Challenging the link between pharma innovation and US drug pricing

A new study claims to debunk the well-worn connection between inflated US drug prices and big pharma’s R&D spending. But what is the connection between innovation and pricing in the pharma space, and is it the whole story?


There has been a noticeable escalation of the debate about drug prices in the US over the last few years. It’s no secret that drugs are typically more expensive in the US when compared to other developed health markets such as Canada, Japan and many European countries.

US list prices are exponentially (sometimes two to five times) higher than those paid in Europe or elsewhere for blockbusters like cholesterol drug Crestor, breast cancer therapy Herceptin or chronic myeloid leukaemia (CML) treatment Gleevec. Even after discounts to US taxpayers – which can be as high as 50% or more – are factored in, prices are often still significantly higher.

US prices: the R&D defence

There is a complex network of factors contributing to these price discrepancies between the US and the rest of the world. Facets of this network include US federal agencies’ inability to negotiate list prices with pharma companies or set price caps, the uneven price-lowering impacts of generic competition and the tacit consensus position that you can’t put a price on a human life when it comes to pricing a drug – a position that is not echoed in countries like the UK.

One of the pharmaceutical industry’s most common defences of high US drug prices is that the premium paid for innovative medicines, in the American market particularly, is vital to fund the R&D that underpins the breakthrough therapies of the future. High innovative prices are also necessary, pharma companies argue, as an incentive to push drug developers to commit to hugely expensive, high-risk research.  

This perception of an American premium funding global research has prompted a natural debate on whether this is a just situation, and whether US patients can afford it. “We can no longer sustain a system where 300 million Americans subsidise drug development for the entire world,” said pharmacy benefit management company Express Scripts’ chief medical officer Steve Miller in a 2015 interview with Bloomberg.

But is this the right way to frame the debate over American drug prices? Certainly the story of US drug prices covers much more than the R&D defence, and as one recent study has attempted to demonstrate, this link between drug pricing and industry R&D costs may not be as strong as has been previously assumed.

New study looks to debunk pricing-innovation link

The study (the results of which were published on the blog of the Health Affairs journal in March) analysed the price differences of the 20 top-selling drugs in the world between the US and reference countries Canada, Denmark, Ireland and the UK to work out the excess revenue generated from higher prices in the American market. This US price premium (which included a reduction according to each company’s reported average gross-to-net adjustment after discounts and rebates) was then compared to the relevant companies’ publicly-filed global R&D expenditure.

"The higher prices US patients and taxpayers pay compared to their counterparts in Western Europe far exceeds what is spent on global R&D."

The analysis found that the pharma companies made around $116bn from the US price premium on the drugs studied, and that these firms spent only around 66% of this sum on their global R&D efforts.

“The recent study published in Health Affairs concluded that the higher prices US patients and taxpayers pay compared to their counterparts in Western Europe far exceeds what is spent on global R&D, contrary to the claim that higher US prices are necessary for global innovation,” says the analysis’s co-author, Memorial Sloan Kettering Cancer Center director of health policy and outcomes Dr Peter B. Bach, a renowned critic of pharma drug pricing. “If US patients and taxpayers were charged equal to the R&D expenditures, $40bn would have been saved in 2015.”

That $40bn is significant given that the US’s total expenditure on pharmaceuticals in 2015 was around $325bn, but the industry and some experts have been quick to question the methodology and conclusions of the study.

Flawed methods?

“We do take issue with the analysis in the study,” says US industry association PhRMA’s senior director of public affairs Holly Campbell in a statement. “Despite whether their estimates tried to take into account discounts and rebates for medicines, their logic is flawed and underscores a lack of understanding about how businesses operate.

“There are many factors that may go into a price of a medicine, including a medicine's benefit based on clinical and real world evidence. The medicine's clinical merits (e.g. efficacy, length or quality of life, reduction in other health care costs) and other factors including unmet need and R&D are considered.”

In a recent interview with BioPharm International, University of Southern California quintiles chair in pharmaceutical development and regulatory innovation, Dr Darius N. Lakdawalla, also criticised the study’s “poor empirical research design”.

