Regarding Drug Pricing, what is not talked about much

This past week drug pricing has been back in the forefront of the news headlines with CEOs of the major pharmaceutical companies testifying in front of congress.  In this article I am going to talk about something that is not really discussed, beyond the role of PBM in setting drug prices, which until recently had not been discussed much either.  That is the role of equity research analysts and the stock market in this business paradigm.  

Let us take an example. Not too long ago, Gilead brought to market game changing treatments for Hepatitis C, which essentially eradicated the disease.  As we recall, around this time there was a lot of complaints of the high drug price for this breakthrough, and disease modifying drug.  At one point after these treatments were in the market there were equity research analysts putting in their notes to investors that these treatments were curing people of the disease so their models predicted there would be less people with the disease in the future thus less revenues generated in the future.  Well, this type of statement also impacts the stock price in a negative way.  Gilead’s stock price at its peak in 2015 was around $120, and now it is around $66.  So on the one hand, there is frustration over the high drug prices, and on the other hand the market is basically “penalizing” Gilead for bringing to the market a drug that was a cure to a disease.  Is there something not right with this picture?  

As we know, a company in any industry, such as Gilead in the above example, becomes larger, it gets tougher to make the same percentage return on investment in actual dollar value, which is rising.  The markets continue to expect similar returns that a company may have had in the past when it was smaller.  This happens in all industries, although in the pharmaceutical industry it may have a greater impact since as we know well the costs of discovering and developing innovative drugs is extremely high.  So one can envision in a situation like this as a company is growing larger and then need to continue to meet market expectations, that they have to develop business strategies to compete and make tough decisions.  This may lead to mergers, acquisition of startups, and also large companies divesting divisions that are not part of their core mission in order to become leaner.  On a side note, this may also have other downstream effects to the economy, such as cost synergies being realized in the form of layoffs, facility closures, and also a potential loss of corporate headquarters in one state, moving to another state of the new company or even a different country.  This makes me wonder about other things, such as when equity research analysts make statements such as a company has a lot of cash on its balance sheet and should make use of it by making an acquisition, what is the resulting net impact of these type of statements?  This dynamic on market expectation is something to reflect on, especially how it applies to the pharmaceutical industry.

Now, lets go to a different industry, the consumer products industry.  Companies release the next new version of a product with minor tweaks and yet the prices seem to increase at a much larger rate.  Yet, one does not really see complaints about high prices, as a matter of fact sometimes it is the reverse where the public is lining up in front of the store to purchase the new version of the product the day it releases. On the other than hand for life saving drugs there is much more attention to prices.  Refer to a previous article of mine here.  

Some years ago, cell service providers changed their business model.  Now the public actually pays to buy the phone and can do it in installments over the period of the contract, let us say two years.  At the end of the two years they own the phone. Can the drug industry transition to a business model similar to this?  It may only be worthwhile to consider this for high price tag drugs that target life threatening diseases as opposed to maintenance drugs.  For example, in the above analogy the PBMs/Health insurers act as the cell phone service providers and get paid in installments over a certain period of time for a therapy.  Calculating the duration of the payments becomes tough when one is talking about aggressive diseases with higher mortality rates like cancers.  If payments are supposed to be made over 3 years, and the patient does not survive past 2 years, then who pays the remainder at that point in time for the last one year?  Obviously not the patient’s family.  It would have to be absorbed in an appropriate fashion by the PBM and the pharmaceutical company.  One can also visualize that instead of the payments being flat over the course of that timeframe, it is an exponential decay where a little more is paid in the beginning.  This combined with a health outcomes based approach may be a possibility to cushion the high price tag of a drug.  It is great to see companies such as Novartis are trying new payment models that are based on health outcomes of patients.

Bottom line it feels like there is a call for more innovative, and cheaper drugs at a faster pace, which is great and what we all want.  At the same time there are some challenges to this and what is the solution(s) to this?  What is the right pharmaceutical business paradigm?  How about giving more economic incentives for companies to re-purpose existing drugs for other targets (refer to a recent article here). 

This debate is not as straightforward as the prices of drugs are too high.  There a few outliers that exaggerate this, such as Martin Shkreli's exploits, and taint the industry.

I welcome your comments on this article and also for you to read some of my previous articles: Does Scientific Research Need a Stimulus; Business of Science, the Dynamics of a Startup; and What is the Next Pharmaceutical Business Paradigm?