While biotechnology accounts for only 1 percent of the overall healthcare costs, the overall cost of biotechnology is growing faster than the economy along an unsustainable trajectory. Biotech drug sales are expected to top $60 billion by 2010. Still, the cost of biotechnology has to be compared with the cost of the disease in terms of the normal hospitalization and treatment required.

Unfortunately, it still leaves a lot of money for patients to pick up. The Centers for Medicare & Medicaid Services (CMS) recently placed new biotech drugs and therapies in a specialty coverage tier where most drugs are $2,000 to $3,000 a month, with 25 percent paid out-of-pocket by the patient.

Patient pain equates with voter pressure and legislators are looking for some answers. Some of the legislation that is being batted about Washington includes: a faster path to generic versions of the biotech treatments, price negotiation between the government and biotech companies, the creation of a federal agency to assess drug values, and shorter, cheaper, more effective clinical trials to reduce development costs, according to published reports. Some form of these will mostly likely emerge once the issues of safety and off-label use are addressed. Not to mention how to pay for the $20.8 billion in biotechnological research and development spent in the U.S. last year. However, unlimited prices may not be the result even without legislative action.

The American Enterprise Institute for Public Policy Research published an article on “The Emerging Market Dynamics of Targeted Therapeutics” detailing the issues around the price of targeted biotech drugs. Targeted drugs tend not to compete with each other even when treating closely related diseases, which makes them resistant to price controls. However, the same properties that generate premium prices also facilitate inventing around successful drugs, eventually leading to vigorous competition despite the lack of generic alternatives.

AEI reviews the market dynamics of targeted therapeutics and offers a review of some of the market forces that should come to bear in regulating biotech prices in the future:

QALYs: The supply of expensive new biotech drugs to should continue unabated even if payers systematically limit reimbursement to consensus recommendations for how much to pay per quality-adjusted life year (QALY) saved. As long as advanced societies are willing to pay on the order of $50,000 or more per QALY, creative biotechnology firms will find solutions that meet such standards and will price them accordingly.

Post approval research: Research on traditional drugs normally ceases as patent expirations approach but without the prospect of generic entry, research investment on a pioneer biotech drug does not face a natural endpoint.

Pricing conundrums: There seems to be no easy way for manufacturers to avoid the price conundrums (and public outcry) generated when new uses or dosages appear on the market at different price points. Research incentives arise from the full range of a drug’s potential uses including those explored after approval. The inability to practice price discrimination among uses could greatly undermine incentives for both initial development and post-approval research.

Competition through faster inventing-around: Targeted biotech drugs can facilitate competition through classic inventing-around a patented therapeutic the same as with traditional drug categories. New drugs can exploit a proven target in a way that avoids patent infringement while retaining a reasonable prospect of success in clinical trials.

Competition through new uses: A second route to competition through targeting is through post-approval research on how a drug’s activity against a specific target may extend to other therapeutic areas, generating new uses for the drug. Expanded uses for multiple drugs can easily overlap, creating new competitive forces such as occurred with Avastin

Drugs that are just better: Research can aim simply at improving existing therapies through follow-on research. Some next-generation biotech companies are expanding upon existing monoclonal antibody technology by developing longer-lasting and more potent antibodies that are cheaper to manufacture for targets that have been well validated by science and the market.

The report indicates that we can expect the rapid accretion of drugs that provide large benefits, especially for previously poorly treated conditions, but at high prices and, often, significant total expenditures.

See the entire report here.

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