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August 15, 2004
David Warsh, Proprietor


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Push Me, Pull You?

I stopped by a forum on global drug pricing for biotech and pharmaceutical company executives at Massachusetts Institute of Technology last week — “Large Molecules, Large Dreams,” it was called. Beneath the usual bubbling excitement of the industry, there was an unmistakable sense of siege.

In Nevada the day before, John Kerry had been campaigning against the post-industrial giants collectively known as Big Pharma, rattling off to cheering seniors the names of proprietary drugs whose prices, he said, were between 157 percent and 243 percent higher in the United States than in Canada.

In this part of Cambridge, Massachusetts, a whole new city glistens, rank upon rank of glass and brick laboratory buildings, financed in large measure by the prospect of brisk business around the world, even at those high prices.  The new development stands on a property of several hundred acres, all but vacant 20 years ago, where a century before, “high tech” had meant a giant factory specializing in copper cable for trans-Atlantic telegraphy.  Harvard University is planning to build another such laboratory hub a couple of miles away.

Yes, the recent growth around Kendall Square had truly been extraordinary, MIT economist Ernst Berndt told the assembled throng. European and Asian drug companies had been relocating their research laboratories there; biotech start-ups had continued to grow. The promise of new large molecules engineered to fight disease truly is enormous. And yet there was cause for worry. “Five years from now,” Berndt wondered, “Will this auditorium be filled again?”

If the prosperous flow of innovations was to be sustained, he said, either the industry would have to find a way to dramatically alter its cost structure, or else “we are going to have to figure out collectively some way across political parties and countries to construct and maintain a structure of global price differentials.”

With the promise that changes in the cost structure would be addressed in another meeting later in the fall, attention turned to various schemes for differential pricing.

Berndt skimmed quickly over the traditional argument for differential pricing. Many industries had high fixed costs and relatively low marginal costs, he said — electricity, telecommunications, software, database services, movies, and so forth.

But none was the same class as pharmaceuticals, where the difference in incremental cost between the first tablet of a new medicine and the second is on the order of $800 million for an average medicine –$800 million to “get the science right” and make certain that the treatment works in some degree, 25 cents to make the second copy, and the third and as many more tablets as can be sold.

It’s long been understood by industry that it is commercially feasible to supply products at very low prices to those who are less wealthy, Berndt said, as long as the upfront costs are recouped by charging high prices to those who can afford them. At that point, additional sales are mostly profit.

Everyday differential pricing came in with the railroads; today, it is familiar to everyone who flies, knowing that passengers who are willing to buy their tickets well in advance pay for less than the last-minute travelers sitting next to them.

So the rest of the meeting was given over to the discussion of the political sustainability of various models of differential pricing. Can “ability to pay” among nations be accurately measured given exchange rate volatility?  What about the opportunities for “gaming” the system?  Suppose there were apparently uniform global pricing, with secret rebates to governmental purchasers? What remedies might be effective against collusion among manufacturers to maintain prices artificially high?

Only at one point was there a glimpse of what it might mean to “pick up the other end of the stick” — that is, to address the basic cost structure of the industry itself by substantially altering the way that R&D targets and spending decisions are made. It came when a representative of the Bill and Melinda Gates Foundation described the “pull” programs by which that most innovative of present-day funders was seeking to call various vaccines into existence by increasing the reward for a successful developer — by guaranteeing a lucrative market to the first developer to hit a carefully specified medical mark.

(Perhaps the most famous pull program in modern history was the cash prize offered by the British government to the successful developer of a sturdy sea-going chronometer — a clock sufficiently durable and precise to permit navigators to accurately measure longitude over long voyages. The story is told in Dava Sobel’s 1995 classic Longitude.)

“If only we could find a patient willing to pay $800 million for that first dose,” said Judy Lewent at one point (she is executive vice president and chief financial officer of Merck & Co.), “we could sell the rest to everyone at cost.  Imagine, though, what that would do to that one patient’s insurance premiums!”

Just so. But of course there is a potential insurer willing to pay that hypothetical $800 million fixed cost for a successful treatment — not just for one such disease but for many. (The $800 million figure comes from a Tufts University study of medical R&D.)   That could-be insurer might be a government, charged with looking after the health care of its citizens.

In such a system, most research goals and treatment targets would be consensually arrived at by various high-level user groups, those who knew the most about the opportunities for moving forward the possibilities in various fields.  Private companies then would commit resources to developing standards in hopes of becoming the dominant supplier of new goods — in the expectation that, in some circumstances at least, progress toward effective new treatments would be both more rapid and less costly than under the current system of highly decentralized decision-making driven mainly by success in the capital markets.

Far-fetched?  No more, surely, than the behind-the-scenes process by which the Internet and the World Wide Web were developed quietly by government funders over a period of thirty years, using a combination of pull and push funding. (Push programs are those that fund inputs to the R&D process — grants to researchers, tax credits for companies, support for government labs — rather than promising to reward the producers of the first successful output.)

The vision of a very different system of incentives for pharmaceutical research and medical innovation is all the more plausible since a working model of it exists directly across the Charles River form the new profit-seeking laboratories of Cambridge — namely the historically nonprofit research hospitals of Boston.

In these institutions, the rate and direction of inventive activity traditionally has been driven by a single payer, the US government, with somewhat different, but generally no less successful results.  The two systems have mixed and mingled in recent years, of course. And yet it is still easy to tell them apart.

Hence the vague sense of unease that underlay the otherwise cheerful meeting at MIT last week.  For it is not just the ardor with which politicians attack schemes of differential pricing the world around.

Gathering force within the medical community is internal criticism of advertising-driven competition among high share price multiple-seeking drug companies, most recently in a new book, The Truth About the Drug Companies, by Marcia Angell, former editor of the New England Journal of Medicine. Its argument is nicely summarized in her recent article in the New York Review of Books.

Let’s see what the industry has to say about the determinants of its cost structure at that sequel meeting at MIT later on this the fall.

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