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BREAKTHROUGH DRUG PRICES: PUBLIC SCRUTINY WOULD FURTHER HARM FINANCIAL MARKETS FOR BIOTECH, BID EXEC DECLARES; BID, PMA RHETORIC v. CLINTON PLAN CONVERGING

Executive Summary

Public review of "breakthrough" drug prices would prolong the current and financial market for biotechnology companies, Biotechnology Industry Organization VP-Legislative Affairs Charles Ludlam maintained during a BIO "Biotech Tuesday" meeting Sept. 14. Ludlam decried as the "public flogging provision" the Clinton health care plan's proposal for a National Health Board with authority to scrutinize introductory prices of "breakthrough" drugs and issue reports on drugs it believes are priced excessively. The BIO exec indicated that he feels that the prospect of formalized government review of prices is most directly targeted at biotechnology products and "would chill our capital markets and keep them in the current depressed state in perpetuity." Under President Clinton's health care reform plan, the proposed board would have no explicit price setting authority but would "encourage" the setting of reasonable prices and would have the authority to request proprietary data from companies on their pricing rationale for products ("The Pink Sheet" Sept. 13, p. 3). The Pharmaceutical Manufacturers Association, whose members have experienced congressional scrutiny of pricing for drugs such as Taxol, Videx and Hivid, appears less uncomfortable with the jawboning authority of the committee than the biotech industry. PMA President Gerald Mossinghoff remarked during a Sept. 15 press briefing that "we have been 'jawbonees' for a long time in the pharmaceutical industry. I think our companies are used to standing up to scrutiny and examination." If the National Health Board were confined strictly to reviews of health care costs without access to internal company data, "I don't believe the industry would be terribly opposed to that," Mossinghoff said. PMA and BIO are united, however, in opposing the proposed board's authority to review company documents relevant to pricing decisions. Mossinghoff declared that the board's "authority to reach into proprietary confidential data somehow to make this judgment that a drug is inappropriately priced" is "offensive." "We would suspect that we would never find a bureaucrat who would find a price that was low enough," Ludlam said. "They would give very little consideration to the reasonable expectations of investors," he maintained, and would instead "tend to focus only on the literal manufacturing cost of the drug, which is of course a small part of the capital required to bring the drug to market." Mossinghoff and Ludlam described the review board as envisioned in the draft reform plan in similar terms. The PMA president called it "very close to a public utility-type price commission operation and I don't think the industry could support that." Ludlam told the BIO meeting that the price board hearkens "back to the regulatory statutes of the olden days" creating an equivalent to the "public power commission." PMA's and BIO's rhetorical attacks against elements of the health reform plan are converging. The associations have three targets: the drug price review board's authority to review internal company documents (termed a "utility price commission" in the industry lexicon), the authority of HHS to deny Medicare coverage for medicines it feels are excessively priced (termed a "blacklist"), and a Medicare rebate (termed a "15% tax"). In meetings with the Administration, the biotechnology industry had been seeking to differentiate itself as the leading domestic high tech industry whose overall unprofitability argued for gentle treatment. As early as February, Genzyme CEO Henri Termeer was publicly reporting on the effort ("The Pink Sheet" Feb. 22, p. 11). Ernst & Young's Biotech 94 report, reviewing the initial posture of the industry in the reform debate, declares that "the broad brush of the reformers is forcing biotechnology companies to separate their agendas from the pharmaceutical companies. It is in many ways a defining moment." However, BIO and PMA are, for the moment at least, now toeing the same line in public. Summarizing the terms for Medicare coverage, for example, BIO's Ludlam said: if "you refuse to negotiate a special rebate with the Secretary [of HHS] or you set a price that the Secretary terms unreasonable, then the drug is disqualified for reimbursement under Medicare. We think that is blacklisting. It's basically price controls by another name." PMA company execs had made similar remarks earlier in the day at a briefing sponsored by Rx Partners (see following story). PMA has been seeking to reap the political benefits of linking the fortunes of established multinational firms with the high-tech panache of the biotech startups. In keeping with the spirit of convergence, PMA released a report on biotechnology arguing that the