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Why Some Drug Prices Should Be High

SAN FRANCISCO – US President Donald Trump recently told the US Congress that Americans must “work to bring down the artificially high price of drugs and bring them down immediately.” He is right that, in the United States, prescription medicines are very costly – a reality that has prompted much public anger. But, in tackling this problem, Trump must be careful not to undermine scientific innovation.

The relationship between unmet medical need, innovation, and high drug prices is complex and politically fraught. For example, the 1983 introduction of the US Orphan Drug Act successfully supported the development of treatments for rare conditions. But, despite the financial incentives (like tax reductions) that the act provided to companies for research and development, the resulting treatments carry jaw-dropping price tags. And some companies gamed the system, repurposing old drugs as much more expensive orphan drugs – a practice that deepened public anger.

However justifiable some of that anger may be, the reality is that the process of discovering and developing new drugs is highly challenging and laden with risks. The aberrant processes underlying many diseases remain a mystery, and it is difficult to perform experimental medical studies that are both ethical and effective.

As a result, the drug R&D process is prone to failure. Only seven of 100 cancer drugs that reach the clinical-testing phase end up gaining regulatory approval. Most drugs fail long before this point. All of this costs money.

Further increasing drug costs is the approval process, which Trump describes as “slow and burdensome.” Of course, the approval process is designed to protect consumers, but that doesn’t change how expensive it can be for innovators. Add all of these costs together, and the top 15 spenders in the pharmaceutical industry are investing about $3 billion in R&D, on average, for each successful new medicine.

But innovation is not being carried out solely by huge pharmaceutical firms. On the contrary, innovations in drug development have historically been the domain of small independent companies like Silver Creek Pharmaceuticals, of which I am CEO. Such companies then sell the drugs they develop, or even the entire company, to larger firms.

To secure investment, firms like mine must prove that, once a drug gets to market, the rewards will more than offset the costs of unsuccessful attempts. There is no special dispensation, based on the moral imperative to heal the sick. In seeking funding, we are competing for the same capital as anyone else, including, say, the gaming sector, which offers excellent returns for investors, but questionable benefits for humanity.

The price of a novel drug has a direct impact on the availability of capital to fund development of the next one. This matters for all health-care systems, but especially for the US, because scientific innovation, including in pharmaceuticals, represents its main competitive advantage – and one of its most important contributions to the world.

My high-prices-for-innovation argument may sound comforting to pharmaceutical lobbyists. But we cannot forget the other side of the issue: ensuring that drugs are accessible to those who need them.

I spent 20 years working within a system that, in many ways, exemplifies this second imperative: the United Kingdom’s National Health Service (NHS). During that time, I chaired my hospital’s “Use of Medicines Committee,” which selected the new medications on which to spend our limited drug budget. Our criteria were simple: safety, efficacy, and value for money. Even though my role has changed, my opinion on what represents value for money in a medicine has not.

At times, medical colleagues were frustrated, because we could not provide them with the newest “miracle” drug; the price tag was simply too high. We, like the NHS in general, had to maximize our budget, by aggressively switching to generics and managing the drug choices that were available to prescribers. I’m proud of our record of securing genuinely innovative drugs for our patients, without bankrupting the hospital.

In deciding the prices of drugs, the country of my birth and my adopted country have clearly chosen different paths. We can learn from both experiences.

In the UK, the state effectively picks winners. While this expands access to many drugs, it also implies considerable costs (because it leaves room for delays and lobbying, with non-experts making the decisions) and limits innovation. It is worth pointing out, however, that the NHS covers 100% of the UK population with little or no out-of-pocket expenses, and spends less than half as much as the US, as a share of GDP, on health care.

In the US, where the free market determines drug prices, the result is higher prices, covered insurance, taxes, and copayments. This enables continued pharmaceutical innovation, but also makes it difficult for some Americans to afford the medicines they need. In this sense, Americans are effectively (and unfairly) shouldering the burden of financing future drug innovations that will benefit the entire world.

The Trump administration now faces a dilemma. If average drug prices are not lowered, popular anger will continue to intensify. If they are slashed indiscriminately, capital will flood out of the US, into countries more sympathetic to drug development, or out of drug development altogether.

This is why the Trump administration should encourage a rational discussion involving representatives from all areas of the health-care industry. To prevent such a discussion from falling prey to populism or industry lobbying, it should be informed by lessons from systems like the NHS (which Trump has praised in the past) concerning how to reduce overall health-care expenditure and take advantage of good-value innovations.

Only such an open-minded and nuanced approach can balance the imperatives of ensuring Americans’ access to medications and preserving America’s competitive advantage – and contribution to the world. The Trump administration should spearhead this effort.