Can the Wrath of Most Favored Nation Pricing (1) be Avoided by Bringing Pharmaceutical Product & Process Development and Manufacturing Practices to 21st Century?
I have shared my learnings and experiences in process development, technology innovation, manufacturing and business practices (2, 3, 4, 5, 6). With the looming threat of lowering the selling prices of the brand drugs through EO 14297, in this post I am sharing what are some of the things companies need to considered to avoid its wrath. Forcing brand drug sale prices by 50% or so to match e.g. European prices will have a significant impact on the P&L of every brand pharma company. However, I perceive this an opportunity for the pharmaceutical companies to lower drug prices, enhance their profits through increased affordability. Effort will simultaneously improve manufacturing technologies and reduce their environmental impact.
I am not suggesting to follow and/or do what I am sharing but let your imagination and creativity take you/us to create products and processes that are our best effort. Discussion is applicable to every chemical business (fine/specialty, coatings, their younger cousin Active pharmaceutical ingredients and their formulations). Perspective presented is mine and is not influenced by any for profit and non-profit entity.
My review is based on cost analysis. Our understanding of costs can assist us to improve processes and methods to enhance profits. I am not challenging any methods but suggesting that as part of continuous improvement, review of the current methods and practices for every profit and cost center can lead us to improve profits. Every little improvement is worth the effort. Readers are welcome to share their thoughts.
To avoid the wrath of Executive Order EO 14297 (1) pharmaceutical companies will have to review their research and development, commercialization, manufacturing and business practices. I am sure that most companies, first blush, would say it cannot be done. However, unless an ongoing concerted effort is made, the current and upcoming US Government administrations can force change of the current practices and they may not be to our liking. Litigations will ensue.
US Drug Prices vs. Rest of the World:
For that last number of years there has been a conversation about the high brand drug prices in the United States compared to other developed and underdeveloped countries. The explanation given by the pharma companies is that price for each brand drug are the highest in their effort to recover the product development costs ($1-2 billion). Everyone has bought this explanation and believe it to be true. However, no independent body/person, has been given a verifiable explanation/justification for these costs. Prices in other developed counties are lower as their healthcare systems have been able to negotiate the sale prices. Prices in developing countries are low just for sheer volume of drugs needed. They pay for the fixed costs and keep the factories operating. Law of economics tell us that no company runs a charity and no one is going to sell their products at a loss unless we all missed the explanation/s.
Proposed EO 14297, if enforced, would influence the balance sheet of every brand pharma company. In Table 1 company “X’’’s real drug, not identified, is analyzed. At this writing the world population is about 8.2 Billion (7). US population (347 million (8)), is slightly less than 5% of the global population. It is interesting, just for numbers sake, to compare the sales of this hypothetical drug in USA vs. rest of the World. Numbers are estimates but are close to the numbers for a real drug. Anyone can do a similar analysis for any drug.
Numbers in Table 1 tell us a story. It is logical to conclude that if the Company “X” is selling the drug at an average sale price of $0.75 per tablet in other countries and is not losing any money. This prices is less than ten percent of the US selling price. Prices (9) in other countries range from $3.00 to $0.55 per day for the 5 mg tablet. If the company has a 50% margin (this includes local pharmacist’s profits), the lowest factory cost could be ~ $0.18 per 5 mg. (based on my manufacturing and costing experience) tablet which includes the API and inert excipients. With this being the case, US selling price in a mutually subsidized healthcare system is alarmingly high.
United States | Global | Total | |
Population | 347,000,000 | 8,200,000,000 | 8,547,000,000 |
Percent using (assumption) | 0.42 | 0.42 | |
Tablets per yr. | 531,951,000 | 12,570,600,000 | 13,102,551,000 |
Average Price /tablet, $ | 9.83 | 0.75 | |
Revenue, $/yr. | 5,229,078,330 | 9,427,9500,000 | 14,657,028,330 |
Tablet, mg | 5 | 5 | |
API needed Kilo/year, kg | 2,700 | 62,853 | 65,553 |
Table 1: Sales of a Real (unidentified) Drug (9)
Table 1 shows the amount of API is needed to satisfy US needs vs. rest of the world. USA population’s API needs are less than 10% of the global population’s needs. Even if it was 10%, still the API volume is small. Drug for US needs can be produced at a single site. API for US demand could be imported and formulated. However, the API for rest of the world is being produced outside US and its formulation taking place at one or more sites outside USA. Without the global market, US selling price of the drugs will be higher than the current prices.
Pharma companies need rest of the world market to absorb the fixed costs and maximize their profits. Claim that US brand pharma bear the cost of new drug may be right but in reality rest of the world bears significant portion of the ongoing costs and that is not well understood and/or recognized. We have to acknowledge that the US sales volume is not large enough and the sales to other countries contribute to each line item of the balance sheet and maximize every company’s profits. In other words they contribute to keep Pharma companies in business. US alone cannot be in business of inventing new drugs. Simply it is a “mutual appreciation society”.
