Drug pricing: caught between ethics and politics | Financier Worldwide

Drug pricing has become a topic of much heated debate, both on the political stage and among drug companies, patients and payors. Many of us are either directly or indirectly (through friends and family) affected by what seem to be ever-rising drugs prices, insurance premiums or co-payments.

Society, in the form of public payors or sickness funds, finances a great part of the pharma industry’s activities, governed through the social contract. What does society expect in return for this investment? The development of innovative drugs that help improve symptoms, quality of life, or in the rare case, even provide a cure. But not only that, payors should – at least theoretically – be provided access to all approved drugs.

Yet, ever-increasing prices for drugs that sometimes offer only incremental benefits for patients’ life expectancy or quality put a strain on this contract between payors and the industry. Snowballing drug prices fuel an emotional debate, in which the lines between ethics and economics often blur, sometimes dividing society, illustrated by last year’s US presidential election campaign. The debate is often carried out on the social media battleground, where so-called ‘solutions’ to complex problems can be formulated in a few lines or less.

Why innovative drugs are expensive

Creating successful drugs is a risky and expensive business that requires appropriate incentives for the main actors. This core argument that the pharma industry employs to justify price increases is hard to refute. Cost estimates for developing a drug from initial research to market vary greatly from one to several billion dollars. There is consensus, however, that making drugs is extremely expensive, especially if you consider all of the failures (only one in 10 drugs makes it through all phases of clinical development). Truly innovative breakthrough drugs tend to be much more expensive than incrementally modified ‘me-toos’. If one takes into account both risk-adjusted costs and dramatic loss of sales after patent expiration typically after 10 years on the market (in some cases more than 90 percent of sales in year one), one can easily calculate that prices need to be high for manufacturers to create value in excess of their cost of capital.

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Drug pricing: caught between ethics and politics — Financier Worldwide.