'The Price of Innovation' Transcript

Note: This transcript has been created with a combination of machine ears and human eyes. There may be small differences between this document and the audio version, which is one of many reasons we encourage you to listen to the episode!

Dan Gorenstein: The U.S. seems to be stuck on a drug price merry-go-round. First, our already high drug prices go up…

News clip: The cost of all prescription drugs rose 30-percent between 2010 and last year.

DG: Patients respond with outrage and disbelief…

News clip: 1200% increase in one month.

News clip: People are dying because they can’t afford this.

DG: Politicians promise big fixes…

President Trump: My administration is launching the most sweeping action in history to lower the cost of prescription drugs.

Sen. Elizabeth Warren: I will lower the price of EpiPens of HIV/AIDS drugs.

DG: And pharmaceutical executives respond with a familiar warning: Cut our prices, and you’ll lose out on new breakthrough treatments.

Ian Read, Pfizer: It won’t allow innovation , it won’t allow the huge cures

David Ricks, Eli Lilly: Cap that forever and what we get is less innovation.

Christi Shaw, Eli Lilly: The less we make the less we put into innovation

DG: That threat scares us. We want cheaper drugs today, but we don’t want to miss out on cures tomorrow.

News clip: What some are calling a new wonder drug…

News clip:…actually can cure Hepatitis C in 90% of cases.

DG: Today, we set aside the fears and look at the facts.

Does the evidence back up the industry’s claim that reducing profits hurts innovation? Or is it possible to lower prices and keep getting the game-changing drugs everyone wants?

From the Annenberg Studio at the University of Pennsylvania, I’m Dan Goresntein and this is Tradeoffs.

DG: One quick note before we start.

When we talk about drug “prices” today, we are not talking about how much you or I pay.

We’re focusing on the overall prices drugmakers charge the federal government and private insurance companies, really how much revenue these companies earn.

OK, on with the show.

To really explore this relationship between price and innovation, it’s important to understand how new drugs go from an idea in a lab to a pill in your medicine cabinet.

Big pharmaceutical companies get most of the headlines, but the process usually starts long before they get involved, with someone like Chaitan Khosla.

Chaitan Khosla: I am a professor at Stanford University. I’ve had a longstanding interest for nearly two decades in celiac disease

News clip: Celiac disease is an immune reaction to eating gluten, which is a protein found in wheat, barley and rye.

News clip: Gluten-free products might seem like a fad, but for 3 million Americans, it’s their lifeline.

DG: Today, the only treatment for celiac — which can cause diarrhea, anemia, osteoporosis, and in rare cases, lymphoma — is a strict, lifelong avoidance of gluten.

But in the fall of 2019, PhRMA giant GlaxoSmithKline purchased a startup that was developing a drug that “could represent a new hope” for patients, a drug developed by Chaitan.

Think of it like an asthma inhaler for celiac disease.

CK: It would be the kind of medicine that people would take once a day as an oral pill, maybe twice a day. And if it works, I emphasize if it works and is sufficiently safe, people will be taking it on a daily basis to protect themselves from low to moderate levels of gluten.

DG: The next step is to put the drug Chaitan discovered through clinical trials, maybe as soon as this year.

But just to get to this point — where the drug enters the grueling, expensive testing phase — took money, work and luck.

CK: That process is a cultural experience, to say the least.

DG: Back around 2006, Chaitan had that big Hollywood-esque moment.

His team discovered that if they could block the effects of this one molecule…

CK: called transglutaminase 2

DG: …they could, in theory, allow people with celiac to consume moderate amounts of gluten without getting sick.

First, they had to develop a drug prototype — a blueprint of how this scientific insight would work as an actual drug.

Fueled by federal research grants, Chaitan’s lab spent years refining their prototype.

By 2013, it was ready to pitch. But not to big pharma.

CK: Pharmaceutical companies operate with a certain risk-reward profile. They are unlikely to make investments with a 10, 20 year horizon. And so that’s where venture capitalists come in. They make the earliest investments.

DG: Chaitan calls venture capitalists the “handmaidens” of drug development.

They put up the risky money, funding small startups and biotech firms they hope will advance the drug even further, enough to make it attractive to the giant drugmakers.

But even when you have a potential drug that could treat millions of people around the world, finding investors is tough.

CK: I have to persuade an investor that if they invest in the drug prototype that had been invented in my lab, they have a fighting chance of getting a return on their investment over a 5-10 year period of time.

DG: Venture capitalists, or VCs, only get that return when a big drug company buys a startup they’ve invested in, so they’re picky about where they put their money.

That puts pressure on scientists like Chaitan to woo these investors.

