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Executive Summary

The National Institutes of Health could enlist the help of the Health Care Financing Administration to review the reasonableness of pricing for products arising from CRADAs (Cooperative Research & Development Agreements), Albert Einstein College of Medicine Associate Professor Peter Arno suggested at the House Small Business/Regulation Subcommittee's Jan. 25 hearing on Bristol- Myers Squibb's Taxol. Health care payors such as HCFA already require more "complex" cost accounting from hospitals than what would be required to review drug prices, Arno maintained. "In terms of an appropriate place in government to do this cost accounting, I suggest that it not be at NIH," he commented. "For one thing, they don't seem to be terribly interested; and secondly, they don't have the expertise. So why not give it to the government bureaucrats who are good at this, like those at HCFA." The disclosure of financial data that might be required could lead some pharmaceutical companies to opt out of CRADAs, Arno acknowledged, but "it is unlikely that all companies would refuse to participate." With the "vast amount" of research conducted by the federal government coupled with the "intensely competitive international pharmaceutical marketplace, there should be no shortage of companies who are willing to collaborate with the government," he contended. The subcommittee hearing examined pricing of drugs commercialized through NIH Cooperative Research & Development Agreements with pharmaceutical companies. Bristol-Myers Squibb's Taxol (paclitaxel), approved in December 1992 for treatment of refractory ovarian cancer, was the current case study. In an opening statement, Subcommittee Chairman Wyden (D-Ore.) outlined several possible options to give the government more leverage on the cost of treatments arising from CRADAs. One suggestion from the subcommittee is a price commitment very early in the development cycle, at the time of the signing of the development agreement. "Before entering into a cooperative venture, the drug price would be negotiated based on a formula that estimates the cost and profits of the new drug." Wyden said. That approach would effectively ask commercial sponsors to bid (with lower prices) for a CRADA contract prior to starting work on a project. Alternatively, Wyden said, NIH could convene an "informal panel of experts" that would confidentially review the manufacturer's proprietary costs and investment data. This panel would then assess the manufacturer's proposed price. More formally, NIH or HHS could establish a "permanent secretariat on pricing" that would give a "yea or nay as to whether minimal thresholds for fair and reasonable pricing specified in the CRADA have been met." The subcommittee chairman said the secretariat could include members with "expertise in the appropriate areas of analysis." Other approaches noted by Wyden could be "cost-plus charging," modeled on agreements used for defense contractors whereby they recover investment costs plus a guaranteed rate of return, or some sort of enhanced royalty or profit-sharing arrangement. (NCI already has developed a de facto system for determining a reasonable price, see related story, p. 6.) Wyden previously has suggested he would favor an expert panel to act as an "objective arbiter" on pricing ("The Pink Sheet" Dec. 21, 1992, p. 24); he told the subcommittee hearing, however, that he is "not wedded to any one" of the enumerated options. However, Wyden declared that he wants to "work quickly to amend the technology transfer program," governed by the Federal Technology Transfer Act, to ensure both development of new drugs and "fair pricing, as well." Aides said the Oregon Democrat would prefer pursuing administrative changes to the CRADA program; to that end, he has written HHS Secretary Shalala to involve the new HHS topside in the interpretation and enforcement of CRADA fair pricing clauses. University of Minnesota College of Pharmacy Professor Stephen Schondelmeyer estimated that as much as 35%-40% of Taxol purchases may be reimbursed by Medicare and Medicaid. He suggested that a panel modeled on the Medicare hospital Prospective Payment Commission might be more appropriate than HCFA to monitor CRADA- developed drug prices. ProPAC, he suggested, is concerned with Medicare costs but reports to Congress unlike HCFA, Medicare's administrative agency. ProPAC also has a "wider" concern for how policies affect private patients. Schondelmeyer reiterated the view that a review panel may be needed to consider drug prices more generally, as is done by Canada's Patent Medicine Price Review Board and similar agencies in "most industrialized countries." Regarding the Taxol CRADA, Schondelmeyer asserted, "It appears that NIH has done little more than accept Bristol-Myers' word that this price is reasonable." He is assisting in a General Accounting Office study of prices of pharmaceuticals developed with federal support. Stanford professor Alan Garber, MD/PhD, argued against removing NIH and other scientific bodies from the review entirely, suggesting that scientific expertise is needed to help gauge the research investment to develop a new drug product. Though addressing Wyden's questions as an individual expert, Garber is a health services researcher at the Veterans Affairs Department and was the principal contractor for an Office of Technology Assessment report issued last year on costs of Genyzme's Ceredase, the orphan drug for Gaucher's disease ("The Pink Sheet" Oct. 12, 1992, T&G-10). "I actually don't have strong feelings about where this [fair pricing review] body would sit," Garber told Wyden, but "you would continue to need expertise in basic scientific processes that lead to the development of the drug and, in fact, in our experience with the Ceredase case there were several areas where we required scientific input that was quite substantial. For example, how big a step was it to be able to develop a process to purify the enzyme?" He cautioned though that "scientific input is certainly not sufficient by itself" and that implementing "a fair pricing clause is not a straightforward exercise and the implicit limits on pricing may ultimately conflict with NIH's goals of technology transfer." "Fair pricing" is "commonly used to mean that the price charged does not greatly exceed the cost of researching, developing, manfacturing and distributing the drug," Garber said. He said the experience of the OTA Ceredase report suggests that "determining such costs is a difficult and serious task." Economic expertise is "particularly important," he added, "because there are many areas of uncertainty and controversy in estimating R&D and manufacturing costs." Einstein's Arno described what he termed a "bolder approach," a policy that exclusive government licenses or patents should be granted only in very unusual cases. Arno argued that a "monopoly price is, by definition, higher than a competitive market price." Second, "the likelihood that insurance coverage for pharmaceuticals will be broadened in the near future means that monopoly pricing will take income away from consumers and taxpayers and redistribute it to the pharmaceutical industry." Pharmaceutical Manufacturers Association Exec VP Robert Allnutt objected to price setting or public utility approaches to the CRADA program but indicated PMA might be willing to explore the option of royalty payments from commercial sponsors. The Industrial Biotechnology Association also favors royalty-type arrangements ("The Pink Sheet" Dec. 7, 1992, p. 7). "PMA supports the basic position adopted by NIH in favor of awarding exclusive rights in appropriate circumstances to private entities" for compounds initially discovered in government labs, Allnutt said. The government "may have a legitimate claim to compensation due to their collaborative efforts," he continued, adding: "PMA would be willing to work with NIH to identify incentives for CRADAs and develop appropriate principles or models for compensation of government contributions." Wyden said he "likes" the idea of royalties but appeared concerned that the costs of those royalties could be passed on to consumers through higher product prices. The chairman said he "would be very interested in seeing a policy paper from PMA on how the royalty arrangements would translate into prices for the consumer." IBA submitted a statement for the committee hearing record that asserts: "We believe that efforts on the part of any federal agency to control prices are powerful disincentives to the innovation on which our companies have built a world-class industry. IBA suggests that a more appropriate and effective means to ensure an equitable return on federal investment in pharmaceutical research would be for NIH to license its technology for monetary consideration negotiated between the parties."

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