Why are pharmaceutical companies charging high prices?
The pharmaceutical dilemma
The dilemma Everything will be fine. This is the message that Ernst & Young's management consultants currently have for the German biotech industry. "Back to the future", says the Biotech Report 2006, out of the valley of consolidation. Slowly, hardly noticeably, but at least. Of course, this means the near future. It is better not to talk about what is brewing on the horizon, because the pharmaceutical industry is in a dilemma - and with it the biotechs: On the one hand, research and development costs for new drugs are rising steadily. A study by Boston Tuffs University estimates that it costs 800 million dollars to develop a new type of drug - including the cost of the countless duds. On the other hand, the health systems are no longer able to absorb the additional costs. The receipt: Until 2002 the pharmaceutical industry was the most profitable branch on the US market, since 2004 it has slipped to third place.
The steadily rising drug prices in the USA, the largest and most important pharmaceutical market, have not been able to prevent this. According to a report by the Kaiser Family Foundation on prescription drugs, drug prices in the United States rose 8.3 percent from 1994 to 2004. Significantly higher than the annual inflation rate. The main reason for this are the patented branded drugs - and many of them are the particularly expensive biotech products, the so-called biologicals. Treatment with the colorectal cancer antibody Erbitux from Bristol-Myers Squibb costs around 17,000 dollars a month in the USA, and the blood cancer drug Zevalin from Biogen Idec even costs 24,000 dollars.
Nowhere else are drug prices so high - and more Americans are realizing that drug companies are doing well at the expense of their wallets. Calls for government regulation of drug spending, as is common in Europe, are getting louder. The pressure, especially on the high-priced biologicals, is increasing and could put the biotech industry in distress if the high betting stakes no longer match the corresponding chances of winning.
Unfortunately, prices cannot simply be reduced by developing drugs more effectively and cheaply. "The drug development will inevitably become more and more expensive," says the psycho-pharmacologist Jürgen Fritze from the association of private health insurances. In the past, a drug against diabetes was approved simply because it lowered blood sugar levels. But that is a basic requirement today. Now it is crucial whether the new preparation has advantages over others, for example better preventing the complications of diabetes. "This takes years of expensive studies in which many patients have to be examined," says Fritze. In cancer research, too, it is no longer enough that the active substance is tolerated by the patient and that tumors can regress. The company now has to prove in expensive long-term studies that it also extends the service life. "The market and progress demand better and better drugs." Drugs will no longer be approved that may only prolong life if there are already drugs that have been shown to reduce the death rate.
Market research But how do pharmaceutical companies calculate, why do they decide to develop one pill but not the other? "From a risk assessment, many companies make an assessment of how a drug could move on the market, increasingly early in the development phase," says Rolf Krebs, former CEO of Boehringer Ingelheim and, before Novartis CEO Daniel Vasella, president of the global pharmaceuticals association IFPMA (International Federation of Pharmaceutical Manufacturers and Associations).
In view of the development times of more than ten years, however, such a forecast is fraught with many uncertainties. At the beginning of the development process one therefore usually concentrates on economically promising research areas, says Krebs. While tumor research is an interesting field due to the number of cases alone, the search for new antibiotics or vaccines fails in this market analysis. Only a few companies are still developing these so-called anti-infectives; Bayer, for example, recently sold the division.
The fact that the market has apparently become unattractive is partly due to the fact that overall resistance to the old drugs is limited, says Krebs. And because most bacteria can still be kept in check with good old penicillin, the market is now teeming with inexpensive generic drugs.
Take tuberculosis, for example: there is news that more and more cases of tuberculosis are occurring, especially in the third world, which cannot be treated with conventional active ingredients. But even if the tuberculosis germs are ten percent resistant, 90 percent of the diseases can still be treated with conventional drugs, which are now also available as cheap imitation drugs. And hardly anyone wants to invest in research for ten percent of a market that is predominantly in the Third World. To make matters worse, according to Krebs, the production of anti-infectives is complex and expensive. "According to the law, vaccines and antibiotics must be separated from other drug production." This means that a company is faced with the fundamental decision as to whether it wants to invest in these special production facilities. After deciding on a research area, it is important to choose the most medically and economically promising projects from hundreds of possible development projects. That is not easy. Because only "when a preparation has passed phase two of clinical testing can it be estimated which product is in front of you," says Krebs. It will then take another four years on average to enter the market. But at least with known indications it can be determined quite well in advance whether the preparation will pay off. In other words: "You can see whether it will be a blockbuster or a small product." At this point at the latest, the big pharmaceutical companies have to make the decision whether they want to pursue the development or not. Because the following phase III is the most expensive part of the drug development. Here are the "very large investments of sometimes more than 100 million dollars," says Krebs.
