Hard Negotiating Tactics: Compulsory Licensing and Willingness to Deny
Peter Kolchinsky, Ph.D.
This is the seventh in a series of articles that aim to define the biopharmaceutical industry’s social contract with America, to examine practices that deviate from that contract, and to propose refinements to healthcare policy to ensure that our continued investment in scientific progress ultimately yields affordable, effective therapeutics for future generations.
Article 1: America’s Social Contract with the Biopharmaceutical Industry
Article 2: What happens when a drug won’t go generic?
Article 3: Protecting Off-Patent Sole-source Drugs from Price-Jacking
Article 4: Why wait for Generics? In praise of me-too drugs
Article 5: False Heroes — How PBMs Add Insult to the Injury of Insurance Cost-Sharing
Op-Ed: Let’s Throw a Patent-Burning Party
Article 6: The favors they do us: Charging less in other countries makes drugs more affordable in America
Article 7: Hard Negotiating Tactics: Compulsory Licensing and Willingness to Deny
Article 8: Unintended Consequences of “Fairness”: Critically examining the idea of the US referencing EU prices
Article 9: Direct-to-Consumer (DTC) Advertising: misnamed, misunderstood, and underappreciated
Article 10: The strange and special case of epinephrine
Please see Important Disclosures for Readers at the end.
US payers are generally unwilling to completely deny access to expensive drugs, though they delay access with administrative barriers (e.g. prior authorization and step edits) and discourage use with cost-sharing. Companies can mitigate these strategies with rebates (i.e. discounts to the payers) and patient assistance programs. One key reason why drug prices are higher in the US than in other comparably rich nations is that some countries are willing to outright deny treatment to their citizens on the basis of cost, a powerful tactic when negotiating price with companies.
Cognizant of the fact that some profit is better than no profit at all, a company will typically offer price concessions to get its drug on the market at a price deemed “fair” under each country’s health technology assessment framework. But companies also can’t be seen as too soft if they hope to find the highest price that each country is really willing to pay. To work, threats of denying access must be credible on both sides. For instance, both the UK and France are currently in stalemates with Vertex over the price of its cystic fibrosis combination therapy Orkambi, each side willing to deny patients access to the drug rather than accept the other’s terms.
Poor countries can employ another threat to get access to new medicines cheaply: simply ignore a company’s patents and authorize generics manufacturers to make copies of the drug, a practice known as compulsory licensing. Compulsory licensing is indeed permissible under international law when a court agrees that there is a legitimate need and failure of a company to be reasonable — recently, a Russian court granted a local pharmaceutical company the right to manufacture Celgene’s Revlimid cancer therapy for the Russian market¹. But poor countries typically lack the ability to make drugs themselves and would have to get a second country with generic manufacturing capabilities to also engage in compulsory licensing on their behalf (which notably Canada once did to make HIV medications cheaply for Rwanda)². In the cases of middle-income countries that do have generics capabilities, they fear economic retaliation from the nation the drug originator company is based in, or the company itself.
Denial of access (at the national level) and compulsory licensing are used just often enough to be considered credible threats. Pharmaceutical companies therefore focus on making a profit in wealthy countries while charging near-generic prices in middle-income and low-income countries.
America’s generosity and its limits
Millions of patients around the world in developing countries enjoy medicines for everything from HIV to heart failure because wealthy nations like the US, indeed the US most of all, paid higher prices for those medicines while they were still branded. While the subsidy that the US pays to help make new medicines available affordably in poor countries can be excused or even embraced as philanthropy, Americans can be forgiven for struggling to understand why they should be subsidizing the treatment of patients in other wealthy nations that could be but aren’t making a proportional contribution to the biotechnology social contract.
Playing on the analogy that paying branded prices is a mortgage that is paid off when a drug goes generic, at which point society “owns” the drug, it can seem that other wealthy countries are waiting for America to pay off the mortgage on a house (or at least they are shirking their fair share of it) until moving in and making themselves at home.
So the question is what America should do about this perceived unfairness. Should it insist that companies deny those countries access if they aren’t willing to pay the same price as in America? Or should it just accept the status quo?
I believe that the most (and maybe only) viable option is a combination of trade treaties and continuing to pressure/inspire other wealthy countries to pay more (either by actually paying more or by widening the pool of patients that they are willing to treat in those cases where they restrict access) by making the case for the global long-term benefits of a growing armamentarium of drugs that will eventually be generic (i.e. inspire the world to buy into the biotech social contract as described in this series). In the meantime, America has to decide what it wants for itself and whether it is willing to pay for drugs regardless of what other countries decide to do. To deprive the rest of the world of novel drugs would likely raise our own costs, as discussed in “The Favors They Do Us”.
