12/18/2005 05:35 am ET Updated Dec 06, 2017

AstraZeneca tells New Zealand cancer patients they will withdraw cancer drug from the market to protest government pressures to lower prices

On December 15, 2005, AstraZeneca, the big pharmaceutical company, announced it would pull its cancer drug Zoladex from the market in New Zealand. Zoladex is used to treat both breast and prostate cancer.

The decision to withdraw the product from the Zealand market is due entirely to a dispute over the amount of money the New Zealand government would pay for the drug.

AstraZeneca's move is aggressive, but this is what companies do to get top prices for medicines.
Tom_McKillop_small.jpg Sir Tom McKillop, CEO AstraZeneca

I was in New Zealand in 1998 when Bristol Myers Squibb (BMS) withheld the supply of a life saving drug in a dispute over pricing. The drug was ddI, an AIDS drug invented and patented by the US government and licensed to BMS, which it sells under the brand name of Videx. BMS wanted New Zealand to pay 30 percent more than the US price. The New Zealand drug reimbursement agency PHARMAC wanted the US price. BMS stopped supplying the drug to New Zealand pharmacies, until the entire national supply was gone. At that point PHARMAC agreed to pay the higher price.

In the current dispute over Zoladex, New Zealand again wants a price that is closer to what AstraZeneca charges in some other countries, including the UK. But AstraZeneca decided to pull the drug from market, rather than accept price cuts.

The decision by AstraZeneca is the flip side of threats by governments or insurance companies who refuse to pay for drugs when prices are too high. New Zealand, like other countries, is struggling to find a way to pay for expensive new drugs, some of which are priced as high as $4,000 to $20,000 per month, for treatments that can last a year or more.

When prices are high, third party insurers (governments, private insurance companies or employers) try to find ways to not pay for products like the breast cancer drug trastuzumab (Herceptin) or the brain cancer drug temozolomide. For example, the drugs can be limited to only certain medical conditions, or as second or third line treatments, rather than first line treatments.

These disputes arise because we reward drug developers with temporary monopolies on new medicines. The companies that control the monopolies have incentives to be as aggressive as possible on drug pricing, particularly when the treatment is for a severe illness. Governments and insurance companies threaten to not pay for drugs, and drug manufacturers threaten to withdraw products if they don't agree with the price. These threats are only credible if each party can demonstrate its willingness to follow through on the threat.
New Zealand is a good place for a company to demonstrate its willingness to withhold a product from the market for four reasons.
  1. New Zealand is a small country, so the total loss in global revenue is smaller than would be the case if a product was withdrawn from a larger market, like France, Japan or Germany.
  2. New Zealand has bowed to US trade pressures and agreed not to use parallel importing to obtain cheaper supplies for the drug in countries where prices are lower.
  3. New Zealand's domestic market is too small to justify efficient production, which reduces the threat of a compulsory license for local manufacturing.
  4. New Zealand is one of the countries that have "opted-out" of the recent WTO agreement which could have been used to make it easier to import generic drugs manufactured under a compulsory license.

The increasingly aggressive pricing of new medicines is a global crisis. But it can be fixed, and fairly easily.

Firms that develop new drugs don't need monopolies on drugs, but they do need money. There is no need to link R&D incentives to high drug prices, if you can get the money to the drug developers through a different mechanism. Fortunately, there are mechanisms that will work, and people are taking them seriously.

A US legislative proposal, HR 417, would create a very large medical innovation prize fund. The Prize Fund would provide money to successful drug developers, on the basis of the positive health outcomes their products provide (over the first ten years they are used). In the current version of HR 417, it would give drug developers one half of a percent of US GDP, or about $60 billion per year, a number that could be changed if policy makers want to increase the total size of innovation incentives.

The important thing in the Prize Fund approach is that it separates the market for innovation from the market for the physical copies of the drug. If passed, it will eliminate the marketing monopolies for all medicines. Competition would lead to much lower prices. When new drugs are priced the same as off-patent generic products (at the cost of making copies), doctors, governments, insurance companies and employers would no longer have an incentive to restrict access. Medicine would be prescribed on the basis of medical merits, rather than cost effectiveness.

The New Zealand story is one of countless reminders the current system is broken. Things are much worse in developing countries, where high prices for any drug means very unequal access.

Since rationing of high priced medicines is a completely unnecessary problem, we should fix it. If we move to the prize fund approach for rewarding successful drug developers, we can radically change access to medicine from Uganda to Beverely Hills, and that is worth doing.