Editor’s Note: Some of the key differences between the House and Senate health reform bills revolve around drug pricing. For example, the House bill requires drug manufacturers to provide, at a minimum, the same rebates for drugs provided to dual eligibles — those eligible for both Medicare and Medicaid — under Medicare Part D as Medicaid would require. The House bill also directs the Secretary of Health and Human Services to negotiate drug prices with manufacturers on behalf of Medicare Part D enrollees.

Some have argued against the House’s attempts to lower drug prices on the grounds that these provisions would endanger the revenues pharmaceutical companies need to conduct research and to develop new drugs. Others have disputed this. For example, a recent Health Affairs study by Donald Light recently challenged assertions that pharmaceutical R&D is more productive in the United States than in Europe, where drug prices are generally lower. In the post below, Light expands on his article and addresses the controversy over drug prices and the relationship between prices and R&D.

My August 25th article on the Health Affairs Web site, “Global Drug Discovery: Europe Is Ahead,” has key findings that pertain to debates in Washington about the future of the U.S. pharmaceutical industry and the rising costs of drugs for Medicare and their prices.  The article was based on all new molecules (NMEs) from 1982 to 2003 assembled by Henry Grabowski and Y. Richard Wang and on their methods for classifying and crediting them to one country or another.

Simple percentage calculations showed that the U.S. 41.9 percent  increase in the proportion of NMEs from 1982-1992 to 1993-2003 was matched by the increase in billions invested by companies in U.S.-based research, so that research productivity remained about the same and low – about 75 percent of the overall ratio of new NMEs-to-research investment. For highly profitable global NMEs, the United States had only a 5.7 percent increase despite the huge increase in corporate investments; so its productivity dropped sharply, from 112 percent of its share of funds to 83 percent.

In both cases – total and global NMEs – Europe outperformed the United States and also significantly increased its productivity of NMEs per billion invested. Regarding critical new drugs that are first in class, Europe and the United States were about even, but this means that U.S productivity decreased substantially and Europe productivity increased, as shown in Exhibit 4 of the article.

Do these results mean that American pharmaceutical companies are losing their edge? Some commentators on Web sites have expressed concern that American companies seem unrestrained in spending whatever it takes to recruit patients, speed up clinical trials, and pay large mark-ups to clinical research organizations as middlemen, while Europeans are more cost-conscious. Overspending may contribute to inefficiency, but we have no sound data.

European countries have also signaled more strongly that companies will be rewarded for significantly better drugs but not for marginally better ones, while U.S. purchasers tend to pay high prices for marginally better drugs as well as good ones. Although the Pharmaceutical Research and Manufacturers of America (PhRMA), the industry trade association, champions high prices, they create an industry fat on easy profits and well-documented opulence. European and Asian competitors may move in as lean competitors. Paying less for marginally better new drugs would be painful but critical, I think, to keeping the American industry competitive. In no other industry – cars, cell phones, computers, software, or TV screens – can companies make marginal improvements and charge 3-4 times more.  

PhRMA vigorously argued that my findings do not show a decline in American research productivity. They pointed out methodological flaws, but ironically, they were criticizing the methods developed by Grabowski and Wang and biased toward the United States, to prove U.S. dominance. For example, orphan or first-in-class NMEs introduced in Europe but not the United States were excluded, while drugs introduced in the United States but not Europe were included. Sixty percent of global headquarters of major firms are in the United States, too. PhRMA celebrated their article as “proof” of U.S. dominance until my reanalysis appeared. Now they condemn its methods.

The original methods are in fact cruder and more inaccurate than even PhRMA indicates. The location of corporate headquarters has little to do with where new drugs are discovered and developed. Yet the fifteen-year campaign by the pharmaceutical industry to persuade Congress that its government protections from normal competition have reaped rich rewards in innovation, and to persuade European leaders that their governmental efforts to get good value for taxpayers’ money have cost them great loss in innovation is based on just such crude, inaccurate measures. My article simply showed that even such crude, biased data could be turned around to show that Europe was ahead.

Where Do We Go From Here?

What we need are studies of who discovered what leading to recent new drugs and who developed them up into trials. What PhRMA should focus on is not discrediting my article (and actually industry-supported studies) but fostering an independent assessment using good measures of how productive American pharmaceutical research is and how it could be even more so. Is Faraz Kermani right that Europe’s new Innovative Medicines Initiative “is eclipsing its U.S. counterpart”?

The second, bigger point of my article for Congress, employers, and insurers is that regardless how productive pharmaceutical companies are, studies show that 85-89 percent of new drugs provide little or no advantage over existing drugs when measured by clinical improvements. Many receive “Priority” status by the Food and Drug Administration (FDA), which replaced its former, more independent rating criteria with looser, industry-friendly ones.

Most R&D will continue to focus on marginally better drugs that garner patent-protected high prices so long as Congress and major buyers pay much more for little value added. These higher prices subsidize spending $609,000 a day on lobbying lawmakers to protect them and to get $20,000-$50,000 for cancer drugs, when evidence indicates that the net, median costs of development to companies are lower than for blood-pressure drugs. More of the research is paid by taxpayers, and trials are smaller, shorter, and easier to run. As I wrote, “…the vast majority of new drugs that constitute 80 percent of U.S. pharmaceutical costs offer few therapeutic advantages and greater risks than good drugs discovered in previous years.”

Third, high research productivity is not adversely affected by much lower prices than in the United States because there is plenty of profit at European, or Medicaid, prices. High productivity in countries such as the United Kingdom, Sweden, and Switzerland has more to do with strong universities and research-friendly government programs than with drug prices. All the claims that U.S.-level high prices are needed to support robust research do not provide any evidence that connects the two. The best direct evidence comes from the UK requirement that companies submit audited, confidential reports on all costs, including up to 23 percent of revenues for R&D, so that prices can be set that guarantee up to 21 percent return on capital. The resulting prices that guarantee recovery of all costs plus good profits are well below U.S. prices.

Other evidence also supports the conclusion that Congress allows companies to charge monopoly prices for monopoly profits well above what is needed. In fact, those high prices contribute to U.S. companies being less innovative and productive. Thus returning dual-eligible drugs to Medicaid prices would be one small step to helping the U.S. pharmaceutical industry be more innovative, and not allowing any new forms of market exclusivity would be another. In fact, any measure that increases competitive pressure for better value will keep the American pharmaceutical industry from going the way of Detroit’s big three in the next fifteen years.