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America's drug problem

Chasing treatments and gouging patients in a bloated, capitalist healthcare system.

Tim Ellis first noticed something was wrong while on a treadmill. This was back in 2008, when he was 42, still living in Los Angeles and had maybe half the tattoos he has now. He'd always been athletic, and jogging was a regular part of his life.

Credit: Travis Huggett

On that day, though, his right leg “just wasn't working right,” he says, so he got off the machine, stretched, rested for a few minutes and tried again. Same result—a vague deadness in his limb. Thinking it a pulled muscle, he gave up and went home.

He failed several more jogging attempts before seeking help and beginning an anxious, circular trip through America's healthcare providers: an orthopedist suggested back surgery; physical therapy and acupuncture brought no relief; his general physician told him to see a chiropractor; the chiropractor diagnosed a neurological condition and sent him back to the physician; the physician dismissed the chiropractor as a quack.

This took close to a year. “By then I was starting to limp a little bit,” Ellis says, and becoming increasingly worried. He demanded his physician send him to a specialist, and that got the ball rolling in the right direction. After a trio of spinal MRIs and a handful of reflex tests, he was officially diagnosed with multiple sclerosis (MS) on June 21, 2010. He had the date tattooed inside a badge-and-string bracelet on his right wrist, the string symbolizing his hope for a cure: he imagines one day figuratively snipping it, and his MS will fall away, into his past.

Today, he and his wife live in New York City where they run their wholesale apparel sales agency, racks of jeans and designer shirts filling the space. His MS treatment began with Copaxone (glatiramer acetate; Teva), but in 2013 he switched to Tecfidera (dimethyl fumarate; Biogen). The drug has a 2016 monthly wholesale acquisition cost (WAC) of $6,315, but each month he pays just $35 on top of his premiums. Of the two drugs Ellis has tried, he finds Tecfidera more effective. “Here's what I know for sure,” he tells me, “[my disease] progressed more in the first three years than it did in the last three.”

Tim Ellis is a win for the American healthcare system. Tecfidera has slowed his disease, and insurance covers all but a manageable co-pay. Biogen has given this man his life back.

Except this is not always what happens. Even patients with insurance are too often facing financial hardship or bankruptcy in the face of spiraling costs, as private insurers have consistently passed their own rising costs to the US consumer through higher premiums, deductibles and co-pays.

A devastating diagnosis

Jill (last name withheld) was diagnosed with lupus at age 13; it has nearly wrecked her twice—the first time in her sophomore year at Ohio State University, when the joint pain, stiffness and headaches she'd gotten familiar with in high school advanced into lupus cerebritis.

“I started repeating conversations,” she says. “I was having seizures and hallucinations. People thought maybe I was doing drugs. They were calling my mom and very concerned.”

She went to a rheumatologist, and positron emission tomography (PET) scans showed the cerebritis. Her mother came to stay in Ohio until Jill was strong enough to travel home to New Jersey, where she underwent “the whole IV cytotoxin protocol for lupus.”

She recovered fully after three years and enrolled in a nursing school. Upon graduation, she entered the medical field and had about 15 years of relative good health and manageable symptoms.

But in 2012, she finished a day of work, went home and “doubled over in pain,” she says. She went to the local emergency room, where they diagnosed her with acute pancreatitis—a complication of lupus—and transferred her to New York Beth Israel, “one of the only places at the time that would do the surgery” of placing a stent in her pancreas, Jill says. She spent weeks in the hospital.

The date of Tim Ellis's MS diagnosis, tattooed on his wrist. Credit: Travis Huggett

New York Beth Israel was an out-of-network facility, and when Jill was handed her portion of the bill, she knew she was in trouble. It wasn't long before she fell behind on her payments, and the hospital turned her over to collections. In summer 2013, she filed for Chapter 7 protection. Court filings show she owed more than $67,000—the great majority described as “medical bills,” to hospitals, radiologists, anesthesia consultants, and medical groups—against her assets, by then down to $14,000, including her car.

Jill had another lupus flare in March 2015. She began to forget conversations, couldn't recall how to use her smartphone. She gave up working after she finished her shift at an assisted-living facility and then drove around for an hour, not knowing “where I was going, how to get home,” she says. “I was hysterical; it was terrifying.”

She waited two months for an appointment with a sought-after specialist at the University of Pennsylvania, but by then she “had kind of unraveled,” she says, and anyway, in July 2015 she had a lupus-related stroke, which put her back in the hospital.

I met her about a year later, at her quiet, clean apartment in rural New Jersey. She's 41, and is struggling with cognition issues, related to both the lupus flare and the stroke. She has filed for disability payments through Social Security, including back pay for work time lost, but has been denied twice, the government's response admitting her lupus and pain, but stating she can “move about and use her limbs” and therefore should be able to find work. She has appealed again.

Octagam (immune globulin intravenous, human), made by Octapharma, is her current treatment, which she receives every three weeks. The drug cost is covered through the Consolidated Omnibus Budget Reconciliation Act (COBRA), which allows a limited-time continuation of insurance after job loss, and her sister is paying the premiums. Her COBRA expires at the end of November, though, at which point she'll apply for Medicaid. While her application processes, she will find herself in limbo, with no insurance and no Medicaid. Without coverage, her infusion of Octagam bills at $7,500. When I ask her if her debts are piling up again, she says yes.

This is not a win for the American healthcare system.

