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biopharmaceuticals
Medical Innovations in Products, Procedures, and Patient Care Continue to Thrive
Over the past few decades the pharmaceutical, biotech, and medical device industries have experienced unprecedented growth. What has driven this growth? Innovation and pricing. Sure, the industries have benefited from an aging population. And yes, the reimbursement policies in the United States (approximately half of the global healthcare market) have been liberal. But taken together, these forces created an environment where innovation was fostered. The demand was there and it was largely price inelastic. Innovate and you'd be rewarded.
And innovate they did. We've seen the advent of targeted cancer therapies and we can now replace a heart valve via a catheter inserted in the leg. Gene therapy, personalized medicine and stem cell therapy are quickly moving from the laboratory bench to the clinical bedside. Many would argue that the pharmaceutical and medical products industries have innovated more than any other industry. (I would give a nod to the semiconductor and telecommunications industries as well.) It is true an aging population and a favorable reimbursement environment have supported this product innovation, but innovation coupled with "pricing to value" is what ultimately led to a high return to shareholders (again outpacing most industries). And this high return to shareholders is what led to continued investment and therefore continued innovation.
It's no surprise that innovative medical products allow significant pricing flexibility. After all, a novel product has no real pricing benchmarks, and when contemplating a launch price you have the luxury to ask, "What price will the market bear?" This market has a lot of attributes that complicate that question (e.g., third-party reimbursement, portfolio pricing considerations, global markets), but you've seen a stock "pop" on the day an FDA approval is granted and for good reason: companies can price that product to reflect the true value of innovation.
Post-launch pricing is also a significant component of return to shareholders. In fact, pricing changes over the course of a product's lifecycle likely influence value more that any other strategic or operational lever at a company's disposal. The most innovative products are able to increase price over time and it is estimated that more than 80% of major pharmaceutical companies' earnings per share growth comes from annual price increases on their products.
"Over the past few decades the pharmaceutical, biotech, and medical device industries have experienced unprecedented growth."
So what does it mean to "reflect the true value of innovation" in price, and how do these companies actually pick a number? Well, the medical industry has the advantage of having a society that monetarily (via third-party and government payers) supports individual patient and physician purchasing decisions. In other words, it is a leveraged system where we as a society have "made a market," for example, in cancer therapeutics. We've enabled prices and price increases that are much higher than we would or could justify individually (six-figure courses of therapy are not uncommon). We've enabled prices that support broad and continued innovation.
But have these high prices decreased access to novel therapies? The short answer is no. Over the last couple of decades companies have realized that high price doesn't necessarily mean lower access. High prices do lead to access challenges for some patients, but paradoxically these high prices actually improve overall access by allowing support of robust patient access and broader outreach programs (though it is easy to grab sensational headlines in the popular press pointing to high price as the problem). While it's disturbing to see stories of patients who are unable to access these therapies, addressing access with aggressive pricing would come at the expense of other critical brand, research and corporate functions. Most important, decreasing price is unlikely to increase overall access and might quell innovation.
Are prices for groundbreaking medical technologies exorbitant? While healthcare spending continues to rise at an unprecedented rate, the number of uninsured and underinsured continues to rise, and many argue that our heathcare system is among the least efficient in the world, the innovation in medical technology has been impressive. As a society, as a market, we have decided that the cost of innovation is worth the price. At least for now.