The debate on drug prices has reached new heights with the controversy around the role of prices in promoting innovation. Critics claim that prices of innovative drugs are excessive and argue that lowering prices will not harm the flourishing innovation. On the opposite end, the pharmaceutical industry insists that restrictive pricing policies will have a detrimental impact on their ability to generate innovation.
Amid these two divergent positions, two health economists have developed a conceptual framework to bring some light to the role played by drug prices in financing pharmaceutical innovation. The framework describes how drug prices influence the ability of pharmaceutical firms to raise money in capital markets and ultimately finance R&D activities. This topic is rarely discussed in the literature; specifically, the need of pharmaceutical firms to secure the finance to fund R&D activities, generally lasting several years before a product reaches the market and becomes profitable.
The authors also argue that value-based pricing (VBP) is a key component of a well-functioning lifecycle of innovation. That is the case because VBP sends the market a clear signal of priorities, and incentivizes purposeful R&D that aims to produce the kind of innovations that meet this demand. It necessarily requires taking a long view by both sides (payers and pharmaceutical industry). This more collaborative approach is particularly critical because deviations from VBP principles, by either firms or payers, will distort access by firms to capital and lead to an undesirable level of innovation in the long term.
This publication is aimed at those interested to learn more about the lifecycle of innovation from a financial perspective, and the role played by drug prices in this cycle.
Santiago MORENO, PhD
