Big Pharma’s Favorite Prescription: Higher Prices

Source: Businessweek

4 Sep 2014

Earl Harford, a retired professor who lives in Tucson, recently bought a
month’s worth of the pills he needs to keep his leukemia at bay. The cost:
$7,676, three times more than when he began taking the pills in 2001. Over
the years he’s paid more than $140,000 of his retirement savings to cover
his share of the drug’s price. “People with this condition are being taken
advantage of by the pharmaceutical industry,” says Harford. “They haven’t
improved the drug; they haven’t done anything but keep manufacturing it.
How do they justify it?”

As evidenced by Pfizer’s (PFE) proposed $100 billion-plus takeover of
AstraZeneca (AZN), Big Pharma is in the throes of the greatest period of
consolidation in a decade. One reality remains unchanged, however: Drug
prices keep defying the law of gravity. Since October 2007 the cost of
brand-name medicines has soared, with prices doubling for dozens of
established drugs that target everything from multiple sclerosis to cancer,
blood pressure, and even erectile dysfunction, according to an analysis
conducted for Bloomberg. While the consumer price index rose just 12
percent during the period, one diabetes drug quadrupled in price and
another rose 160 percent, according to an analysis by DRX, a provider of
comparison and management software for health plans.

Starting prices for drugs are escalating as well. Fifteen cancer drugs
introduced in the past five years cost more than $10,000 a month, according
to data from Memorial Sloan Kettering Cancer Center. A cholesterol-lowering
treatment for those with certain rare genetic disorders costs $311,000 a
year, and a cystic fibrosis medicine—developed partly with funding from a
charity—costs $300,000 annually.

The recent series of acquisitions may push prices even higher, says Robert
Kemp, an economist at the University of Louisiana at Monroe. That’s because
the more drugs a company has in a therapeutic area, he says, the more
pricing power it may have when negotiating with payers. “In general,
concentration has been shown to lead to higher prices in most industries,”
Kemp says. “That’s just basic economics.”

Desperation is also propelling the increases, with drugmakers raising
prices on products that remain under patent to offset sales declines from
blockbusters that have lost such protection. And companies with older drugs
boost prices when rivals show up, either to match the price of the newer
drug or to make up for prescriptions lost to the competitor. While generic
drugs pushed by insurers and the government now make up 86 percent of all
medicines used in the U.S., that hasn’t reduced total spending on
prescription drugs. In 2012, Americans spent $263 billion, or 11 percent
more than the $236 billion in 2007, according to government data.

“We have been consistently noticing that as manufacturers near the end of
their product’s life cycle, they are seeking larger price hikes than they
previously did,” says Sharon Frazee, vice president for research at Express
Scripts Holding (ESRX), one of the largest pharmacy benefit managers, which
operate employee drug plans for corporations and insurers.

Increases in prices for existing branded prescription drugs accounted for
$20 billion of the industry’s 2013 sales growth before discounts and
rebates. That largely offset $19.3 billion in revenue declines because of
patent expirations, according to the IMS Institute for Healthcare
Informatics.

Drug spending growth is “in line” with other medical spending, says Lori
Reilly, executive vice president for policy at Pharmaceutical Research and
Manufacturers of America, or PhRMA, an industry association. When generic
and brand-name drugs are put together, drug price increases have been
slower than the growth of other health-care prices, she says. “You have to
look at the significant contribution that many of these medicines make to
improving outcomes” and the fact that revenue from existing brand-name
drugs helps fund new drugs still in testing, she says.

In some cases insurers and pharmacy benefit managers are pushing back by
forcing some medicines onto reimbursement tiers that require patients to
pick up more of their cost. And doctors are for the first time exploring
ways to better educate patients on the gains and costs that can be expected
from the drugs they prescribe. A leading organization of cancer doctors,
the American Society of Clinical Oncology, is working on an algorithm for
rating the cost-effectiveness of expensive oncology drugs and will urge
physicians to use the system to discuss the costs with their patients.

