an independent evaluation organization in the United States, ruled Entresto’s price about right.

It would not be difficult for the research-based companies to distance themselves from the likes of Valeant, which spends about 5% of its revenue on R&D, compared to a typical 20% for the research-based companies. Their problem, however, is that they exploit similar, though less radical, pricing strategies for their own established products, just more quietly. 

A solution could be for the research-based companies to adopt a voluntary code of conduct that would limit price increases on established products to inflation or to the cost of inputs. The short-term hit to profits would help protect the industry from getting thrown in with “hedge-fund pharma.” 

Moreover, the code of conduct would signal that its subscribers want to be rewarded for improving patients’ lives with innovative products, not for using market power for short-term gains. 

This would be a small step for multi-billion dollar companies, but a giant leap towards becoming a respected partner when decisions about the future of healthcare are being made.

Soeren Mattke, M.D., is a senior scientist at the the RAND Corp. and the managing director, RAND Health Advisory Services. A version of this article originally appeared at The Health Care Blog.