Pharmaceutical pricing - where does innovation fit?

Europe's long-term reliance on the US to do much of the heavy lifting on innovation is problematic

When Britain's Prime Minster David Cameron described the life sciences industry as the "jewel in the crown" of the United Kingdom economy this week, he indicated that his government appreciates the potential of pharmaceutical innovation as a source of much-needed economic growth. A picture was painted in which enhanced innovation would not only benefit patients in the National Health Service, but could also become a major export good for UK plc. Yet in reality, the prime minister's blueprint is only part of the equation. The missing element relates to how best to increase the uptake of innovations once they have reached the market.

The Stockholm Network has studied the pricing of pharmaceuticals and our newest publication, Which price is right? highlights how many national approaches to pricing are failing to appreciate the global and durable effects that prices can have. As a result, it identifies that some pricing systems are allowing locally-determined, short-term objectives to be pursued at the expense of creating globally sustainable healthcare systems; which could better secure investment in research and development and help to cultivate medical innovation.

Pricing generally varies across Europe, although policy-makers tend to agree that the price of a treatment should be controlled in order to keep costs down - and there are a multitude of different regulations that attempt to do this. In 2014, the UK will move towards a new system of "value-based" pricing that aims to extract greater value for money while refocusing innovation towards unmet needs. Yet it does so, on the basis of thresholds that will work to control prices. This controlled pricing differs from market-based pricing, like in the United States, where manufacturers have more freedom to price products in line with market conditions. The result is a market which dwarfs not only the UK, but the whole of Europe combined with R&D spending and pharmaceutical launches higher in America than in any other market.

There is, of course, a downside to market-based pricing; as public prices for medicines in the US are on average 29 per cent more expensive than the main European markets. This is hardly surprising, given that most price regulations in Europe are designed to bring prices down. However, patients in the US benefit from better access to new medicines as a result. The mean time lag for new pharmaceuticals launched in the US between 1996 and 2005 was 5.6 months, as opposed to 12 months in the UK, and 80 per cent of all the medicines launched globally during this period were available in the US; compared to just 64 per cent in the UK. Last year, the German parliament approved a drug pricing reform that was explicitly designed to reduce medicine costs. On that basis, it seems to have been successful with receipts decreasing since the law's introduction. Yet, during the same period, Germany's role as an early launch market in Europe has diminished - with key medicines already being delayed for marketing despite receiving safety approval by regulators.

What is clear is that policy-makers need to decide whether the price of pharmaceutical innovation is worth paying in comparison to the benefits that it provides to patients. Although it may not seem so initially, Europe's long-term reliance on the US to do much of the heavy lifting on innovation is ultimately problematic. Firstly, it puts European nations in a position where they can be accused of free-riding on patients in the US; and, therefore, not paying their fair share towards the current cost of developing new medicines that are of value to the entire globe - not least to their own patients. Secondly, it means that European nations have surrendered some autonomy over their healthcare systems by placing the burden for medical innovation on the shoulders of others, while leaving themselves susceptible to regulatory changes in external markets over which they have no authority.

Pricing policy should not be a race to the bottom. And while payers have a duty to manage their budgets in an effective manner, they should take care when contemplating price controls and consider them as part of an overall approach - which understands the efficiency of healthcare systems in a dynamic way. Short-term measures to reduce pharmaceutical prices artificially are not only unlikely to deal fully with the problem of rising healthcare budgets, but they are also likely to hamper innovation further down the road. Pharmaceutical innovation is like a Christmas cracker: it cannot be opened by simply pulling on one end. To unlock the potential of innovation, the prime minister needs to focus not just on how to discover and develop new medicines, but also how to get them from the market to the patient.

Paul Healy is a senior researcher at the Stockholm Network think-tank and author of the paper Which price is right? Regulating the cost of pharmaceuticals in Europe and North America