In his latest foray into drug pricing, Senator Bernie Sanders launched an investigation into the “unacceptable, outrageously high” prices of Ozempic and Wegovy, two GLP-1 weight loss and diabetes medications that have soared in popularity since they were approved by the FDA in 2021. Sanders argued that these drugs are unaffordable for millions of patients and questioned discrepancies in cost between the United States and other countries such as Canada and Germany. His comparison between prices for drugs in the U.S. vs other markets is one he’s made before, most notably in the recent Senate Hearings he led where CEOs from three of the leading pharmaceutical manufacturers came to testify and try to explain the basis for the cross-country differences in cost.
Sanders’ cost argument in this case relies on the cost to manufacture GLP-1 drugs, which researchers have estimated to be around $5. Compared to the retail price, which hovers around $1,000 for a four-week supply, this gap is staggering. But isolating manufacturing costs to make the argument that the acquisition cost for patients is too high overlooks the reality of how businesses across industries develop and price products. It is particularly inappropriate to make this connection for the pharmaceutical industry, but more ominously this action advances the argument that the government, rather than the market, should determine how pharma companies can and must price their products. This door was opened in the passage of the IRA, a subject I have covered previously. And this latest foray opens that door wider.
Few, if any, industries price innovative products on a cost-plus formula. They price in terms of the underlying value of the innovation the product represents. Innovations almost always involve risk and uncertainty, often emerging out of product failure. One of the most widely recognized examples of this is 3M’s glue failure which became the basis for its blockbuster ubiquitous post-it notes. Understanding how this dynamic works in the pharmaceutical industry is even more critical with far-reaching ramifications associated with health and longevity. The nature of research and development in pharma is inherently risky. Most promising compounds never see the light of day. The average cost of developing a new drug is over $2B, and new drug candidates have less than a 5% chance of approval. But there is also risk in bringing clinically successful compounds to market.
When Investment Rhymes with Canada
Canada has a proud history of achievement in the areas of science and technology, and the field of biomanufacturing and life sciences is no exception.
Just because a product works in a clinical trial setting and has a strong safety profile doesn’t mean it will be broadly adopted, or that reimbursement will adequately compensate the manufacturer for undertaking needed discovery and development. Even after a product is approved for use by the FDA in this country and reimbursement by commercial payers and CMS is deemed adequate to launch the drug, commercialization comes with its own inherent risks. Competition must be addressed. The market needs to be conditioned to appreciate the value reflected in the innovation and be willing to embrace the new product in favor of the old standard of care where it adds clinical value. The large upfront investments and the underlying costs of doing business never guarantee a commercial payoff. These companies and their investors take on risk during the lengthy and uncertain product development, approval, and commercialization processes. In a free-market economy where innovation is rewarded, consumers and the economy benefit. These companies deserve to recover their investment and make a profit.
Challenging unfair pricing practices is a legitimate topic for Congressional oversight where the market is unable to regulate itself. But even in this arena it’s important to bring a more thorough, accurate depiction of the cost/risk/benefit equation to the table. There are also other dynamics at play that impact patient access to important medicines which are not being addressed by Sanders in this latest round of attacks. Singling out an industry segment won’t solve the underlying problem of healthcare costs. But the real danger is that these hearings only serve to erode the legitimacy of one of our leading industries without illuminating any path forward. Pharma companies need to price their products. They’re not utilities — at least not yet.
Photo: gerenme, Getty Images
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Rita Numerof, PhD, President of Numerof & Associates, is an internationally recognized consultant and author with over 30 years of experience in the field of strategy development and execution, business model design, and market analysis. Her work across the global healthcare spectrum gives her a unique perspective on the challenges of pharmaceutical and medical device manufacturers, healthcare delivery institutions, payers, physicians, and suppliers. She has authored six books, including Bringing Value to Healthcare: Practical Steps for Getting to a Market-Based Model, and is a regular contributor to Forbes, where she writes about the business of healthcare and the need to move to a market-based model.
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