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Outrage over drug prices may not force change: Richard Evans explains

Richard Evans of Sector & Sovereign Research [1]


The controversy over prescription drug costs accelerated as some companies raise prices to previously unseen heights, and others slapping six-digit price tags on the latest medicines for cancer and other  hard-to-treat diseases. The upshot is the entire pharmaceutical industry is being widely criticized. Despite the microscopic scrutiny now being applied to drug makers, efforts to clamp down on the entire industry are unlikely to hamper the brazen upstarts generating headlines, according to Sector & Sovereign Research analyst Richard Evans,  who once made pricing decisions for Roche. We spoke with him about the trends and implications. This is an edited version.


Pharmalot: You note that there are two types of price increases being taken. Tell us about them and what effect are they having on the marketplace?

Evans: There are two broad categories. One involves a new technology that comes into the market and has a higher price than the older product. The gap between the new and old products has been growing pretty significantly over the last decade and, over time, has now had a big effect on average market prices. This means new products are coming in at much higher prices as a starting point and then increasing over time.

The second involves products already on the market and have price increases over time and the current controversy is focused on this type. But there are actually two flavors here. There is the normal market pace in which most brand drug makers are increasing list prices by 10%, on average, over the last 10 years in the US.

But a small subset of companies is increasing prices tremendously. Turing Pharmaceuticals, with its 5,000 percent price hike, is the notable example lately, but you see others, like Valeant Pharmaceuticals, that use the technique repeatedly and systematically. They saw they buy a drug and could take prices to new heights once they owned them.

Pharmalot: But to what extent are these players influencing pricing? Other than Valeant, we’re not talking about companies with large product portfolios, right?

Evans: No, this hyperinflation I mentioned tends not to have a very big effect on average prices across the entire market, often because these products tend to be relatively small to begin with. So the impact on overall market pricing is minimal, although it sure matters if you’re one of those patients.

Pharmalot: Well, the price hikes are certainly generating outsized attention, so how is the backlash likely to play out?

Evans: We think the pricing for the new innovative products, which are priced at a premium and displacing old products, is on safe ground. The simple reason is that there is no institution – government or private – that will deny patient access to a truly innovative product. Unlike in other countries, such as the UK, where they have said no to major advances in medicines, we simply have never done that in this country.

Pharmalot: So, for investors, this will be seen as good news, but not so much for patients?

Evans: Yes, but remember, for the most part, out-of-pocket costs are unrelated to the price of the drug. This doesn’t vary according to the price of the drug but instead depends on placement on insurance formularies [the list of drugs given preferred coverage]… If the price of a drug doubles, I probably won’t see it in my out-of-pocket limits or maybe I live in a state where that cost is limited. So I won’t see the full price increase.

Pharmalot: But consumers do feel those increases.

Evans: Well, the premiums I pay to have for my drug coverage ultimately have to go up to accommodate the more expensive drugs. So patients do pay the cost of those higher drug prices, but they do so through their plans. And from year to year, they find themselves with less generous drug benefits and higher out of pocket costs… You’ve got more families who have coverage now, but the average quality of coverage has gone down.

Pharmalot: Let’s get back to the price hikes. Much of the recent criticism is directed at Turing, which is run by a former hedge fund manager, and Valeant. But don’t nearly all drug makers jack up prices?

Evans: Most of the larger cap ‘traditional’ drug companies, with the exception of Johnson & Johnson and Roche, have moved price aggressively for quite a few years. The biotechs are more of a mixed bag. Their new product prices tend to be very high, but price inflation following drug launches tends to be more gradual, though there are exceptions.

Pharmalot: Do you expect the increased scrutiny to force any changes?

Evans: No, I don’t think they’ll be any changes.

Pharmalot: Why not?

Evans: Having run drug pricing at Roche for eight years, I specifically avoided actions that could likely result in my boss getting a subpoena. That’s something we really wanted to avoid. I think those companies still have the same mindset. Some of these other companies are less concerned about it. Otherwise they might not take those huge price increases.

Look, the companies driving price increases are not your grandfather’s drug company. They’re less concerned with having a public spotlight on them in a negative way. And Congress doesn’t have the power to implement price controls.

The House Oversight committee is really not the key committee when it comes to pricing matters. Even if the hearing happens, the companies will take their lumps and go back to what they’re doing and there’s no change.

What I’m saying is the legislative options are limited to things that don’t have a direct effect. At best, Congress might alter policy for Medicare Part D or place restriction on the Orphan Drug Act. But Congress is really limited to editing federal programs and is not in a position to extend pricing limits beyond the scope of federal programs. Now, if one of the other committees with jurisdiction over pricing were to pick up this issue, then you have to think the wheels are turning and we may see some draft legislation.

Pharmalot: You mentioned the Orphan Drug Act, which refers to drugs approved to treat rare diseases. Can you explain how and why this might come up in relation to pricing?

Evans: Congress gives seven years of marketing exclusivity from the date of FDA approval of a drug and also gives tax credits equivalent to R&D spending. But Congress is rankled by some of the prices for drugs that were approved as orphan drugs. A lot of people think drugs for rare diseases have been high. They could modify the law so that the benefits drug makers receive under the Orphan Drug Act are contingent on some definition of reasonable pricing.

Pharmalot: But that doesn’t really address the broader problem, does it?

Evans: No, in reality, it doesn’t, because [such a change] wouldn’t impact the companies that created the controversy in the first place. But it would have an effect on the market in that it could remove some of the sticker shock.