Even if we do nothing, the rest of the world actually won’t be able to take the status quo for granted; many new treatments are expensive to produce even before taking profit into account. Compulsory licensing, or the threat of it in the first place, can only work to keep drugs inexpensive when the therapy in question can be produced cheaply and easily, as is the case for most small molecule drugs. And so middle-income countries that wield compulsory licensing as a tacit threat to keep drug prices low will increasingly find themselves in a bind as novel drugs become more complex. Drug-device combinations, biologics, and cell and gene therapies are difficult and expensive to manufacture. Unless their goal explicitly is philanthropic, companies would sooner not sell a drug to a country than sell it below the cost of production, which for complex drugs can be quite high. Either middle-income nations will be willing to deny patients access to these therapies, which is possible, or we will discover that there are breakthroughs so compelling that even these countries really are willing to pay more than they previously did or thought they would. Though the UK or France is hardly a middle-income country, those nations’ reaction to Vertex’s cystic fibrosis (CF) therapy Orkambi is illustrative.
Orkambi stalemate in France
Here’s what you need to know to appreciate what lessons these Orkambi cases have to offer for global price negotiations. Vertex has developed a set of drugs called potentiators and correctors that work to varying degrees alone or in combinations to treat various genetic CF sub-types. A potentiator called Kalydeco works very well on its own for the small sliver of CF patients with “gating” mutations. Vertex combined Kalydeco with a corrector molecule to create a combination treatment (Orkambi) that offers only a modest benefit for most other CF patients and is also now approved in the US and Europe. Appreciating that Orkambi wasn’t the best it could do, Vertex is developing a triple combination of Kalydeco and two correctors that recently demonstrated high efficacy, essentially offering all CF patients the kind of benefits that previously Kalydeco offered to the few with gating mutations. Kalydeco costs roughly $300,000/year per patient in the US and less in Europe (in the UK the price is $267,000), where it is reasonably well covered for that small patient population. Orkambi is reimbursed in the US at $273,000/year and priced lower in Europe; in Germany for example the price is €133,000 (about $163,000).
After prolonged negotiations between France and Vertex over the price of Orkambi, France insisted on an 80% discount to the price Vertex was charging other European countries. Meanwhile the UK rejected Vertex’s proposed price (which it has kept under wraps) and an offer that included access to all its current and future CF therapies. The company responded by openly questioning the UK’s support of biotech innovation³ (leading some to suggest Vertex is reconsidering the locations of its UK-based European headquarters and laboratories). In France, Vertex discontinued clinical trials of its newer and potentially even more effective triple combination agents on the premise that it would be unethical to test drugs on patients who might then not be able to access them once they are approved. While it might seem that France was simply refusing to pay for a proven drug, it’s noteworthy that France actually pays the European rate for Kalydeco. In other words, France seems to be saying “We’re willing to pay your price, but only for drugs that work well.”
Ordinarily, I would say that since even mediocre drugs eventually go generic, offering infinite value over the long run at a finite cost, their development should still be incentivized by society paying their high branded prices for the relatively short time they are patented. After all, it’s impossible to know when what started as an incrementally beneficial therapy becomes the foundation for a more effective treatment regimen. However, in this case, Vertex has already presented data demonstrating that its emerging triple combo regimen is highly effective, far more so than Orkambi.
Therefore, if France or the UK would apply the same reimbursement standard to the triple combo once it’s approved as it did to Kalydeco, Vertex should feel reassured that the triple would be reimbursed and should therefore continue to enroll French patients in trials of the triple even if France insists on playing hardball over Orkambi. For its part, France could have agreed to reimburse Orkambi for the next couple of years at the standard European rate, knowing that patients on Orkambi would indeed be upgraded once the triple is approved. The net result would have been a brief period of paying for at least some efficacy in the spirit of supporting innovation that had a high likelihood of yielding a much better treatment in the near future.
France and the UK acknowledged the value of Vertex’s innovation by reimbursing Kalydeco at a negotiated rate and, rather than settling for a subpar first-generation combination therapy for the broader CF population, seem prepared to hold out for the good stuff. Such an approach to drug price negotiations might be fairer if a country published in advance how much it would pay for various degrees of benefit instead of deciding what it is willing to pay after a company has incurred the expense of bringing a new therapy to market. It’s true that many innovators are not afforded such courtesies by customers, but such pre-negotiated agreements are common in the aviation and defense industries in which companies may spend billions and many years developing expensive planes and technologies and need to line up customers in advance to be assured that they are creating viable products that others will pay for.
