As impressive as that number is, it pales in comparison to many other drugs on the market, some of which cost as much as seven figures for a typical course of treatment.
In the US, such high drug prices can limit access for many and drive up insurance costs, fueling the ongoing debate: Do biopharma companies really need to charge as much as they do?
“The industry response has been as consistent as the complaints,” he says David Dranov, professor of strategy at Kellogg. “They say they have to cover their research costs and if they don’t, they have to cut the research.”
In general, developing truly innovative drugs requires more research money than developing more stage drugs. It is also riskier, because the chances of success are unknown. Without sufficient financial incentives, drug companies argue, they will deliver fewer innovative drugs, which ultimately means worse health outcomes.
But is this really it? Does less monetization really lead drug companies to cut back on innovation? It’s a critical question, given that the US government leaves drug pricing largely to market forces.
“We’re doing this as a country because we’re interested in driving future innovation,” he says Craig Garthwaite, professor of strategy at Kellogg. Essentially, the US is willing to trade some access to drugs—due to high prices—to secure more innovative drugs in the future.
To explore the connection between profit and research, Dranove and Garthwaite collaborated with Manuel Hermosilla at Johns Hopkins. But instead of examining whether the reduced ability to make money prompts companies to curtail innovation, they studied the opposite: Does the promise of higher profits lead companies to plow more money into innovative research?
Specifically, they explored how biopharmaceutical research has changed since its inception Medicare Part Dwhich increased prescription drug coverage for Americans over 65. Part D has led to new coverage for about 5 million seniors, which means more prescription drug purchases and more profits for drug companies.
While 5 million people may sound like a lot in the context of the $400 billion US pharmaceutical market, this was a “relatively modest shock,” the researchers write. However, the impact allowed for an effective research experiment.
They wanted to see if the expected boost to drugmakers’ profitability actually resulted in innovative treatments aimed at older patients. Or would companies play it safe by focusing development efforts on copycat versions of drugs that already target this population, such as those that treat high cholesterol?
The researchers found evidence for the latter: after Medicare Part D, pharmacists overwhelmingly pursued new versions of existing drugs, rather than innovative products. However, this means that the reverse is also true: gradual price cuts may not stifle innovation.
“When the biopharma industry says that any change in drug pricing is going to kill the innovation engine, that’s not really true,” says Garthwaite. “Our study puts some limits on that.”
Definition of drug innovation
Pharmaceutical companies are known to focus on products they consider profitable.
“Drug companies invest in areas where they believe there is demand for their developments, just like any profit-maximizing company,” says Dranove.
But critics have argued that this process does not necessarily lead to innovative medicines that improve social well-being. Critics argue that the potential to make money usually pushes drugmakers to bring the third or fourth version of a drug to market rather than seek a cure for a disease we can’t currently cure, such as pancreatic cancer.
To test this claim, the Kellogg researchers first had to define what counts as pharmaceutical “innovation”—that is, what makes a drug truly innovative.
The researchers came up with a definition: “Do medicines represent new options for patients that might not otherwise exist?” says Garthwaite. Based on this line of thinking, they then looked at whether clinical trials for a given drug fit the bill.
Specifically, they looked at “target-based actions” (TBAs), or what a prospective drug actually did in the body—which biological entity it targeted and by what function, such as blocking a specific lipid to lower cholesterol. Most new drugs tend to either focus on a new TBA or use a largely unprecedented combination of multiple TBAs.
Expected profits and innovation
The study used pharmaceutical research data from 1997 to 2018 on more than 70,000 molecules developed worldwide by more than 4,300 biopharmaceutical companies. This time period covered the emergence of Medicare Part D, which was created as part of the Medicare Modernization Act of 2003 and went into effect in 2006.
This made possible a “natural experiment” on the relationship between expected profits and innovation. As of 2006, pharmaceutical companies would expect to see an increase in profits for drugs aimed at elderly patients due to increased prescription drug coverage for this population.
The question, then, was whether this increased expected profit would drive more innovation in drugs targeting the elderly—or would companies play it safe by focusing on copycat versions of existing drugs?
The choice: Playing it safe
The study showed little change in research on scientific new drugs for older adults in response to Medicare Part D.
“We saw an increase in drug research targeting the elderly after the expansion of Medicare Part D,” says Dranove, “but it was largely for drugs with the same targeted actions as before—that were essentially treating the same condition in body”.
From 2012 to 2018, there was a 106 percent increase in the number of clinical trials for less innovative drugs targeting the elderly, but only a 14 percent increase in trials for newer pharmaceuticals.
This means that in response to the new financial incentives, pharmaceutical companies have largely focused on copycat versions of drugs rather than truly new products.
“What the new Medicare Part D was affecting are drugs that have value only at the fringe,” says Garthwaite.
A green light for pricing regulation
The main practical implication of the finding is that incremental changes in drug profits are unlikely to affect innovation appreciably.
On the one hand, this is discouraging news for healthcare professionals and policymakers who might otherwise support incremental incentives to spur innovation. But on the other hand, it also suggests that policies that slightly lower drug prices will not stifle the pursuit of new drugs. In short, the researchers argue that small changes in pharmaceutical company profits will neither encourage nor discourage innovation.
“Increasing competition or diminishing returns from product development will not kill the biopharmaceutical industry,” says Garthwaite.
That means Americans could potentially enjoy lower drug prices—and the access that comes with them—without suffering a costly loss of biopharmaceutical innovation.
“That social impact is ultimately what we’re all about,” says Garthwaite.
The researchers also point out that the generic drugs developed in response to Medicare Part D represented some value to patients – Lipitor was not the first cholesterol-lowering drug on the market, for example, but it improved upon existing ones and became a high income product for Pfizer, a win-win.
“The fifth [copycat] The drug that is brought to the market may have the fewest side effects,” says Dranove. “Or it could be what’s driving prices down.”
Implications for COVID-19 research
So what incentives? I will encourage biopharmaceutical companies to develop a truly innovative drug?
For an answer, look at the hundreds of companies that have joined the world hunt for cures and vaccines for COVID-19. Welfare gains from even the biggest generic drug “pale in comparison to the first drug that actually cures COVID,” says Dranove. “This is the game changer.”
And, of course, the expected profits from a cure for COVID are much higher than what Medicare Part D introduced.
“Real drug discoveries are really hard, and incremental changes in profitability are not the main reason these things happen,” says Dranove.
