Why drug prices are so high

083115_diabetescost_THUMB_LARGEWall Street investors, from 2012 to the middle of 2015, have poured more than $50 billion in new capital into the pharma industry, according to Leerink, an investment bank that does equity research.  That influx of cash shifted the character of the industry, says John Rother, head of the nonpartisan advocacy group National Coalition on Health Care. Instead of focusing on time-consuming R&D, drug companies began worrying more about delivering short-term gains to shareholders, he explains.

The drug industry boasts some of the biggest profits of any industry .  In the first quarter of 2016;

  • AbbVie posted a net profit margin of 23%
  • Amgen’s was 34%
  • Biogen’s  was 36%
  • Gilead Sciences’ was 46%.

By comparison, Google’s parent company posted a 21% quarterly net profit margin in 2016; Walmart’s average is 3.5%.

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By patenting everything from how a medicine is manufactured to what kind of capsule it comes in, and by strategically re-upping the life of a patent by tweaking the way a drug is formulated, drugmakers can build legal fortresses around their products.

For example, while the basic compound for AbbVie’s best-selling anti-inflammatory drug Humira expires in December, AbbVie CEO Richard Gonzalez assured analysts in 2015 that its nearly 70 additional patents would keep the drug competition-free until 2022. “Any company seeking to market a biosimilar version of Humira will have to contend with this extensive patent estate which AbbVie intends to enforce vigorously,” he said. Between 2010 and January 2016, AbbVie increased the wholesale price of Humira by 138%, according to Truven Health Analytics. Two doses cost $1,600 in 2010; now they’re $3,800. Since 2005, AbbVie has made more than $53 billion from sales of Humira, according to IMS Health. By 2020, the company expects the drug to deliver $18 billion per year.

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For 20 of the biggest drug companies, 80% of shareholder earnings in 2014 were the result of price hikes, according to the investment bank Credit Suisse.

Pharmaceutical companies argue that these numbers don’t tell the whole story, since they focus on publicly available wholesale prices, rather than the undisclosed, negotiated ones that insurers and pharmaceutical distributors end up paying. For example, while the list price for a standard weekly dose of Enbrel is $932.16, a spokeswoman said, the average selling price is 24% less: $704.23. But industry analysts say the discounts that drug companies offer are not enough to offset the price hikes. After adjusting for estimated rebates and other price concessions, net spending in 2015 was still up 15% for specialty drugs and 8.5% for all medications from the years before, according to IMS Health.

World of DTC Marketing Insight…

Is there any doubt that drug pricing is going to be a key issue in the upcoming election?  The strategy of increasing drug prices and using R&D costs as a justification is not believable.  The real reason is that pharma serves Wall Street more than its customers.  A strategy of increasing prices is not sustainable, but with pharma CEO’s raking in millions of dollars in compensation based on share prices it’s not about to end anytime soon.

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