Life Sciences Blog

Risks for pharma in the aftermath of San Francisco’s Proposition D, allowing direct price negotiations for pharmaceuticals




On 5 November, San Francisco voters approved a measure requiring the city to directly negotiate drug prices with pharmaceutical companies. The policy statement included in the so called Proposition D is general enough to look like it can be dismissed as a lofty declaration with not much practical impact, but I beg to differ on this issue.

Proposition D – given the overwhelming support it received from San Francisco voters – should be taken very seriously by pharmaceutical companies … for it is often with lofty declarations that drastic policy changes begin.

I would not go as far as to say that Proposition D spells the end of free pricing for pharmaceuticals in the US. Still it is a serious enough indication of a shift in public opinion on drug pricing. As such, it would be unwise to ignore it.

What triggered Proposition D? The inclusion of a text mandating the San Francisco government to negotiate directly on drug prices was proposed by the AIDS Healthcare Foundation (AHF) in 2012. The initial proposal was triggered by concerns that Gilead Sciences – itself based in the San Francisco Bay Area – had priced its newly approved four-in-one antiretroviral pill Stribild at an annual wholesale price of USD28,500—a 35% premium over its older three-in-one HIV drug Atripla. Stribald was approved by the FDA on 27 August 2012. Just two days later, the AHF announced plans to put a proposed law on the November 2013 municipal ballot in San Francisco and claimed that Gilead’s pricing of Stribald was the reason for its initiative.

Initial reactions to the AHF proposal were mixed with many commentators arguing at the time that the proposal had not gained sufficient traction as it had not been supported by any other HIV charities or non-profit organisations.

In order to be included in the November ballot, the AHF proposal needed 10,000 signatures by registered San Francisco voters in support of the initiative. The required signatures were gathered by 22 February 2013.

Wording of Proposition D: Empty declaration or a driver for change? Thus, the policy came to be one of four included in the 5 November ballot surrounded by less seminal proposals such as two initiatives related to construction of buildings on the waterfront and a proposal to prevent money in the Retiree Health Care Trust Fund from being used by the city for other things. The original text of the policy initiative states that it should be City policy to use all available opportunities to reduce the cost of prescription drugs. Reference is then made to the high number of HIV-infected patients in the city, their limited finances and Gilead’s profits.

The main part of the policy that pharmaceutical companies should be particularly worried about is as follows: “The people of San Francisco wishing to ensure maximum access to life-saving medications to all of the citizens of the city, state and nation resolve to employ all opportunities that the municipal government possesses to bring down the price of prescription drugs. The initiative requires that San Francisco enter into direct negotiation with drug manufacturers to pay less to essential medications that it purchases. In addition, the San Francisco delegations to the California Legislature and the US Congress are asked to carry legislation to reduce current drug prices paid by all levels of government by at least one third.” The text, as proposed, was approved by 80.08% of voters. A simple majority would have sufficed to pass the proposal.

Risks for Pharma in the aftermath of Proposition D And so Proposition D: “Prescription Drug Purchasing City of San Francisco” is now enshrined into San Francisco municipal policy.

In total San Francisco spends around USD23 million on pharmaceuticals per year. With the implementation of the Affordable Care Act (ACA), Medicaid is meant to be expanded – and California is one of the 25 states that have so far confirmed they will be expanding their Medicaid programme to include additional beneficiaries. So any discounts secured on medicines would be much welcomed by San Francisco.

Considering how recent the approval of Proposition D was there has, as of yet, been no impact on the pharmaceutical industry. City officials are yet to consider “all opportunities” they possess for bringing down prices and attempt to explore those in direct negotiations with pharmaceutical companies. Notably, this requirement now applies to all essential prescription drugs – not just HIV treatments – the City pays for. Additionally, the City is meant to be putting pressure on both the state and federal legislature to bring down prices by a third. How effective this pressure is in achieving actual price reductions for pharmaceutical products is yet to be seen. I certainly don’t expect San Francisco to suddenly start enjoying substantially lower drug prices than the rest of California. It may happen, but it will take time.

But what this initiative tells us – especially given the margin of support it gained by voters – is that there is considerable public support for negotiations and now there is a precedent for a grassroots initiative requiring government to engage in direct negotiations on pharmaceutical prices with pharma companies. It may be just one city at this point – and a particularly liberal one –but it may well serve as an example for other jurisdictions in the United States.

In this context, it does not even matter whether San Francisco manages to secure lower prices for pharmaceuticals as a result of the policy. With pharmaceutical prices still kept confidential in the Untied States, as long as other states or other cities within the country believe – wrongly or not - that San Francisco is achieving lower prices through direct negotiations, they too may opt for policy changes allowing direct negotiations with the pharmaceutical industry.

About The Author

Milena Izmirlieva is head of the Life Sciences research team at IHS Markit. Her areas of expertise include market access, pricing and reimbursement, HTA, generics and biosimilars, corporate strategies, and pharma promotion and advertising.