Originally published in The Wire.
Geneva: High prices of cancer drugs hurting desperate patients have caught the attention of policymakers everywhere. But do high prices of medicines that provide huge financial returns to pharmaceutical companies also distort innovation?
A new cancer report by World Health Organisation (WHO) has both countries and the pharma industry debating on just how much profit cancer drugs generate for pharmaceutical companies. At stake is not only how much money the drug industry makes from high priced cancer drugs, but also, as the report suggests – is this investment really efficient? Is too much money chasing too few cancer drug candidates with only marginal benefits, diverting funds away from other therapeutic areas?
The technical report that minced no words, said that “pharmaceutical companies set prices according to their commercial goals, with a focus on extracting the maximum amount that a buyer is willing to pay for a medicine”. The industry denounced the report as flawed.
The report showed that in some cases, the return on investment on research and development fetched companies as much as $14 for every dollar invested. The report infers:
[T]he high financial returns from cancer medicines, together with other government’s incentives, might have over-incentivized the pharmaceutical industry to dedicate considerably higher, possibly disproportionate, levels of investment towards the R&D of cancer medicine.
The innocuous-looking comprehensive technical report on pricing of cancer medicines, issued by the WHO, drew widespread support and endorsement from most countries. Member states came together to endorse and support the crucial report on cancer medicines at the 144th Executive Board meeting in Geneva in January 2019.
All countries suffer from exorbitant prices of drugs which balloon procurement costs to meet rising burden from cancer related deaths. The global cancer burden is estimated to have risen to 18.1 million new cases and 9.6 million deaths in 2018. A majority of these deaths occur in low and middle-income countries.
Countries called the report a milestone in the debate around high prices of medicines. It is now aiding international cooperation and dialogue on addressing rising prices of cancer drugs in the wider context of access to medicines.
This story tries to understand and explain some of the issues raised by the industry, including on returns on investment, pricing transparency and efficiency of investments – and compares it to what the WHO’S report has said. It also places the report in the context of the discussions at the executive board meet last week. The Wire exclusively spoke to the author of the report.
Background: The need for the report
The report, titled ‘Pricing of cancer medicines and its impacts’, was first released in December 2018. It was taken up and noted by the WHO’s 34-member Board. Some member states, notably the US, wanted the WHO to organise an information session on the report ahead of the World Health Assembly in May 2019.
The WHO issued the 171 page report following a resolution on cancer prevention and controlin the context of an integrated approach at the 2017 World Health Assembly. Following the parameters described in the resolution [para 2(9)], the report presents evidence on the impacts of pricing approaches (or lack thereof), availability and affordability of cancer medicines. It examines the possible relationship between pricing approaches and R&D of cancer medicines, including incentives for investment in R&D on cancer and in innovation of these measures. It also examines possible funding gaps in undertaking R&D and issues of transparency in price and governance.
The report, supported with more than 400 references, was crafted through several stages of consultations and meetings. There were consultations with member states on the report. The secretariat reported that there were several meetings with the Essential Medicine List Cancer Medicines Working Group and an informal advisory group on availability and affordability of cancer medicines, whose experts provided advice on the technical approach to assessing benefits of cancer medicines, the scope of the report, analytical feasibility and case studies, and suggested options that might improve the affordability and accessibility of cancer medicines.
The report on costs, transparency and efficiency of cancer R&D
The report untangles the complicated and connected issues of price of drugs, costs to make drugs, the incentives to invest in R&D; and whether these mechanisms should be transparent for the sake of public interest and good governance.
The report recognises that the industry considers a number of factors could determine prices including costs of R&D, costs of production and commercialisation, the “value” of medicine, sufficient returns on R&D. The industry disagrees on the extent of the returns on R&D in cancer research.
In what may sound counter-intuitive, the report found that “the costs of R&D and production may bear little or no relationship to how pharmaceutical companies set prices of cancer medicines”.
As mentioned before, the report says that companies put an overwhelming emphasis on commercial goals while setting prices.
There has been continued debate on estimates of R&D costs for drugs – but the most commonly accepted estimates are between US$ 200 million and US$ 2.9 billion, the report says.
Analyses in its cancer report involved examining the sales incomes from cancer medicines. According to the report, for the 99 medicines included in the analyses (those approved by the US Food and Drug Administration from 1989 to 2017 for the originator companies), the average income return by end-2017 was found to be US$ 14.50 (range: US$ 3.30 to US $55.10) for every US$ 1 of R&D spending, after adjustments for the probability of trial failure and opportunity costs.
