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Vishal Gulati

Turing and Valeant are Exposing that Drug Pricing & Cost of Innovation are Often Not Linked

October 6, 2015

When we look back at the pharmaceutical industry evolution in a decade’s time, a minor character with a major role in that evolution will be  a misguided former hedge fund manager. Martin Shkreli has become the face of the reputation car wreck for the industry and it is hard to look away from it. The Daraprim pricing saga exposes the collective failure of policymakers, of pharma companies and of healthcare providers to balance the incentive for innovation with affordability of drugs. Somehow, it has largely been accepted that to have the former you have to accept the latter. Many companies innovative, and otherwise have used pricing as an open door to bumper profits.

Although the price gouging problem is particularly acute in the USA, it does affect most of the developed world to some extent. It is not something which was unknown until now but until now this opera did not have the cast of villains and victims to focus on. Most coverage on pharma pricing more like a lesson in economic theory and policy making than a matter that could affect us all. In general, the opposing views would be contrasted in the media and settled with a line in the end saying, making new drugs is hard and costly so we have to suck it up.

But this time it was different, this time the villains couldn’t have been more loathsome  because unlike many pharmaceutical and biotech companies (disclaimer: I have been a biotech VC but did not invest in Turing or Valeant) Turing and Valeant are as much like a pharma company as a vending machine is like a gourmet restaurant. They don’t have labs full of scientists, they probably operate from swanky offices where they identify market asymmetries they can exploit for bumper gains and develop a financially engineered solution. It is innovative but not in the way as we understand medical innovation, it is more akin to a smart accountant saving you tax by conjuring up an accounting trick than a clever business idea that generates outsized profits.

Having said that Turing and Valeant are atypical, it seems clear the fallout of this saga will (and should) expand the debate wider to cover the more difficult part of the problem which is how can we create sufficient incentive for innovation and also protect payers and patients against price gouging.

Here is today’s NYTimes piece on how Valeant is all about price gouging and is a serial offender.

Here is a list of my thoughts around what are the various tools we have which could help us address this problem:

  • Broaden the Base: If drugs discovery and development will almost exclusively be funded by Pharma/VC backed companies it will have an impact on pricing, access and the kind of drugs that will get developed. Role of foundations and crowdfunding is currently under exploited.
  • Monopoly Restriction: Many countries have antitrust type legislations which could stop companies from exploiting monopoly situations. Most such laws are used timidly in fear of backlash from free market zealots, often it takes decades of exploitation before anything is done.
  • Price control: Before your free market brain goes into hyperdrive, imagine a situation where pricing of a drug is related to the value it provides. It is not a communist idea. Many capitalist business models operate on the basis of giving users information of the value of a product. Many countries do it. NICE in the UK is an example (not everyone loves them though).
  • IP Strategy: Maybe there are ways of making IP sharing more lucrative for companies rather than fighting over.

Innovation is the answer, in this case, policy innovation in how we incentivise and fund drug development