The real risk would be that those running these calculations would undervalue future benefit, especially using conventional cost-effectiveness models that do not take eventual genericization into account, as the UK’s NICE fails to do (the UK reimburses many drugs at prices above those NICE deemed cost-effective⁴, which suggests that NICE’s calculations are just a negotiating tactic rather than a hard line). But at least companies would have advance warning that, if a Phase 2 trial demonstrated that a drug candidate were somewhat effective but not enough to meet reimbursement thresholds of certain countries, they need not bother to commercialize the drug there. That might allow some companies to save resources for next-generation products, if they have them, that would hopefully meet countries’ higher efficacy bars. For other companies, that would spell their demises, just as failing to meet regulators’ standards for benefit-risk often does now. Such a bargain would reduce patients’ access to effective treatments that their governments consider incremental, though transparency would at least allow patients the opportunity to lobby their governments to lower those bars, if they felt that even incremental benefits were important (or maybe what appears to be a small benefit on average is really a large benefit for an unpredictable few).
In the unique Vertex-France instance, a reasonable compromise would be for France to offer a clear and public assertion that it would pay the full European price for the triple, once approved, if its efficacy remained superior to Orkambi’s, and for Vertex to both sell Orkambi at the discounted rate France is willing to pay and enroll French patients in trials of the triple. Precisely because Vertex is already supported by sales of Kalydeco and highly likely to have a more effective drug on the market within a couple of years, Vertex’s innovation engine would likely not be significantly undermined even if this compromise were implemented on a global scale in all countries, costing Vertex a few billion in sales.
But this theoretical compromise ought not then be seen as a precedent by which to adjudicate The Biotech Social Contract in general. In most cases, France’s tactics applied on a global scale would rob the world of the benefits of real but incremental innovation. Most companies that have gotten an incrementally effective drug approved don’t already know that their follow-on drug candidates will be far better. Failure to get reimbursement would likely result in those companies not being able to fund the rest of their pipelines. Imagine if Orkambi were Vertex’s first drug, the triple did not yet have compelling proof-of-concept data, and France’s tactic were applied globally: Vertex’s stock might have collapsed and it might not have been able to get the funds to advance the triple into trials, robbing CF patients around the world of the transformative potential of its third-generation treatment.
New Zealand welcomes Soliris disruptors
Denying patients access to a drug, even the only drug that might treat their disease, remains unusual. When a country pushes back on a drug’s price, companies have a strong incentive to find a compromise. The obvious incentive is that each country represents an opportunity to garner at least some incremental profit.⁵
Another incentive is that, if a company doesn’t sell its drug to a particular country because of price, it opens up an opportunity for competitors to enroll those untreated patients in trials of newer therapies that might disrupt the current drug’s sales. For example, Shire and Pfizer had a hard time finding patients with Gaucher to enroll in trials of their enzyme replacement therapies because Genzyme made its first-in-class Cerezyme available to every patient it could find in every country, even if it had to give the drug away for free, giving Genzyme a longer monopoly than its patents would have predicted.
So it was particularly remarkable when New Zealand balked at the >$600,000-per-year cost of Alexion’s drug Soliris, an anti-C5 antibody for the treatment of Paroxysmal Nocturnal Hematuria (PNH), a rare blood disease, even as it acknowledged that the drug likely had a survival benefit. The NZ government stated that even if the drug were priced at the lower prices offered in the UK and Canada, it would still be too expensive to cover in NZ. Rather than access discounts or free drug, the country appeared to boycott Soliris on principle, denying its fewer than two dozen patients access to a proven therapy. Patients and their advocates lobbied the government to reconsider, including making the argument that “the public should be able to decide whether to spend more on ‘life saving’ medicine or to put interest on student loans, or to raise taxes, or to stop wasting money on the military or movie productions.”⁶ But the government did not relent.
As a consequence, New Zealand became a preferred clinical trial site for early testing of competing complement inhibitors, its righteousness a boon to companies that otherwise would have had to coax PNH patients off of Soliris just to prove to them that their own drugs could work as well or possibly better. Once companies had at least some evidence that their drugs worked in Kiwi patients, it was easier to convince patients in other countries to discontinue Soliris and enroll in trials of these agents. New Zealand may be assuming that prices will come down once there is more than one PNH drug on the market. But if it merely turns out that those new and better drugs displace Soliris as the standard of care and are priced as highly, New Zealand will have to confront the reality of either paying those high prices or truly forcing their patients to go without, at least until a treatment goes generic.
