Terra Sigillata

This week has seen the launch of a new health blog by the Wall Street Journal. While I don’t hold the highly conservative views of the WSJ editorial pages, I have found the paper one of the best international sources of information on health trends in both conventional and alternative medicine. The only problem about the blog is that while it links to the day’s health news, the original articles are still firewalled behind the subscription.

But I do wish to note Jacob Goldstein’s post on an article by Geeta Anand about Dr Steven Harr. Harr is a Hopkins-trained doc-turned-stock analyst who has expressed great concern about skyrocketing cancer drug prices. The novelty of his view is that the pricing is not just bad for patients, but bad for the industry as well.

The story about Harr came on the day that GSK’s Tykerb (lapatinib) was approved for use in breast cancer together with another cytotoxic drug (capecitabine (Xeloda)). At $2,900/month, this oral HER2 tyrosine kinase inhibitor provides an option for patients whose cancers have not responded to Genentech’s Herceptin. While $2,900/month sounds high, it is in fact lower than pricing on similar, recently-approved drugs. Amgen’s Vectabix runs $8,000/month.

Wall Street analysts rarely speak out for fear of alienating the companies they cover. But as Dr. Harr sees it, the high costs are bad for business. He has repeatedly argued that rising drug prices could trigger government controls, hurting the industry long term. He says soaring cancer-drug prices, generating fat profit margins, aren’t sustainable.

“I do not favor government setting prices on drugs because it will stymie innovation,” he says, “but it is my fear that this will happen.”

Advances in research are changing cancer from a death sentence to a chronic disease for many people. That is also bringing huge new costs: In 2002, cancer drugs accounted for 13% of the nation’s drug spending, according to Morgan Stanley; this year it says such spending is projected to almost double, to 22%.

The story talks more about Harr, a research analyst at Morgan Stanley, ran into some problems when critiquing Genentech’s pricing on Avastin, an antiangiogenic therapy that costs about $47,000 for a ten-month course. Genentech also happens to be a client of Morgan Stanley.

Often, Wall Street research analysts steer clear of criticizing corporate clients for fear of losing financing business as a result. But Dr. Harr put up another slide at his presentation, telling the group he believed “Genentech may be trading short-term profits at a cost to its own (and the industry’s) long-term returns.”

His suggestion: Genentech should impose a cap on the price each patient pays for Avastin.

For the next hour, the group debated the issue. Genentech managers challenged him, with one demanding he provide an example of any other monopoly industry that had voluntarily lowered prices for fear of government intervention. Perhaps the oil industry, Dr. Harr responded, before conceding he was stumped.

A few days later, Dr. Harr published a 33-page report, maintaining his “hold” on Genentech stock.

The next week, Dr. Harr asked an associate to calculate what portion oncology represented of total U.S. drug spending. When he saw the numbers, he says, he was stunned: By 2007, cancer drugs were projected to account for almost a quarter of the nation’s drug spending. In September 2005, Dr. Harr released the numbers in a report. “The government or private payers will eventually push back on price or reimbursement,” he wrote.

Drug pricing is a very hot issue in Congress. Patients are having to pay out-of-pocket thousands of dollars for many of these new, targeted therapies. But insurance companies are pushing back and Harr fears that Congress will push back as well. Drug companies, on the other hand, fear that any price controls will stifle innovation in R&D, an issue that doesn’t go over well with the consuming public who sees extensive spending on direct-to-consumer drug advertising.

There have to be creative solutions to these issues. We are at the height of our understanding of cancer and how to stop it, but federal research funds are tapped beyond the ability to fund all the good ideas out there. Drug companies get grief as profiteers but few people truly understand the difficulties involved in bringing a drug to market. Health insurance companies continue to post billion dollar annual profits, claiming that it is their right to profit from controlling medical costs. The money has to come from somewhere – and everything costs money.

If I had all the answers, I probably wouldn’t be writing this blog.

Comments

  1. #1 MattXIV
    March 16, 2007

    While it’s hard to find good solutions to these problems, there are some pretty obvious bad ones. Like congress imposing price controls because the monopolies it created under patent law to subsidise the companies charge prices are too high for life-saving drugs, when demand will be most inelastic, and thus prices most marked up under a monopoly, for life-saving drugs.

  2. #2 Roy Hinkley
    March 17, 2007

    What the nice gentlemen from Genentech are looking for is a course in business ethics.

    To wit: while it’s perfectly acceptable to strangle your competition to death,…

    it’s generally considered gauche to handle your customers in the same fashion.

  3. #3 factician
    March 19, 2007

    Normal intellectual property law seems inadequate for modern medicine. If one puts a patent on a computer chip that is twice as fast as the competition, and then prices it at a thousand times what the competition charges, the market will take care of that. No one will buy the chip at the outrageous price.

    However, if a cancer drug works twice as well and the company charges a thousand times what the competition charges, people will sell their first-born child to get the drug. The market can’t fix this.

    It’s naive to think that companies will voluntarily agree to take a price hit. Some regulation is required here. (After all, isn’t patent protection a price regulation? Let’s get some balance).