distinction between "drug" and "biotechnology" companies is "artificial." The report found that, of the 143 biotechnology medicines and vaccines currently in human clinical trials, "some 30% are being developed, at least in part, by established drug firms," Miles Pharmaceutical Division President Horst Wallrabe said during the Sept. 15 press conference. In addition, "33% of research projects in major pharmaceutical companies were based on biotechnology -- compared to only 2% in 1980," the report states. Of 178 health-care related genetic engineering patents awarded in 1992, 43 went to PMA companies versus 37 that went to "other U.S. companies." The survey was conducted in April by the Boston Consulting Group on behalf of PMA. "Some have tried to make a distinction between the biotechnology companies and the so-called 'conventional' pharmaceutical companies," Wallrabe said. "This is an artificial distinction." It "is safe to assume that a much higher percentage of the research projects that eventually become approved medicines will be manufactured and/or marketed by traditional pharmaceutical companies," Wallrabe added. Because many biotech firms lack the resources to conduct large-scale clinical trials or to manufacture and market products worldwide, Wallrabe said, they will continue to turn to PMA companies to collaborate in bringing their products to market. The Ernst & Young report reached a similar conclusion (see preceding story). "More important," Wallrabe continued, "the research-based pharmaceutical industry increasingly is using biotechnology techniques." Wallrabe cited his own company as an example. Miles launched its first biotechnology product, the antihemophilic factor Kogenate (licensed from Genentech), in February. The company recently has consolidated its biotechnology business into one operating unit in West Haven, Conn. ("The Pink Sheet" Sept. 13, T&G-15) and is pursuing research in hemophilia, septic shock, diabetes, arthritis, osteoporosis and the common cold, he said. Amgen Chairman Gordon Binder remarked during the PMA briefing that "there is one distinction" between drug and biotech companies "that is true" -- the small companies "need money from Wall Street to survive." Reinforcing the recent proposed notion that the industry is fragile, Binder said: "We strongly believe that policymakers and legislators must take a hard look before they impose controls that could break the back of the still-young, but very important, biotechnology industry." He urged lawmakers to "consider not just the cost to the healthcare system of biotechnology products, but the savings to the healthcare system that these products can provide." Recent industry statistics on biotech company formation counter Binder's predictions. Ernst & Young finds, for example, that the start-up of new biotech companies in the twelve months ended June 30 "is revving up to match the pace in the 1980s." Ernst & Young estimates that the total number of biotech firms increased to 1,272 from 1,231 a year before. Ernst & Young execs explain that the start-up financings indicate a faith on the part of the financial markets in the prospects for biotech firms three or four years hence when the health reform plan has been assimilated. The greatest negative effect of the Clinton health plan concerns in the financial community seems to be falling on the small companies which have already gone public and are now approaching the need for renewed funding. Binder pointed to Amgen's Neupogen, which he said has helped the Duke University Cancer Center and the Fred Hutchinson Cancer Center to perform bone marrow transplants as "an outpatient procedure." An operation that "formerly cost $150,000 to $200,000 per procedure and required extensive hospitalization now costs about $50,000," he said. Noting PMA estimates that all prescription medicines account for "just 7% of total healthcare costs," Binder said that "new biotechnology drugs account for just 3% of that 7%. In other words, new biotech drugs are just 1/500th of the healthcare market. If anyone believes eliminating new biotechnology drugs will cut total healthcare costs, it's some sort of 'new math' that I can't understand." FDA Acting Associate Commissioner for Legislative Affairs (and former Senate aide to Vice President Gore) Jerold Mande reassured the BIO meeting that "there is a reservoir of good will amongst policy-makers in the executive branch and Congress" towards the biotech industry. He suggested that lawmakers will take seriously the threat that actions that harm the environment for biotech in the U.S. could cause the industry to somehow go the way of microelectronics" and move overseas. "Nothing is set in stone," Mande reminded the industry association. He argued that the move away from explicit price controls in the plan means that "people are listening to some of the concerns out there. This is a very open process."
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