New Financial Strategies Needed to Support Biomedical Innovation

The ongoing battle over drug reimbursement and pricing has raised questions about whether the pharmaceutical industry can continue to rely on high U.S. revenues to fund biopharmaceutical R&D. Payers and insurers have become more aggressive in demanding clear evidence of value for high-priced medicines and are rejecting old models for coverage and reimbursement.

The February issue of the journal Health Affairs addresses these issues with a series of articles describing rising pressures on pharmaceutical development and reimbursement:  Medicare policies that limit coverage for new interventions; the shift in venture capital financing away from life sciences; how biosimilars will further expand generic drug prescribing; and the growing strength of pharmacy benefit managers (PBMs) and health plans in pressing for evidence of value to justify premium prices.

MIT economist Ernst Berndt and colleagues document how the economic returns on pharmaceutical development have declined since 2005, resulting in sharply reduced revenues and net economic returns in recent years. The “golden age” of pharma economic profits occurred in the late 1990s, Berndt notes, and since then, the “patent cliff” has eroded returns, and market competition has limited the profitability of new product launches. If this level of diminished returns persists, Berndt predicts it will reduce industry support for biomedical innovation over the long term.

Development of new antibiotics to tackle drug-resistant bacteria requires increased R&D incentives, simplified clinical trials, global collaboration, and a reimbursement model that is de-linked from volume of use, according to John Powers of the George Washington University School of Medicine and others. Because the usual push for high sales volume of a new medicine would promote inappropriate use of new antibiotics, a new approach is needed that reimburses a company for the drug, even if it is not used.

A commentary by James Robinson, health economics professor at the University of California, Berkeley, acknowledges that more sophisticated payers are reducing revenues available to support biopharma R&D. But a benefit of a more constrained funding environment, he says, is that as it will compel the development of new products with performance and price features “most valued by payers and patients.”   Robinson emphasizes, though, that policy makers should accept premium pricing for genuine breakthrough technologies, such as new hepatitis C treatments. The clinical benefits of these drugs are “so large,” he points out, that the products are cost-effective based on widely accepted metrics. And the “political outcry over the steep prices charged for Sovaldi” sends “an inappropriate message to the industry.”

Robinson adds that price competition now characterizes the hep C drug market. Price discounting can be stimulated more broadly, he notes, by permitting wide payer use of comparative performance evidence in formulary decision-making and the elimination of mandates on Medicare and private insurers to cover all drugs in a class.