Cutting drug prices hinders development of new medicines
According to an ESMT CA study commissioned by Novartis
Cutting the prices of drugs will severely reduce the number of new medications making it to market, according to a study from the European School of Management and Technology (ESMT), based in Berlin, Germany.
The ESMT Competition Analysis (ESMT CA) report on pharmaceutical innovation and pricing regulation, commissioned by Novartis, says there is a direct link between strict regulation and low innovation. New drugs likely to be hit hardest under tough pricing regulation include antibiotics and treatments for cardiovascular disease and immune system disorders such as multiple sclerosis and chronic meningitis, it says.
‘Our study shows the consequences that pricing and reimbursement regulation can have on pharmaceutical innovation. It also shows that, incorrectly applied, regulation can reduce the value of pharmaceutical projects and curtail the resources available to carry them out,’ said Hans Friederiszick of ESMT CA.
‘Rational investors will naturally look for the most profitable investment choices, which is why regulation has a direct impact on the number and characteristics of the medications developed.’
The ESMT report says European governments predominantly see pharmaceutical pricing models as a tool for cost control in the public health sector, but may not acknowledge its implication on product value and, hence, the development of new drugs.
It notes that External Price Benchmarking (EPB), a model widely used across OECD countries, causes a 5.7% drop in the optimal pharmaceutical portfolio value of a representative company under the ESMT CA simulation. Another system, Internal Reference Pricing (IRP), used in 17 EU-member and 3 non-EU OECD countries, causes an 11.7% drop.
Prices lower than market value in the cases of both IRP and EPB means that less money is available to invest in new products, the report says.
IRP can lead to ‘a failure to launch for one in ten products, half of them highly innovative’ because it may group innovative drugs that have just been launched with older drugs whose patent life has expired or is about to expire ‘effectively shortening the life cycle of innovative drugs and decreasing the incentive to innovate’.
ESMT adds that current pricing models are often shown to favour ‘breakthrough’ pharmaceutical innovations over ‘follow-on’ drugs, or incremental improvements. Under a form of IRP introduced in Germany in 2004, later-in-class drugs always have their price referenced against the relevant first-in-class drug, ESMT says, even if they have new and beneficial characteristics.
This can lead to a different understanding of ‘innovation’ for patients and pharmacists. For example, a statin may be redeveloped to have fewer side effects or be more beneficial for one group of patients and this will seem like an innovative development to the patient but will not necessarily be innovative enough from the pricing regulator’s point of view to benefit from favourable regulation.
ESMT says the study demonstrates the need to support both ‘first in class’ and ‘best in class’ products, rather than drawing a regulatory distinction between ‘break-through’ products and everything else.
