When it comes to global drug sales, all revenue is not created equal

Once a new drug is invented, it can benefit patients from all corners of the world. And in turn, many countries ​“chip in” and contribute to the global reward for innovation to varying degrees, based on the perceived societal value delivered to their citizens. Unfortunately, many countries outside the US choose to chip in very little, using faulty math to disguise the fact that they just don’t want to pay. But generally speaking, drugs are globe-trotters.

You might think a dollar of revenue for one drug in one country equals a dollar of revenue from any other drug in any other country. Or that a dollar of revenue a few years after a drug launches is the same as a dollar 15 years out. A buck is a buck, right? 

But unraveling how each of those dollars is earned shows to what degree each provides the incentives for continued medical innovation, how investors think about the relative importance of global markets, and how investors think about where to place future drug discovery and development bets. 

The bottom line is that when it comes to global revenues for innovative medicines, US revenues for ​“winners” (the top selling drugs) matter most, since these come at the highest profit margin and launch more quickly, and serve as the primary incentive for biomedical innovation. This is not to say that the US pays too much. Most medicines are a bargain when you look at their value to society. Rather, other countries pay far too little. This free-riding comes at cost, most of all, to the citizens of those countries that seek to delay access for the sake of driving near-term budget savings. Indeed, for drugs launched from 2012 to 2021 the average time from first global launch to public reimbursement in G20 countries was almost 4 years.

Last month, I had the opportunity to participate in a panel on ​“global differential pricing” at ISPOR’s Annual Meeting in Atlanta, a global conference for health economics and outcomes research (HEOR) professionals and other stakeholder groups including patients, payors, employers, and policymakers. You might remember we had a Quest for Affordable Innovation at ISPOR – this was a stop along the way. 

Global differential pricing is a term used by health economists to describe how to facilitate timely global access to an innovative medicine while determining the appropriate share that each country should pay to reward the innovator and thus keep biomedical innovation intact. 

Here are the three key points I made:

1. Global Drug Revenue and Innovation: What is the actual revenue from global drug sales that incentivizes innovation? While global pharmaceutical revenue is often cited as about $1.5 trillion based on invoice prices, the portion of that revenue that motivates R&D in novel drugs is closer to 400-$430 billion – I’ll explain how we get there from $1.5 trillion. 
2. The current importance of US revenues and the importance of ​“the winners”: The US market, though only 5% of the global population, contributes disproportionately to pharmaceutical revenue and profits. And not all drugs are created equal; the top 20 selling drugs do a lot of the heavy lifting when it comes to supporting global innovation. Policies that bring down the winners, like government price controls prior to the typical 14 years of exclusivity investors count on, damage innovation everywhere. 
3. An effective global differential pricing model in which every country pays its ​“fair share” could lead to earlier and broader access to new medicines for ex-US patients and increased incentives for innovation, particularly for diseases more prevalent in lower-income countries. In the long term, it might actually improve outcomes and reduce total costs of care by incentivizing more competition.

My presentation aimed to provide valuable insights and foster meaningful discussion on how to better support pharmaceutical innovation and patient access worldwide. Let’s take a look.

WHAT IS THE GLOBAL DRUG REVENUE THAT ACTUALLY INCENTIVIZES INNOVATION?

Let’s start with the $1.5T of global medicines spend at invoice prices

Sales stemming from drugs requiring low‑R&D work (e.g., generics, older reformulated medicines, and other non-original brands) do not incentivize investment in R&D intensive work that leads to novel drugs. New medicines are incentivized by payments for new medicines. Payments for old medicines merely reward the making of old medicines.

Innovators start with the $900B of original brand spend … at invoice prices.

We estimate net spend WW of $600 – 650B on original brands

That $900B original brand global spending includes ~$200B in gross-to-net discounts in the US. Assuming most gross-to-net discounts are on the US market, we estimate $600 – 650B of WW net spend on original brands. US medicine spend of $629B at invoice price levels, of which 85.4% on original brands, for $537B at invoice prices; IQVIA assumes 37% gross-to-net for ​‘protected brands’, for $338B at net prices (~$199B in gross-to net).

So, original brand ​“net” spend is more like $600 – 650B.

And what incentivizes R&D investment are profits, not revenues, so keep in mind that margins are much lower on sales ex-US. The US is 5% of the global population and half the revenue for branded drugs. As complex as reimbursement in the US is, it is a lot harder and takes longer in European and other developed countries, and is more expensive to ramp up sales across all the countries from which the other 50% of net revenues stem, so profits there are much lower, resulting in a much lower contribution to incentives for R&D investment.

And time matters… innovators do not view drug revenue that comprises $600 – 650B on original brands equally…

‘Builders’ underwrite to the ​‘mortgage’ period granted by Hatch-Waxman (which averages about 14 years), after which we assume a drug’s price will be competed down by generic/​biosimilar competition.

‘Landlords’ are more focused on extracting rents beyond the typical Hatch-Waxman period of exclusivity. These strategies for extracting rent typically emerge after launch and are not counted on by investors funding the initial R&D. That green line does not motivate early-stage investors. You see that green line more often with biologics. And some drugs, particularly complex ones like gene and cell therapies, are natural monopolies (they can’t be biosimilarized) which is why price controls after 14 years are an understandable mechanism for making sure that drugs abide by the intent of Hatch-Waxman.

Small companies still developing their first drugs are purely Builders focused on the Mortgage reward.

But industry has not historically spoken for Builders without being conflicted about giving up the Landlord rent streams from aging products. Some big biopharmas that have R&D pipelines and mature profitable products (>14 years) are hybrids of Builders and Landlords. Their internal Builders (e.g., heads of R&D) want to preserve the Mortgage streams. The Landlords can afford to see innovation extinguished as long as Rent streams are not entirely eliminated. This is why some big biopharmas can seem to struggle to embrace ​“the biotech social contract” and can’t speak for small biotechs and their investors.

When we remove revenue for aged products, we estimate global revenue of $400 – 430B for products in their Mortgage period.

This is the revenue that incentivizes ~$200B of R&D spend per year (the IQVIA R&D report notes $138B of R&D spend for the top 15 pharmas and $61B in venture capital and public biotech investments in 2022).

HOW IMPORTANT ARE US REVENUES FOR THE TOP 20 DRUGS IN INCENTIVIZING INNOVATION?

Photo by Ferdinand Stöhr on Unsplash

US revenues from the top 20 innovative drugs account for ~1/4 of total innovative drug revenue.

Global revenues from the top 20 innovative drugs in the US account for ~1/3 of total innovative drug revenue.

We estimate the top 20 drugs account for >50% of industry profit from marketed products (before considering R&D for indication expansion or new products).

Impact of a Global Differential Pricing Model That Enables Everyone to Pay Their ​“Fair” Share

An effective global differential pricing model, likely arrived at through trade agreements, will mean earlier and broader access for ex-US patients, effectively reducing the significant time lag to accessing innovative medicines for ex-US countries and maximizing the potential benefits to global patients in need.

It will also provide greater incentives for innovation in the long run. Greater ex-US profits will catalyze innovations across different disease areas, particularly for those that disproportionately impact patients in ex-US countries.

It will also likely result in lower global health spending (comprising both drug and health services spending) over time – as medicines become more affordable through genericization while the cost of health services (e.g., hospitals, emergency rooms) increases over time. For innovative medicines, more innovation will mean greater choice for patients, and competition within each indication will ultimately result in lower prices. Now that’s a good thing for people around the world.