Health Care

Big Pharma's Favorite Prescription: Higher Prices


Big Pharma's Favorite Prescription: Higher Prices

Illustration by Steph Davidson

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.”

“In general, concentration has been shown to lead to higher prices in most industries. That’s just basic economics.”
—Robert Kemp

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.

The bottom line: The $20 billion increase in the prices of prescription drugs in 2013 largely offset $19.3 billion in patent expirations.

Langreth is a reporter for Bloomberg News in New York.

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Companies Mentioned

  • PFE
    (Pfizer Inc)
    • $30.39 USD
    • -0.10
    • -0.33%
  • AZN
    (AstraZeneca PLC)
    • $74.94 USD
    • -0.21
    • -0.28%
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