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Lakdawalla speaks about how drugs aren’t being properly valued.
No Patient Left Behind recently worked with EntityRisk to look at the ways that drugs are valued and determined that many drugs were not being properly valued. Darius Lakdawalla, chief scientific officer at EntityRisk, spoke with Pharmaceutical Executive about the findings and how these new valuations were determined.
Pharmaceutical Executive: How are drugs being improperly valued?
Lakdawalla: We looked at how the Institute for Clinical and Economic Review evaluated 20 drugs over recent years and asked what would happen if you used more up to date methods of evaluation and how that would impact their conclusions. Essentially, what we found was that you would end up with the result that many more drugs represent more value for money than what the institute would have concluded.
We incorporated several more elements of value that are missing from the institute’s traditional methodology. One of them is the idea that prices of new drugs eventually decline, because generics or similar treatments enter the market, which leads to price reductions. Another point is that new drugs have value not just to the patients they treat, but also as insurance policies to people who might get sick.
An example is somebody in 1990 who is HIV negative but is sexually active. They were at risk for contracting HIV, and the threat of the disease loomed very large. If you fast forward seven years, a similar person in the same situation would have an improved situation by virtue of the fact that there were highly effective treatments that could protect them in the event that they get sick.
In economics, that’s a notion that we call value of risk reduction, and it can be incorporated into the assessment and value of new drugs. It’s very valuable to treat severe illness. It’s the same logic as having earthquake insurance for a house in Los Angeles, but not getting the extended warranty for a minor household appliance. People have a greater demand for protection when the losses they’re facing are very large, so I insure my house but not my toaster.
By the same logic, this kind of insurance value of drugs is more important for highly severe illnesses where the losses are significant. All of this is incorporated into newer methods of valuation and when accounting for those, you find that drugs can be more valuable than what the institute says.
It’s important to note that they’re not always more valuable than what they cost, even using these newer methods. Out of the 20 drugs we looked at, two of them remained less valuable than the cost because their clinical benefits were too modest. An economics analysis shouldn’t tell you to always spend money in every circumstance. It does need to incorporate, however, the full value that people get out of these drugs.
PE: Was this way of valuating drugs making it less valuable to develop innovative drugs?
Lakdawalla: Their conclusions were leading to value assessments that dampened incentives to innovate. Those methods led to lower value-based prices, which means the rewards for discovering new technologies are lower. That’s the logic beneath that point.
PE: Could you discuss the platform used to perform this analysis?
Lakdawalla: PROVEN is a platform that has been developed by a company called EntityRisk (full disclosure, I’m a co-founder and chief scientific officer). The idea behind the platform is that there have been a lot of innovative methods proposed in economics literature in the past 10-15 years, but not everyone is familiar with how to implement those methods. By nature, they’re newer so not everyone has been exposed to the practice of making them real.
Usually, the way they get implemented by pharmaceutical companies is by hiring a consulting firm that figures out how to do it and that takes a long time. That is not always cheap. The questions was whether we could automate that process and put it in reach of more companies so they could look at the full value of their products, perhaps even earlier in the product development cycle where they might not be willing to invest in a consulting firm.
In a prior life, I was a co-founder of a consulting firm that performed this work. A frustration we sometimes faced was that we’d have the ability to do a project, but it was too slow for a quick turnaround.
This is designed to fill this gap.
The platform takes all of the knowledge that we’ve developed in our research and absorbs it in our software. It takes a traditional cost effectiveness model as an input, and then it will tell you the additional elements of value that come out of newer methods. It works by using math and uses peer review methods to estimate the effect of insurance value, price declines, etc., and it takes that and performs the math rapidly.
It's flexible, so we can incorporate any drug or disease area and provide an answer much more quickly than under previous technologies.