Tim Ellis and Jill illustrate the stark dichotomy of healthcare in America. For some, there are affordable, seemingly miraculous drugs that return a patient to a full life. For others—even those with insurance—it's a frustrating, labyrinthian system that financially imperils those ill enough to need it.

Rightfully or not, the media and the public have identified the culprit as drug companies and their aggressive pricing policies. Industry leaders are beginning to wake up to the massive public opinion problem their sector faces, yet many continue to look the other way, hoping the issue fades. It might. Or perhaps failure to address the fault lines in the US healthcare system means the government will step in and enforce its own solution.

A rising tide

The high cost of healthcare as a whole has been a long-standing problem in the United States, but the debate is increasingly shifting to rising drug prices. A poll by the Kaiser Family Foundation, a non-profit focused on health issues, in September reported that 77% of respondents feel prescription drug costs are unreasonable, an increase of 5% on the previous year1. And the American people have decided who is at fault—a Gallup poll released the same month indicates that just 28% of US citizens have a positive view of the pharmaceutical industry—its lowest score in at least 16 years2.

Particularly troubling are the prices of biologics. There is no doubt that these drugs are expensive to conceive, trial and manufacture, compared with traditional small-molecule drugs. But with strong patent monopolies and weak competition after patent expiry, brand biologics are the drug industry's gift that keeps on giving. An analysis of the top-selling drugs worldwide shows how the rise of biologics has reshaped drug sales. According to the database BioMedTracker, a decade ago, the top-ten selling drugs combined to generate $56.2 billion in sales, with the only biologic on the list being Epogen (epoetin, Amgen). In 2015, the top ten drugs combined to sell $86.1 billion worth, $67.2 billion of which came from seven biologic products. Some drugs on the list, like Humira (adalimumab, AbbVie), have gained revenue through additional indications, but nearly across the board, drug manufacturers have consistently raised list prices faster than the rate of inflation (Fig. 1).

Figure 1: The top 25-selling biologics have in general aggressively increased prices regardless of years on the market or indication.
figure 1

(a) Average annual percentage price increase compared to annual average rate of inflation over life of drug. Launch decade listed at top. (b) Average annual price increase percentage grouped by indication. Oncology products rank behind autoimmune and neurodegenerative disease drugs. (c) Avonex and Rebif, two long-standing MS drugs, have had average annual price increases of 35% or more. Based on wholesale acquisition cost. *Based on average wholesale price. Source: Truven Health Analytics.

Policymakers are now watching closely, particularly after the recent uproars involving Valeant's (Laval, Quebec) aggressive price hikes on products acquired from company buyouts, and Turing Pharmaceuticals's (New York) overnight 5,000% price increase for an old toxoplasmosis drug Daraprim (pyrimethamine) acquired from Impax Laboratories. Leaders from the brand biopharmaceutical industry joined the chorus of disapproval at these examples of price gouging, labeling the companies as predatory outliers unrepresentative of the innovative, R&D-intensive industry, but many of those same brand companies also ravenously raise the prices of their drugs.

Jill, at home. Credit: Travis Huggett

Companies also aim for as much profit as possible for new drugs at launch. The highest-profile example here is the development and launch of Sovaldi (sofosbuvir), an innovative cure for hepatitis C sold by the biotech monolith Gilead (Foster City, CA, USA). Sovaldi is indeed a life-changing breakthrough for patients, but the combination of high price and high demand for the drug served as a lightning rod, prompting a Congressional inquiry and report (Box 1).

The result has been an upwelling of government initiatives meant to reduce costs and bring pricing practices into the light. In March this year, the Department of Health and Human Services (and the Centers for Medicare and Medicaid Services) released a proposed rule change to the Part B (see Box 2 Glossary for a description of Part B) drug payment model. The change mainly calls for reducing the fee paid to doctors, from 6% of the average sale price of a drug to 2.5% plus a flat fee of $16.80 (ref. 3). This is being tested in autumn 2016, and is meant to remove the financial incentive for physicians to prescribe higher-priced drugs. A second part of the new model would be explored in 2017 and concerns value-based purchasing, in which “tools” would be used to “manage drug and health benefits” with an eye toward matching drug efficacy to its price.

Meanwhile, there has been a flurry of activity at the state level, with proposals calling for drug pricing transparency or controls in New York, Virginia, Massachusetts and California (via Prop 61), to name a few. In June, Vermont—where prominent industry critic Bernie Saunders is a senator—became the first state to successfully pass a bill. The law requires drug companies to submit justification for increases in 15 drugs that Vermont spends considerable dollars on, and that have increased their WAC by 50% or more over five years, or 15% or more in the prior 12 months. Failing to supply information about the price increases could bring a $10,000 fine for “each violation” and a case in civil court4.

The topic of pricing has now reached the pinnacle of American politics: Democratic presidential nominee Hillary Clinton pledged to stop “excessive profiteering” for drug companies and to “drive down prices.” Republican nominee Donald Trump has more broadly acknowledged healthcare costs are not sustainable and that consumers need “more options” for their drugs.

In the context of presidential candidate statements, and the near-constant stream of articles in mainstream media about high drug prices, it's worth examining the factors clogging the drug-to-patient pathway, the business practices that promote and protect high prices, the investment needed to produce drugs and just what might be done about all this mess.

Who determines drug prices?

