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Pricing Pharmaceuticals, Part 2
"Does anyone know what Vice President Bush called this in 1980? Anyone? Something-d-o-o economics? ... 'Voodoo' economics.”
The Economics Teacher, Ferris Bueller’s Day Off. Paramount Pictures.
In 2012, Zaltrap®, a VEGF inhibitor, was approved for the treatment of colorectal cancer and was in direct competition with Avastin®, a monoclonal antibody towards VEGF-A that was approved in 2004. In patients with advanced colorectal cancer, both drugs added approximately six weeks additional life expectancy1. The cost difference, though, was fairly staggering: Zaltrap® was priced at $11,000 per month of treatment, nearly twice as much as Avastin®. This led to backlash in some major cancer centers, with one giving a public statement that they will not prescribe Zaltrap® due to its lack of value. Three weeks later, the price of the drug was cut by nearly 50% in the form of discounts and rebates to the provider.
Bevacizumab (Avastin®) and aflibercept (Zaltrap®) both work by inhibiting VEGF.
But which is better?
In a previous blog post, we discussed a couple of the reasons why drugs cost so much. These reasons include the cost of R&D and the incorporation of the cost of failed drug candidates into the price. However, these two things cannot encompass all of the price making decisions of drugs, and many critics of the drug industry would be able to point out numerous examples where the price of a drug will far outweigh both of those things. In fact, some companies may spend as much on marketing as they do on research2. In this blog, we will cover two additional reasons why drugs may cost more than the average person may expect.

I can definitely get $300 bucks for this... If I fill it with 300 one dollar bills.
Storage Wars, A&E.
Again, the purpose here is not to pass judgment regarding the ethics of how drugs may be priced. The post is only bringing to light some of the factors that may affect the way these decisions are made.
To Encourage Investment

If you read my last blog, you'll know that drug development is a risky business. Over 93% of drugs entering into Phase I clinical trials do not make it to approval3. The pharmaceutical industry is quite volatile, and a single failure can bankrupt a company, especially if it is a start-up. Unfortunately, drug development is also very expensive, and the costs leading up to the approval of a drug will almost always reach a point where federal and non-profit grants will be unable to completely account for all expenses. Thus, some of the money needs to come from investors.

In case the rest of the pipeline doesn’t work out.
One of the key principles of investment is that high risk needs to translate into high reward. So how do you encourage people to invest in a process that costs a billion dollars and has a 93% chance of failing after entering Phase I trials? You greatly reward the investors in those few times the drug candidate does succeed!
What the Market Will Bear

Though it may be hard to hear, sometimes a company will try to price something as high as they can, particularly if there is no direct competitor and as long as people are willing to pay for it. That last part is key, since even if a company wants to set something at an astronomical price, there may be various influences that will still affect the cost.

Just like in the story in the beginning, the prescriber or patient has the power to refuse a drug just because it costs too much. The government entities may also force a price adjustment. For example, the price of Sovaldi™, discussed in our previous post, is approximately $1,000 per pill in the U.S. However, in places that are comparatively less wealthy, this may be a hard pill to swallow (pun intended).
In some places, the government has the final say in price. In the case of Sovaldi™, a round of treatment costs $30,000 less in Europe than in the U.S., while in India, the cost of an entire round of treatment is only $900! A 99% discount4! Now, charging what the markets will bear is incredibly dicey when dealing in healthcare, which is a reason that most drug companies now offer free or low cost methods of obtaining drugs for patients that truly cannot afford it through any other means.
Everything 99% Off!
There's definitely more that can be discussed with respect to how a drug can be priced, and even the ones I've touched on barely scratch the surface of those topics (I may be a Ph.D., but it’s not an Economics Ph.D.!). As I hope the reader is finding out, drug pricing is not as simple as how much a compound costs to make. Since there's still more to discuss, don't be surprised if we come back to this topic one day. Until next time!

Monopoly, Hasbro.
Questions or suggestions? Let us know,
If you want to learn more:
  1. A Tale of Two Drugs, MIT Technology Review
  2. Pharma Spending on Marketing, Fierce Pharma
  3. Success Rates of Investigational Drugs, Nature
  4. Sovaldi™ in India, Forbes
Contributed by Ed Chen, PhD.
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