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European Biopharmaceutical Review

A Tale of Two Cities

There has been a significant change in drug development strategy – pharma is moving away from blockbusters and towards orphan indications. The past year has seen the introduction of new innovator drugs that are transformative in their effectiveness against underserved medical needs. However, in order to capitalise on these opportunities, companies must, out of necessity, recover development costs from a modest patient-base. At the same time, patients, governments and payers across the globe have voiced their collective concern over prices. On both sides of the Atlantic, the word most often heard is ‘unsustainable’.

The price of drugs is more visible than other healthcare costs and, in many instances, is directly borne by the patient. From the perspective of payers, there is a need to control costs, while rewarding innovation and risk-taking with an adequate return. Pharma development is unique in its profile of high R&D expenditure and high failure rate.

Washington: The Market That Pays More

The US currently pays an estimated 18% of GDP on healthcare. By some accounts, this covers a disproportionate share of global biomedical R&D. The US system is a patchwork of payers, insurance companies, pharmacy benefit managers, retail pharmacies, physicians and medical service providers. On the whole, it works effectively to provide patients with what they demand – efficient access to quality care and a first look at new therapies.

Consistent with the free-enterprise model, there is no single national authority overseeing drug prices. The US government does leverage its buying power to set reimbursement rates for medical goods and services that it obtains. However, most of the purchasing power is in the hands of individual private insurance companies, their pharmacy benefits managers, and state payers of Medicaid benefits. Payers have established formulary lists, reimbursement rates, co-pays and, in many instances, prescribing guidelines, to encourage the use of the most cost-effective alternatives or generic equivalents. As healthcare provision is mainly based on managed care – pay-for-outcomes and comparative effectiveness models – over 80% of US drug prescriptions are filled by generics.

There has been extensive pushback by payers towards the new high-end innovator drugs and it would be rare for a true medical necessity to be denied treatment. Nonetheless, it is often the case that the newest, highest priced drugs will require greater medical justifi cation, especially when alternatives exist.

London: A National Health Service

The UK NHS is the world's largest publiclyfunded health system. There is one payer that manages all aspects of healthcare provision, and free medical services are funded through taxation. In the UK, the total cost of healthcare is estimated to be around 9% of GDP and many analysts cite lower prices for most drugs, with outcomes comparable to the US.

Controlling drug costs is a powerful policy lever, particularly in times of tight budgets. Two institutions play an important role in maintaining price stability: the National Institute for Health and Care Excellence, which evaluates the clinical and cost-effectiveness of new drugs using health economics models; and the Pharmaceutical Price Regulation Scheme (PPRS), which allows the NHS to negotiate directly with manufacturers to regulate the profits that companies can make from NHS businesses.

The main feature of PPRS is a negotiated cap on profits – after allowances for R&D – although companies have flexibility to adjust prices on individual drugs. Currently, there is a greater emphasis on financial- and outcome-based measures of drug effectiveness in defining the offer price to the NHS within an annual budget.

Industry Trade-Off

The recent crop of high-profile orphan drugs is now at the forefront of the healthcare-economic debate, and may signal a tipping point in industry-payer relations. This brings into focus the trade-off between medical need, the ability to pay, and the assurance of a future, robust industry pipeline.

Pharma business strategy is leaning toward niche indications. The spectacular launch and record-breaking sales of one of these new drugs – at a breathtaking price – calls into question many of the assumptions that have guided the interactions between pharma and healthcare systems for decades. Resolving these issues within a budget-constrained environment will need creative solutions on both the buy and sell sides.

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Emile Bellott is an industry consultant with over 25 years of experience in drug discovery, development and pharmaceutical outsourcing.
Emile Bellott
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