Further, 33 of those medicines had already qualified as “blockbuster drugs” by having an average annual sales income exceeding US$ 1 billion, the report explains. (The Return on Investment (ROI) is basically a ratio between the net profit and cost of investment.)
The industry did not agree with this assessment. In its statement at the Executive Board on the WHO’s cancer report, the International Federation of Pharmaceutical Manufacturers and Associations (IFPMA) said:
[The report] relies on flawed methodology resulting in overstating the return on investment, suggesting that industry achieves a windfall 1,400% return on investment, contrary to a recent report that estimates R&D returns for biopharmaceutical companies have declined to 1.9%.
It added that revenue from oncology treatments support and fund research into other diseases. IFPMA represents research-based biopharmaceutical companies, and regional and national associations across the world.
The Deloitte report (‘Measuring the return from pharmaceutical innovation 2018’) cited by the industry, showed that Deloitte’s estimates of the projected return on investment of late stage pipelines 12 large cap biopharma companies drop to 1.9%. (A drug pipeline refers to potential drug candidates that a company has under discovery and development)
The Deloitte report calculated “the internal rate of return (IRR) and used it as a proxy to measure biopharma’s ability to balance R&D investment (initial and ongoing capital outlay) with the cash inflows (drug sales) the industry is projected to receive as a result of this investment.” Deloitte says, the IRR is based on the total spend incurred bringing assets to launch and an estimate of the future revenue generated from the launch of these assets.
The WHO says the two reports cannot be compared. In an exclusive interview, the author of the WHO report, Dr Kiu Siang Tay, technical officer, working on Innovation, Access and Use in the department of Essential Medicines and Health Products at the WHO, told The Wire that the information in the WHO report is based on direct observation of reported sales incomes, by considering return on investment as a measure.
Tay added, “We found a median of US$ 14.50 return in income for every US$ 1 of R&D cost, after adjustments for the probability of trial failure and opportunity costs. To be clear, this analysis did not estimate profit return because we do not have information about the costs and year-to-year variations in costs (i.e. expenses and taxes) specific to cancer drugs. The Deloitte report, on the other hand, looks at the internal rate of return for late-stage development drugs in 12 companies, based on future projections. These projections put profit return on research and development at 1.9% for these late-stage pipeline drugs. The set of products are not specific to cancer. The two studies are not comparable.”
On the issue of transparent pricing of drugs, the WHO report says that high prices of cancer medicines may have inadvertently caused inefficient R&D practices as well as unethical or illegal business practices. “The increasing use of agreements with confidential rebates and discounts has had a negative impact on price transparency, potentially leading to outcomes that are inefficient or not conducive to good governance,” the report said.
The industry believes that transparency on pricing could hurt preferential pricing strategies. IFPMA said in its statement, “The Report also failed to analyze the unintended negative consequences of its policy recommendations, such as the impact of full price transparency on the capacity of companies to provide preferential prices to developing countries. It does not appropriately take into account the specificity of different national healthcare systems, particularly between developed and developing countries, and promotes policies that could be detrimental to many countries.”
In addition to prices of drugs, incentives given for cancer research have generated much discussion in global health. To what extent to companies benefit from say sources of public funding and how does it impact prices. The report addresses this.
The report raised a fundamental argument on whether cancer research has been “over-incentivized” and more broadly on the efficiency of such large investments.
One justification for high prices of drugs has been ploughing back profits on sales into R&D in order to “reward innovation”. But given the extraordinary returns in some cases, the report said, “the returns on the factors of production of cancer medicines are in excess of what would be necessary to maintain operation of the pharmaceutical industry.”
The report goes further and suggests that “excessive returns, combined with market dominance, could encourage companies to engage in wasteful rent-seeking activities such as lobbying and filing patent clusters to delay entry of generic/biosimilar products, distort investment and stifle innovation.”
It cites evidence of disproportionate levels of research for cancer medicines, despite lower success rates of clinical trials and the highest number of discontinued projects. The potential for lost investment would normally mean that the pharma industry should have diverted investment away from cancer research, the report explains. But higher level of investment for cancer research, “might be explained by the considerable financial incentives in place to safeguard the higher risks of failure”, the report suggests.
The report warns that long-term innovation of cancer medicines might be at risk due to the inefficiencies and distortion of investment that could to excessive returns from cancer medicines combined with market dominance.
