The Economics of Innovation

There seems to be a general belief that marketing priorities drive the research and development agendas of biopharmaceutical companies. In reality, the evolution of science and societal needs are what really dictate the pathway to drug innovation. During World War II, for example, the need to mass-produce penicillin led Pfizer to develop the deep-tank fermentation technique that was later used to produce other antibiotics during the 1950s and 1960s.

More recently, pharmaceutical companies set aside research priorities to intensify their focus on addressing the AIDS epidemic in the early 1990s, turning what was once a death sentence into a chronic disease that can be managed over time.

The ideal is when scientific understanding and societal needs converge. That is the case today in cancer research and precision medicine, as the sequencing of the human genome has given us a better understanding of the underlying disease, and a golden opportunity to treat the leading cause of death in the United States.

For the past decade, we have observed an increase in financing of oncolytic medical research by biopharmaceutical companies, which previously invested more in discovering and developing medicines for diseases with vast populations, such as hypercholesterolemia or hypertension. Now those same companies have shifted their focus to precision medicine. Beyond the benefits of improvements in the effectiveness of drugs, reduced toxicity and lower overall healthcare costs, the focus on precision medicine has produced two important socioeconomic outcomes: It has reduced the number of patients who may have received treatment with minimal effectiveness, and it is redefining the economics of biopharmaceutical research.

Simply stated, the amount spent to bring and maintain a new medicine to the marketplace has grown exponentially, while the number of patients benefiting from these new discoveries has decreased substantially.

To demonstrate this shift, one must compare not only the number of new medicines and indications, but also their designations as a surrogate for the number of patients for whom they provide a benefit. Based on U.S. regulatory data from 1995 to 2000, only 42 New Molecular Entities (NMEs) out of a total of 233 had an “orphan designation” (18 percent), which is the designation given to drugs that are developed to treat diseases or conditions impacting less than 200,000 persons.

A decade later (from 2010 to 2015), the percentage of orphan drug NMEs increased to 37 percent. Meanwhile, during this same period, the number of oncology NME’s approved by the FDA nearly doubled. At the same time, the amount invested in research and development by biopharmaceutical companies from 2000 to 2013 ($26 billion in 2000 versus $51.1 billion in 2013) and post-approval financial expenditures has doubled, while the average cost to develop and gain approval of a single new drug has more than tripled ($800 million in 2003 vs. $2.6 billion in 2014).

In determining the price of a medicine, most biopharmaceutical companies consider the impact on patients and their disease, the availability of other treatments, the potential to reduce healthcare costs, and affordability. Currently, nearly 90 percent of prescriptions dispensed in the US are generics. In the 12 months ending in September of 2015, 70 million Americans (almost 1 in every 3 adults) were taking a generic version of Pfizer’s innovative medicines. The other 10 percent are taking new, innovative medicines that often treat serious and chronic conditions, such as cancer and rare diseases, for a small number of patients who also have access to patient assistance programs through biopharmaceutical companies.

This is why Centers for Medicare and Medicaid Services (CMS) is estimating that the total cost for drugs as a percentage of the overall healthcare costs will continue to remain stable at 10 percent, as the use and availability of generic medicines increases and biosimilars enter the U.S. marketplace.

In the end, what we need is an honest discussion regarding the economics of drug development –then we can continue to help the small number of seriously ill patients gain access the lifesaving medicines they need.

Morning Consult