In truth, some of the government scrutiny on drug pricing is pandering—this topic is simply the low-hanging fruit for lawmakers, and pharma is an easy target. Though overall healthcare costs in the United States are ballooning, less than 10% of the $3 trillion Americans spent on healthcare in 2014 went to prescription drugs—about the same as in recent years (Table 1). If politicians seriously wanted to do something about rising healthcare costs, they would do well to focus on doctors' offices and hospitals, which consume a larger proportion of taxpayer money, and where prices are every bit as egregious and opaque as those for drugs (Box 3 and Fig. 2).

Table 1 What do prescription drug hikes contribute to rising healthcare costs?
Figure 2: Deductibles and coinsurance, on the rise.
figure 2

The average amounts paid per person for deductibles and coinsurance have been quickly rising. Source: refs. 12 (deductible) and 13 (coinsurance).

Yet, there is no doubt that biotech drug makers deserve the eyes now fixed upon them. A report in April 2016 from IMS Health (Danbury, CT, USA) shows that costs for drugs defined as 'specialty'—in general, biotech drugs—have been on a sharp upward trend. In 2015, they accounted for $150.8 billion of total medicine spending, a 21.5% increase over 2014, based on list prices, and up nearly 84% from the $82 billion five years prior5. Embedded in that steep incline are sizable increases for oncology products, antivirals for hepatitis C and MS drugs, among others.

Data from this IMS report also showed that invoice price levels for branded drugs already on the market increased by 12.4% in 2015 from the year previous, demonstrating how drug makers continue to increase prices after launch. But inside that 12.4% increase is a smaller number: the average net price for drugs in 2015, after rebates and other concessions given by manufacturers, rose by just 2.8% (Fig. 3). This is actually a decrease from the 5.1% net price jump seen in 2014, and much lower than in previous years. The difference between what drug makers charge and what they receive is hampering the drug ecosystem: in recent years, a smaller proportion of the increases in list price have reached company bottom lines.

Figure 3: Diminishing returns.
figure 3

Average WAC percentage price increase vs. net percentage price increase of established brands. As invoice prices have increased, the estimated amount actually reaching drug makers has fallen. Source: ref. 14.

This divergence stems from manufacturers' rebates, but also the convoluted route a drug takes from company to patient (Fig. 4). Once a drug leaves the manufacturer, it ships to a provider's warehouse, or a wholesaler, and from there it is mailed out, or lands at a pharmacy or infusion center, and eventually reaches the consumer. There are also pharmacy benefit managers (PBMs), who help insurance companies operate their drug offerings, and patient-assistance programs, which help consumers with co-pays or deductibles. Money changes hands at every step. Thus, to score a somewhat modest 2.8% increase in net price in 2015, drug companies had to raise the WAC by double digits, and watch as middle men took their cuts. This is helping drive up the list price of both new and established drugs.

Figure 4: A maze of drug channels and the flow of money.
figure 4

The path from drug maker to patient is anything but straight, and at each stop, money is exchanged. PERS, personal emergency response services; CMS, Centers for Medicare and Medicaid Services; AWP, average wholesale price; NADAC, national average drug acquisition cost; MAC, maximum allowable cost; GPO, group purchasing organization; HMO, health maintenance organization; LTC, long-term care. Source: Academy of Managed Care Pharmacy

And, as the drug industry often points out, list prices are frequently undercut by sizable—though hidden—concessions. The average discount from payer to PBM is somewhere between 20% and 25% says Yevgeniy Feyman, adjunct fellow at the Manhattan Institute in New York. This makes list prices something of a false front anyway, but they can still greatly affect insured and uninsured patients alike.

The uninsured, of course, have no PBM to negotiate a lower price and no insurer to pick up the majority of the cost. They are left with the largesse of drug makers (especially when needing biologic drugs). To their credit, many drug companies have created patient assistance programs to help the uninsured and those in financial need.

But insured patients also suffer the effects of high list prices, again especially for biotech biologic drugs. Box 4 and Table 2 show the 'tiers' of drug reimbursement for the Blue Cross Blue Shield Network. For lower tiers, consumers pay a set amount, called a co-pay; for 'non-preferred drugs'—those not on a PBM's formulary—these co-pays can add up fast. But for the biologics in tier five, patients pay a percentage of the list price, called coinsurance, and it can quickly deplete a family's budget. Certainly PBMs are reducing overall drug costs by negotiating discounts, Feyman says, “but it doesn't help the patient.”

Table 2 Levels of patient drug payment

It's no wonder consumers are shouting.

To help alleviate this pain point, drug makers supply coupons to handle patient co-pays and coinsurance. These can be found easily online or through patient assistance programs. On the surface this seems altruistic, and that isn't wholly incorrect. Picking up the patient's responsibility soothes the financial sting, and it does promote compliance (patients sometimes skip treatments to control costs). But coupons also serve to keep patients from complaining about high prices.

Insurers, on the other hand, find coupons troubling. Rebates are brand-drug marketing, they say, useful for pushing consumers away from cheaper alternatives, and in this way, exacerbating the overall cost of drugs. A few insurers have tried to do away with them completely, most notably, UnitedHealthcare (Minnetonka, MN, USA), which first refused to accept coupons for 6 specialty drugs (Humira among them), then refused coupons for another 25, before ultimately giving up on the idea altogether. Public health systems, such as Massachusetts's, have also dabbled in banning coupons for commercially insured consumers. But because coupons help patients in such a direct way, the topic has been too hot to touch for long. Only the federal government has succeeded in keeping them off the table; the Anti-Kickback Statute of 1972 excludes coupons from the federal payment system for people over 65 (Medicare), the poor (Medicaid) and other government programs (but not the Affordable Care Act (ACA)).

