The New York Stock Exchange Arca Pharmacetuical Index has risen 50.15 percent over the past three years. As Credit Suisse has reported, drug price increases are a “key driver” of pharmaceutical profit growth. Despite calls, for example, for Medicare to negotiate drug prices directly with manufacturers, drug price increases are not about to stop anytime soon.
Wall Street demands year-over year growth in earnings and profits in order to drive stock prices, and there are two reasons that Wall Street needs higher drug prices to accomplish this. The first is because growth by medical innovation – that is, entering more drugs onto the market and expanding their use after approval – is neither reliable nor sufficient. This is due to the uncertainty in the drug development and the U.S. Food and Drug Administration review processes – the enormous and increasingly costly and time-consuming pre-approval and post-approval study requirements, restrictive labeling and limits on communications with doctors and patients imposed by the FDA. So, drug price increases are used to fill-in the earnings gaps.
Second, the FDA has adopted an organizational bias against new drugs as evidenced from their progressively more onerous regulations. It seems that in FDAs view, drugs (even approved drugs) are a problem, not a solution. FDA requirements imply that drugs are toxic time bombs that represent more risk than benefit. So, when a drug is on the market and providing benefit to patients without being associated with terrible side effects, the risk of FDA pulling the drug from the market or applying even more restrictive labeling lessens; therefore, its value increases. When the value of an asset increases, shareholders demand that higher prices are charged.
The two most reliable means drug companies have to meet or exceed Wall Street earnings demands are cost cutting and increasing prices. In October, Biogen announced it would cut its workforce by 11 percent, and big biopharma companies have been steadily downsizing, particularly from research and development staffs: Merck announced the closing of its Cubist drug discovery facility, Sanofi cut its cancer research and development program in Boston, GlaxoSmithKline cut 900 research and development jobs from North Carolinas Research Triangle Park in 2014 and Pfizer recently announced more research and development cuts. As the old adage states, however, you cannot cut your way to growth, and Wall Street needs sustained growth.
Pharmaceutical research and development is a gamble. As Jack Scannell of the Innogen Institute writes, “the R&D lottery is expensive to play, most games are a bust, and the rare wins take a long time to pay out.” He continues, “Without the private sector investors, there would be vanishingly few new drugs. It is true that investors are happier now than they were 4 or 5 years ago when pipelines seemed very bare, but the recent increase in new drug approvals is linked to therapy areas where pricing power is highest and where, as direct consequence, prices attract the most political scrutiny.”
The system needs investors to be happy so that they continue to fund research and development activities by investing in smaller biotech companies and by being bullish on big biopharma, which then acquires the smaller companies outright, or licenses their successful programs. Investors are happy when earnings estimates are met or exceeded, and drug price increases have been responsible for this.
The better way, of course, is to remove as much uncertainty as possible out of the research and development game. We are in the midst of a boom in science and medicine. Genomics and proteomics have unlocked the secrets of many diseases, and have given us great clues to many others. The mining has yielded much, but our regulatory approach has not kept up; in fact, it has regressed. In order to provide patients with the fruits of the new discoveries of basic research and to introduce new drugs at a reliable pace in order to maintain the support of investors, the regulatory landscape needs to change.
Only by restoring the FDA to its appropriate place in the medical ecosystem will this happen. The FDA is supposed to approve drugs that are safe and effective, meaning they effectively modulate clinical signs and symptoms of disease. The FDA, however has assumed a different role: Approving drugs for which clinical benefit (as well as improved survival and clinical outcomes) has been unequivocally proven through long and costly trials and by the agencys definition of clinical utility. This is not its mandate. Rather, it increases uncertainty and research and development costs and time, and it reduces the number of drugs that are approved, particularly for diseases that affect large populations of patients.
Not only does the FDAs approach hamper medical innovation, it is neither valid nor consistent with Congress vision in passing FDA legislation. Rather, hospitals, doctors, medical research consortia and post-market studies offer the most appropriate means to determine the clinical benefit of safe and effective products in the real world.
Americans have two choices: Accept rising drug prices to sustain investment in private sector research and development, or return the FDA to its proper role of adjudicating safety and effectiveness so that the medical ecosystem can select the most clinically beneficial products. The latter will benefit more patients and reduce drug prices, and that is why we are calling for it in our Medical Innovation Impact Index Alert. The time to do this is now, as the 2017 Prescription Drug User Fee Act and Medical Device User Fee Act reauthorization hearings are happening.
It seems to be an easy choice.
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