Issue 11 / 26 March 2012

WHEN a developing country stands up to the might of the pharmaceutical industry and refuses to accept drugs being priced out of the reach of its citizens, it’s tempting to cheer.

In a judgment handed down by India’s patent authority this month, pharmaceutical giant Bayer was forced to grant a license for its cancer medication sorafenib (Nexavar) to a local generics manufacturer. Nexavar is used in the treatment of advanced renal cell carcinoma and hepatocellular carcinoma.

Bayer had been marketing the drug in India at 280 000 rupees ($A5290) for one month’s supply, whereas the generic manufacturer plans to sell the same quantity at 8800 rupees ($A166). It will also provide the drug free of charge to at least 600 “needy and deserving patients” each year.

In finding that Bayer had failed to make sufficient quantities of the drug available in India or to provide it at a reasonable price, the judgment from the Controller of Patents said the price of the drug was “simply unaffordable by the common man”.

A government employee on the lowest grade would have to work for 3½ years to pay for one month’s supply, the judgment said.

This was despite “thumping sales” internationally that had grown in leaps and bounds every year since the drug’s 2006 launch.

This is not the first time the issue of drug prices in the developing world has reared its ugly head — the long battle over the cost of AIDS medicines in Africa is another that comes to mind.

The pharmaceutical industry generally doesn’t come out of these stoushes looking good.

On one hand, you have large corporations making huge profits while, on the other, you have poor people dying for lack of essential medication. Hard to win hearts and minds on that one, no matter how much PR spin you put on it.

The standard argument from the industry is, of course, that it will not be able to afford the substantial investment in research and development (R&D) required to bring a new medication onto the market if its intellectual property rights are not respected.

It has to make a lot of money from successful drugs to pay for all the research that doesn’t bear fruit.

There’s some justice in that argument. Drug companies are not charities and they will only develop new treatments if they can make a buck out of it.

The industry’s reluctance to invest in developing new antibiotics is a prime example of what happens when the financial underpinning for R&D isn’t there.

The problem with the industry’s argument, though, is the lack of transparency when it comes to drug pricing — and this applies as much in Australia as it does in the developing world.

Australian patients may pay only $35.40 for a month’s supply of Nexavar, but the cost to our Pharmaceutical Benefits Scheme is $6457.08.

We simply have no way of knowing whether that price represents a fair return on Bayer’s investment or not.

What did it cost the company to develop the drug and what would be a reasonable loading to recognise the commercial risks inherent in developing any new treatment?

On the other side of the ledger, how should we allow for the benefits that pharmaceutical companies often reap when they “piggyback” on publicly funded research or receive more direct subsidies?

Bayer, according to the Indian judgment, received a 50% tax credit in the US related to clinical trials of Nexavar because it was deemed an orphan drug (one developed to treat a rare condition).

The public is certainly entitled to expect a return in the form of a lower price when it provides that kind of subsidy, something that may or may not have been factored in by Bayer in this case.

Pharmaceutical companies are always going to want to charge the highest price they can but we, and the government authorities that represent us, are entitled to demand clear justification of their claims.

When it comes to Nexavar, the pricing strategy appears to have backfired.

If Bayer had been prepared to provide its drug at a concessional price to people in the developing world who couldn’t otherwise afford it, the company could not only have claimed the ethical high ground but might also have avoided the threat of other jurisdictions following the Indian lead.

Jane McCredie is a Sydney-based science and medicine writer.

Posted 26 March 2012

3 thoughts on “Jane McCredie: Taking aim at drug pricing

  1. Stuart Baker says:

    An excellent post. Just a small point for the future, the following is not quite right – “Australian patients may pay only $35.40 for a month’s supply of Nexavar, but the cost to our Pharmaceutical Benefits Scheme is $6457.08”. The total cost is $6457.08, the cost to the PBS is $6457.08 less the patient contribution, so you need to subtract $35.40, or $5.80 (or $0.00 for an Safety Net Entitlement patient), giving $6421.68 cost to the PBS in the example quoted.

  2. Anonymous says:

    This is breathtaking. PBS drug prices are far from opaque.

    Clearly Ms McCredie doesn’t have the faintest notion of how the PBS processes operate or she would realise that the price is proposed by the company and the PBAC determines whether or not that price is justified by the health benefits conferred.

    “We simply have no way of knowing whether that price represents a fair return on Bayer’s investment or not.”

    That is an utterly irrelevant consideration; the PBS is not an industry support program.

    The price of a drug should reflect the clinical benefit it offers to patients. Paying high prices for drugs offering little or no additional benefit over existing therapies simply because they represent large investments on the part of their manufacturers is both wasteful and irresponsible, and represents an unacceptable opportunity cost.

    Every other industry has to manage investment risk – cars, electronics, aircraft – why should the pharma industry be allowed to offload all its risk onto the consumer through high prices?


  3. Jane McCredie says:

    Thank you, Stuart Baker, for pointing out that the cost to the PBS is actually $6457.08 minus the patient contribution. And, to the anonymous commenter, I certainly didn’t mean to imply that it was the PBAC’s responsibility to ensure pharmaceutical companies get an adequate return on their investment! The committee’s role is, of course, to assess cost-effectiveness, based on the clinical benefit to patients. That is as it should be, but it is not what I was writing about. The subject of my post was the prices drug companies set for their products and how difficult it is for anybody outside the industry to assess whether those prices represent a reasonable return on investment or something closer to profiteering – a particularly important question when companies have received public funding to help them develop the product in the first place.

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