Drugs: Penny Wise, But a Pound Foolish
by Michael Shulman
BiotechBlitz
I typically write about stocks of interest to investors, but today I am just hacked off. Bear with me and pardon the pun.
Not all drugs and biotech companies are created equal -- and the belief that a drug may cost too much because of its price, is representative of the simplicity and shallowness of the current debate in politics and in press about healthcare costs in the United States.
We live and, for the most part, benefit from a capitalist healthcare system built into a capitalist economy -- with all the commensurate risks and rewards. High-priced drugs with large profit margins are part of this system, and the numbers kicked around by politicians and the press obscure the central reality of our system: A high price for a drug is not necessarily a high cost to society when a drug saves or extends a life and when profits spur the development of treatments that (over time) reduce costs by saving or improving the lives of patients.
Two recent editorials complained about the price of cancer treatment Avastin, made by biotech giant Genentech (DNA), and Genzyme's (GENZ) treatment, Cerezyme, for Gaucher disease.
Avastin fights various forms of cancer and costs upward of $110,000 per annum or more, while Genzeyme's product can top more than $400,000 per annum. The Times's editorialists believe this is way too expensive. Tell that to a patient with Gaucher's disease or a cancer patient who lived, on average, the five and a half months predicted by the median survival of patients in the Avastin clinical trial that led to the drug's approval. In a country that rewards creativity and success, don't you want to reward companies for saving patients so they can reinvest the money to save more patients in the future?
I am no apologist for an industry holding many companies that currently make far too much money for what they return in improvements in public health -- Amgen and its anemia drugs come to mind -- but this specific complaint is misplaced and depressingly similar to the hollow campaign rhetoric dominating the air waves.
While the editorial reflected public frustration with medical costs it also is a mirror of the poverty of the healthcare debate which is increasingly dominated by the inability of patients and the general media to separate prices from costs. In reality, a seemingly high-priced drug may actually save money in the short or long run, not to mention the life of a patient.
I do not deny that patient, public and political frustration is well grounded - too many things cost too much, from allergy shots to fifteen dollar boxes of sterile tissues -- but price should and cannot be confused with cost. In this instance, the clarity of the target (a $100,000 a year drug) and the vast size of the company led the debate.
If the company were a start up that had never made a penny, tried for 10 years to develop the drug and finally succeeded, would there have been criticism? Of course not, and the focus would have been on the happiness felt by surviving patients and the money saved when they left the hospital and went home to live, and not to die in a hospice.
A new report that came out today made this point all too well.
Genentech's cancer drug Rituxan, in combination with chemotherapy, has helped younger patients with non-Hodgkin's lymphoma live two-thirds of the time for five years or more, compared to 50% of the time in the early 1990s. Call it longer living through high-profit chemistry. Genzyme has a robust pipeline paid for with profits from Cerezyme.
This does not seem to faze politicians, patients and pundits who fail to discriminate among the products and the companies that supply them. Avastin is not a "me-too" product; it is not the umpteenth variation of the same pain killer; it is not a treatment for a brand new disease like restless toe syndrome. Avastin, along with many other high-priced drugs, extend and, sometimes, save lives. That is Genentech's mission. Reducing the price of Avastin, and the flow of dollars available to develop new products at a company like Genentech will materially affect the development of new products and eventually lead to the premature death of many patients.
Do I exaggerate?
The drugs in question took more than a decade to develop and are (or were) unique when approved. Avastin is a first and best-in-class anti-angiogenesis cancer drug that reflects billions of dollars in past, current and future development costs. I follow many companies in the life sciences industry and can say without hesitation the drug's parent and creator is considered by many (including me) to be the world's finest cancer company. Genentech has more than 100 clinical trials underway, and is always pushing the envelope and looking for new ways to save lives. The funds for the trials and "envelope pushing" come from high-priced drugs already on the market.
Some surveys also find Genentech to be the finest place to work in the United States -- and it would be difficult to find a company with a better track record for working with, and listening to, the FDA. You won't see pictures of Genentech scientists on yachts with Congressional lobbyists and call girls -- instead they spent their money on R&D last year -- more than they declared as a net profit.
The laws of economics are simple -- a reduction in price of current drugs will reduce Genentech's ability to improve Avastin, develop new treatments and serve patients. Ultimately, a lower price for Avastin may actually mean a higher cost to society.
