Flawed WHO Study Could Jeopardize Patients’ Access to Cancer Medicines
Determining whether the prices for medicines are appropriate or not is critically important, which is why studies that attempt to answer this question must stand up to scrutiny. Studies that undervalue medicines jeopardize the development of future cures, while studies that overvalue medicines justify the imposition of excessive health care costs today.
Judged against this goal, a recent World Health Organization (WHO) technical report is disappointing. In this report the WHO claims that the industry’s current pricing approach “makes cancer medicines unaffordable, preventing the full benefit of the medicines from being realized.”
Given the global influence and stature of the WHO, it is imperative to determine whether the analysis justifies such a conclusion. Even a cursory examination of their report reveals that there are fundamental flaws in their methodology that invalidate their conclusion.
One of the core results of the WHO analysis claims that every $1 of research and development (R&D) expenditures on cancer medicines generates a median of $14.50 in sales income. This multiple is presented as evidence that the global income stream from cancer drugs is excessive, and should be reduced. The results of the WHO analysis, however, in no way supports such a conclusion.
It is unclear that the WHO’s chosen sales revenue to R&D expenditure multiple is a meaningful metric for determining the appropriate price of a medicine. But, even ignoring these concerns, the study’s conclusions are still not supported because the authors committed two fundamental methodological errors.
First, the goal of the report as stated by the WHO was “to quantify the reported global incomes from the sales of individual medicines approved by the US FDA in 1989–2017 for the treatment of hematological cancers, solid tumors and related conditions such as neutropenia and hypercalcemia.”
This indicates that the intention of the study was to quantify the sales data of all cancer medicines approved by the FDA between 1989 and 2017. However, in conducting the analysis, the WHO eliminated 37 percent of the study population because these medicines had insufficient data associated with them. Why these medicines had insufficient data is unknown. A probable explanation is that many (perhaps all) of these medicines were not commercially successful.
If the most commercially unsuccessful medicines were excluded from the analysis, then the remaining study population will be biased toward a higher total sales revenue multiple over R&D costs. The commercially unsuccessful medicines required the same amount of R&D expenditures, but (by definition) generated much fewer revenues.
Second, the analysis summed up the global sales revenues earned on the chosen cancer medications between 1989 and 2017. Simply summing up a stream of revenues over time is an inappropriate and meaningless calculation because it does not account for the time value of money – a fundamental financial principle.
The time value of money recognizes that a dollar earned in 2017 is not equivalent to a dollar earned in 1989. In order to have comparable figures, the dollars earned in 2017 must be discounted into 1989 dollars.
Perhaps the easiest way to see why this calculation is so important is to review the returns of the S&P 500 between January 1989 and December 2017. According to DQYDJ’s S&P 500 return calculator, assuming an investor reinvested her dividends, then she could have received a 1,622.5% return on her money over the 1989 and 2017 time period. Put differently, a $100 investment in the S&P 500 as of January 1989 would be worth $1,622.48 by December 2017.
While this 10.34% annualized return is not necessarily the right “discount rate” for the WHO study, it exemplifies that earning money in 1989 is not the same as earning money in 2017 – any money received in 1989 could be invested, and earn a large potential return.
Accounting for these two flaws alone significantly alters the WHO’s sales revenue multiple. By my calculation, accounting for these factors reduces the revenue multiple by nearly 350 percent! Since the study estimates contain an error that alters the conclusion by as much as 350 percent, the results are not reliable.
Yet, these were not the only flaws of the study. The study also demonstrated a fundamental misunderstanding of the negotiation process that sets drug prices globally. It excluded key benefits created by cancer medicines such as the benefits created by better cancer treatment and longer survival rates, the potential reduction in other health care costs, and the reduction in other social costs. It also failed to account for pharmaceutical companies’ actual cost of capital and, mismeasured health care affordability.
Due to its global influence, the results of this study are inappropriately encouraging ill-considered policies such as the imposition of stricter price controls and more government regulation of medicines. If implemented, these policies will threaten continued innovation and make cutting-edge cancer treatments less available to patients who rely on them.