WHY PEOPLE DON’T TRUST DRUG MAKERS

WHEN former hedgefund manager and current Turing Pharmaceuticals chief executive Martin Shkreli hiked the price of his generic antiparasitic drug pyrimethamine from $13.50 to $750 per pill, he invited understandable national outrage. He also prompted presidential candidate Hillary Clinton to call for price controls on a wide variety of medicines.

The subtext here is clear: Americans think pricegouging on prescription medicines is rampant. This isn’t surprising, since the pharmaceutical industry has done a poor job of explaining why drugs cost what they do. More than threequarters of Americans support mandatory limits on the price of certain drugs. And 86 percent want drug firms to disclose how, exactly, they set prices.

The best way for drug firms to quell this outrage is to give Americans what they’re asking for: more information. Specifically, the industry needs to shed light on the huge sums they spend on research, their rising researchanddevelopment failure rates and the refusal of insurers and pharmacybenefit managers to pass on manufacturer discounts to patients.

Of course, drug pricing is a complicated mat ter. Which is why the industry should focus on a few basic points when making its case.

First, the cost of research. Since 2000, drugs firms have spent over half a trillion dollars developing new medicines. And research costs for the last year alone totaled more than $51 billion. That’s up from $15.2 billion in 1995.

These are extraordinary spending levels, even compared to other researchintensive industries. In fact, the pharmaceutical sector spends five times more on R&D than aerospace, and 2 ½ times more than the software and computer industry. This is the kind of investment that pharmaceutical innovation demands, and it’s reflected in the economics of advanced drugs.

The industry also needs to do a better job explaining just how many failures firms endure searching for the next breakthrough medicine. Drug companies must develop hundreds of compounds until they find one suitable for testing on humans. Of those rare compounds that make it to phase1 human trials, fewer than 12 percent win approval from the FDA.

That’s why bringing just one drug to mar ket costs an average of nearly $2.6 billion and takes more than 10 years, according to researchers at Tufts.

If drug companies were open and honest about their frequent and expensive failures, they could quash the myth that pharmaceutical research is obscenely lucrative.

Drug prices aren’t merely the result of high development costs. The price of any given drug is the result of a lengthy process of meetings and negotiations between manufacturers and payers over a long period of time — often years before the FDA approves a product.

So when insurance companies demonize the pharmaceutical industry for high drug prices, they’re being more than a little disingenuous. Insurers and pharmacy benefit managers — not drug companies — are the ones who determine what patients pay for medications.

Consider the controversy surrounding the hepatitis C drug Sovaldi. When the medicine came on the market, it quickly became known in the press as “the $1,000 pill.” This may be a great sound bite, but it’s hardly accurate.

In reality, insurers and benefit managers negotiated discounts that reduced the price of Sovaldi by 20 to 50 percent. But they didn’t pass the full discount on to the consumer. Instead, insurers and pharmacy benefit managers pocketed the money to pad their bottom lines and executives’ wallets. Last year, CVS Caremark Corporation, one of the biggest benefit managers, paid its CEO over $32 million.

For many patients, particularly those without insurance coverage, Sovaldi’s manufacturer supplied a coupon ensuring that copays for the drug wouldn’t exceed $5.

In other words, the manufacturer went out of its way to ensure that few would have to pay full price for Sovaldi. In cases where patients had to shell out for “the $1,000 pill,” insurers were mostly to blame.

Most Americans, of course, are largely unaware of this information, which is why opinions have turned so sharply against the pharmaceutical industry. If they intend to win back the public, drug companies have some explaining to do.