“It is simply ‘poor economics’ to chase drugs for the sake of profitability alone. Investment into drugs for cancer research has got the industry into a vicious circle,” one expert told The Wire on the condition of anonymity.
What the report suggests
In a departure from the tone of such technical reports, the report boldly suggests that, “..lowering current prices might in fact be conducive to long-term innovation.” After all, financial return is a function of price and volume; potential impact on revenue due to lower prices could be offset by higher volume, particularly when the marginal cost of production is low, the report justifies.
Global correction of unaffordable prices of cancer medicines will require considerable short-term system adjustments, but such adjustments are fundamental to the sustainability of access to cancer medicines, and medicines in general in the long term.
In bare terms, the report that has caused much consternation to the industry says, “Some stakeholders have influenced medicine prices higher than the true clinical value of cancer medicines, essentially lending higher negotiation power to the pharmaceutical industry. This power imbalance compromises the ability of the system and individuals to pay for these medicines, and deliver quantities less than what would be required for maximizing societal welfare.”
Citing evidence, the report says that lowering medicine prices would not impair the incentives for R&D of cancer medicines. Touching upon the much heated discussion on public financing of drug research, the report says, “Excluding infrastructure investment and labour development, public sector investments in health R&D accounted for 30% of the total US$ 240 billion funding globally in 2009. The remaining 60% of R&D investment came from the business sector and 10% from non-profit-making organizations.”
Stakeholders such as Knowledge Ecology International, believe that incentives to invest in R&D are linked to prices. On the cancer report, KEI said:
We believe international action is required to improve transparency in reporting the costs of R&D and production, including public sources of funding. We agree with the report that prices for cancer drugs are not based upon R&D costs, but also note that incentives to invest in R&D are linked to prices. This creates a conflict, or policy incoherence, between access and affordability on the one hand, and innovation on the other.
KEI has urged the WHO to host a meeting to look at the feasibility of progressively de-linking R&D incentives from prices, so that efforts to make cancer treatments more affordable do not conflict with innovation objectives.
What countries said
One developing country delegate told The Wire, that they see the report as a milestone. “This report will be used as a reference point and as a precedent to be cited in all future discussions on prices of cancer drugs and more generally on access to medicines.”
Australia told the meeting that costs of cancer drugs are the biggest driver of costs of medicines.
India asked the WHO to work on voluntary licensing of patented medicines to make cancer drugs more affordable. Italy called the report as a “tour de force” and said that international action is needed to take it forward.
Some countries hoped that the US would support and consider the report. “Drug prices for cancer are expensive everywhere – the American prices become like a reference price, so therefore important for the US, to engage on this,” one delegate said.
The US said that the country cannot support policies that include the use of flexibilities in the World Trade Organisation Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) or increasing R&D cost transparency.
During the proceedings of the board meeting, the US drew attention to the lack of pharmaceutical industry involvement in the preparation of the report.
Given the contents, scope and tone of the report, the industry was reportedly “flabbergasted”that the WHO did not consult with companies on the report.
In its statement, IFPMA said, “…We are concerned that the Technical Report has been developed without adequate consultations with key stakeholders, including industry, as well as patient groups and national regulatory authorities, who could speak to industry practices, approval practices and the benefits of oncology therapies. As a result, this assessment does not reflect the full economic value to society from these innovations.”
Dr Mariângela Batista Galvão Simão, assistant director-general for drug access, vaccines and pharmaceuticals, informed the executive board during the discussions, “We believe that it would have been a case of perceived conflict of interest by consulting industry on this report. We would have been open to receiving information about net prices of individual cancer medicines their specific R&D costs, for example. But we believe this information would have been difficult to obtain from industry stakeholders.” She added that information from pharmaceutical companies can be included in an addendum to the report. The information furnished in the report is based on publicly available data.
What concrete actions will follow this report, remains unclear for now. But countries see an opportunity to work on high prices of medicines, in the wider context of the WHO roadmap on access to medicines and vaccines, that was also taken up at the Board meeting.
Specifically, the roadmap on access mentions that the WHO will coordinate actions on health research and development including, “Promotion of transparency in research and development costs; development of incentive mechanisms that separate/delink the cost of investment in research and development from the price and volume of sales; and establishment of additional incentives for research and development of new products where there are market failures. Support for implementation of schemes which partially or wholly delink product prices from research and development costs…”
Certainly for patients and for shareholders of pharmaceutical companies, the industry would do well to critically examine their pipelines and review how to invest more efficiently in R&D for cancer medicines, one expert said