Drugmakers Plan to Defend Prices by Proving Value of Medicines

Drugmakers Plan to Defend Prices by Proving Value of Medicines

By Kerry Young, CQ Roll Call : Nov. 25, 2015

Executives from the nation’s biggest drugmakers are telling their investors and stock analysts that they will defend the high prices of their products by showing the benefits that they can deliver in maintaining and restoring health.

Proving the medicines can deliver significant results will become “a more significant component of the pricing discussion,” said Dominic Caruso, the chief financial officer for Johnson & Johnson, on a webcast from the Credit Suisse conference earlier this month.

“We think that that’s a good thing,” Caruso said. “Raising the bar for innovation to be associated with meaningful outcomes, we think, will solve the pricing dilemma" for companies able to make strong cases for their products.

Caruso is among the executives from drugmakers with household names and jealously protected reputations that are trying to distance their companies from the backlash sparked largely by smaller firms. The Senate Committee on Aging has said it intends to hold a December hearing on drug prices following an uproar about Turing Pharmaceuticals, led by Martin Shkreli. The panel has asked Turing to explain why it licensed the Daraprim tablet used to fight life-threatening parasitic infections in people with compromised immune systems and then raised the price from $13.50 to $750 a tablet. Daraprim has been approved in the United States since 1953, according to federal records.

Marquee members of the Pharmaceutical Research and Manufacturers of America want the public to see a difference between their companies, which they say make significant investments in the hunt for new medicines, and firms like Turing. J & J, Merck & Co. and Eli Lilly & Co. each spent between $4.7 billion to $8.5 billion on medical research last year.

Merck Chief Executive Kenneth C. Frazier, who also serves as the chairman of PhRMA's board, said he tries to "very hard to distinguish between" what he calls "the innovation-based companies that do take a value approach to pricing" and "a few companies that I think are unrepresentative of the entire industry."

"While there's a lot of noise out there, my experience in Washington is that people do recognize that this industry is important, that these innovations are critical to society," Frazier said on an October call with analysts about quarterly financial results.

Merck's roots as a company date to the 1880s. Its legacy for charitable contributions includes developing and providing for free a drug to combat a parasitic infection that causes an affliction called river blindness. Kenilworth, New Jersey-based Merck now is working on fighting several kinds of cancer by spurring reactions in the immune system, as well as drugs for Alzheimer's disease and diabetes.

“People do recognize that this industry is important, that these innovations are critical to society, that we, for example, need a disease-modifying agent for Alzheimer's,” Frazier said. “People see what these immuno-oncology drugs are doing, and they know that that's just the beginning of what we can do as an industry.”

National Debate

Yet there’s growing anger among cancer patients and physicians against pharmaceutical giants like Merck because of the prices charged for their newer cancer drugs. Merck’s Keytruda cancer drug, which works by acting on the immune system, costs $12,500 a month. That puts it beyond the reach of some patients unless they can get financial assistance. The protests of oncologists are muted in contrast to the widespread public vitriol sparked by Shkreli, but they are more likely to persist and perhaps have a greater influence on the debate ahead on drug prices.

Former Obama administration adviser Ezekiel J. Emanuel, a trained oncologist, sees the December hearing planned by the Senate Committee on Aging plans as only one of the earliest steps Congress will take in looking at the costs of medicines. It’s unlikely that Congress will take any substantive action on drug pricing in this session or even the two-year 115th session that starts in 2017, but the level of public anger makes it likely that the federal government may take action in time, said Emanuel, who is now a professor at the University of Pennsylvania and a senior fellow at the liberal Center for American Progress. Drugmakers in the meanwhile would do well to look for strategies to cool this rage and put some voluntary limits on the costs of their products, he told CQ HealthBeat.

"We're just at the start of a national debate,” Emanuel said in the interview. "If they don't come to the table with something that does keep costs under control, you are going to see a lot more pressure."

Pharmaceutical companies and their advocates have long argued that these firms charge high prices in the United States to cover the risks of drug research. Lilly last month, for example announced that it would discontinue development of the experimental evacetrapib medicine for clogged arteries. It's publicly claiming a loss associated with this drug of as much as $90 million, which will be accounted for in the company's financial results for the last three months of 2015, or the fourth quarter.

For the third quarter, which ended in September, Lilly reported a profit of $800 million and revenue of $4.96 billion. That equals roughly 16 cents of profit for each $1 taken in. The firm spent $1.14 billion on research, and more than $2.8 billion on production, marketing, selling and administrative expenses.

Like his peers at J&J and Merck, Lilly Chief Executive John C. Lechleiter was asked by stock analysts on an October conference call about third-quarter results to weigh in on Washington’s concerns about drug pricing and profits. Lechleiter, a research scientist who climbed the ranks at Lilly, said complaints about drug prices often surface around presidential campaigns, as the industry remains a popular target with politicians.

Like his peers at J&J and Merck, Lechleiter said that he will emphasize the work Lilly is doing in fighting diseases such as diabetes in defending its prices. Pharmaceutical companies have a "great story to tell," said Lechleiter, whose firm brought the first insulin injections to the market in the 1920s and the Prozac antidepressant in the 1980s.

“I’ve never been as optimistic as I am about the chances we have as an industry to really make a difference for patients,” said Leichleiter, who joined Lilly in 1979. “We have got to keep telling the story, keep reminding people.”