The list price/discount tug-of-war and the co-pay/coinsurance/rebate cascade between insurers and drug makers are just two issues snarling drug pricing; there are plenty of others.

Biosimilar bust and delaying tactics

It's worth noting that for all the evidence damning Gilead's initial pricing model in the Sovaldi report—and it's a thoroughly engrossing read—the drug progressed as it should in a free market6. Gilead was first to launch with a groundbreaking drug that reset the treatment paradigm for a large, in-need population. The company had a short window before competition arrived, and exploited its first-in-class status within that time frame. When competition arose, in the form of AbbVie's Viekira Pak (ombitasvir, paritaprevir, ritonavir and dasabuvir) in December 2014, Express Scripts (St. Louis, MO, USA), a large PBM, secured a deal with AbbVie for Viekira Pak to be on its roster of preferred drugs at an undisclosed rebate to the list price of around $84,000. Gilead in return cut deals with CVS (Woonsocket, RI, USA), Anthem (Indianapolis, IN, USA) and Humana (Louisville, KY, USA) to get Sovaldi and Harvoni (sofosbuvir and ledipasvir) labeled as preferred treatments on those formularies; according to Gilead, discounts averaged 46% in the United States for 2015, and exceeded 50% for government payers. Within years of launch, competition had brought to heel the prices for Sovaldi, Harvoni and Viekira Pak.

Yet, there are two problems with this. The first is that Gilead's exploitation of its Sovaldi window strained the federal budgets for treating hepatitis C patients and somehow seemed like an exploitation of the American taxpayer. This did not sit well with the public or the government. The second, and more long-term problem, is that for many of biotech's biggest drugs, there is no competition at all to bring down prices, and the window never seems to close.

The Drug Price Competition and Patent Term Restoration Act of 1984, also called the Hatch-Waxman Act, basically created the generic drug industry. It established the Abbreviated New Drug Application process, in which a drug maker needs to show only that its product is bioequivalent to the reference drug: same composition, dosage, active ingredient and route of administration. This reduced the cost of development considerably, and the prices for generic drugs came down—IMS Health reports that the average patient exposure for a generic drug has stood at about $8 since 2010—and today around half of prescriptions are filled by generics5.

This is not the case for biologics. Biosimilars—copies of biologic drugs—are harder to make than chemical generics, and for a while the brand biotech industry argued they were unsafe to make at all. This stalled the biosimilar approval pathway in the United States until the Biologics Price Competition and Innovation Act of 2009, which President Obama signed into law as part of his Affordable Care Act in 2010. Although the law opened a route to approval for versions of biologics, since 2010 just four biosimilar drugs have passed through it: Inflectra, a biosimilar of infliximab; Zarxio, a biosimilar to filgrastim; Erelzi, a biosimilar to Enbrel (etanercept), approved in late August this year; and in September Amjevita, Amgen's biosimilar to Humira.

The impact has been minimal. Zarxio was launched at a 15% discount to Amgen's Neupogen, but the drug has not substantially cut into sales of the brand; the other three biosimilars have not been launched at all. The reason for this is best explained by looking at the current drug kingpin, Humira.

Humira tops our list of the top-selling drugs for 2015, bringing in $13.9 billion. The antibody targets tumor necrosis factor (TNF) and is indicated against a range of inflammatory diseases with large markets. It was first approved in 2002 for rheumatoid arthritis and launched the next year by Abbott (Abbott Park, IL, USA), though the R&D team has expanded the drug into another nine indications in the United States, the most recent being uveitis this June. It has 14 approvals internationally and is sold in 90 countries. A combination of this expansive patient base, direct-to-consumer advertising—data from Kantor Media (London) show that $347 million was spent on Humira ads in 2015—and steady list price increases have transformed an efficacious drug into one of the world's most valuable.

A patent analysis by IP Checkups (Berkeley, CA, USA) shows Humira has more than 70 patents directly attached to it (Supplementary Table 1) covering composition, formulation and method of use. The main composition patent behind the drug expires late in 2016, and even after the approval of Amgen's Amjevita, which was cleared in seven indications, more than a dozen biosimilar adalimumabs remain in development.

Yet, AbbVie seems set to protect this strong revenue stream. CEO Richard Gonzalez told analysts and investors during a conference call for the company's 2015 third-quarter earnings that he believed both “the litigation process” and Humira's “intellectual property estate” would keep biosimilar competition away until 2022. This seems possible; even before the official approval of Amjevita, AbbVie on August 4 filed a lawsuit against Amgen for 10 infringed Humira patents, though the lawsuit claims there are a total of 61 in dispute between the companies. Should AbbVie fail in this initial lawsuit, the company says it “reserves the right” for a “second wave” of litigation to deal with the remaining patents. Consider the slow wheels of justice and it's easy to imagine Humira competition kept at bay for another five years, as Gonzalez predicts. Over that period, Humira drug sales would total more than $70 billion at current sales volume and price levels. This process of filing ancillary patents to extend a drug's exclusivity is called evergreening, and it is common practice.

A second problem is 'pay for delay,' and it works like this. A generic drug company files suit against the innovator, challenging its patents in hopes of breaking the monopoly. In response, the innovator settles the suit and the generic company receives a payment in return for restrictions on marketing the generic drug. The Federal Trade Commission (FTC) tracks these transactions, and early this year it issued a report showing that in fiscal year 2014, there were 160 final resolutions on patent disputes between brand and generic drug makers, and 21 of them were potentially pay-for-delay deals masquerading as settlements, covering 20 branded drugs with combined US sales of $6.2 billion.

