f the lowest drug prices in Europe. It also has one of the worst records in developing innovative at can compete globally. The most successful companies in France are firms that produce and -too' drugs or palliatives with little therapeutic value. Innovative companies are punished with ar✓ prices to favor companies that produce low price drugs without regard to their ability to add value. Indeed, "one might joke that is an honor to receive a low price in France, as this a signal "global competitiveness." # 19 uct patents were instituted for the Japanese pharmacuetical industry in the 1970s, the amount of &D has increased rapidly. However, most drug developed in Japan are made for the Japanese pan reduces the price of existing products every two year. This system has skewed innovation toor product extentions and compounds that are not efficacious in order to get high prices. wo years however, the Japanese government has begun build up the nation's presence in bio. Specifically, Japanese companies are aggresssively seeking to acquire product and technology US biotechnology companies in order to quickly upgrade their scientific and industrial capabilid, with the shortage of financing for biotech in the United States, Japan has become an important last resort for many small biotechnology concerns in this country. Finally, new drugs can now arket at 2-3 times the price they could have expected in years past. The government hopes that prices encourage the development of innovative products. Controls Just Pricing Pressure in Disguise? ntional wisdom is that price controls will force companies to discard the development of increg development and focus their talents and money on innovative products in the hopes of developkbuster. As this overview suggests, this notion is inconsistent with experience under price control ces shaping and encouraging innovative research. Price regulation rewards incrementalism and sk-taking, particularly if the price and access of new drugs are regulated. Without innovation, it is a country's pharmaceutical industry to be globally competitive and its biotechnology industrial pidly develop. That is one reason the European Community is considering ways to do away with ols. on Administration's proposed price control scheme has much in common with the French system of armaceutical prices and reducing the price of innovative drugs as well as the German system of deng innovation in favor of generic drugs. In both health care systems, riskier and innovative reiscouraged. In turn, the introduction of minor product extensions are encouraged. In Germany y, generic companies are prospering and research-intensive companies are cutting back R&D actihe US, larger generic concerns are estimated increases in sales and profits of 40 percent over the ears. likely that price regulations in the US will reduce innovation. Political reforms of the market sysrope have achieved little cost control. They have been effective in discouraging innovative R&D. The Triumph of Britain and the Failure of France." Page 22. Lower prices result in less investment. That was the case in the pharmaceutical industry in the 1970s and that is the case under price regulation in Europe, Japan and elsewhere. It is possible however that price regulations in the US won't discourage innovation? After all, the industry has gone through three years in which price increases have declined and even stagnated after all discounts, price freezes and generics are taken into account. Managed care concerns are increasingly are favoring lower priced drugs and are beginning to examine the cost-effectiveness of new drugs before agreeing to pay for them. In addition, the industy has paid out nearly $1 billion a year to the federal government in the form of medicaid rebates. And yet, R&D spending has increased, not decreased. If the both the pharmaceutical and biotechnology industry were able to thrive and invest in innovation in the new pharmaceutical market, why would government regulation of launch prices make any difference? First, because of the time lag between discovery and market introduction, the impact of the policy and market environment today will not be fully felt for years. Nonetheless we have some preliminary trends. Price competition has begun to have an effect on R&D. It has sent a signal that cheaper versions of existing products are in demand. As a result, drug companies are spending more money to acquire generic product lines or increase sales volume to offset price stagnation. Marion Merrill Dow's acquisition of generic maker Rugby-Darby and Merck's $ 6 billion acquisition of Medco Containment Services, a mail order pharmacy, are two examples of this trend. At the same time, according to In Vivo, a biotechnology and pharmaceutical newsletter, pharmaceutical alliances with biotech firms have declined20 Second, as cash flow declines, R&D will decline as well. For biotechnology companies, the decline in cash flow - all risk capital used for R&D - the decline is dollar for dollar. The only opportunity for robust earnings growth are breakthrough products. Grabowski and Vernon estimate what would happen if the government cut the price of breakthrough drugs by 23% (essentially capping the price of breakthrough drugs to a breakeven rate of return on R&D investment) which is close to the proposed basic rebate of 17%. Rebates on breakthrough drugs could be higher. Cash flows for the top best selling drugs or biotechnology therapies would fall below the total cost of R&D." The impact on rates of R&D should be obvious, particularly for biotechnology companies. Third, government price controls would cover up to 50% of all prescription drugs purchased. As the largest purchasers of drugs it would have immense, near monosponistic power to force prices down, extract discounts and pay only for drugs that met its terms. Government can singlehandledly create significantly more pricing pressure than several managed care concerns can collectively bring to bear. Finally, government price controls are not merely an extension of market pressure, they represent a fundamental shift in values. Controls substitute a political process for the marketplace. In order for controls to work individuals must be made to adhere to the governmental or bureaucratic decision. Millions of physicians, pharmacists, medical researchers, companies, and patients who make decisions based on the quality and value of pharmaceutical innovations would be replaced with a few (in the case of the HHS Breakthrough Drug Council, thirteen) "experts". These experts will evaluate the 'reasonableness' of drug prices in terms of products in the same therapeutic category (an interesting criteria since breakthrough drugs are supposed to be unique by definition), manufacturer cost information, prices of drugs in other countries and projected volume. 