CK: For every project like mine that gets funded by venture capital at that stage, they’re probably nine others that don’t, and I think most of us scientists recognize that within those nine that don’t get funded, there probably are at least four or five projects that have just as good a chance of success if they were to be funded.

DG: Promising projects, says Chaitan, die on the vine because one, it’s not easy to attract VC money.

And two, it can be pretty uncomfortable.

He’s seen colleagues enter into what he calls a matchmaking game — meeting with five potential investors, maybe ten…

CK: And then say, “You know, I really don’t have an appetite for this kind of thing.” I had a reason to be committed to celiac disease. So even if 19 venture capitalists told me, “Chaitan, thanks, but no thanks,” I’d still knock on the door of the next 20.

DG: Chaitan’s conviction came from an obligation he feels to the taxpayers who funded all his initial work, a desire to deliver some kind of return on their investment.

And it came from his son, who was diagnosed with celiac at a pivotal moment in Chaitan’s career.

CK: The week after my son got his diagnosis, I got a call from the National Science Board saying that I had received the Waterman Prize.

DG: That meant Chaitan was going to have $500,000 to research whatever he wanted.

CK: The one thought that was the silver lining on this very dark cloud that I was staring at was, I’m a scientist. And not only am I a scientist, I have dedicated my career to connecting molecules to human disease. Maybe this is an opportunity for me to start doing research on a subject I had no qualifications to do research on and see how far it could go.

DG: 20 year later, that prize money is now a promising drug, headed for clinical trials with one of the largest pharmaceutical companies in the world.

It only got there after Chaitan persuaded San Diego-based Avalon Ventures to invest millions back in 2013.

More and more drugs rely on venture capital to get to market. VC investment in pharma and biotech has more than tripled over the last decade to around $17 billion.

The industry points to this trend and says lowering drug companies’ profits would mean lowering the returns VCs could expect from their investments and make them less likely to fund the breakthrough treatments of tomorrow.

And some economists agree.

Craig Garthwaite: I think it’s important to recognize that if you decrease the returns to innovation, that money can just leave the pharmaceutical sector and go to another place where you can make a bunch of money in venture capital like tech.

DG: This is Craig Garthwaite. He’s an economist at Northwestern who studies drug prices.

CG: That venture capital money, that’s very mercenary. It’s just looking for the highest return in that sense. If you really reduce the returns, the money will just flow out, and we’ll get sort of more scooter companies or whatever social media app these guys are going to invest in, and we’ll get fewer new drugs as a result of that.

DG: This is the kind of story industry executives tell when asked about the downside of regulating drug prices — less reward leading to less risk taking.

But here’s the thing: The U.S. has never enacted sweeping legislation to drive drug prices down. So we don’t actually know what would happen.

But academics like Garthwaite assume we’d see fewer novel drugs because of the research we do have, from when pharma’s bottom line has grown.

CG: More future profits leads to more investments in innovation. It’s 100 percent clear. We find that evidence from a wide range of different kinds of studies.

DG: Craig says researchers have analyzed how industry responded to a range of new incentives, from an aging population to new vaccine laws and government drug programs.

Every time, he says, they arrived at the same conclusion.

CG: More future profits leads to more investments in innovation.

DG: To put it plainly, when there’s money to be made, drugmakers show up ready, willing and able, which makes sense.

What Craig wanted to know — that all that research had yet to answer — was what kind of drugs were created when drugmakers saw more dollar signs in their future? Were they treatment breakthroughs? Or more of the same?

So in 2014, he and his co-authors took a closer look at the industry’s response to the creation of Medicare Part D.

President George W. Bush: When I came into office, I found a Medicare system that was antiquated and not meeting the needs of America’s seniors.

CG: In the early 2000s under President Bush, we made a decision as a country that we were going to provide prescription drug insurance for the elderly.

Bush: We need to bring Medicare into the 21st century, to expand its coverage, improve its services.

CG: So prior to that point, Medicare did not provide comprehensive prescription drug insurance.

Bush: Medicare’s most pressing challenge is the lack of coverage for prescription drugs.

CG: And so we passed that law. It went to effect in 2006. And as a result of it, about 5 million new elderly patients received access to prescription drug insurance. And so people said, well, you know, given what we know already, we should see more drugs that are created and aimed at the elderly.

DG: What’s the basic question that you guys are asking in this paper?

CG: So the basic question is what kind of innovation did we get? Obviously, not all innovation is equal and there are certain kinds of innovation we might think contribute more to social welfare than other kinds.

DG: And what was the assumption that you had, Craig, about how drug makers are going to respond to the creation of literally overnight millions of new customers?