The FTC in 2001 began filing lawsuits against this practice, and in May 2015, it announced its largest settlement to date with a pharmaceutical company, stemming from a 2008 suit. The FTC alleged that Cephalon (Frazer, PA, USA) reached agreements with generic drug makers Teva (Petach Tikva, Israel), Barr (Montvale, NJ, USA), Mylan (Canonsburg, PA, USA) and Ranbaxy (Gurgaon, India) to drop their patent challenges on Provigil (modafinil), the blockbuster sleep aid, and delay “generic entry for six years,” said FTC chairwoman Edith Ramirez. By the time of the settlement Teva had purchased Cephalon, and agreed to put up $1.2 billion to “compensate purchasers, including drug wholesalers, pharmacies and insurers, who overpaid because of Cephalon's illegal conduct.”

Since the Cephalon ruling, and since the Supreme Court's decision in FTC vs. Actavis in 2013, in which the court ruled that a reverse payment from drug manufacturer to generic company can be a violation of US antitrust laws, the number of potential pay-for-delay settlements has been decreasing: 29 in fiscal year 2013, and 40 in fiscal year 2012. But when business practices keep competition on the sidelines, drug makers are free to not only raise their prices without worry of a biosimilar undercutting them, but also push those higher prices through the payer system year after year. According to data from BioMedTracker, Humira has generated more than $78 billion in worldwide revenue from 2004–2015.

Which leads to another issue. Of that $78 billion, $40 billion came from the US market alone.

US pays for all

Although groundbreaking biomedical research that leads to new drugs happens all over the globe, it is predominantly the vibrant US drug industry that brings them to market. US drug makers have launched more first-in-class biotech drugs than the rest of the world, combined. A list of the 25 top-selling drugs worldwide in 2015 from BioMedTracker shows 23 of them were discovered or developed by American companies. Yet, despite the US biotech's startup scene benefitting from US taxpayer funds from the US National Institutes of Health (NIH) for basic research, federal Small Business Innovation Research (SBIR) grants for startups and the herd of US venture capital (VC) firms, Americans often pay considerably more to receive these home-grown drugs than their counterparts in foreign markets (Table 3).

Table 3 Continental disparities: Sovaldi wholesale price at launch in the United States versus other wealthy countries

Gilead's pricing plans for Sovaldi illustrate this divide. The US Congress's Committee on Finance report6 showed that while Gilead set the price at $84,000 for a 12-week course in the United States, it formulated prices across Europe tens of thousands of dollars lower (Box 1 and Table 3). The drug industry also discounts pricing in developing markets; Gilead signed an agreement with Egypt in 2014 to list the drug at $908.04 for the same course of treatment and entered licensing agreements with seven generic firms in India to supply both Sovaldi and Harvoni to 91 developing countries—a model it had used for years to supply its lifesaving HIV drugs6.

This pricing stratification has been happening for decades and highlights the way in which the US taxpayer helps subsidize drug provision and innovation across the globe. Yet, the Committee on Finance report6 on Gilead's Sovaldi pricing also revealed what many already suspected. The authors wrote they found “scant evidence” that Gilead considered the $11.2 billion it paid to acquire Sovaldi creator Pharmasset when figuring the $84,000 launch price, and that the “nominal” cost of manufacturing Sovaldi also “played no part in establishing the price.” Rather, the decision was made to “not only maximize revenue, but also prepare the market for [second-generation drug] Harvoni and its even higher price.”

Maximizing revenue is a CEO's job and shareholders are ever-watchful in this regard, but moves like this also feel exploitive to US citizens and are yet another reason for the increasingly loud call for transparency and price controls. In the summer of 2015, a group of more than 100 oncologists collectively published an article7 that pointed out that every cancer drug approved in 2014 cost more than $120,000 a year, for which out-of-pocket costs for patients could reach $25,000 to $30,000. The article also discussed a study showing that cancer drugs rose by an average of $8,500 per year over the past 15 years. According to the authors, the current pricing system is “unsustainable and not affordable to many patients.”

Hagop Kantarjian, of the MD Anderson Cancer Center (Houston, TX, USA), the corresponding author on the paper, says that current “drug prices have nothing to do with the cost of research, or cost-benefits, or market forces.” He pointed to the many drugs in the kidney cancer field, all with comparatively lofty prices. When a new drug is approved, he says, drug companies just “look at similar drugs and put their own drug 10–20% higher.”

“They are profiteering,” he says. “It's immoral.”

He's far from the only one who feels this way. In May this year, Amy Kapczynski of Yale Law School (New Haven, CT, USA) and Aaron Kesselheim of Brigham and Women's Hospital (Boston) published an article8 in which they lobbied for use of a “little known law, codified at 28 USC section 1498.” The law gives the government “the right to use patented inventions without permission, while paying the patent holder 'reasonable and entire compensation'.”

This compulsory licensing is basically the concept of 'eminent domain' applied to the pharmaceutical world, and the article mentions the only known case of it being threatened in the United States: in 2001 for importation of generic versions of ciprofloxacin (Cipro) to stockpile against anthrax, after Bayer (Robinson Township, PA, USA) rebuffed the government's request for higher production and a lower price. Bayer eventually backed down, but the article suggests this law be used when there is a “large disconnect” between the cost of development for a drug and what the maker is charging, and when “substantial public health benefits” would result.

