The $100,000-Per-Year Pill: How US Health Agencies Choose Pharma Over Patients

Don Reichmuth survived prostate cancer once before, back in 2007, so his physician was concerned when tests recently revealed the cancer had returned. Reichmuth’s physician prescribed a drug called enzalutamide, marketed by the Japanese company Astellas Pharma, Inc. under the brand name Xtandi. But when the physician sent the prescription to the pharmacy, the managers of Reichmuth’s insurance plan sent back an immediate refusal to approve it.

Reichmuth, a retired teacher who lives in Washington State, was puzzled by the logic. Then he learned the price of the Xtandi prescription: over $9,700 each month.

Reichmuth is just one of millions of Americans who are experiencing prescription drug sticker shock. There are the extreme high-profile examples, like the former hedge fund manager Martin Shkreli hiking the price of a critical toxoplasmosis drug by 5,000 percent overnight, or a new hepatitis C medicine costing over $1,000 a pill. But the issue extends beyond the headlines. Pharmaceutical corporations consistently set most of their prices hundreds of times higher than their manufacturing costs, then relentlessly raise those prices at rates far exceeding inflation. The result is breathtaking corporate profits as high as 42 percent annually. The industry’s average return on assets more than doubles that of the rest of the Fortune 500.

Meanwhile, many US seniors are forced to choose between paying for medicine or food. Hundreds of cancer physicians recently took to the pages of the journal Mayo Clinic Proceedings to angrily protest the fact that with the cost of cancer medicines now averaging over $100,000, one in five of their patients can’t afford to fill their prescriptions.

The physicians are not the only ones who are angry. A Kaiser Health Tracking poll last year showed that 72 percent of Americans felt that drug prices were unreasonable, and even more believe drug companies put profits before people. The US is the only major industrialized nation that does not regulate medicine costs, so US patients pay far and away the highest price globally for prescriptions — often twice as much as patients in other developed nations. As Don Reichmuth says, “This situation is really bringing out the greed.”

The drug that he was prescribed offers a good illustration of the current state of affairs. Like manufacturers of most other high-price drugs, Astellas Pharma is in an enviable position: Xtandi has monopoly patent protection and is a sought-after treatment for an enormously damaging disease. Prostate cancer is the third most common form of cancer in the US, affecting nearly 3 million men and causing over 26,000 deaths annually. Xtandi is used to treat what is known as castration-resistant prostate cancer, a relapse of the disease that is both more deadly and more treatment-resistant than early stages of the cancer. Xtandi is so effective that it is being tested for possible use in treating breast and ovarian cancer.

All of which has been very good news for Astellas Pharma and Xtandi’s co-developer, the biopharmaceutical company Medivation. Global sales of the drug in 2015 were $1.87 billion. Thanks to price increases and an aging population, those sales numbers have climbed steadily upward, and there is every reason to believe the trend will continue. Investors certainly think so: The key research that led to the discovery of Xtandi was conducted at UCLA, which earlier this year sold its rights to the drug for over a half-billion dollars, the largest technology transfer deal in University of California history.

A huge portion of those Xtandi sales have been paid by US patients and taxpayers. The US market accounts for the majority of Xtandi revenues, with Medicare alone paying $633 million in 2015, at a rate of over $100,000 per Xtandi patient per year And, as it turns out, US taxpayers are not just this drug’s biggest customer: they are the ones who funded its invention in the first place.

“We Paid for That Drug the First Time”

Astellas and Medivation hold the monopoly patent on Xtandi until at least 2027, but US government dollars played the critical role in the research that discovered the drug. Both the National Institutes of Health (NIH) and the Department of Defense funded the research at UCLA that led to the invention of Xtandi. But that US investment has not led to any discount for the Medicare program. Nor has the US role in Xtandi’s discovery prevented multiple private US insurance plans, like Don Reichmuth’s, from balking at paying the high Xtandi price tag. Many plans require cheaper drugs to be used first or only allow Xtandi prescriptions if patients contribute substantial co-payments.

