Value and cost-based pricing

David Grainger wrote recently on his DrugBaron blog about the pricing of pharmaceuticals. It is an intelligent piece, yet if I may I would like to improve upon it.

The central tenet is the argument that drug pricing should be based on value to the patient (and, by extension, the healthcare system) rather than based on cost of R&D, production etc plus a certain profit. (To be clear, we are talking here about patented medicines, when market-based methods of defining prices are relatively inefficient.) This has a certain attraction to it, but in practice we are a long way from its operation, and particularly so for common diseases.

The arguments about pricing have come to a head with the introduction of Solvadi (sofosbuvir), Gilead’s breakthrough treatment for hepatitis C virus, which is estimated to cure up to 90% of patients who receive it over a 12-week course (in combination with existing drugs), but at a cost of $84,000. Insurers have cried ‘Foul!’.

Gilead have based their claim on a value-based method, similar to the eye-watering prices charged for many other effective drugs for rare diseases. Alexion, famously, charges patients $400,000 a year for eculizumab (Soliris), a monoclonal antibody which attenuates the C5 protein, and down-regulates specific immune reactions. Eculizumab is approved for the ultra-rare and life-threatening diseases of paroxysmal nocturnal haemoglobinuria (PNH) and atypical haemolytic-uremic syndrome. These conditions affect only a handful of people a year.

But there is a central difference between the Alexion case and the Gilead case, which is down to scale. Hepatitis C virus is not a rare disease, in fact it is relatively common. Insurers have calculated that if administered to all hepatitis C virus patients, this one drug alone would cost the US healthcare system $300 billion a year, more than the country now spends on all prescription medicines.

Value-based systems may work in situations of rare disease, where the cost to the system is relatively small, but are essentially unsupportable without either markedly increasing the healthcare budget overall or reducing the budget for other diseases. Neither of these options, for obvious reasons, are easily accommodated.

On the other hand, the arguments for high drug prices for rare diseases are not just based on value; they are also based on the need to divide the amount spent on R&D amongst a smaller number of patients. It is an argument that is accepted by payers from both state-backed and private systems; it is essentially a justification of a cost-based price, but one that innovators use in order to support the reimbursement rates they need to justify their business model.

In a sense, this is the obverse of the argument used by payers when they cavill about the high costs of pharmaceuticals relative to the costs of production. Grainger complains of the attempt by payers to ‘have their cake and eat it’, to base drug prices on cost-plus when value-based methods would give an answer that they do not like. In orphan drug pricing, innovators use cost-plus arguments to justify high prices for small markets for drugs with little added value. It is the argument that Orphan Medical used when it marketed sodium oxybate (Xyrem) for narcolepsy with cataplexy at a monthly cost of $9,250 per month in the US (prices as of October 2013). Orphan also marketed Xyrem in various aspects of insomnia, fibromyalgia, periodic leg movement, restless leg syndrome, Parkinson disease, MS, chronic pain, daytime fatigue and excessive sleepiness and so on — which are not rare, but when Xyrem is prescribed it is priced the same as the narcolepsy product.

(In case you do not recognise ‘sodium oxybate’, the active ingredient in Xyrem is the sodium salt of gamma-hydroxybutyrate, also known as GHB or the date-rape drug for its role in many sexual assault cases, as well as being commonly used for consensual recreational purposes. So, similar to opiates, benzodiazepines, amphetamines and ketamine, which have legitimate and illegitimate uses, the chemical has twin personalities, being approved as a pharmaceutical for prescription medical purposes, as well as being classified as an illegal drug in the wrong hands.)

The problem with value-based pricing, attractive though it is in theory, is not just that it is unaffordable when the disease or condition is too common. It is also that it becomes very contentious when it is used for a serious life-threatening disease. The issue was dramatically highlighted in the African drugs for AIDS crisis of 2000-1 when many of the major pharmaceutical companies found themselves on the wrong side of world opinion in seeking to obtain patent-based pricing for saving the lives of the world’s poor.

Companies nowadays therefore need adjustable and complex pricing methods to ensure that those without insurance or access to affordable healthcare are somehow treated, often by charging higher prices for those who can ‘afford’ to pay. In the end, the argument about AIDS drugs for Africa came down to a power struggle between the multinationals and the world patent system; versus Cipla and public opinion. The MNCs misjudged the issue entirely, and the latter ultimately won; not only did Cipla make substantial profits while selling patented protease inhibitors at generic prices, but it was seen as a saviour rather than patent infringer. We have a much less innovator-friendly patent system in India as a result (ask Novartis, who failed to get an Indian patent granted for their breakthrough treatment for chronic myelogenous leukaemia, Gleevec [imatinib]). Nowadays, these problems and potential problems need to be anticipated because in the court of public opinion, excessive pricing is seen as more than profiting from ill-health, it can be equated to blackmailing someone at death’s door for their life-savings.

Drug repurposing comes in to this discussion too: the value of the use of a generic drug in a secondary use may very well be priced inappropriately — but inappropriately low rather than too high. In other words, patents skew drug pricing not just when they are in operation, but also when they are not in operation. Without the innovator carefully anticipating the problem of generic substitution, (and taking steps to avoid it) the value to the patient is not properly priced. And in consequence, lacking a commercial basis, repurposing developments of generic (or soon to be genericised) drugs like metformin for colorectal, liver and pancreatic cancer; liraglutide (Victoza) in Alzheimer disease; and exenatide (Byetta) for Parkinson’s disease are being developed with public or charity funds rather than with commercial capital.

At the end of the day, pricing of pharmaceuticals is a complex assessment that includes much more than universal parameters such as value or cost. It also includes the ability and willingness of the payer to pay, which depends on the scale of the disease and the wealth of the country. If pricing were based on objective parameters alone, there would be a similar price in Germany as in the USA, as we are used to with consumer electronics. Of course there is essentially no difference in the value to a patient in France or Canada, Greece or the USA. But there is a substantial difference in the ability and willingness of healthcare providers to pay (as well as their monopsonistic power) on a country-by-country basis. The price then comes down to a negotiation, informed both by the innovator’s justifications and the payer’s expectations. This is why Xyrem is priced in the UK at around 10-12% of the US level, even though the respective GDPs are nowhere near this disparate, production costs largely independent of country and patient benefits similar in both places.

Finally, Grainger refers to Catherine the Great as a recipient of an early form of smallpox vaccination, at a price which is equivalent in today’s money to Gilead’s Solvadi (sofosbuvir). It is an appropriate analogy also because Catherine the Great led a disparate life and was noted for her voracious sexual appetite. In today’s terms, hepatitis C may very well have been something she would be at risk of. However, in the 18th Century, different forces were at bay. In the end, she reputedly died after a stallion fell on her, while in the act of intercourse. I suppose you could say that she knew the value of life’s full variety, but paid a heavy price for her desire to experience it.