Pricey biotech drugs steer health care to precipice

The Vertex offices in the Innovation District.
The Vertex offices in the Innovation District.

The Massachusetts life sciences sector in some ways looks like a 21st century version of Detroit’s automotive business in its 20th century prime. It’s an industry of global stature. It regularly vaults companies onto stock exchanges. It attracts workers from around the world. And it pays them good salaries.

But instead of affordable Fords and Chevys, our hometown firms are cranking out Lamborghinis and Bentleys. They make expensive drugs that are steering the health care system toward a precipice. At least we’re getting there fast, and looking good along the way.

Let’s start with a few things we can all agree on. These innovative biotechs take big risks over a decade or more, working hard to turn early laboratory insights into products that may extend our lives or keep us out of the hospital. More often than not, they spend tens or hundreds of millions of dollars — and fail.

Their presence in the region brings jobs, attracts other industry players, and creates new wealth. In the knowledge-driven global economy, they help make Massachusetts look like a tan twentysomething behind the wheel of a convertible Ferrari.

But the industry has been doing everything in its power to make itself look like Monty Burns, the money-hungry mogul who owns the nuclear power plant on “The Simpsons.” Here’s how.

First, it makes sense that when a drug is no longer covered by a patent, someone else can make a copy and sell it as a less-expensive generic. But the drugs made by the biotech industry are more complex than, say, a Walgreens-brand antacid pill.

For years, the industry has battled the introduction of biotech’s version of generic drugs, called “biosimilars,” once the patents on their drugs end. Some reasons were grounded in science, and ensuring that follow-on drugs really did do the same thing, without producing new, negative side effects. But since the US Food and Drug Administration approved the first biosimilar earlier this year, the maker of the original drug, Amgen, has pursued lawsuits against Novartis, which developed the biosimilar.

How much could biosimilars save? In 2013, the pharmacy benefits management company Express Scripts estimated that if just 11 biosimilars were introduced for drugs coming off patent, about $250 billion could be saved over a decade. Yes, that’s billion.

Second, executive pay in biotech has caught up to “big pharma,” even though biotech has portrayed itself as the nimble mouse to pharma’s fat cat. Biogen chief executive George Scangos had a 2014 compensation package worth $18.6 million, according to regulatory filings, and Jeffrey Leiden, chief executive of Vertex Pharmaceuticals, had one totaling $36.3 million. By comparison, the chief executives of Pfizer and Merck had pay packages worth $21.3 million and $23.2 million, respectively.

Finally, the price of the products has started to make headlines. A new two-drug combination from Vertex to treat cystic fibrosis, on the verge of FDA approval, is expected to cost north of $300,000 per year. Last year, California-based Gilead Sciences launched a hepatitis C drug that costs $1,000 per pill. The pill cures hepatitis C in 90 percent of people who take it, but the tally for a 12-week course of treatment is $84,000 — tough to swallow, though a bargain compared to $175,000 or more for a liver transplant down the road.

While we are seeing a profusion of breakthrough treatments like Gilead’s, the price is often determined by asking, “What’s the highest price I can charge and get away with,” said Alison Taunton-Rigby, a former biotech executive who serves on several corporate and nonprofit boards. Speaking at a recent industry conference, Taunton-Rigby said, “It’s an attitude we need to talk about. I think we actually have a black mark against us as an industry.”

Unfortunately, no one at a half-dozen large and small biotech companies I contacted wanted to talk about the issue.

Who is talking? Insurers. At the same industry conference, Harvard Pilgrim chief executive Eric Schultz described pricey new drugs as “a steam locomotive coming down the track,” adding millions of dollars in costs for the insurer.

Tony Dodek, associate chief medical officer at Blue Cross Blue Shield of Massachusetts, says high-priced “specialty drugs” represent just 1 percent of the prescriptions handed to Blue Cross’ members, but 25 percent of the insurer’s spending on drugs, a share that is rising rapidly. “That’s not sustainable,” Dodek says.

So what happens next? A few possibilities…

Insurers and pharmacy benefit managers may demand “value-based pricing” or “outcomes-based contracting.” Basically, if a drug doesn’t do what it promises, the insurer and the insured patient get their money back.

Medicare, the nation’s biggest purchaser of prescription medicines, may finally gain the ability to negotiate on pricing; today, it pays the sticker price. Most other countries negotiate prices, and some estimate the United States could save $500 billion over a decade if it followed suit.

“In 10 years, that will have happened,” predicts John LaMattina, former head of research at Pfizer and now a senior partner at the life sciences incubator PureTech Ventures in Boston. “That will put some pressure on pricing, but I think we’ll still see a pretty decent return that would sustain investment in new drugs.”

Ken Kaitin, director of the Tufts Center for the Study of Drug Development, presents a third option. As the first state to enact universal health coverage, Kaitin suggests Massachusetts could lead again by bringing together drugmakers and insurers to voluntarily establish a fair pricing system.

“I’m not talking about price setting,” Kaitin said, “but it’d be putting some boundaries around the system so we don’t go overboard. It’s a horribly cruel irony to be developing breakthrough products that people can’t afford.”

Many in the industry will complain that they need these high prices to justify the millions of dollars burned bringing a new drug to market, and attract new investment to cultivate the next generation of drugs. But the industry needs to consider ways to trade short-term “profit maximization” for its own long-term vibrancy.

There’s one more possibility. Things continue on the current trajectory: breakthrough drugs, lawsuits, patients unable to afford drug co-pays, and rising insurance premiums.

In other words, just keep making those Lamborghinis and Bentleys, and hope customers keep coming into the showroom with open wallets.

Scott Kirsner writes the Innovation Economy column every Sunday in the Boston Globe, in which he tracks entrepreneurship, investment, and big company activities around New England.
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