Genentech and Avastin are easy targets for politicians, the media and complaining patients. The harder (and real) targets are avoided by too many people.
What are the real drivers of runaway costs? People, not patients.
According to Dr. Mark McClellan -- former FDA and Medicare chief now at the Brookings Institution -- the key to cost control is keeping people healthy. The current system rewards the treatment for illness and its reimbursement and often does not pay for routine physicals and other measures to improve health, like managed exercise and diet programs.
Of course, no one ever sold a newspaper or got a vote by saying "Hey, fatso, you may need help, but the first place to start is by getting the potato chips out of your mouth."
But sticking it to a company that has improved or saved 10s of thousands of lives (but is an easy target because of a $100,000-a-year drug) is sexy.
It would be better if the politicos, the public and the media took a look at the real cost and value of a drug, not the price -- and that's something we currently don't do.
A good example is the recent demise of drug BiDil and NitroMed.
BiDil was the first drug ever approved by the FDA for one ethnic group: African Americans. This heart medication was so successful in trial that the patients on placebo were put on BiDil midway through the trial for ethical reasons -- the patients receiving the drug saw a 43% reduction in deaths from heart attacks.
No matter -- BiDil failed in the marketplace because payers (insurers and Medicare) would not pay. Medicare and private insurers asked for too high of a co-payment from patients who could not afford the drug. These payers did not, and would not, factor in a 43% reduction in deaths, and all the costs associated with a sick and dying patient, when demanding these co-payments. And this narrow view of the costs won the day! Since the drug has been approved it is probable that more patients have died unnecessarily of heart problems who could have been managed with BiDil, than the number of soldiers who have died in Iraq.
Narrow-but-headline-grabbing analyses of high-priced drugs undermine the truth: It is the value of a drug relative to its price that matters. Narrow, artificial price limits on life-saving, unique drugs can kill -- and, are likely, already doing so.
BiotechBlitz is a regular contributor to BioHealth Investor
_____________
BiotechBlitz
I typically write about stocks of interest to investors, but today I am just hacked off. Bear with me and pardon the pun.
Not all drugs and biotech companies are created equal -- and the belief that a drug may cost too much because of its price, is representative of the simplicity and shallowness of the current debate in politics and in press about healthcare costs in the United States.
We live and, for the most part, benefit from a capitalist healthcare system built into a capitalist economy -- with all the commensurate risks and rewards. High-priced drugs with large profit margins are part of this system, and the numbers kicked around by politicians and the press obscure the central reality of our system: A high price for a drug is not necessarily a high cost to society when a drug saves or extends a life and when profits spur the development of treatments that (over time) reduce costs by saving or improving the lives of patients.
Two recent editorials complained about the price of cancer treatment Avastin, made by biotech giant Genentech (DNA), and Genzyme's (GENZ) treatment, Cerezyme, for Gaucher disease.
Avastin fights various forms of cancer and costs upward of $110,000 per annum or more, while Genzeyme's product can top more than $400,000 per annum. The Times's editorialists believe this is way too expensive. Tell that to a patient with Gaucher's disease or a cancer patient who lived, on average, the five and a half months predicted by the median survival of patients in the Avastin clinical trial that led to the drug's approval. In a country that rewards creativity and success, don't you want to reward companies for saving patients so they can reinvest the money to save more patients in the future?
I am no apologist for an industry holding many companies that currently make far too much money for what they return in improvements in public health -- Amgen and its anemia drugs come to mind -- but this specific complaint is misplaced and depressingly similar to the hollow campaign rhetoric dominating the air waves.
While the editorial reflected public frustration with medical costs it also is a mirror of the poverty of the healthcare debate which is increasingly dominated by the inability of patients and the general media to separate prices from costs. In reality, a seemingly high-priced drug may actually save money in the short or long run, not to mention the life of a patient.
I do not deny that patient, public and political frustration is well grounded - too many things cost too much, from allergy shots to fifteen dollar boxes of sterile tissues -- but price should and cannot be confused with cost. In this instance, the clarity of the target (a $100,000 a year drug) and the vast size of the company led the debate.
If the company were a start up that had never made a penny, tried for 10 years to develop the drug and finally succeeded, would there have been criticism? Of course not, and the focus would have been on the happiness felt by surviving patients and the money saved when they left the hospital and went home to live, and not to die in a hospice.
A new report that came out today made this point all too well.