The “large disconnect” scenario fits the Sovaldi situation, Kapczynski says, as does the public benefit of wiping hepatitis C off the American landscape. This leaves the question of what price Gilead deserves in return for developing a breakthrough drug.

“There is no magic answer as to what it is,” she says. “The real issue is that companies have resisted the idea that there is any reasonable price for a drug to be sold [at], and this is what is not sustainable in the long term for payers, or for the industry, for that matter.”

Playing defense

As the pricing argument has intensified, the drug industry has for the most part remained silent. When seeking interviews for this article, I was repeatedly asked what “angle” it would take before getting a yes-or-no decision on participation, and one public relations firm told me an entire slate of companies was not available to discuss pricing. My best conversations were had off the record, and I got the sense that the industry has decided its arguments would only be ignored, misunderstood or used out of context to spawn yet another negative article.

And there have been many negative articles, often pitching the issue as a fight between drug makers and consumers. But the Biotechnology Innovation Organization (BIO, Washington DC, USA) says the real battle is between insurers and drug makers. Jim Greenwood, CEO of BIO, says the insurance industry is in a financial bind, in part because of the ACA, which brought insurers scores of new customers but is costing them money because insurers 'lowballed' on their premiums.

In response, private insurers “have decided to make the drug industry a scapegoat,” Greenwood says. “And we are not going to take that lying down, because if policymakers react to that deceptive storyline and start price controls on our industry, all the promise of innovation goes away.”

BIO is expecting the ACA to change no matter how political power is aligned in 2017, and it is planning to be part of the discussion. BIO is also fighting to make policymakers aware of the gaping differences between the Turing Pharmaceuticals of the world and the small, R&D-intensive biotechs that are chasing innovation. Greenwood says he's seen progress there, but he's skeptical the general public will ever see biotech's side of things.

“It's an unreasonable expectation,” he says. “You can say, 'Drugs cost too damn much', and everyone will applaud. Our response will be 500 pages of War and Peace, explaining the cost of failures, and what investors need, and the cost of R&D, and we can explain the chain between the manufacturer and the patient—that's all well and good. But if you go to the drugstore and the price is $400, no one cares. That's not how consumers react.”

Tillman Gerngross is co-founder and CEO of Adimab (Lebanon, NH, USA), an antibody discovery platform, and he has co-founded another five companies beyond that. Adimab does not make drugs themselves, but big pharma is a client, as are many young, VC-backed biotechs. He also doubts that a look inside the biotech process will appease the public.

“The question is not, 'What does it cost to make a drug?' but rather, 'What does it cost to know what to make?'” he says. “Once you know the structure of Sovaldi, to make it costs pennies. That's the wrong discussion. You need to know what pill to make, and what the structure is—that's the value.” Only once all that is known—gathered from preclinical work and the clinical trials and the previous failures—can you begin “selling information in the form of a pill.” Gerngross says that “people don't understand this,” and thus “are never going to be sympathetic to pharma's argument.”

Partially that is because it's hard for consumers to take a long-term view—we tend to think in the now, with our wallets, as Greenwood suggested. Still, it's clear even high-priced drugs can save the healthcare system money over time. Sovaldi again serves as a prime example. The drug had an initial list price of $84,000 per course of treatment, yet hepatitis C often causes liver scarring, cirrhosis and liver cancer, and patients can sometimes require a transplant. If those costly future procedures are removed from the healthcare equation, even Sovaldi's initial list price makes sense, and when factoring in the current discounts Gilead is conceding, there is no question the drug saves money in the long-term.

The same concept applies to GlaxoSmithKline's (GSK; Brentford, UK) gene therapy drug, Strimvelis (autologous CD34+ cells expressing adenosine deaminase; ADA), recently approved for the rare disease severe combined immunodeficiency due to ADA deficiency. The drug is expensive to make, as is treatment, which involves removal of autologous bone marrow cells, insertion of a normal copy of the ADA gene via a viral vector into cells and infusion of the cells into the patient. Patients are also sometimes pre-treated with low-dose chemotherapy. The drug is priced at €594,000 ($667,000) for the one-time, potentially curative process. That sounds lofty, but the conventional option is enzyme-replacement therapy for these patients, GSK says, and that can cost millions of dollars over a ten-year period. When the Strimvelis price was announced, it was met with almost universal acceptance.

Although the cost of conceiving and making Strimvelis is on the far edge of the bell curve, a paper from the Tufts Center for the Study of Drug Development (Boston) suggests that even the average cost for developing and winning approval for a new drug is an astonishing $2.6 billion—about $1.4 billion in cash outlay, and another $1.2 billion in time costs to investors9. The industry loves to toss these nebulous figures around, but there is no doubt building a true breakthrough drug is a difficult, time consuming and expensive process. It's also clear that without a sizable return for those few drugs that do survive the gauntlet, not only will companies likely lower their own R&D budgets, but also the pool of outside investors—especially biotech's vaunted VC sector—would probably shrink. This would hurt innovation simply because drug development is a numbers game.

So the reward at the end of the long journey needs to be there. Perhaps, then, reducing drug costs becomes a question of carving away at the bloat in the system. Patient stratification and better diagnostics could help, completely removing from the equation patients who take a drug, pay for it through insurance or otherwise, but are not cured, healed or bettered in any way. Though this might not lower the price of drugs—in fact, it might do the opposite, with companion diagnostics justifying a higher value for a 'proven' drug—it could remove needless spending from the ecosystem and bring overall healthcare costs down.

