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Headlines about high drug prices are nothing new. The high cost of bringing new drugs to market, plus high merger and acquisition activity in pharmaceuticals have led to price increases across the pharmaceutical sector.
Drug costs are increasing rapidly. What does that mean for pharmaceutical research?
Opportunistic increases in drug prices, like with Daraprim and the EpiPen have caused significant consumer backlash and perhaps taken away from attention as to why drug prices are increasing so rapidly and what can be done about it.
But none of this means the pharmaceutical industry is doomed. Far from it. People will always have healthcare needs that include medications, plus the population in many countries is aging, and longer lives mean a bigger market for drugs. While blockbuster drugs will continue to be developed, it appears that the pharmaceutical market is entering a post-blockbuster phase. Drug patent issues are evolving, and pharmaceutical research is going in new directions. Investment strategies will have to change as well.
Problems with the Existing Pharmaceutical Business Model
The return on pharmaceutical research investment is falling, and some envision it reaching 0% in a few years unless something changes. Yet the pharmaceutical industry creates value that depends on steady R&D productivity. What’s causing the decline in return on R&D investment? Rising costs of clinical trials and a challenging regulatory environment are factors, as is increasing pressure from payers and providers. Additionally, as new drugs improve the standard of care, it raises the bar for still newer drugs, reducing the potential scope for improvement.
It may be that the pharmaceutical industry as we know it will fade away, and the pharma and biopharmaceutical industries together will evolve into an entirely new market, just as the old pharmaceutical industry evolved from the chemicals industry. It is the organizations (and investors!) who are most willing and able to adapt that will benefit from this.
Ways to Keep a Lid on Drug Spending
There are four basic ways to reduce spending on drugs:
- Shifting from more expensive to cheaper drugs in the same class
- Shifting more costs toward patients and insurers
- Cut drug prices
- Cut total drug use
The sheer expense of bringing new drugs to market will require new business strategies for drug developers and investors.
There isn’t a single mechanism that is most effective. Rather, many countries are working on combinations and variations of these methods to keep the costs of healthcare under control. But it’s clear that older drug policies won’t make sense in a world where biologics and highly targeted drugs are being developed while emphasis on the blockbuster small-molecule drugs that address huge swaths of the population is declining.
Biosimilars Won’t Play out Like Generics
But won’t “generic” versions of biologics cut prices the way generic small molecule drugs bring down ordinary drug prices? Not necessarily. While generic small molecule drugs are more readily substitutable for brand name drugs, biosimilars are harder to substitute for original biologic drugs. Part of it has to do with the sheer complexity of large molecule biologics, and part of it has to do with how drug patents work with biologics compared to ordinary drugs. In other words, while a generic small molecule drug can make prices race to the bottom (with exceptions where there is only a single generic manufacturer), the same may not be true for biosimilars because of the personalized, targeted nature of biologics.
New Business Models Will Emerge in Era of Personalized Medicine
Blockbuster drugs will continue to be invented because drug technology continues to advance. But the era of the Lipitors and Viagras dominating the world pharmaceutical markets won’t be what it once was. Advances in highly targeted, more complex and personalized drugs lead to high-priced drugs that address smaller segments of the population. And it only makes sense that old market forces will be different when that is the case.
Some pharmaceutical investors believe that the push toward personalized drug development simply isn’t a sustainable business model, and that the costs to develop such highly-targeted drugs can never be recovered. But it also makes sense that new technologies will cause new, more sustainable business models to emerge. Either way, there’s probably no going back to the way things used to be.