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Drug Evaluation Debate

NICE's rejection of four cancer drugs on cost-effectiveness grounds sparks outcry

In August the National Institute for Health and Clinical Excellence (NICE) provisionally accepted the economic evaluation of four innovative, efficacious drugs for kidney cancer in the 290-page report by the Peninsula Medical School Technology Assessment Group (PenTAG), which unequivocally concluded: "The probability that any of the interventions would be considered cost-effective is zero."

In the predictable backlash, a chorus of media-savvy patient groups, frustrated specialists and the four drug manufacturers concerned applied intense pressure to reverse the unpopular decision. Arguments focused on the fact that current standard of care was grossly inadequate, and that the absolute costs of treating the relatively small UK patient population with orphan-indicated, innovative drugs would be negligible compared to the £11bn annual NHS drug spend.

For Leslie Galloway, chairman of the Ethical Medicines Industry Group (EMIG), which represents small and medium-sized biopharma enterprises (SME) in the UK, the issue is stark: "I don't believe we can say to people that they have to die because it's not cost-effective to keep them alive." Even the Royal College of Physicians wrote to NICE, criticising the PenTAG health economic model and stating: "The overwhelming clinical opinion is, therefore, that sunitinib, in particular, should be approved by NICE."

Rawlins' assault
Caught in no-man's land between his political pay-masters and the increasingly sophisticated patient and industry lobbies, NICE chairman, Professor Sir Michael Rawlins' response in a mid-August Observer interview was not simply a riposte to the four manufacturers, but a direct assault on the entire pharmaceutical industry's business model. It was a master-class in changing the game, forcing pharma onto the back foot, and giving credence to the stratagem that attack is indeed the best form of defence.

Rawlins' criticism was two-fold: firstly he questioned the cost structure of drug prices, arguing that the drugs could be produced for one-tenth of their price, and that prices included marketing costs. Moreover, he said, European drug prices were not only subsidising US direct-to-consumer (DTC) advertising costs, but also future patent-expiry costs. Secondly, he claimed "perverse incentives" such as profit maximisation, shareholders' expectations of annual double-digit growth, and the linkage between senior management earnings and share price were driving up the price of drugs.

Pharma defence
Considering the first point, it is not unreasonable to assume that Rawlins is acquainted with the discounted cash-flow curve for a successful pharma project – where a long period of negative cash flows is followed by a patent-constrained period of high gross-margin sales to provide an adequate return on investment.

Dr Richard Barker, director-general of the Association of the British Pharmaceutical Industry (ABPI), commented in an interview: "We don't have difficulty in explaining the pharmaceutical business model to senior decision-makers – two booklets were used widely in the last year in Whitehall – however we need a broader awareness programme." For Leslie Galloway, the issue of communicating business models is complex: "Describing the typical business model is a real challenge: of 300 pharma companies in the UK, 90 per cent are SMEs delivering 35 per cent of the total NHS drugs volume, but only getting 10 per cent of the overall value."

Pharmaceutical marketing spend may be considered a function of ensuring maximum product adoption to achieve peak sales as quickly as possible, and a reaction to the financial incentives of current linear price structures where marginal revenues are constant for every extra unit prescribed. Even the UK Office of Fair Trading (OFT) conceded that urging companies to reduce marketing expenditure was not "the right response to this problem".

As for UK prices subsidising the US, Barker was unambiguous: "That is nonsense. Prices are lower in the UK than many other markets and the high US prices reflect the full cost and value of innovation."

Finally, it is widely known that US drug prices are among the highest in the world, and that US patient and consumer lobbies frequently complain that by bearing the full cost of innovation it is they who subsidise European drug prices – not vice versa.

Profit controls
As for "perverse incentives", Rawlins is almost certainly aware that, under a rolling contract, strict profit controls apply to the supply of branded drugs to the NHS, currently set at 29.4 per cent of capital employed. In comparison, the oil, banking and information technology industries all have higher industry-wide profit margins than pharma. The Pharmaceutical Price Regulation Scheme (PPRS) between the NHS and the pharmaceutical industry has been running for 51 years and even guarantees to pay companies if they don't achieve a minimum level of profit.

