Lowering Drug Prices Isn't Easy

Lowering Drug Prices Isn't Easy

President Donald Trump told drugmakers at a White House meeting last week that prices were “astronomical” and hinted at negotiating for Medicare, while also mentioning regulation.  Lower priced drugs are a popular goal and to some degree the poor behavior of members of the pharmaceutical industry have brought this criticism on themselves - drug firms that have exponentially raised prices deserve the public furor they receive.  But it is our prediction that if he truly embarks on steps to reduce drug prices, he will find a general reduction of drug prices difficult to achieve.  And such a reduction might be harmful to new drug development.    We covered the current drug pipelines in our report on the Top 25 Pharmaceutical Companies.

Drug pricing is high in the U.S., much higher than in other countries, though much of this is premised on the U.S. burden to support innovation. Limiting pricing and controlling financial gains, after the cost of development and bringing a drug to market, we may find that development pipelines will become shorter, reduce depth. Today's drugs are more complex than a couple decades ago and with that often comes a higher cost of development.  It is not impossible to get some prices down, but an overall price decline across the board is an aggressive goal.

The drugs that sit on the market at 'astronomical' prices without good reason such as what happened with Mylan's EpiPen are often noticed and experience public backlash and justification for pricing becomes an issue. On the other hand, a firm such as Gilead Sciences has some of the highest priced drugs on the market today, focusing on HIV and hepatitis C. These drugs are newer therapies with remarkable results, they come at a cost but when the benefits outweigh the high price we may find it difficult to see a reason for the manufacturer to lower the price without an alternative incentive.

The pharmaceutical market as a whole has witnessed a number of significant changes in recent years, providing both setbacks and new opportunities. The number of blockbuster pharmaceuticals reaching patent and exclusivity expiration status and vulnerable to generic competition has changed the landscape of the market for many manufacturers. The growing interest in biotechnology development has transitioned an industry once focused on chemical-based therapies to biologic therapies and produced exceptional changes in many areas of medical treatment over the last two decades.

Companies such as Pfizer have been unable to ignore the benefits of investing in biotechnology and have shifted their pipelines to focus on therapies in this direction. Strategic acquisitions and partnerships with biotech companies have allowed traditional pharmaceutical companies an opportunity to become diverse in pipelines and product offerings. Companies like Amgen, which specialize in biotechnology, now compete with a growing number of what the industry has once considered to be the traditional pharmaceutical company, This is a trend expected to continue to grow as interest in the small biotechnology focused companies continue to be acquired by the Pfizer's, Novartis' and Roche's of the industry.

One way to potentially reduce the cost of development is to reduce the time in regulatory approval. The time it takes to approve a much needed therapy, 12/18 months, is lost time for the developer and ultimately adds to cost. If the process were to be reduced, leading to faster time to market, faster start to return on investment and gain exclusivity time back we may see a benefit to manufacturers that results in lower drug costs.  The firm said that until plans were clear on how Trump expects to achieve this goal of reduction, it is difficult to speculate how it will affect pricing, investment and pipelines in the future.   R&D spending for 2015 for companies such as Roche, Johnson & Johnson and Novartis top the list, investing 20%, 13% and 18%, respectively. These companies could be forced to reduce spending if revenues decline as a result of pricing limitations without other incentives such as regulatory streamlining and tax incentives.

Challenges to the Development of New Drugs

Despite the new approaches, new technologies and a wealth of new information, drug R&D is still challenged by understanding exactly how drugs will work and why they may fail. Target validation remains a quandary as well. Thus, the hurdle of getting past Phase III trials and launching more NMEs continues. In order to overcome this, many large pharmaceutical entities have turned to smaller drug discovery firms. The biotech industry is generally thought of as the leading source for innovative drug products. New biologic drug approvals have been climbing for the past 10 years and have been making up a larger portion of all drugs approved. Some of the major mergers and acquisitions in the last year have been from transitioning pharmaceutical companies that want to take advantage of leading biopharma businesses.

For example, Pfizer acquired Wyeth in October 2009. The acquisition was part of Pfizer’s shift towards a broader, more competitive biopharma company. Pfizer continues to develop small molecules but sees the potential in significantly increasing its stake in biologics.  Another issue that companies may have to deal with over the next several years is whether there is going to be more emphasis on cost effectiveness or value-added to a new drug. Are drugs that are really innovative going to have the advantage over just the follow-on products?

Many companies are exploring that and trying to understand how much emphasis is going to be put on that as new drugs go through the FDA and then look for reimbursement approval. Pharmaceutical products are tested before they reach the market in many clinical trials and studies. The process is used to test and confirm the safety and efficacy of medicines for humans to use throughout a course of treatment. The testing process begins with preclinical laboratory or animal tests. If a product moves from the preclinical phase, controlled clinical testing is used to test a product on human volunteers. The testing process has five basic stages in addition to gaining market approvals:

• Preclinical (laboratory testing)
• Clinical Phase I (initial human testing, focuses on safety)
• Clinical Phase II (tests for effectiveness and safety)
• Clinical Phase III (focus is on more complete testing in safety and effectiveness)
• Registration (marketing approval)
• Phase IV (post-marketing studies)

A new drug, often called an investigational new drug, is tested in phase I trials to determine tolerability. Doses are minimal in this phase but doses can be increased to study how the body processes the drug. The terms often used for body/drug interaction are “pharmacokinetics” and “pharmacodynamics”. Pharmacodynamics focuses on how a drug affects the body. Pharmacokinetics focuses on how the body processes the drug. This phase tests a product more often on healthy volunteers.

