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Azar's Plan To Tie U.S. Drug Prices To Foreign Ones Will Impact Investments In R&D

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Americans, be they Republicans or Democrats, are outraged by the rising cost of prescription drugs. People become even more incensed when they hear that the U.S. prices for medicines are higher than in Europe and Japan, countries where the government controls the drug prices. Many feel that Americans are bearing the brunt of the costs of discovering and developing new medicines.

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Enter Alex M. Azar II, a former executive at drug giant, Eli Lilly, and now Donald Trump’s Secretary of Health and Human Services (HHS). At the Brookings Institute last fall, Azar made news by proposing changes which would enable the government to reduce payments for the 27 highest-cost physician-administered drugs – drugs that are part of the Medicare Part B program. His rationale was simple:

“In Medicare Part B today, the government gets the bill, and we just blindly pay it, plus six percent for the provider who administers it. There is no negotiation, and the payment mechanism actually encourages prescribing more expensive drugs.”

HHS analyzed the prices that Medicare pays for these 27 drugs and found that, on average, they were 180% of what other wealthy countries pay. Azar’s proposal would change this by requiring manufacturers to provide discounts over a five year phase-in period so that Medicare would pay 126% of what other countries pay. This type of plan is referred to as International Reference Pricing (IRP).

Needless to say, the biopharmaceutical industry has a number of issues with Azar’s proposal. The Pharmaceutical Researchers and Manufactures of America (PhRMA) has expressed specific concerns with having U.S. prices determined by countries with single-payer health systems that dictate drug prices or determined by less wealthy countries like Greece where affordability is in question and drugs are cheaper by necessity. Interestingly, the PhRMA concerns have been echoed by both the Wall Street Journal and the New York Times However, the purpose of this post is not to continue this debate. Rather, it is intended to take issue with one of Azar’s views of the impact of his proposal.

“Our model will save $17 billion in Medicare drug spending over the next five years. That’s $3.4 billion a year. The pharmaceutical industry reports they spend an average of 21% of revenue for R&D. At most, this model could pull around $700 million out of their annual R&D budgets, which they boast are more than $70 billion a year. These savings, while substantial for American patients and taxpayers, cannot possibly pull out more than 1 percent of R&D.”

Thus, Azar claims that HHS can reduce spending on Medicare Part B drugs with little impact on biopharmaceutical R&D investment. Duane Schulthess, Managing Director at VitalTransformation, questioned Azar’s claim on this. As he delved into specific compounds on Azar’s list of 27, he found some startling data. One striking case is with Biogen’s Multiple Sclerosis drug, Tysabri.

“According to Biogen’s 2017 annual report, sales of Tysabri represented $2 billion of their global revenue of $12 billion. In other words, roughly 17% of Biogen’s total revenue was derived from this one product in fiscal year 2017. $1.12 billion of Biogen’s revenue from Tysabri came from the U.S.; the rest of the world was responsible for roughly $860 million. While only $306 million of their U.S. sales were accountable to Medicare Part B, there is little doubt that a forced reference price would radically impact all U.S. prices, as any insurer would negotiate based upon the price paid by Medicare Part B.

In 2017, Biogen spent $2.26 billion on R&D. A cut of $630 million in U.S. revenue due to reference pricing equates to a whopping hit of 30% of Biogen’s total R&D budget, not 1%.”

How does Schulthess come up with a $630 revenue decline in Tysabri sales under International Reference Pricing? The U.S. price of Tysabri is 2.9 times higher than the average benchmark in Europe. Thus, if one ‘normalized” the $1.12 billion in U.S. sales to the European levels, Tysabri sales would be lowered to $386 million in the U.S. However, Azar has said that Medicare would allow a 26% markup over the European prices. Thus, assuming that all U.S. payers would benefit from the price set by HHS for Medicare Part B, Tysabri U.S. sales would drop from $1.12 billion to $486 million, a loss of over $630 million. Given that Biogen invests roughly 20% of top line revenues into R&D, this drop in Tysabri sales would amount to $126 million less for R&D. That’s a hit of 5.4% of the R&D budget, not 1% (but not 30% either).

Such a loss in research funding for Biogen is not trivial and would have severe consequences. Research programs would have to be eliminated and many scientists would be let go. But the loss of $630 million in sales would reverberate not just in R&D but throughout the whole company with job eliminations across the board. Wall Street would also react negatively limiting Biogen’s growth prospects.

Unfortunately, this scenario would not be unique to Biogen. There are companies like Amgen and Roche with multiple entries on Azar’s list. The irony in enacting the HHS proposal to tie Medicare Part B drug pricing to International Reference Pricing is that this will have a disproportionately negative effect on companies that have the more innovative, newer products on the market for what are often the most challenging diseases. In all likelihood, should the Azar proposal come to pass, biopharmaceutical companies would shift R&D resources out of areas that would lead to Medicare Part B physician administered drugs – areas where we are still in dire new of new therapies.

Something does need to be done to address the discrepancy of drug prices in the U.S. vs. those in other countries. However, the Azar proposal is misguided in that, despite his assertions otherwise, enacting it will have a negative effect on pharmaceutical R&D in areas of serious medical need. It is important to recognize that the biopharmaceutical industry is one of the most important in the U.S. Let’s find ways to continue to support it rather than diminish it.