Patients for Affordable Drugs (P4AD), the wholly-owned group advocating on behalf of the Laura and John Arnold Foundation campaign to reduce the number and price of new drugs and limit their access, has produced what it regards as the real cost of developing Kymriah, “the first gene therapy available in the United States, certain pediatric and young adult patients with a form of acute lymphoblastic leukemia (ALL)”. The therapy is a cure for most patients. Kymriah’s costs about $475000 but only if it works. And Novartis is financing the acquisition cost of the medicine in many cases.
But P4AD, run by David Mitchell (whose firm – GMMB -- was responsible for running over a billion dollars’ worth of campaign commercials for the Obama ’12 and Clinton ’16 campaigns, is using the price as a target for the ads its 501c4 (P4ADNow) will be running (using LJAF money) supporting price controls on prescription drugs and attacking congressional candidates who don’t agree with them. (Most patient groups help patients with their daily lives and support research. P4AD simply collected stories and names through the 501c3 and is now using them for their political attack on Novartis.)
Many people, myself included, criticized Mitchell for asserting that NIH invested $200 million in Kymriah and that all Novartis did was manufacture the cells and hand them out. Now, along with academics like Aaron Kesselheim – another LJAF money recipient, he has come out with a ‘study’ posted in a Health Affairs blog that purports to show that Kymriah’s price should be about $160,000.
The simulation is pure fantasy. It is an exercise in ideological accounting carried out to justify the Arnold supported agenda to cut drug prices, including seizures of patients, step therapy, price controls, etc. A few months ago, another Arnold funded individual, Vinay Prasad published an article that overstated the profits of cancer biotech firms and understated R&D and concluded that cancer drug development yields a 10-50 fold return on investment. That study was the source of a lot of deserved derision.
Mitchell and Kesselheim apply Prasad’s LJAF funded methodology to Kymriah in the Health Affairs blog. They presume that the development of Kyrmiah carried no risk. (I wonder if the models John Arnold’s used at Enron used the same assumption about energy exploration and distribution.) The authors claim that the NIH assumed all the cost at the riskiest part of development, preclinical work. This is nonsense. The fact that fewer than 1 in 10000 pre-clinical projects become commercialized products underscores the fact that translating biology into products is the most costly and riskiest of enterprises.
To paraphrase an article in Nature: The authors' calculation ” imply that each clinical trial was a guaranteed success. Instead, clinical drug development should be regarded as a series of high-risk wagers where success in the first wager.”
For example, Novartis began clinical trials in 2009. It did not earn any revenue for almost a decade. The authors assume away the risks of drug development and the opportunity cost of tying up billions for ten years.
Further using cash flows from operating income only (which include revenue and costs), presents unrealistically high valuations for biotechnologies. “Risk is mitigated as biotechnologies progress through development. When this increasingly mitigated risk is taken into account, the risk-adjusted cash flow can be discounted to arrive at the risk-adjusted NPV.”
In the real world, the present value of each risk-adjusted cost is subtracted from the present value of the risk-adjusted payoff to arrive at the rNPV. Only by adding together all of Novartis’s costs and risks and then discounting for time, is the true rNPV is finally revealed. Mitchell does none of that.
Finally, the internal cost of capital (6 percent) is ridiculously low. The internal cost of capital is based on what the market for investment bears and reflects the fact that over time returns will be quite low or non-existent. In the real world of biotech, especially projects for small groups of patients, the internal cost of capital is estimated at 20% or higher. As Ian Coburn notes:“This reflects investors’ expectation of a return sufficient to compensate them for taking on extraordinary risk. Permanently lowering realized returns will lead to lower investment in a critical component of the life sciences industry.”
In their fantasy world, the authors claim that expected returns could be 60 percent lower and offer investors a rate of return that is lower than US treasury notes. The cost of capital increases with risk. The authors assume no risk is being taken by Novartis or any other entity in undertaking clinical development. Indeed, the authors claim at reducing operating income and profits because it’s not fair and Novartis can afford to make less.
Even if we accept the notion that Novartis is not charging a fair price, most companies developing cell therapies are NOT Novartis. They are smaller firms and their costs of capital will be even higher. The authors seem to think that it is possible to reduce rates of return without affecting how much a company or VCs need to “pay” for outside capital. (See Prasad piece for another example of this absurd assumption. and a good laugh.)
If they think it possible, then by all means start up a company that can reduce prices. One of Mitchell’s co-authors, Paul Kleughten, was the CEO of a generic drug company. Let him enter into a partnership with the NIH that gives the agency control over prices. Let him try to raise capital or find a partner for a firm that presents financial projections and a research plan consistent with their assumptions.
The fact is, their model will reduce investment and drive up the cost of capital needed to support biotech. Price controls will steer investment into other sectors. Voluntarily capping profits means less money for other potential cures and will deprive millions of people in the future of their wellbeing and lives. That’s the reality P4AD and their LJAF funding compatriots offer.