In fact, the price of Xtandi in the US is actually two to four times higher than in other high-income countries. Glade Smith, an Arizona retiree who pays nearly $500 per month in Medicare co-pays for Xtandi, is frustrated that patients in nations like Japan and Canada are enjoying far lower costs, despite the fact that his government dollars helped develop the drug. “I’ve spent a lifetime paying quite a lot in taxes,” Smith says. “We paid for that drug the first time, when it was developed, so why in the world do I have to pay so much for it again?”

It turns out that the key role played by US funding in Xtandi’s genesis story is a familiar one. Best estimates are that about 40 percent of pharmaceutical research and development costs are shouldered by governments and private philanthropy, not the private corporations who end up holding the patents. The public investment is way higher than suggested by pharmaceutical industry rhetoric, which tends to skip over the fact that its companies spend more on marketing than on research.

Even the 40 percent figure understates the key role played by government investments in medicine research, which are heavily weighted at the front end of the process — the basic research that is essential to identifying how a disease may be vulnerable to attack by medicines.

Since that early-stage research is also time-consuming and several steps removed from a finished product that is ready for sale, it is an unappealing investment for a for-profit drug corporation. So those corporations turn to governments, especially the US National Institutes of Health (NIH), to handle this most risky part of medicine research. The NIH annual budget for medical research is now $30 billion per year.

For the most valuable medicines, governments play a particularly crucial role. Pharmaceutical corporations’ research is inevitably focused on the search for the next big-selling product. That product often targets less critical health needs (think erectile dysfunction or cosmetic drugs) or is a “me too” drug, a non-innovative medicine aimed at carving out a piece of an existing lucrative market. So the NIH and other government funders lead the way in discovering the most impactful medicines. A study of drugs receiving the priority review status from the US Food and Drug Administration, meaning that the medicines would provide a significant improvement in treatment, showed that two-thirds of them traced their roots back to government-funded research.

Even the impressive results of such studies understate the impact of governments on drug research. The studies only looked at direct government research funding, which does not account for the significant indirect support given pharmaceutical industry research by way of tax credits that can reach as high as 50 percent. Once direct government support and generous tax breaks are added to the equation, some analysts calculate that private industry only pays for a third of US biomedical research — and much of that industry contribution is focused on drugs like erectile dysfunction medicines or cosmetic treatments, whose chief value is profit, not better health.

There are many examples of lifesaving medicines that exist only because of government research. The cancer drug paclitaxel was developed with research funded by the National Cancer Institute, a division of the NIH. Government funding played the critical role in the breakthrough development of the antiretroviral AZT and the highly effective leukemia drug imatinib. The same is true for major mental health medicines and many vaccines. There is every reason to believe that the reliance on federal funding for the most critical drugs will continue, given the decreasing success of pharmaceutical companies in early-stage research and the much-discussed plans for a US-government-funded $1 billion cancer “moonshot.”

“Those Rights Are Legally Worthless”

Big Pharma wasn’t always the beneficiary of US government-funded medicine breakthroughs. Until the 1980s, the rights to those discoveries were either owned by the federal agency that supported them or placed in the public domain. The idea was that patients could affordably access the medicines and other researchers could build on the discoveries. But then the Patents and Trademark Amendments Act, eventually known as the Bayh-Dole Act, was passed into law. Bayh-Dole allowed universities and small companies who receive federal research funding to claim patents for the discoveries that came out of that research.

After the law went into effect in 1981, universities and teaching hospitals wasted no time beating a path to the patent office. In the first five years under Bayh-Dole, their human biology patent applications increased 300 percent. Universities quickly began forming partnerships with small biotech companies, and ultimately with large pharmaceutical corporations. If the risky government-funded research bears fruit, those corporations have proven to be happy to buy the exclusive patent rights to the discoveries — and the monopoly pricing powers that go with them.

As a result, Bayh-Dole changed the way medicine research was conducted. The consulting firm Bain recently conducted a study that showed that top pharmaceutical corporations were earning more than 70 percent of their revenue from medicines that were developed by someone else. That was the path Xtandi followed, going from UCLA labs to Medivation and then across the Pacific to Astellas, with NIH and the Department of Defense (DOD) funding the trip.

