To save money and lives, make drug approval easier

Last week, The Wall Street Journal reported that pharmaceutical giants are rushing to develop a vaccine for the new coronavirus. They’re hoping to begin human trials by April — just three months after the virus first appeared. In the meantime, they’re sending free antivirals to treat patients and studying whether older drugs might actually work for coronavirus.

The effort is an important reminder of the good that pharmaceutical R&D does, in an environment where the Canadian government has the prices of drugs in its sights. One recent study of 30 countries estimated that 73 per cent of the increase in life expectancy in recent decades is due to new pharmaceuticals alone.

Another study found that by replacing more expensive forms of care like surgery, new drugs have reduced hospital usage by 25 per cent per decade. These “offset effects” mean that even the newest drugs — typically the most expensive ones — save four to five times their costs. These savings come, not only from surgeries avoided, but also from nursing, ambulatory care, and outpatient costs no longer incurred. One study calculated the cost per additional life-year gained thanks to pharmaceutical innovation at US$2,730, compared with US$61,000 or more for dialysis, a commonly used benchmark. Perhaps counterintuitively, these savings mean that more spending on new pharmaceuticals actually saves money for the health system.

Alas, some drug prices are high, and they are rising. The average price for a new cancer drug, for example, has more than quadrupled in 20 years. A significant driver of these rising prices is pharmaceutical R&D, which has become far more expensive and, partly as a result, far more risky. Regulatory requirements in the United States, the largest drug market, have driven costs and delays to the point where it takes, on average, 15 years and $3 billion to develop a single new drug. Further costs and delays are required before companies can provide the drug in Canada.

Meanwhile, pharmaceutical R&D remains a high-risk investment. Today, only one in eight new drugs that pharmaceutical companies study actually makes it to market — which means the one drug has to pay for all the R&D spending on the seven drugs that didn’t make it.

Price controls aim at the wrong target, hitting profitability instead of reducing costs. This has a real impact on R&D. One recent study found that a $100 drop in pharmaceutical revenue leads to a $58 drop in pharmaceutical R&D spending. This suggests that just a one-third drop in pharmaceutical prices would completely wipe out R&D, which currently stands at 18.7 per cent of pharmaceutical revenue. The industry would of course respond to such a decrease by abandoning projects or shuttering factories.

Outside the U.S., from Canada to Europe to Japan, government price controls mean that prices actually paid for pharmaceuticals don’t come close to covering these R&D costs. In reality, Canadians already pay only 30 cents on the dollar compared with what Americans pay, while some Europeans pay even less. Partly as a result, Canadians wait an additional 630 days before new drugs are approved and then another 473 until public plans list new drugs.

To both control costs and promote access to life-saving drugs, the federal government should make it more, not less, attractive for new drugs to come to Canada. This means streamlining approvals for any drug already approved in the U.S. or Europe and seeking ways to treat more conditions with pharmaceuticals rather than surgery or nursing homes, which can be very expensive.

Over the past several decades, the pharmaceutical industry has saved millions of lives and, via offset effects, billions of health-care dollars. From coronavirus to cancer, the government should be doing all it can to keep it that way.

Peter St. Onge is Senior Economist at the MEI and the author of “Pharmaceuticals: Life-Saving Benefits That Pay for Themselves.” The views reflected in this op-ed are his own.

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