Accosting Drug Costs: The Elusive Holy Grail?

indiana jonesSo how do we get big pharma to disclose their drug costs? Mandate them through a legislation, one might say. Well, a couple of US states are now trying it, but facing rather serious resistance from drug makers. After all, it can’t be easy to get to the holiest of the holy grails when it comes to drug innovation: namely drug costs. For this is a bluff that cannot be called without serious repercussions for the mainstream model around which patents and pharmaceutical innovation are predicated. There’s way too much at stake!

Rema Nagarajan notes in the Times of India as below:

“Just like the Supreme Court of India demanded that Bayer submit an account of its costs in developing the anti-cancer drug sorafenib, more and more states in the US are proposing legislations that could force pharmaceutical companies to reveal the development cost of drugs and profits to justify the high prices they charge.

Five states in the US, including Massachusetts, Oregon, California, Pennsylvania and North Carolina, moved legislations that could have forced  pharma companies to justify the high price they charges for drugs.

However, Oregon’s Pharmaceutical Cost Transparency Bill was defeated recently. Had the bill been passed, pharmaceutical manufacturers would have had to file an annual report with the health authority on costs associated with the prescription drug for the previous year including a detailed break-up of the cost of drug discovery, clinical trials, marketing and advertisement for the drug and so on.

These bills are coming up as the national debate on rising cost of prescription drugs intensifies. Last year, several US senators were up in arms over the pricing of Gilead’s new Hepatitis C drug with the brand name Solvadi (sofosbuvir) which is expected to cost at least $84,000 for the full treatment course, or $1000 per pill. The senators demanded that Gilead explain the reason for such high pricing.

When Bayer contested the royalty rate fixed for operating the compulsory licence given to the Indian company Natco to produce sorafenib, the Supreme Court bench asked why Bayer had not made available the unaudited accounts of R&D expenses to develop the drug, which would have been the best evidence to calculate a reasonable royalty rate. Though Bayer argued that 98% of the cost of a drug was from failed drugs which made providing precise accounts impossible, the Apex Court refused to accept this argument and ordered that in absence of any evidence supplied by Bayer, they would go with Natco’s statement that all R&D costs of Bayer were recouped within the first year itself.

Shamnad Basheer, an IP expert pointed out that it was unfortunate that the laws in most countries did not mandate a revelation of true drug costs, without which, one would never whether drug makers were being undercompensated, overcompensated, or fairly compensated. “Given their excessive profits year after year, the prevalent perception is that big pharma is being overcompensated. Till such time as these drug companies are transparent about their costs and profits, India should use this perception in its favour, coming down on the side of public health and affordable medication, wherever possible,” stated Basheer in an opinion piece on the supreme court judgement.”

The last comment above draws from my Mint editorial, portions of which I extract below:

” …drug costs have been the best-kept secret of the pharmaceutical industry—with one exception. Big pharma selectively hands out data to one institution that it funds (Tufts Center for the Study of Drug Development), which then comes up with a periodic study every decade or so.

Not too surprisingly, the costs multiply at a fanciful rate with each such study. The latest Tufts figures were released just last month, pegging the price at an astounding $2.56 billion, up from $802 million in 2003. However, the institute has yet to reveal its methodology for arriving at this humongous figure, a methodology that has been vociferously attacked in the past for several reasons, including the fact that the Tufts Center fails to independently audit the figures submitted by a select cabal of big drug makers.

In the past, I’ve recommended an investment protection model for incentivizing drug innovation, noting that drug originators must mandatorily submit their costs in order to merit market protection till they recoup these along with a rate of profit commensurate with the health impact of the drug. Will we see a shift to such a model soon? Only time will tell. In the meantime, drug costs will continue to remain an enigma.”

For those interested, the investment protection model can be found here (free download from SSRN).

ps: image from here.


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