CG: Having thought about this question for a while before the study, my intuition going in was that we would get firms investing in products that were both sort of replicating existing science, but also treatments we otherwise might not have gotten.
What we ultimately found is that we got far more of the drugs that seemed to replicate existing science or go after disease areas for which there are already treatments and far fewer of the truly new therapeutic options and fewer of the truly new scientific advancements.

DG: Were you surprised?

CG: Yeah, I thought we might get more of the more novel treatments. But having spent more time looking at my results and thinking about the underlying economics, you realize that we do have some room as a society to make changes and small changes to profits without destroying the engine by which we get truly innovative treatments. And that is not something I thought going in. That doesn’t mean, however, that we can make very large changes to profits and expect that the same result would happen.

DG: And so in a way, even though there’s this point that the industry makes that economists agree with, that there is a connection, there’s a relationship between price and innovation — the more you drive down price, the more that will impact innovation — the big lesson you took from your research was, it’s not as black and white as maybe it’s been purported to be.

CG: Yeah. I think it’s clear that the relationship exists. I think it is not as black and white as industry would like you to believe. Nor is it as black and white as supporters of regulated prices would like you to believe. There’s a sort of a wide swath of gray area that we have to think about, about what types of products do we want and what type of innovation do we want. What we’re really trying to do then as people who are serious about policymaking is figure out what is the appropriate tradeoff that we can have there between access today and products for the future.

DG: Although Craig has come around to the idea that some small changes could be made to drug prices, he still thinks the main message from all this research is: Tread carefully when it comes to price controls or risk future innovation.

Others aren’t so sure.

Stacie Dusetzina: I mean, my biggest beef with this area is that I don’t think we have nearly enough of an evidence base for the question, “If we reduced prices on drugs, what would happen?” because we haven’t really tried to drive prices down in a regulatory sense before.

DG: Like Craig, Stacie Dusetzina is an economist — she’s at Vanderbilt — and she also studies drug prices and health care policy. She doesn’t dispute the basic relationship between price and innovation.

SD: I think logically it just makes sense.

DG: But she thinks there is a way to lower prices more aggressively without harming innovation, at least not the kind of innovation we value the most.

SD: I think what we need to do is make it very clear that we want to pay for value, that when a drug is being developed, if it has a significant benefit relative to existing treatments and really is an innovative product and not just another drug that does the same thing as a drug that already exists, that we signal to the companies, to the investors that that’s what we’re willing to pay for.

DG: A quick note on value: It’s really hard to measure.

How do we value a drug that improves a person’s memory? Or one that allows someone to eat foods without fear of becoming ill, like Chaitan Khosla’s son?

It may seem like putting numbers on the value of improving health is a preposterous idea, but many countries actually try to do it.

They do their best to measure the benefit of drugs and then set prices through government negotiations that reflect the value of the drug.

Since that process can be so hard and contentious, some in the U.S. have suggested a shortcut.

SD: One of the ways that has been proposed to do this is by indexing our price in the U.S. to other countries. This has been proposed in both the House drug pricing proposal, H.R. 3 that came out late last year…

House Speaker Nancy Pelosi: Makes lower drug prices available to all Americans. It stops drug companies from ripping off Americans while charging other countries less for the drug.

SD: And it was also part of the international pricing index proposed by the Trump administration.

Trump: So we’re paying a price based on the price that other nations are paying. That’s what we’re going to pay.

SD: And the idea is basically that we would leverage negotiations that happen in other countries where they focus on the value of a product and set a price based on how much clinical benefit that product brings to patients. And in our system, we would just borrow that work and those prices, and we would pay a bit more than those other countries have agreed to pay.

DG: And Stacie, a proposal like this could have a so-called chilling effect on these VCs that we were talking about at this top of the show. But you think it’s worth it?

SD: Yes, absolutely, I think the tradeoff, you know, it’s all over the map what this particular proposal would do. The Congressional Budget Office estimated it would result in eight to 15 fewer drugs. The White House Council of Economic Advisers weighed in and said it could reduce the number of drugs by 100. So there’s wild guesses about what exactly we’re trading off by implementing price negotiations and trying to reduce prices.

DG: For decades, the drug industry’s constant refrain — cap drug prices, lose out on future cures — has helped paralyze effort to slow rising drug costs.

But the evidence shows it’s not that simple.

The industry is right: The best research suggests regulating prices would likely lead to fewer new drugs.

But it’s impossible to predict the number or the novelty of those lost drugs.

Would they be slight improvements? Or true game-changers, like a treatment for celiac disease?

Perhaps a day will come when we dare to find out. Until then, we will continue sparring over speculation.

I’m Dan Gorenstein. This is Tradeoffs.