“I also think there is some confusion about the economic issues here,” Lakdawalla said. “Innovation investment is driven by expectations of future revenues, not necessarily by current revenues...'more money today' does not necessarily translate into more innovation spending today. Rather, the mechanism works through expectations about the future policy and market environment, and how these are likely to influence the revenues that can be earned when a pipeline drug is eventually launched.”

The bigger picture: measuring true innovation

So while there is certainly a discrepancy between US drug price premiums and the pharma industry’s global R&D spending, thereby undermining a common justification for high prices, it’s far from the whole story. Certainly it would be naïve to pin the entire US drug pricing debate on the connection between pharma revenues and R&D. Even when considering the cost of innovation in particular, this link only represents part of the picture.

Part of the issue is public trust, and the naked profiteering of some firms – Turing Pharmaceuticals, Valeant and others – that have massively jacked up the price of acquired drugs without much justification has eroded that trust in a major way. Advanced modern treatments, many of which are biologically-derived and much more expensive to develop than traditional small molecule drugs, may well justify a high early price tag to reward true innovation, but the predatory business models of a minority of companies casts a shadow over the whole industry.

"Part of the issue is public trust, and the naked profiteering of some firms – Turing Pharmaceuticals, Valeant and others – that have massively jacked up the price of acquired drugs."

‘Pay to delay’ strategies and the practice of adding new patents or making incremental changes to drugs to maintain exclusivity without adding much in the way of new clinical benefits also dampen the price-lowering effects of generic competition.

On the broadest level, the drug price differences observed between the US and many of its developed counterparts can perhaps be best boiled down to a more fundamental separation in pharmacoeconomic philosophies. The US system could be broadly summarised as a free market approach, where drug prices are generally dictated by what the market is willing to pay, with list prices set by pharma companies not contested by government.

Fair value or free market?

In many cases, European countries follow more of a ‘fair value’ method, by which public agencies judge the clinical worth of a drug and insist that its price matches its perceived value. This means that national authorities are responsible for evaluating the innovative characteristics of new therapies and translating their benefits over current standards of care into their price calculations.

A good example of this is the quality-adjusted life year (QALY) system used by the UK’s National Institute of Health and Care Excellence (NICE) to judge the cost-effectiveness of new drugs based on the number of years of quality life a patient might gain on a new treatment. NICE’s guidelines state that it is generally willing to pay up to £30,000 per QALY, and possibly more for some cancer drugs or end-of-life treatments.

There are pitfalls inherent to both systems. For ‘fair value’ pharma pricing systems run by national health networks, cost-effectiveness often comes at a cost of reduced options for patients, and British patient groups have, at times, been highly critical after being denied access to a new drug that NICE deemed poor value for money.

As PhRMA’s Campbell notes: “Price differences that may exist between the US and other countries are often achieved through price controls that result in restricted access to medicines and fewer choices for patients. For example, new data show patients in Europe wait an average of nearly two years longer to get access to cancer medicines compared to patients in the US. Even after this wait, patients in Europe still have access to far fewer medicines.”

On the other hand, the US free market approach and the lack of government-level negotiation over drug prices leaves the market vulnerable to abnormal price spikes (as in the cases of flagrant price-gouging) and much higher list prices in general. Allowing the industry to set its own prices puts a lot of pressure on insurers to secure big discounts, and ‘innovative’ drugs that achieve similar or only incrementally better results than cheaper competitors can still find a strong market position.

As Regeneron CEO Leonard Schleifer frankly stated at a Forbes healthcare conference in December: “The real reason we’re not liked is that we’ve used price increases to cover up the gaps in innovation. That’s just a fact.”

The fastest access to pharmaceutical innovation comes at a high price, and the US, at present, appears willing to pay it. But there are signs that the tide is turning, at least in terms of public sentiment, and with President Donald Trump seemingly open to the idea of introducing drug price controls, the titanic US pharma sector might do well to start looking inward on pricing and innovation. Either that, or it’s got a lot of lobbying to do.