There's also talk of varying drug price by indication. In this scenario, a patient taking Humira for psoriatic arthritis would pay a different price from one taking it for uveitis, depending on how effective it is in each indication and what else is available. Certainly, costs could be reduced by moving to a value-based pricing system, in which the insurer does not reimburse unless the drug is effective, or reimburses at a lowered rate if the effect is marginal. It has never been exactly clear how this would proceed, but the industry has been kicking the tires on the idea for a while.

But there's a final way the trend in drug prices might be shifted, and that is through stronger resistance from payers—the industry's insurers and PBMs. This might already be underway, and certainly it was on display with Sovaldi and Express Scripts. The giant PBM is still at the forefront on this issue, and in early September it announced an “Inflammatory Conditions Care Value Program” to try and “better align a drug's price with the value that drug provides a patient,” similar to The Institute for Clinical and Economic Review (ICER) reports (Box 5), in such conditions as rheumatoid arthritis or psoriasis. The PBM's program calls for 'niche' products, approved for just a single indication, to be placed against monster drugs like Humira and Enbrel to allow more competition. Express Scripts also said it will offer refunds to payers if a patient discontinues a drug within the first 90 days of prescription—in effect putting spent money back into insurers' hands that in the past was long lost.

It's the sixth program Express Scripts has unveiled; others include hepatitis, oncology and diabetes. This type of payer pushback and fostering of competition might already be having an effect. When Gilead won approval in June for the hepatitis C pill Epclusa (sofosbuvir and velpatasvir), which covers all six genotypes of the disease, it also announced a list price of $74,760 for a 12-week course—around $10,000 less than the initial list price for Sovaldi.

If the industry was initially quiet on pricing, things have changed. It has been reported10 that the Pharmaceutical Research and Manufacturers of America (PhRMA) raised members' dues to build financial reserves for the anticipated fight over drug prices after the US presidential election, and BIO has now lined up its own defenses. In February of this year, it launched a website and video campaign themed “time is precious,” dedicated to the work biologics, in particular, have done to extend the lives of the sick through slowing of disease or cures, and the cost savings that can follow. In September it announced another site and video, applying the theme “innovation saves” to both lives and money. The website has select data on drug costs versus longer-term hits to the healthcare system, including examples around hepatitis C treatment. It also points to future drugs, stating that if a product for Alzheimer's delayed the onset of symptoms for just five years, it would save the US healthcare system $367 billion by the year 2050.

These are all valid points, but I also asked Greenwood if he thought, in a broader sense, that a large part of the problem is the swollen, broken healthcare system every drug company must operate in.

“Absolutely,” he said. “We're talking twenty-first-century cures in a very old payment system that has evolved over time. Whether you want to use the term 'broken' or not is one thing, but it's certainly not transparent.”

Waiting on the hammer of price controls

Buried in the middle of the Committee on Finance report6 on Gilead's pricing of Sovaldi is a quote from William Cardarelli, director of pharmacy at Atrius Health, and a member of Gilead's payer advisory board. When asked about a possible controversy over the high impact of Sovaldi, the report attributes this comment to him: “This too will pass, the hysteria will die down; there's something new every year. The government has the attention of a two year old.”

That might be true—perhaps the lip service from politicians is election-year bloviating—but many in the industry are preparing for change. Robert Coughlin is the president and CEO of MassBIO (Cambridge, MA, USA), the non-profit advocacy group for the life science sector of Massachusetts. He feels certain “the issue is not going away,” and if the industry doesn't find a fix for the high prices and patient outcry, “the government will,” he says, and “the government will get it wrong.”

That's a common sentiment—and worry—among drug industry CEOs. All the aforementioned fixes are scalpels, attempting to solve the problem with a cut here, a removal there, but there is also a much bigger possibility, what one industry insider called “the hammer”: the government as a single payer.

The idea isn't new, but it resurfaced over the summer as a main platform for Democratic presidential nominee hopeful Bernie Sanders. In his vision, the government is the only reimburser for health care in the United States, giving it the power to negotiate prices for both procedures and drugs in a similar way to nationalized health plans in Europe. His plan proposes doing away with co-pays and coinsurance, and also reducing health administration costs, as a single payer should mean less paperwork. It would cover vision and dental, and remove the barriers between in and out of network. It would be funded by a flat, income-based premium paid by both families and employers, plus some new taxes. His campaign estimated it would cost $1.38 trillion a year.

Although this sounds like utopia for patients, there is nary a soul in the drug industry who thinks it is a good idea. To get at why, I spoke to Jeremy Levin. He's CEO of Ovid Therapeutics (New York), a startup focused on orphan diseases of the brain, but he's also former CEO of generic giant Teva Pharmaceuticals, where he sold drugs in 110 countries, many of which in Europe operated with a single payer.

The strongest mark against a single government payer, he says, is the success the US system has had in driving drug innovation. “Around the world, the overwhelming majority of all new drugs come from the US,” he says, owing to its capital markets, its robust patenting structure, the NIH, the growth of the life-science-focused VC ranks and even the oft-disparaged US Food and Drug Administration.

A single payer system could scuttle all that. “You can't target one part without affecting all parts of it,” he says. Indeed, the pharmaceutical industry has supplied such a panoply of drugs that US patients are nearly indignant if told there isn't a product for what ails them, and no one would vote for slowing drug research, not with cancer, Alzheimer's or diabetes sitting on the horizon.