21 Henry G. Grabowski and John M. Vernon, "Returns on New Drug Introductions In the 1980s", Duke University, October 27, 1993, Supplemental appendix, page 3. 151 Hence, price controls replace social interactions that arrive on a price based on the highest worth of a drug in terms of a patient's health with a system that focuses exclusively on the cost or cost-effectiveness of a product. Innovation is encouraged because a market will reward new products that benefit consumers by saving lives, increasing the quality of life and reducing medical costs. Price controls reject these preferences and stipulate that drug prices will be set according to the need to meet budget targets or a planner's definition of what is reasonable'. Controls restrict the ability of firms to obtain higher prices when they introduce more valuable and innovative products. Far from merely being an extension of market forces, price controls supplant them and subsume the value of innovation to the political goal of cost containment. Lower prices send a signal that innovation will not be rewarded with higher returns. By limiting rewards for innovation and discouraging investment, price controls limit innovation. As Dr. Judith Wagner, a Senior Associate with the Health Program at the Office of Technology Assessment has noted," an administrative process for controlling drug prices would add a new source of uncertainty..one that would not be resolvable until all the money has been spent. Consequently, investors would be more hesitant to commit early R&D money..." #22 23 Tradeoffs Between Price Controls and Innovation: Current Consumption or Future Investment? Some policymakers have argued that a decline in R&D and breakthrough products is an acceptable tradeoff for getting drug prices under control and extending prescription drug coverage to all Americans. They realize that pricing freedom is a powerful incentive for encouraging investment in future cures instead of demanding the consumption of current drugs at lower prices. Without pricing freedom, there is no effective mechanism to encourage consumers to forgo the immediate benefits of cheaper drugs for the formation of risk capital required to fund breakthrough research. Political and bureaucratic organizations cannot effectively meet the health needs of future generations. Instead, they tend to respond to demands for current consumption for acute medical needs. As Dr. Michael DeBakey noted in Science magazine, "The most effective way to improve health is to gain new medical knowledge, and that requires the expansion and intensification of research" To the extent that price controls reduce investment in innovations, price controls sacrifice the goal of quality on the altar of cost containment. As a result, future investments in preventative or curative treatments receive a lower priority. In this context, it is important to remember that the medical advances to cure, prevent and effectively treat most of the devastating disease of our time will have to come from bio-medical breakthroughs. We can travel no other route to improve the quality of health care and break the grip of illness on the human condition. It is for this reason that the public should look at Europe's experience with all forms of price controls and think carefully about enacting them. Once in place, they will be very difficult to reverse. Price controls could be our ironic contribution to the health of the next generation. 22 Statement of Judith L. Wagner, Ph.D. Senior Associate, Health Program, Office of Technology Assessment, Before the Special Committee on Aging, Washington, DC, November 16, 1993, page 13. 23 Some congressmen have gone so far to suggest that pharmaceutical firms should be prohibited from selling generic products because independent generic firms might not survive the competition! Apparently, the only way pharmaceutical firms should respond to market pressure is to launch breakthrough drugs at lower prices and let generics eat away at their market share without a response. 24 Michael E. DeBakey, MD., "Medical Centers of Excellence and Health Reform." Science. Volume 262, October 22, 1993, page 524. About the Gordon Public Policy Center The Gordon Public Policy Center is a non-profit, non-partisan and interdisciplinary research center located at Brandeis University. The Center's mission is to analyze domestic public policy to improve the policymaking process. As part of its Regulatory Review Project, it has identified government regulation of bio-pharmaceutical companies as an important, but neglected, aspect of the debate over the direction and scope of health care reform. Robert Goldberg, Senior Research Fellow, is responsible for this aspect of the project. His research will deal with a wide range of critical issues such as pharmaceutical price controls, the role of biomedical progress in improving the health care system and controlling costs and the future of biotechnology under health care reform. For information on the Gordon Center's research programs contact Martin A. Levin, Ph.D. at 617-736-4795. Individuals interested in contacting Dr. Goldberg may do so at 201-379-4029 or via fax at 201-467-5579. Robert Goldberg, Ph.D., Senior Research Fellow pact of Price Controls on Biotech Stocks: The Future is Now g to The Wall Street Journal "right now is precisely the time to be raising money"...by blic.' So why is all the money pouring into the IPO's of companies that develop real ese golf equipment or information devices, but not biotechnology? several reasons for the collapse of the capital markets for biotech stocks including poor Its for drugs the market believed would be blockbusters'. However, the discussion of trols and the proposals to regulate and review the price of new, breakthrough drugs has, important and widely identified factor in the decline of biotech stocks and it is the one at public policy can influence. g to an article in the Philadelphia Inquirer, a White House official stated that, "I just gine that people are relying on this provision to decide whether to invest money." In estors are do just that. According to Oppenheimer & Co., Inc. biotech analyst Jeff Casthreat of government price controls has led investors to shift their money out of biogy."2 Talk of government controls on the launch price of new drugs has already reduced New Stock Offerings To Surge This Fall." The Wall Street Journal, August 30, 1993, page Bl. effrey Casdin, Personal Communication. October 12, 1993 |