Portfolio management However, long before they have a clear idea of the medical and economic value of an active ingredient, companies have to initiate hundreds of projects, because only one in a hundred clinical development projects usually passes the approval hurdle. That is why the corporations juggle with immense risks. "In each of their therapeutic areas, the pharmaceutical companies try to have projects with a relatively low technical-scientific risk, which are therefore more likely to move into the next phases," says Matthias Krings of the pharmaceutical consultancy Catenion Strategies. Since these projects usually have a lower sales potential, there are also projects with a higher degree of innovation, but also a higher risk in the portfolio. They are, so to speak, the bet that offers the chance of a particularly high turnover.
Every company has such a risk-balancing mechanism. "Of course, it is still worth trying to position what I have produced with relatively little risk and effort on the market as the greatest possible innovation," says Krings, alluding to the discussion about analog preparations, which are usually only represent relatively small improvements compared to the drugs that are already known (see also p. 76).
How such an active ingredient will hold its own in a known market can be assessed comparatively well, says Krings. Of course, there are also imponderables here. "But if the company has already made this assessment successfully several times with other drugs, then a feeling develops that it has the uncertainty under control." In the case of completely new indications or completely new therapeutic approaches, management has fewer reference points to deal with this uncertainty. "For a long time there was a clear tendency to give such projects less space in the portfolio," says Krings. Real innovations have become correspondingly rare. He therefore believes that the pharmaceutical companies should "explicitly aim to become more innovative." Price calculation High prices for particularly innovative drugs could certainly be an incentive. When calculating the price, however, neither the risk nor the possibly particularly high costs of the development project played a role. At least that is what Ryan Million of New York consulting firm Trinity Partners writes in the journal Nature Biotechnology: "Contrary to what is commonly assumed, companies do not price their products at a level where they can be certain, the research and development expenditure or to bring back the future marketing expenses for the product ", he states there. Rather, the starting point for the price calculation is the market analysis. Which competing products are there? Are there over-the-counter or prescription only? Are there cheap copycat drugs or only patent-protected branded drugs? If the advantages over competing products are marginal, marketing must be supported by a (low) price. If the drug has clear advantages, this will also be reflected in the price. If there is no competition at all, i.e. if an active ingredient is the only therapy option, the price is usually correspondingly high.
Biologicals are often the first choice for the treatment of rare and previously untreatable diseases. Because these indications can usually not be treated with conventional chemical agents, so-called small molecules. The fact that biologicals are more expensive is not only due to their unique position - they simply cost more to produce. The chemicals can be produced synthetically. "The manufacturing costs are less than one euro per gram, often less than ten cents," says Krings. The production of a daily dose of monoclonal antibodies could, however, cost hundreds, sometimes more than a thousand euros. Because the antibodies have to be provided with very specific sugar chains for the human body to accept them. That is why the antibodies have to be produced with the help of expensive mammalian cells, says Rolf Krebs. "In addition, there are only a few producers in the world." All of this means that biologicals still have a hard time on the market. Between 1999 and 2004, the number of biological blockbusters rose from three to eleven, and chemical blockbusters from 27 to 82, says Krebs. "Chemistry plays an even bigger role than biology." And it looks like it won't be easy for expensive biotech drugs and other innovative drugs in the future either.
The Answer Even if it seems inevitable that more health will cost more money, the industry is still intensely looking for ways and means to reduce development costs.
The economic answer to rising costs is usually to increase productivity, for example through automation. That was the wrong approach in drug development. Portfolio management has led the pharmaceutical industry to develop productivity-driven research and development structures over the past 15 years due to "technological promises and pressure from the stock markets," the management consultancy Catenion recently stated. Creativity has been replaced by the attempt to industrialize and automate the cognitive process. And indeed: machines deciphered the human genome, databases overflow with detailed information, robots test millions of substances for their effects. Researchers suddenly have to meet productivity goals.