Phase II testing moves towards testing the product against a specific disease or condition. More accurate dosages and the best routes of administration are determined. Additionally, data concerning a product’s safety and possible risks are collected. A larger trial group (compared to phase I) is used in phase II. Often several hundred-trial patients are studied in phase II.

Phase III testing is completed on the largest number of people. The data from previous tests is used to continue the study of phase III products, as well as additional data collection for safety and efficacy. Phase III testing is often double-blind, meaning the patient and the caregiver do not know whether or not the trial participant is taking the active ingredient or a placebo. Some studies also test multiple therapeutic products and a placebo.
Clinical trials require a considerable amount of resources so even if a product meets early safety and efficacy criteria, a company may be unable to take a product to market because of costs. Products that show promise may be pushed through development by investors and/or interested third-party companies that see the benefits of a product.

The trial process uses volunteers that may drop out of studies if they wish to do so. Government agencies and review boards monitor the trial process and they can cancel a trial as well.

If a product is allowed to pass phase III, it moves to the registration process. This stage allows health authorities to determine if a product is indeed safe and effective. In the U.S. this agency is the Food and Drug Administration. Marketing a new drug in the U.S. requires a New Drug Application (NDA) and in Europe, a Market Authorization Application (MAA) is filed with the European Agency for the Evaluation of Medicinal Products (EMEA).
Upon receiving product approval, a manufacturer may conduct post-marketing studies, or phase IV trials. This stage of testing provides additional data including long-term risks, and benefits. Certain accelerated product approvals require phase IV testing.

Drug approvals as a percent of drugs analyzed are decreasing. Estimates suggest the number of approved products in traditional pharmaceutical research is approximately 1/2 of what it was 15 years ago. Researchers have reported that only about 1:10,000 chemical compounds are safe or effective enough to move through the approval process. There are several strategies currently in place working to address this issue and expand the success of compounds.  In 2014, the National Institutes of Health (NIH) introduced a large joint venture project comprised of itself, FDA, 10 biopharmaceutical companies, and various non-profit organizations such as the Lupus Research Institute, and Alzheimer's Association. The goal of the project is to accelerate drug development by selecting better biological targets of disease. By working together, the companies and industry organizations hope to reduce costs and increase available therapies.

Failure Rates and Impact on Costs

Companies are finding more disease targets using advanced research techniques, but if the therapies fail in late-stage trials, it is usually very expensive. If better disease targets are selected from the start, companies expect to develop more effective therapies and waste less in lost R&D investment.  The failure rate for new compounds decreases with phase; however this can be more costly when failures do happen. It is suggested that a phase I compound has a 90-95% failure rate; a phase II compound has an 80-85% failure rate while a phase III compound has a 30% failure rate. The distribution of development costs associated with each phase is as follows:

• Phase I - 2%
• Phase II - 9%
• Phase III - 89%

Pharmaceutical companies spend significant resources in research and development (R&D) activities. Even when comparing all industries, drug development companies are at or near the top when comparing research expenses to total revenues.  Fluctuations in revenues, expansionary policies, and pipeline projects are all important aspects of how much is spent in R&D. Companies with advanced development technologies combined with the number of projects in development can push R&D spending to billions of dollars and 15-20% of revenues each year.

Drugs in Development Currently

There are an estimated 508 projects in development from the top 25 companies which have the potential to add value of upwards of $100 billion in additional revenues to the current pharmaceutical market by 2025, according to Kalorama Information’s records.
Drugs in the oncology segment are expected to make a significant impact to current markets, increasing treatment options, competition and providing advanced alternatives to current therapies. The oncology market is expected to see compounded annual growth of 5.4% through 2025.

Cardiovascular and blood drugs in late-stage development by companies evaluated in this report will experience a turn in the market performance, from declines to growth, due largely to an aging and growing population. The increasing incidence of cardiovascular diseases worldwide and the steady demand for blood therapies will be primary factors for growth. The growing competitive landscape will allow just 0.5% CAGR for the next five years.

Neurotherapeutic drugs in development are expected to more than offset declines by products reaching patent and exclusivity expiration. Products in the mental illness arena will add the significant portion of revenues, followed by movement disorder treatments such as Parkinsonism.  Minimal growth is expected.

Participating companies in the respiratory and inflammation condition treatment segment will see moderate increases through 2025. Sales are showing 1.3% projected annual growth.

Drugs in development for infectious diseases are expected to fuel growth for the pharmaceutical industry—inclusive of vaccines. Innovative treatments will be key in this segment as the anti-infective market is concentrated with competitors and choices for therapy. The segment is poised from strong growth stemming from the HIV and hepatitis programs of companies such as Gilead. Drugs focusing on unmet need and resistance will also show promising revenue. Treatments for infectious diseases are expected to be the second-fastest growing segment behind oncology with sales increasing by 4% on average annually through 2025. 

Other drugs in development focus on products in areas such as diabetes; gastrointestinal disorder; sexual dysfunction; dermatology not otherwise included in other segments; fertility drugs; hormones; osteoporosis treatments; renal disease; ocular treatments not otherwise included in other segments and other specialty segments.  Growth rates will vary.  Specific areas with high potential for growth include diabetes treatments, gastrointestinal diseases, hormones, and ocular treatments.