Pharma companies suggest that to develop a new drug it can take up to TWO billion dollars. These numbers to me are a hearsay as I have not been able to verify these by an “independent” entity. If EO 14297 (1) is implemented i.e. reduce the selling price for this drug by 50% in USA, it can wipe out significant funding for the discovery of a “NEW DRUG”. To recoup the loss would mean that pharma will have to look at each line item of its balance sheet i.e. how to conserve. This means business model change.
Pharma: What to look for?
Pharma companies, if EO 14297 (1) is implemented most likely will have to reconfigure their business model. Every “t” and every “i” will have to be meticulously crossed and dotted for marketing, sales, product and process development, and manufacturing. It is time to shed 50+ years old business model. It needs to change as the WORLD has changed.
Marketing and sales expense along with every line item will have to be reviewed. My speculation is that if a new drug for a disease is more effective than any existing drug, it will sell by word of mouth. Advertising might have to be minimized and that will be a line item savings. Let the best drugs sell based on the efficacy and performance rather than force feeding what majority of the customers do not understand.
Most likely Research and Development would have to be treated as a profit center instead of a cost center. This would require each company to review their product discovery, processes development and manufacturing methods to lower their costs. “Village”(2, 3, 4, 5, 6), unlike the current tradition, would have to be involved from inception of every product development as there will be no opportunities to re-invent and optimize the drug’s manufacturing processes after the product enters clinical trials and is commercial. Effort to re-invent the manufacturing process for a brand drug i.e. under patent would be expensive as the regulators most likely would ask to reconfirm its efficacy and characteristics.
If the above is implemented pharma landscape will change from inception. My expectation is that complete command of the product and process will reduce the regulatory approval time and lead to longer NDA “in-patent” time meaning instead of patent expiring in approximate 10-12 years might get additional 4-5 years of patent life. This could compensate lost revenue due to EO 14297’s inclusion.
I don’t know how many chemists and chemical engineers associated with any pharmaceutical product, process development and manufacturing are familiar with the cost analysis but it would be enlightening and of great value if the VILLAGE (2, 3, 4, 5, 6) gets involved in the product development from the start of product discovery. It is expected that some of the village members would be able to share the value of “what if” of the product development, process stoichiometry and manufacturing before a sample is submitted for clinical trials. An optimized process before it is scaled up for rigorous testing does not take time. This information can and should be used to optimize the process and minimize its environmental ill-effects. (references).
My conjecture is that inclusion of EO 14297 (1) on pharmaceutical landscape will be beneficial to the overall pharma landscape and could reduce drug shortages and lower prices. It is best if the pharma companies took the reins and saddled the horse. Government intervention should be the last resort. Direct marketing is another option. Besides pharma companies the biggest obstacle will be the US private sector, Pharmacy Benefit Managers (PBMs) who along with their influencers will make sure EO 14297 (1) it is not implemented (12).
Girish Malhotra, PE
EPCOT International
1. EO 149297: Delivering Most-Favored-Nation Prescription Drug Pricing to American Patients
- Malhotra, Girish: Chemical Process Simplification: Improving Productivity and Sustainability, John Wiley & Sons, February 2011
- Malhotra, Girish: Chapter 4 “Simplified Process Development and Commercialization” in “ Quality by Design-Putting Theory into Practice” co-published by Parenteral Drug Association and DHI Publishing© February 2011
- Malhotra, Girish: Research Report: Strategies for Improving Batch or Creating Continuous Active Pharmaceutical Ingredient (API) Manufacturing Processes, March 2017
- Malhotra, Girish: Active Pharmaceutical Ingredient Manufacturing: Nondestructive Creation De Gruyter April 2022
6. Malhotra, Girish: Profitability through Simplicity
7. Current World Population https://www.worldometers.info/world-population/
8. United States Population (live https://www.worldometers.info/world-population/us-population
9. Pharmacy Checker.com https://www.pharmacychecker.com/
10. Malhotra, Girish: Active Pharmaceutical Ingredient Manufacturing (API) and Formulation Drive to NET ZERO (Carbon Neutral)? Profitability through Simplicity, April 29, 2021
11. Malhotra, Girish: NET ZERO for Active Pharmaceutical Ingredient & Fine/Specialty Chemicals: Nondestructive Creation, Profitability through Simplicity, November 7, 2024
12. Malhotra, Girish: Implementing Executive Orders on Domestic Production of Critical Medicines and Achieve Most Favored Nation Pricing, Profitability through Simplicity, June 11, 2025
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