Genentech's cancer drug Rituxan, in combination with chemotherapy, has helped younger patients with non-Hodgkin's lymphoma live two-thirds of the time for five years or more, compared to 50% of the time in the early 1990s. Call it longer living through high-profit chemistry. Genzyme has a robust pipeline paid for with profits from Cerezyme.
This does not seem to faze politicians, patients and pundits who fail to discriminate among the products and the companies that supply them. Avastin is not a "me-too" product; it is not the umpteenth variation of the same pain killer; it is not a treatment for a brand new disease like restless toe syndrome. Avastin, along with many other high-priced drugs, extend and, sometimes, save lives. That is Genentech's mission. Reducing the price of Avastin, and the flow of dollars available to develop new products at a company like Genentech will materially affect the development of new products and eventually lead to the premature death of many patients.
Do I exaggerate?
The drugs in question took more than a decade to develop and are (or were) unique when approved. Avastin is a first and best-in-class anti-angiogenesis cancer drug that reflects billions of dollars in past, current and future development costs. I follow many companies in the life sciences industry and can say without hesitation the drug's parent and creator is considered by many (including me) to be the world's finest cancer company. Genentech has more than 100 clinical trials underway, and is always pushing the envelope and looking for new ways to save lives. The funds for the trials and "envelope pushing" come from high-priced drugs already on the market.
Some surveys also find Genentech to be the finest place to work in the United States -- and it would be difficult to find a company with a better track record for working with, and listening to, the FDA. You won't see pictures of Genentech scientists on yachts with Congressional lobbyists and call girls -- instead they spent their money on R&D last year -- more than they declared as a net profit.
The laws of economics are simple -- a reduction in price of current drugs will reduce Genentech's ability to improve Avastin, develop new treatments and serve patients. Ultimately, a lower price for Avastin may actually mean a higher cost to society.
Genentech and Avastin are easy targets for politicians, the media and complaining patients. The harder (and real) targets are avoided by too many people.
What are the real drivers of runaway costs? People, not patients.
According to Dr. Mark McClellan -- former FDA and Medicare chief now at the Brookings Institution -- the key to cost control is keeping people healthy. The current system rewards the treatment for illness and its reimbursement and often does not pay for routine physicals and other measures to improve health, like managed exercise and diet programs.
Of course, no one ever sold a newspaper or got a vote by saying "Hey, fatso, you may need help, but the first place to start is by getting the potato chips out of your mouth."
But sticking it to a company that has improved or saved 10s of thousands of lives (but is an easy target because of a $100,000-a-year drug) is sexy.
It would be better if the politicos, the public and the media took a look at the real cost and value of a drug, not the price -- and that's something we currently don't do.
A good example is the recent demise of drug BiDil and NitroMed.
BiDil was the first drug ever approved by the FDA for one ethnic group: African Americans. This heart medication was so successful in trial that the patients on placebo were put on BiDil midway through the trial for ethical reasons -- the patients receiving the drug saw a 43% reduction in deaths from heart attacks.
No matter -- BiDil failed in the marketplace because payers (insurers and Medicare) would not pay. Medicare and private insurers asked for too high of a co-payment from patients who could not afford the drug. These payers did not, and would not, factor in a 43% reduction in deaths, and all the costs associated with a sick and dying patient, when demanding these co-payments. And this narrow view of the costs won the day! Since the drug has been approved it is probable that more patients have died unnecessarily of heart problems who could have been managed with BiDil, than the number of soldiers who have died in Iraq.
Narrow-but-headline-grabbing analyses of high-priced drugs undermine the truth: It is the value of a drug relative to its price that matters. Narrow, artificial price limits on life-saving, unique drugs can kill -- and, are likely, already doing so.
BiotechBlitz is a regular contributor to BioHealth Investor
_____________
posted by Nico at
10:17 PM
1 Comments:
BiotechBlitz,
Thank you for laying out clearly that the relationship between prices and costs is not simple/shallow as debate and public perception often portrays. Unfortunately most drug/biotech companies are not (or no longer) operating like Genetech with willingness to invest in sciences and the associated risks to create new drugs (without the excesses mentioned) so have made the bed we lay in. IMO this is largely because too many are now run by Business/Marketing/Legal types that do not really understand/focus on R&D but rather only image and shareholder value, with the shareholders wanting quick and large profits without risks and that if it does come is after long-term efforts.
CMC guy
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