The text of the Bayh-Dole Act, however, suggests that US taxpayers and patients should be protected from being asked to pay for both the medicine research and the monopoly-protected purchase price. To prevent this kind of double billing, Bayh-Dole contains two safeguards. The first is called “march-in” rights, allowing the federal agency that funded the research to issue a license to a generic manufacturer. The agency can exercise this right if the patent-holder is not making the federally-supported drug “available to the public on reasonable terms.” The second safeguard is a royalty-free license to the US government, which allows the government to manufacture the patented invention itself or license someone else to do so, without paying any fee to the patent-holder, as long as the product is for government use. As an example of this second option, the US could allow generic manufacturing of a drug like Xtandi for use in the Medicare, Medicaid and Veterans’ Administration health programs.

The impact of these safeguards should be enormous: generic costs for medicines average over 80 percent less than patent prices. There is only one problem. In the 35 years since Bayh-Dole’s passage, federal agencies have not once used these rights to address the cost of medicines. Over the years, a half-dozen requests have been made to the National Institutes of Health to license generic manufacturing of drugs it paid to develop, including HIV/AIDS, leukemia, and glaucoma treatments. Each time, the agency refused to do so.

Most of those requests to the NIH cited the high prices of federally supported medicines. But one request was based solely on the fact that the medicine in question — a key treatment for the rare Fabry’s disease — was not being manufactured in sufficient supply by the patent-holder Genzyme. The medicine Fabrazyme was developed by the Mt. Sinai School of Medicine with NIH funding. Yet, at the time US Fabry’s patients filed their petition in 2010, they were being rationed at only 30 percent of the recommended dose and newly diagnosed patients were being denied the drug altogether. The petition to the NIH asked for the agency to exercise its Bayh-Dole march-in rights, licensing another manufacturer to make the drug and give a 5 percent royalty to the patent-holder.

The patients’ request was drafted by Pennsylvania attorney and law professor Allen Black, who filed the petition on behalf of two friends who had Fabry’s. Black thought that Bayh-Dole clearly called for the NIH to step in, especially since the drug developed by US funds was fully available to European patients even while US patients were being turned away. But the NIH refused to act, suggesting that a different manufacturer would not get up to speed quickly enough to address the problem.

One of the two original Fabrazyme petitioners has since died. To Black, if the NIH refused to act in the Fabry’s case, it has no intention of ever using Bayh-Dole to license generic drug manufacturing. “At this point, we know that those rights are legally worthless,” he says.

“The Question Is: How Stupid Is the Government?”

The public and political attention to skyrocketing drug prices continues to build. An AARP survey taken earlier this year showed that 81 percent of respondents aged 50-plus think drug prices are too high and over 90 percent want politicians to take action about it. Both Hillary Clinton and Donald Trump have sharply criticized drug makers and vowed to push for Medicare drug price negotiation. With this increased frustration has come renewed attention to the government powers reserved by Bayh-Dole. In January, 51 members of Congress wrote a letter to Francis Collins, director of the NIH, and Sylvia Burwell, secretary of the Department of Health and Human Services (HHS), urging them to use their Bayh-Dole rights to address the drug pricing crisis, and scolding the NIH for denying all previous requests. “The failure to act in the past has undoubtedly sent an unfortunate signal that prices for federally-funded inventions can be set as high as a sick or dying consumer will pay,” they wrote.

A few days after the Congressional letter was sent, the advocacy groups Knowledge Ecology International (KEI) and the Union for Affordable Cancer Treatment filed a request with the NIH, the HHS and the DOD, asking the agencies to license generic manufacturing of Xtandi. The petition cited those agencies’ extensive roles in funding the development of the drug, Xtandi’s significantly higher price in the US compared to similar nations, and the health risks endured by the US prostate cancer patients facing Xtandi co-pay and insurance coverage barriers. Three months later, a Canadian manufacturer of generic cancer drugs contacted the federal agencies, promising the ability to produce a generic version of Xtandi for $3 a pill, just 4 percent of the cost Medicare pays for the patented version. “In this case, all the federal government has to say is that the monopoly will end if the prices are excessive,” said James Love, director of KEI and a longtime advocate for affordable medicines.

