When negotiating with relatively wealthy countries, companies are also mindful of not giving discounts so large as to feel grossly unfair to the US payers and the US public. Given the current outrage and sense that the US is being treated unfairly, it seems companies were right to have been concerned by differential pricing and may have let the gap widen too much.
Should the US payers change their stance and be willing to deny treatments based upon cost, they’d have more leverage in price negotiations for all the drugs that have already been developed, but the impact on innovation would be significant. Investment in new medicines would pause, which really means many ongoing programs would be defunded and shut down, until investors could understand how payers would set prices. So US payers would have to be transparent about how they calculate “fair” prices so that investors and drug developers could plan ahead. If investors and companies had to assume much lower prices when making financial models, funding would logically dry up for many programs in early development today, particularly for rarer diseases and certainly for a lot of personalized medicines, which help comparatively few patients. This would be terrible news for patients and families suffering from these diseases and a short-sighted approach for society as a whole. While these drugs would indeed be expensive in the short term, as generics they are cost-effective for society in the long term, per the Biotech Social Contract.
No Deal in New Zealand
Every negotiation involves balancing interests: drug companies want to help patients (both out of compassion and to keep them from falling into the arms of competitors), drug companies want to earn a profit (which itself is necessary to keep inventing drugs), and payers want to save money. Drug companies sometimes have a monopoly on a unique treatment (i.e., no me-toos or generics) and some countries have a single-payer system that also wields leverage, yet in almost all cases they can agree on a price so that patients don’t go without.
In 2013, the government of New Zealand balked at the >$600,000-per-year cost of Alexion’s drug Soliris, an antibody for the treatment of the rare blood disease Paroxysmal Nocturnal Hematuria (PNH) even as it acknowledged that the drug likely saved lives. It stated that even if the drug were priced at UK or Canada levels, it would still be too expensive to cover in New Zealand, and implied that it would need a 95% discount to consider the drug cost-effective. On principle, Alexion refused to sell Soliris to New Zealand at that low price or to provide free drugs to its patients, who numbered fewer than two dozen and had to make do with blood transfusions. Patients and their advocates lobbied the government to reconsider, making the argument that “the public should be able to decide whether to spend more on ‘life saving’ medicine or to put interest on student loans, or to raise taxes, or to stop wasting money on the military or movie productions.”190 But the government did not relent.
As a consequence, New Zealand became a preferred clinical trial site for early testing of competing PNH treatment. In this way, its righteousness was a boon to companies that otherwise would have had to coax PNH patients off of Soliris to prove that their own drugs could work as well or possibly better. Once companies had at least some evidence that their drugs worked on Kiwi patients, it was easier to convince patients in other countries to discontinue Soliris and enroll in trials of these experimental agents. New Zealand may be assuming that prices will come down once there is more than one PNH drug on the market. But if it merely turns out that one of those new and better drugs displaces Soliris as the standard of care and is priced as highly, New Zealand will have to confront the reality of either paying that high price or truly forcing their patients to go without, at least until the treatment goes generic.
Single-payer Leverage
Some have proposed that prices are higher in the US because other countries have single-payer systems that negotiate on behalf of their entire populations, whereas the US system is fragmented, with each insurance company or pharmacy benefit manager (PBM) negotiating on behalf of fewer patients.191 They might point out that Germany pays slightly less on average for drugs than the US, and the UK pays about half as much (though, again, such studies are always confounded by the secrecy surrounding rebates in each country).192 If such a person is tempted to ascribe these price differentials to the advantages of a single-payer system, keep in mind that the US PBM Express Scripts negotiates on behalf of over 100 million Americans193—more than the population of every European country except Russia, and greater than Canada and Australia combined. If, after negotiating rebates, Express Scripts pays more for a drug than the UK, France, or Sweden, it’s not because they don’t have the leverage derived from the size of the customer base. True leverage stems from being willing to walk away, and, fortunately for 100 million Americans, Express Scripts knows it can’t deny patients access to important treatments (though again, they do extract price concessions in the form of rebates when they can play me-too drugs against one another).
Compulsory Licensing
Poor countries have another way to get access to new medicines more cheaply than in the US: simply ignore a company’s patents and authorize generics manufacturers to make copies of the drug. This is known as compulsory licensing, and it is permissible under international law when a court rules that there is a legitimate need for the drug and deems the company’s price negotiations to have been unreasonable. HIV antiviral drugs are the most famous examples, and several countries have secured compulsory licenses to patents for these medications. If a country is not capable of making a compulsory-licensed drug itself, it might get another country with generic manufacturing capabilities to engage in compulsory licensing on its behalf, as Rwanda did when it got Canada to make HIV medications cheaply, but only for Rwandan patients.194
However, the motives behind compulsory licensing are not always as they seem. Thailand was keen to employ compulsory licensing to grant its for-profit, government-approved pharmaceutical company the right to make HIV drugs, even though it could have purchased higher-quality drugs more cheaply from Indian generics manufacturers. It was just a ploy to support its own domestic pharmaceutical industry. Eventually, thousands of Thai patients taking their government’s substandard drugs developed resistance, making their viral infection harder to control.195 Thailand went further, seeking compulsory licenses on a range of drugs for cardiovascular disease and cancer, but partly reversed course under US trade pressure. More recently, a Russian court granted a compulsory license to a Russian drug company to patents for Celgene’s Revlimid and Pfizer’s Sutent, two cancer drugs.196 But these cases are not common.