It is obvious that such a system primarily produces innovations that can be expected, i.e. at best further developments of well-known therapy concepts. Projects that could open up a completely new, but also unknown, market for the company fail in the risk assessment or are left to biotech companies or public research.
Big Pharma only takes action when success is foreseeable. Example: Antibodies, biotechnologically produced proteins that can detect and render harmless almost every molecule in the patient's body that causes disease. Biotech companies such as Morphosys in Germany or Cambridge Antibody in the UK had provided both clinical and commercial evidence that antibodies could be used as drugs before pharmaceutical companies such as Novartis or Schering were ready to make any significant investments in the antibody business. However, as the demand for novel drugs increases, the common practice of taking on former high-risk projects from smaller pharmaceutical companies will become increasingly costly. The question therefore arises as to whether some of the big players should risk more, according to the management consultants at Catenion.
At present, breakthrough innovations are more likely despite than because of the prevailing R&D management. You have to allow more room for creativity and unexpected discoveries in portfolio management, says consultant Krings.
More space for chance His colleague Fritze knows that rationality is not always crowned with success. Of course, with the help of automation and a lot of knowledge about a disease mechanism, one can find an active substance that intervenes in a cellular mechanism as desired. But is the mechanism in the development of the disease really that crucial? "The German biotech company Tegenero had a very clean idea of the disease, its active ingredient and the treatment in humans," says Fritze. And yet everything turned out very differently. Six test subjects almost died when they were injected with a usually ineffective dose of the antibody. "This is an example of theory-led drug development." In contrast, the importance of chance in drug development is underestimated. "In the 1950s, tuberculosis doctors observed that the mood of patients treated with the consumption drug isoniazid improved," says Fritze. "It was the hour of birth of antidepressants of the monoamine oxidase inhibitor type." However, fewer and fewer doctors are still paying attention to how the patient reacts to a preparation. "The doctor forgets that every single case of treatment is also a research case, because with no patient can you be sure that the likely effect will actually occur." In the past, a major driving force behind drug innovation was to turn random positive side effects into a main effect. "The further development of known substances from one indication area into another is interesting because it is not so expensive," agrees Barbara Sickmüller from the Federal Association of the Pharmaceutical Industry. "Developing the tried and tested is actually a very intelligent thing and should be made much more interesting from an economic point of view." The Boston company Combinatorx has proven that it is economically viable. She struck gold in the dusty drug stores of the pharmaceutical industry. The chemist and CEO Alexis Borisy came up with the idea of combining some of the 2,000 known substances in the hope of a new effect. He found: an antibiotic and an antipsychotic inhibit cancer growth. And an antidepressant along with a cortisone preparation helps against asthma.
The company tests two million combinations for new effects and keeps finding interesting effects. Biologists explain the combination effect by the fact that the targets for drugs in the cell, the proteins, do not act in isolation from one another. Carefully turning several adjusting screws in the cell machinery works just as well as conventional individual therapy, which only blocks or stimulates one screw. In addition, the process offers another advantage: the known substances are less noticeable due to unknown side effects. They have already been tested. That saves time and money. Borisy believes "testing one drug in combination with others will be a standard step in drug development in the future."
Way out China Money could also be saved by outsourcing research. "The international pharmaceutical companies cannot go on like this," says Yiyou Chen, head of research at the biotech company Starvax. "If the big pharmaceutical companies want to survive, they have to cut their costs." China is a way out, says Chen. "You can use your money to finance five times as many development projects in China as in the USA or Europe." It's worth it when you consider that out of a hundred development projects, only one drug emerges in the end. The Shanghai consulting firm General Biologic estimates that developing a drug in China costs an average of $ 120 million - just one eighth of the costs in the United States and the European Union.
And while drug development in the USA takes an average of eight to ten years, according to calculations by the Food and Drug Administration (FDA), the approval authority for food and drugs there, an active ingredient in China is approved within five to eight years . The longer a drug can be sold within the patented period, the higher the proceeds. For a blockbuster, that can easily amount to a billion dollars a year. Roche already has a research center in Shanghai and Novartis is in the process of establishing one.