Once again, the NIH flatly rejected the petition with a four-paragraph letter from Collins refusing to step in. The letter never referenced Xtandi’s cost and stated only that the drug was physically available. HHS Secretary Burwell just as quickly declined a Congressional request to formally set standards for exercising Bayh-Dole rights, and also rejected Congressman Lloyd Doggett’s call for a public hearing on the Xtandi petition.

Those decisions have brought the health agencies some unwanted scrutiny over their relationship with the industry that benefits so handsomely from the lack of federal intervention.

The pharmaceutical companies’ outsize influence in Congress is well-known — the industry is the world’s most prolific spender on both lobbying and campaign contributions, and has a small army of 1,369 lobbyists working in Washington, D.C., alone. As Senator Richard Durbin said as far back as 2002, two years before the industry managed to block Medicare from negotiating drug prices, Big Pharma “has a death grip on Congress.”

But the top US health agencies also have their own close ties to the industry. Pharma and the federal departments share a well-documented revolving door of key staff. The Foundation of the NIH is managed by a board of directors stocked with pharmaceutical industry executives and lobbyists. In April, when NIH director Collins was asked by Senator Durbin at a Senate hearing why he refused to exercise Bayh-Dole licensing rights, Collins replied that he feared doing so would harm the agency’s relationship with the drug companies. The NIH also awards private companies exclusive licenses to some drugs it discovers in-house, and its process for doing so has been criticized as non-transparent and overly solicitous of corporate priorities. In one public statement that may have been more revealing than intended, a spokesperson for a brand-new company that received one of the licenses called his CEO’s relationship with an NIH official an “asset.”

These close connections frustrate both advocates and some lawmakers. “To maintain its cozy relationship with the pharmaceutical industry, NIH has chosen to ignore price-gouging,” says Congressman Doggett. “Taxpayers continue to fund research for too many drugs that too many cannot afford.” The NIH and HHS did not respond to requests to comment on the criticism of their Xtandi responses and relationship with the pharmaceutical industry.

In the June edition of the journal Nature, intellectual property attorney Alfred Engelberg co-authored with a Harvard Medical School professor an article calling for NIH to exercise its Bayh-Dole rights for Xtandi. In an interview, Engelberg said the current medicines research dynamic equates to an “unholy alliance” between the NIH, academic centers and the pharmaceutical industry. The end result, he says, is socialized drug discovery leading to privatized profits. “The question here is, ‘How stupid is the government?'” Engelberg says. “Billions of dollars in biomedical research is handed over to the industry with no strings attached, and then the government buys the majority of the output at the other end, with no price regulation.”

The advocacy groups who filed the Xtandi petition intend to appeal the decision. If necessary, they say they will refile it under the next President’s administration. (In 2004, Hillary Clinton publicly supported a march-in petition for an HIV/AIDS drug.) In the meantime, the big-picture impact of unregulated Xtandi pricing on US prostate cancer patients is difficult to calculate. But Don Reichmuth has no trouble assessing the impact on his personal budget and the overall US healthcare system. Shortly after learning about the Xtandi $100,000-plus annual price tag, the far-lower prices in other nations, and the NIH’s refusal to intervene, Reichmuth received a flyer in the mail from his representative in Congress boasting about his efforts to obtain affordable prescription drugs for seniors. Bad timing!

Reichmuth immediately sat down and wrote a letter in reply, sending a copy to his local newspaper. “All you have done is obstruct change and protect Pharma,” he wrote. “I therefore declare your flyer BOGUS.” Still going without the Xtandi that his doctor has prescribed, Reichmuth says he is eager to share the letter — and his story — with anyone who is willing to hear. “This whole system is wrong!” he declares.