Are Lower Drug Costs a Red Herring?

The first drop in spending in 20 years on drugs for common diseases like high cholesterol grabbed the headlines when reported by Express Scripts. The fact that this decrease was more than offset by increased spending on specialty products was relegated to the smaller print in subsequent paragraphs. This latter trend, however, is likely to continue to drive total pharmaceutical spending higher and is less susceptible to long term price decreases from generic competition.

Those who latch on to the highlight of the report as an indication that increasing the use of generics is the way to impact rising health care costs significantly should realize that three factors will make this a desirable, but ultimately insufficient measure to cure what ails run-away spending in the US and more importantly, it puts the focus on the wrong side of the value equation.

First, pharmaceuticals account for a mere ten percent of the total healthcare spend and have been at that level or below consistently since the 1960s. While it is true that spending on drugs has increased along with other sectors, any reduction - no matter how desirable or achievable - in pharmaceutical spend will have a limited impact on the overall cost of healthcare.

Second, in the near term, there are fewer big selling small molecule drugs coming off patent in the next few years than there have been in recent years when multi-billion drugs like Lipitor and Paxil faced generic competition for the first time. The past few years have seen a huge growth in generics as a wave of patents expired. Drugs coming off patent after about ten years of sales represent one of the few cost reductions extant in the health care system.

Third, the area of largest growth in the pharmaceutical industry -- specialty products in general and biologics more specifically -- presents the greatest challenge to generics manufacturers. It will be difficult for generic manufacturers to achieve the same price differential that makes generic versions of small molecules so attractive. There are a few key reasons:

• The reduced margin associated with biologics - even with higher unit prices - limits potential price reduction.

• In addition, the cost of manufacturing biologics is far greater than for small molecules. The capital investment required serves as a deterrent to competitors producing and supplying copycat products.

• The complexity of the manufacturing process will also serve to limit the number of producers with the technical capability to meet the high standards needed to ensure both bio-equivalence and avoid the potential safety issues inherent in creating a biologic.

• Regulatory agencies may require clinical trials to demonstrate safety and efficacy. These trials are associated with additional added cost and new capabilities.

• Finally, there are those who advocate that regulators should restrict generic substitution without a physician's approval which would likely necessitate some level of detailing for biosimilars eroding the margins and/or price differential even more.

Although the exact approval pathway for biosimilars in the US is still uncertain, we believe that eventually there will be generic competition and that these new products will be somewhat cheaper than the original. There will be fewer manufacturers -- ironically current manufacturers of branded products may be the best positioned to produce biosimilars due to the capital and technical investments needed -- and the degree of price reduction will be lower than for small molecules.

While any reduction in spending on pharmaceuticals -- provided it does not adversely impact outcomes -- is welcome, we should not be distracted by the prospects for generics pharmaceuticals from the need to seek lower costs in the other 90% of the healthcare industry.

That said, the focus on cost reduction, the elimination of waste, unnecessary procedures, fraud and abuse is only part of the picture. There must be accelerated movement to a market based approach to healthcare, reflecting increased transparency and accountability for outcomes. . . tying together payments and outcomes.

And while we are on the subject, we should shine the spotlight on innovation and cures. Focusing on cost fails to recognize that new discovery has led to significant productivity gains as patients with serious medical conditions (high blood pressure and cholesterol for example) live longer, productive lives ultimately adding to the tax base! Imagine the productivity gains if we really did find a cure for Alzheimer's. Pharma is the only sector that can take this on. These companies must have the ability to invest in risky R&D and generate fair rate-of-return for in-market products that add value. The alternative is pretty bleak. We can't save our way to prosperity.

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