Bloomberg | Robert Langreth*
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
—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.
*Robert Langreth is a reporter for Bloomberg News in New York.