Some is better than none
While they typically pay less, even when they can pay more, other countries offer significant benefits for the global biopharmaceutical industry: collectively they represent about half of the industry’s profits, and the pool of patients they provide for clinical trials reduces drug development costs and timelines. America indeed shoulders the burden of incentivizing drug R&D for the entire world, and in fact reaps more benefits from the Biotech Social Contract than any other nation. Should we adopt other countries’ practice of denying access altogether on the basis of price, there will only be losers: the biotechnology industry, much of which is based in the US, would likely collapse, and the growth of society’s highly cost-effective generic drug armamentarium would soon slow or cease entirely.
Getting other wealthy countries to pay more for innovative drugs would either result in more R&D, higher profits and wages within the industry, or just possibly lower drug prices in the US (though this last outcome would only come about if companies felt some shame about letting their profit margins expand). The most likely outcome would be an increase in profits and R&D since higher profits function as an incentive for R&D. Some movement on international drug prices may be accomplished through bilateral or multilateral trade agreements; Canada, for example, was a serial compulsory licensor in the decades prior to the North American Free Trade Agreement (NAFTA)⁷. But as long as those nations are willing to deny access on the basis of price, we have to come to terms with the possibility that America has to pay for what it wants and accept whatever contributions other countries are willing to make.
Acknowledgements: I’m grateful to Chris Morrison for his invaluable and substantive thought-partnership and drafting/editing, to everyone who engaged with me in the constructive debates that led up to these articles, and to Erin Clutter and the RA Capital graphics team for creating artwork that so astutely captures the essence of each core concept.
Sources
¹ http://fortune.com/2018/07/11/celgene-russia-nativa-revlimid/
² https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2893582/pdf/nihms204056.pdf
³ https://www.scribd.com/document/383499498/Vertex-Letter-to-Prime-Minister-6-July-2018
⁴ http://www.pmlive.com/pharma_news/nice_backs_first_ultra-orphan_drug_soliris_639672; https://scienceblog.cancerresearchuk.org/2009/02/04/nice-recommends-sutent-sunitinib-for-advanced-kidney-cancer/; https://decisionresourcesgroup.com/drg-blog/niche-and-rare-disease/kalydeco-sailed-vertexs-orkambi-faces-strong-headwinds-europe/
⁵ Charging lower prices in one country than in another makes good economic sense provided there is no reimportation of low-priced drugs into countries where they are priced higher, a risk companies mitigate by controlling the supply released to each country. Governments and other payers also have a strong incentive to agree to a compromise price and block exports of their limited supply since they do not want to be seen depriving anyone treatment.
⁶ https://www.pharmac.govt.nz/assets/eculizumab-2013-08-analysis-of-feedback.pdf ; http://www.pnhsanz.org.nz/advocacy1.html
⁷ https://www.ictsd.org/downloads/2008/06/cs_reichman_hasenzahl.pdf
Peter Kolchinsky, Ph.D.
Peter Kolchinsky is a founder, Portfolio Manager, and Managing Director at RA Capital Management, LLC, a multi-stage investment manager dedicated to evidence-based investing in healthcare and life sciences. Peter is active in both public and private investments in companies developing drugs, medical devices, diagnostics, and research tools, and serves as a Board Member for various public and privately held companies, including Dicerna Pharmaceuticals, Inc. and Wave Life Sciences Ltd. Peter also leads the firm’s outreach and publishing efforts, which aim to make a positive social impact and spark collaboration among healthcare stakeholders, including patients, physicians, researchers, policy makers, and industry. He authored “The Entrepreneur’s Guide to a Biotech Startup”, written on the biotech social contract, and served on the Board of Global Science and Technology for the National Academy of Sciences. Peter holds a BS from Cornell University and a Ph.D. in Virology from Harvard University.
Important Disclosures for Readers
The contents of this publication are intended for informational and educational purposes. The views and opinions expressed are those of the author and are subject to change. They do not necessarily reflect the views or opinions of RA Capital Management® or any other person the author is affiliated with.
Nothing of the content should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security or product. The author and/or RA Capital Management® may hold or trade securities of the companies named in this publication or that manufacture the drugs discussed.
Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this article are trade names, service marks, trademarks or registered trademarks of their respective owners.
The author’s opinions are based upon information he considers reliable, and there is no obligation to update or correct any information provided.
© 2018 Peter Kolchinsky, Ph.D.