Compulsory licensing is rare for three reasons. First, it isn’t right to drive a hard bargain and force a poor country to invoke compulsory licensing. It’s simply wrong to withhold essential medicines from people who truly can’t afford them, so companies tend to find ways of making needed drugs available in poor countries inexpensively, obviating compulsory licensing.
On a more practical level, companies don’t have a financial incentive to play hardball on prices with very poor countries. Wealthy countries don’t compare their prices to those in developing nations and can explain away steep discounts there as philanthropy.
The third reason is that countries that invoke compulsory licensing risk damaging trade relations, if they do so regularly or in unwarranted circumstances. It’s not entirely surprising that Russia allowed one of its own companies to trod on the intellectual property rights of two American companies at a time when relations between America and Russia have cooled. If Russia wanted a concession from the US, it might offer to reverse course on compulsory licensing of American drugs, as Canada once did in the early 1990s, while negotiating for its place in the North American Free Trade Agreement, after decades of making generics of novel drugs in violation of America drug patents.
In any case, compulsory licensing, or the threat of it, only keeps drugs inexpensive when the therapy in question can be produced cheaply and easily, as is the case for m
ost small molecule drugs. Countries that wield compulsory licensing as a tacit threat will increasingly find themselves in a bind as novel drugs become more complex. Drug-device combinations, biologics, and cell and gene therapies are difficult and expensive to manufacture. Unless their goal explicitly is philanthropic,197 companies would sooner not sell a drug to a country than sell it below the cost of production, which for complex drugs can be quite high. Countries used to getting drugs at a steep discount will either prove willing to deny patients access to these therapies, which is possible, or we will discover that there are breakthroughs so compelling that even they really are willing to pay more than they previously did or thought they would.
Are US Prices Unfairly Higher?
Lower prices in other countries do not necessarily mean unfairly lower prices. In many countries, branded drugs are priced comparably to the US market when we adjust for wages and purchasing power. For example, in 2016, the price of Harvoni in the US was about $73,000; in Portugal, the adjusted price was about $71,000 and in Poland, $119,000.198 Of course, given all the secret rebates and discounts negotiated by governments and private payers, it is difficult to say whether these prices truly reflect what was paid (see Chapters 4 and 7).
And even when drugs are cheaper in other countries, it doesn’t necessarily mean that they are more affordable than they are in America. Affordability is also a function of how much money a customer has, not cost alone. A recent study found that while FDA-approved cancer drugs are more expensive in the US, they are also more affordable in the US.199 A drug priced at two months’ salary for an average American might cost more than a year’s salary in India. To be fair, studies like this don’t always take into account insurance coverage, cost-sharing, or rebates, so the results are often based upon list prices, not actual cost.
In Europe, many countries set their prices based on what other countries pay, a practice known as “reference pricing” (discussed in more detail below), though it doesn’t work as one might expect, and it has no relationship to the notion of global fairness. A study of list prices and affordability for drugs for rare diseases across a dozen countries showed that, while the nominal list prices were indeed consistent, these drugs were far less affordable in poorer countries (Greece, Hungary, Poland) than in wealthier ones (Germany, Sweden, France), once wages, purchasing power parity, and other wealth-normalizing methods are taken into account.200
So, is this the intention of pharmaceutical companies? It wouldn’t make much sense for a company to make their products unaffordable—there’s no profit in that. What happens is that each country negotiates for secret rebates/discounts from the reference price for a drug, which allows a company to make at least some money and that country to treat at least some patients. The point is that achieving consistent and affordable pricing based upon a single reference price across many countries is more theory than reality.
Come negotiation time, European payers rarely look at US prices, which wouldn’t help them win lower rates from drug manufacturers, while in the US, payers are known to grumble about lower European prices. Yet, drug importation remains illegal, so just knowing that prices are lower elsewhere doesn’t offer concrete leverage. Grumbling eventually can turn into something more substantive. Therefore, companies set US prices to maximize profits with US payers and European prices to maximize European profits, doing their best (unsuccessfully, it seems) to avoid massive discrepancies that might cause friction with US payers or the public.