Action The authorities are also taking note of the dilemma of pharmaceutical research, and attempts are being made to counteract them. In 2004 the FDA called on the pharmaceutical industry to make suggestions on how the process of drug development could be accelerated and improved in response to the falling number of approvals for novel drugs.
A total of eight of the global pharmaceutical companies, including Bristol-Meyers Squibb, Johnson & Johnson, Merck, Pfizer and Novartis, entered into a collaboration with the FDA. The agency called the initiative Critical Path and founded the C-Path Institute in Tuscon, Arizona. 76 Methods for economizing and accelerating drug development are to be examined there for their suitability.
Novartis is participating with three projects, says James Shannon, head of development at the pharmaceutical company in Basel. One of these aims to make four so-called biomarkers ready for use, which can presumably predict negative drug side effects on the kidneys. Biomarkers are protein or gene variants that make people react differently to drugs. Novartis' biomarkers will also be passed on to other companies in the consortium, who will check whether the markers can also be used to predict the toxic effects of their preparations on the kidneys. Shannon estimates that there will be a "dramatic increase in such biomarkers" within the next two to five years. Because you can use it to predict the safety of a drug candidate very early in the development process.
Novartis only recently discovered how useful this is. In a development program that the Swiss are promoting in cooperation with Schering, the drug candidate PTK787 did not achieve the desired effect. The fabric should stop a colon tumor from growing. But only 17 percent of the patients reduced the risk of the disease getting worse. Approval seemed questionable. But Novartis examined the test subjects for various biomarkers during the study, including an enzyme called LDH. As a result, the researchers knew that PTK787 would at least help patients with large amounts of this enzyme in their blood: 40 percent of patients reduced the risk of the tumor growing. The drug was ineffective in test subjects with a low LDH value.
Rare - but interesting "Biomarkers allow us to run smaller clinical study programs with certain parts of the population, the drugs achieve a higher degree of effectiveness and as a result achieve greater medical and economic value," says Shannon. "Because we have tested many active ingredients in an undefined population in the past, we may have often wrongly discontinued development" - losses that certainly contributed significantly to the estimated $ 800 million development costs per drug.
In the past, what usually didn't cost companies any money was research into rare diseases - the corporations never even dared to approach them. Because no matter how urgent a medical need may be, no investment is made where there is no market, says Krings, who used to work as a molecular biologist himself. "But now there is a trend reversal at some companies." Because niche indications now have a completely new meaning for companies - as a test balloon. "A study of niche indications with a few patients allows conclusions to be drawn about the effectiveness in other, more profitable indications." Such studies help to better understand the biological network that causes the disease. And since the cells of the human body function similarly in principle, the investigation of niche indications can be used to research indications that are more economically interesting.
With such a "proof-of-concept" study, Novartis developed an antibody that influences a signaling substance that regulates inflammation in the body such as rheumatism or arthritis. "In the past, Novartis would have looked at rheumatoid arthritis to see if the antibody worked because it's a big market," said Mark Fishman, president of the Novartis Institutes for Biomedical Research in Boston. But to make a meaningful statement about the effect of the drug, one would have had to test hundreds of patients. At the risk of spending a lot of money in vain.
In order to test the effect of the antibody, Fishman instead selected Muckle-Wells syndrome as a test balloon, a hereditary disease in which children in particular suffer from various inflammatory reactions with constant fever, headaches and rashes because too much of the signal substance is produced . Indeed, the antibody worked, so the company can invest in more expensive clinical trials that promise bigger markets with less risk. "This proof-of-concept strategy has revolutionized drug development," says Fishman. "Every drug that Novartis develops will go through such a human study in the future." From a business point of view, this also pays off because the development of drugs for rare diseases (in the USA that means less than 200,000 patients per year, in the EU less than five per 10,000 inhabitants) is subsidized by the state: tax breaks for research are accelerated Approval procedures and market exclusivity for the first seven, in Europe even ten years - that is considerable development aid. That will hardly be enough to solve the pharmaceutical dilemma. But the development in the pharmaceutical industry shows that tight budgets can have a positive effect on creativity.
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