As for corporate governance, it is common for remuneration committees at public limited companies to give share options as performance incentives to senior executives, but linking their earnings to drug prices ignores some business fundamentals: product price will be set in a viable price range, reflecting market and company pressures. Since the reimbursement question is, by and large, a binary decision it is clearly not in the company's interest to set a product price point at a level where it won't be reimbursed. That NICE was in a position to evaluate four manufacturers' drugs in an area of previously unmet medical need is testimony to the success of free market economics: firms responding to economic incentives, resulting in competition which drives prices down.

Rapidly disseminated
The interview comments were rapidly disseminated home and abroad, in both lay and trade press, with most second-hand reports relishing the "perverse incentives" reported to be keeping drug prices high. Few voices spoke in defence of the beleaguered pharmaceutical industry.

However, The Times and The Economist repeated comments by a spokeswoman from the Association of the British Pharmaceutical Industry (ABPI) on recouping R&D investments and falling real-term drug prices, which were included in the original Observer article.

The Times ran an op-ed piece by Stephen Pollard, the director of a Brussels pharma-funded think-tank, who explicitly coupled R&D investments to economic returns over multiple projects. The author eulogised free market economics for giving incentives to pharmaceutical firms to invest in innovation, in comparison to where the profit motive was absent, explicitly mentioning the Soviet Union.

Drug pricing
The Economist predictably explored the health economics in greater depth, focusing less on Rawlins' critique of the industry and more on drug pricing detail, such as the variance in quality-adjusted life-year (QALY) costs between the reimbursed threshold (approximately £30,000), and the range of QALY costs of the four drugs evaluated in the PenTAG report (£71,000- £171,000).

Keiron Sparrowhawk, partner at Pricespective, a value consultancy, commented: "Taking healthcare inflation into account, the QALY threshold should be about £60,000 today. By using £30,000 as a threshold we are saying that we value life less than before."

For Barker the over-reliance on QALYs is the core problem: "Not only is there a case to see the QALY threshold rise with inflation, we are calling for clinical judgement, patient input, and the level of scientific innovation to be considered too."

The issue of 'value-based pricing' from the OFT report was portrayed as a move to reconcile both NICE and the industry's viewpoints. An otherwise cogent analysis was marred only by The Economist's suggestion that this was the first such controversy in NICE's nine years' existence. Industry stalwarts may recall the zanamavir influenza incident in 1999, and a number of controversial decisions where the decision was that intervention should be postponed, such as in Alzheimer's.

Barker says: "Another example is in age-related macular degeneration, where drug funding would be made available only when one eye was already blind. This again shows the limitation of the QALY and the illogical conclusions, which are rightly being challenged."

If criticism is a gift to the pharmaceutical industry, then the readers of The Times and Health Service Journal websites are particularly munificent. Readers' comments such as "what's important is the marginal cost of manufacturing the drug, not the cost of developing it, which is already sunk; we need an entirely different way of financing pharmaceutical companies," and "the bleating that is heard about price reductions damaging the R&D effort of big pharma sound[s] pretty hollow when the R&D budget is compared with the much larger marketing budget" not only show the magnitude of the industry's communications challenge, but are also very perceptive. Indeed the financing of R&D in innovative big pharma has been in flux for the last decade, evolving towards a venture capital funded model, pioneered by GlaxoSmithKline and the Centres of Excellence for Drug Discovery (CEDD), and the spin-out model exemplified by Roche and Actelion.

Although the PenTAG report seems absolute, it repeatedly qualified that the drugs were not cost-effective at a willingness-to-pay threshold of £30,000 per QALY. The industry can either take a reactive stance, justifying high drug prices when under attack, or it can engage policy-makers on a broader discussion of the clinical and social value of medicines.

One such question relating to the QALY is articulated by Keiron Sparrowhawk: "People entering the last stages of their life place a higher value on life – if someone has a month to live it will be the most valuable time of their entire life, but the QALY doesn't take this into account."

Another point of discussion is whether or not to give NHS patients a choice to pay the difference for more expensive drugs not reimbursed by the NHS, in a top-up scheme. What is clear is that all players within the pharmaceutical industry will need to communicate their viewpoints on these matters to a broader constituency of stake-holders soon.

The Author
Gerhard Symons is a doctoral researcher at the Centre for Health Management, Imperial College Business School, London.

1st October 2008


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