Still, Levin agrees the industry has lost its way. Pharma, he says, is forever chasing short-term profits to hit quarterly earnings estimates, and that too often means raising drug prices, cutting R&D budgets, buying back shares. Levin looks at Humira—a drug long in the tooth, heavily protected and still wildly profitable—and sees corporate failure, because there is nothing coming up behind it to replace its revenue stream.

Yet, he does think there is a way out, and it starts with Allergan (Parsippany-Troy Hills, NJ, USA) CEO, president and chairman Brent Saunders. In September, Saunders posted on his company blog a missive titled “Our Social Contract with Patients.” He wrote that while it was “hard to speak out publicly on this now,” he said his company would rededicate itself to investing in innovation, to monitoring drug safety, and to better educating physicians. Most daring, however, he also promised that Allergan would not engage in predatory pricing or gouging, and would limit annual price increases to “low-to-mid single digits percentages.”

That's how it starts, Levin says. But that has to be followed by others, and then “we need those kinds of brave statements from those in insurance and the PBMs.” The drug industry needs to repair its reputation, and if more companies open their pricing models to the public eye, the remainder will be pressured to join, because “no one is going to want to be left behind when the train leaves the station.”

What he's saying is that the cause for today's drug imbroglio—capitalism—might very well be its cure.

Sound and fury

Our patients Tim Ellis and Jill remain on divergent paths, as will many others like them. Ellis keeps a hopeful eye on the MS drug pipeline, and in June of this year he had the word 'Gratitude' tattooed on his neck, an acknowledgment of everything he's thankful for in his life: career, the love of family and friends, his wife.

The last time I spoke to Jill, she was dealing with chronic fatigue—common with lupus—and had begun cognitive therapy, running through memory drills and puzzles with a speech therapist at a nearby facility. Her appeal is with the Office of Disability Adjudication and Review, though it's not clear when it will be heard—she only knows she'll be notified 20 days in advance. Things have been bad enough for her to apply for food stamps. This life, simply because she was unlucky enough to have lupus.

Meanwhile, the public's anger is far from spent. Ariad (Cambridge, MA, USA) in October was officially asked to explain the high price of its leukemia drug, Iclusig (ponatinib), by Bernie Sanders and Elijah Cummings, US Representative for Maryland; in August, it was Mylan placed under the hot lights, for a series of price hikes going back years.

The Mylan product is EpiPen, an auto-injector for epinephrine, meant to treat anaphylactic shock resulting from, among other things, food allergens or insect stings. EpiPen is based on the old, simple drug epinephrine, and its price moved from around $100 nearly a decade ago when the parent company Mylan acquired it, to more than $600 this year. Through a combination of business-savvy—but morally cloudy—moves and price hikes, Mylan grew EpiPen sales to more than $1 billion in 2014, its first product to reach that threshold, though it is a massive company with a portfolio of more than 1,400 generic and branded pharmaceuticals.

The firestorm began online, with a petition called “Stop the EpiPen price gouging,” posted to Facebook by a woman from Brooklyn, New York, The New York Times reported11. From there it spread, picking up support, particularly among mothers. When Bernie Sanders commented on it via Twitter, other politicians chimed in. If Mylan is a company with a “history of doing what's right”—as its website says—nothing felt right about EpiPen's pricing and rapid growth, and soon the company's name was splattered across media formats: niche, mainstream and social.

As the pundits sliced away, Mylan CEO Heather Bresch went onto CNBC live. In essence she was there to staunch the bleeding and promote the $300 patient coupon the company had just scrambled to announce. But once she'd laid that extracted gift on the table and began fielding scolding questions from the interviewer, in exasperation she pulled back the curtain on the US healthcare machine.

She pointed to the line of insurers, PBMs, wholesalers and pharmacy retailers who put their hands into the pot after a drug is launched, and explained that this is why her company offered a $300 coupon directly to the patient rather than cut EpiPen's price. She lamented that healthcare is the only industry in which the buyer acquires a product without knowing the cost, and said this is a real problem. She admitted that America's drug spend subsidizes innovation for the rest of the world. She acknowledged that most citizens—through no fault of their own—can't understand their Byzantine insurance plans. And she confessed that the US healthcare system “incentivizes high prices,” calling this “the conversation no one has wanted to have.”

“I am hoping this is an inflection point for this country—our healthcare is in crisis,” she said, as CNBC ran inflammatory snippets of her words across the bottom of the screen. She went on: “That is why Congress, and the leaders of this country, need to quit putting their toe in this topic and really fix the system. We have an outdated, inefficient system—the patient is paying twice. They are paying full retail at the counter, and they are paying higher premiums on their insurance. It was never intended that the consumer would be paying list price. Never. The system wasn't built for that.”

The honesty was startling, and the complex issues she'd put forth required deep thinking in response. But there was none to be had. The interview ended, and for weeks afterward, snarky internet memes with Bresch's face sprouted, faded and were replaced on Facebook. Online, the EpiPen price hikes were used to vilify both sides of the political aisle. Bloggers attacked Bresch's salary, her education and her family lineage. News sites sifted through Mylan's past misdeeds, and the use of the company jet. A Congressional House committee called Bresch to testify, during which a grandstanding congressman said he was “sickened” by Mylan's actions. Twitter went on being Twitter.

In other words, no one was really listening.

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Huggett, B. America's drug problem. Nat Biotechnol 34, 1231–1241 (2016). https://doi.org/10.1038/nbt.3734

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