The DRX drug cost survey examined average wholesale price, a benchmark
based on wholesaler list prices that doesn’t include discounts negotiated
by health plans. It’s roughly equivalent to what a person might pay at a
pharmacy if he didn’t have insurance, says Jim Yocum, DRX’s executive vice
president. Big health plans often negotiate prices that are 15 percent to
20 percent less than the wholesale price, he says.

Numerous drugmakers had multiple drugs whose price climbed at least 75
percent in the period analyzed by DRX, including Merck (MRK), Novartis
(NVS), and Eli Lilly (LLY). Wholesale prices in the U.S. for some doses of
nine drugs sold by Pfizer rose more than 75 percent since 2007, DRX found.
That includes a former top seller, the cholesterol pill Lipitor, which lost
U.S. patent protection in 2011.

“We believe our prices reflect the value of our medicines and provide the
necessary incentives for ongoing R&D investments,” Andrew Topen, a Pfizer
spokesman, wrote in an e-mail. “Drug prices reflect many factors such as
development risk, the ever-increasing cost of doing business, and their
value to the health system.” He also said the company’s list price doesn’t
reflect discounts to government, managed-care organizations, and other
commercial health plans.

The economics of prescription drugs are unlike those of other markets.
Patents protect against competition by copycat drugs for years, and
Congress forbids one of the biggest buyers of medicines, Medicare, from
negotiating prices with drugmakers directly. The result: Drug price
inflation “is about as fast as it has ever been for as long as it has ever
been,” says Richard Evans, an analyst at health investment researcher SSR
Health.

How drug companies price medicines “is one of the industry’s dirty
secrets,” says Bernard Munos, a former Lilly executive who founded
InnoThink Center for Research in Biomedical Innovation, an Indianapolis
consulting firm. “Everyone is engaging in extreme prices because they can
get away with it.”

New branded rivals in a market sometimes provide cover for older players to
boost prices. For example, prescriptions for Biogen Idec’s (BIIB) multiple
sclerosis drug Avonex have slowly declined in the U.S. in recent years
because of competition. At the same time, Avonex’s wholesale price has
risen 147 percent to $1,363.50 per injection this year from $552.19 in late
2007, according to data from DRX. After discounts, the DRX analysis found a
typical health plan pays about $1,177 per injection.

Largely because of price increases, Avonex’s U.S. sales have grown 75
percent since 2007, reaching $1.9 billion last year. Avonex’s price “is
comparable to other competing injectable drugs, if not a little lower,”
says Kate Niazi-Sai, a spokeswoman for Biogen. The company invests in
research in difficult neurologic diseases, she says.

Insulin products for diabetes had some of the biggest price increases, the
DRX survey found. Since late 2007, U.S. prices have jumped at least 160
percent for various forms of Lilly’s Humulin. When told that one
concentrated form of Humulin more than quadrupled in price since 2007, a
Lilly spokesman said the company was equalizing the per-unit prices for the
concentrated forms with the less concentrated forms.

During the same period, prices for Lantus, a long-acting form of insulin
from Sanofi (SNY), have increased as much as 160 percent in the U.S. for
one form and 97 percent for another.

Sanofi “considers a wide variety of market conditions” in determining U.S.
prices, said Mary Kathryn Steel, a spokeswoman for the company, in an
e-mail. Some recent price increases have helped bring the cost of Lantus
more in line with that of competing drugs, Sanofi Chief Executive Officer
Chris Viehbacher said in an interview.

Even cancer pills that were already among the priciest medicines have seen
rapid hikes. Novartis’s Gleevec drug for chronic myeloid leukemia—the drug
Harford, the retired professor, takes—cost $118.78 for a single
400-milligram pill in late 2007. This year that same pill costs $306.43,
according to the DRX analysis of average wholesale prices, and after
discounts the typical health plan pays about $264 per pill.

Gleevec “remains among the most competitively priced drugs in its class,”
said Eric Althoff, a spokesman for Novartis, in a statement. Most patients
on the drug pay less than $100 per month out of pocket, he said. Many
insurers and governmental payers aren’t so lucky.

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