The Favors Other Countries Do for America
In a February 2018 report, the President’s Council of Economic Advisors lamented the “free-riding actions of many small countries,” which reduce companies’ worldwide profits and place a heavier burden on the US patient. The report suggested trade policies that could help reduce this burden but did not provide specifics.201 This and other studies seem to indicate that some countries could afford to pay more than they do for drugs and that if that were reconciled, drug companies would be able to reduce how much they charge for their products in America without sacrificing profit.202
But before we get into who can pay what, we need to consider what would happen if American drug companies simply couldn’t sell drugs in other countries. As noted earlier, the US accounts for roughly one third to one half of drug company revenues and more than half of its profits.203 If companies could only sell in the US, they’d have to charge about twice as much to generate the same return on investment. So though other countries may pay less than Americans might think is fair, they are still subsidizing the operations of a drug industry that makes treatments Americans want.
Another way other countries help keep America’s drug costs down has to do with clinical trials. Gilead was able to show that Harvoni worked in the types of hepatitis C that are rare yet still a problem in the US because they could find patients infected with these strains of the virus more quickly in other countries. It would have taken much longer to recruit enough of these patients in the US to prove to the FDA that the drug worked on these particular strains. In addition, working with scientists, physicians, and manufacturers in other countries helps keep costs down since labor costs are lower in many of them.
Americans value the benefits that drugs offer. They demand more innovation and don’t want to be ripped off. So if the world were just America, one might surmise that Americans would still demand that drug companies work on cures for cancer and Alzheimer’s and infectious diseases and that insurance companies find some way of covering these expensive drugs. In reality, all the other countries comprising the Rest of the World (RoW) participate in the drug development process, contributing a large fraction of patients to global clinical trials and half of the profits necessary to meet drug companies’ current return on investment targets, ultimately allowing America to enjoy lower drug prices than if it were the only country on earth.
But let’s say a country helps an American company develop a drug but then refuses to buy it because the price is more than they are willing to pay. Patients participating in clinical trials would have undertaken great risk, but they would not benefit once those trials were finished. Indeed, that’s as unethical as it sounds.
For example, HIV medications are far more easily tested in Africa where the rate of infection is higher, and then the drugs are sold at a large profit in the US but distributed very cheaply in Africa. Compulsory licensing was conceived with the recognition that to do otherwise would be unethical.204
So if companies aren’t willing to sell drugs to countries at prices they are willing to pay, then they should stop relying on patients there for clinical trials, which would result in drug development taking longer and costing more, to the detriment of patients everywhere, including America.
Americans have such a strong drive to both innovate and treat patients that I think the drug industry would continue to exist in some form if it only served the American market. But without other countries subsidizing drug development in all the ways I just mentioned, America would contend with higher drug prices.
Now consider the inverse scenario. What if there were no America? Without the American market, the modern biopharmaceutical industry would likely shrink dramatically or essentially cease to exist. It wouldn’t be able to generate a sufficient return on investment if it were developing products for countries that are willing to deny treatments to patients based on cost. Perhaps other wealthy nations would discover that they are willing to pay more for drugs than they do now if the alternative is watching their citizens suffer and die prematurely of diseases that biotechnology could address. Hopefully this exact experiment will never be run, but there are other ways we might discover whether other countries are willing to pay more than they do now, namely reference pricing.
Reference Pricing: A Hypothetical
This section was developed with contributions from Anthony Bower.
What if America simply forced the issue of “fair” prici
ng by introducing regulations stating that it won’t pay more than other comparably wealthy countries? Such international reference pricing has been repeatedly proposed by politicians and academics as a solution to high drug prices in the US. Let’s look at how it might play out.
Firstly, depending on how it was implemented, reference pricing might only impact list prices, making it entirely ineffective at lowering the cost that payers incur. Companies could set a high international reference price, and then simply offer secret rebates in each country to arrive at the prices they charge now.205
Complicating Global Partnerships
Often, different companies market a drug in different countries, such as when a US biotech company licenses European rights to its drug to a foreign company in exchange for sharing in the work and cost of its development. US law requiring reference pricing would only apply to the company commercializing the drug in the US, leaving the partner with foreign rights free to set the price in Europe to maximize its own profits. If the reference pricing law were applied without making exceptions for such international partnerships, then odds are that the US would enjoy European prices for many partnered drugs, but the benefits would be short-lived because companies would stop splitting commercialization rights in this way (no US company would give away its ability to control price), which would create friction for innovation and commercialization while doing nothing to reduce US drug prices.
But let’s assume that the US government took secret rebates into account by forcing companies to report what they charge in each country and setting net prices in the US based on international net prices. In theory, if a country won price concessions from the company, those savings would flow through to the US.
The Great American Drug Deal Page 17