Drug prices rising because of pressure from shareholders to deliver higher profits

KEY TAKEAWAY: So far in 2019, more than 3,400 drugs have boosted their prices, a 17% increase compared with the roughly 2,900 drug price increases at the same time in 2018, according to a new analysis by Rx Saving Solutions, a consultant to health plans and employers. The average price hike for those 3,400 drugs stands at 10.5% or about 5 times the rate of inflation, the study found.

Can we please stop the propaganda that “it’s about patients”? Drug prices are rising because Wall Street wants higher profits.

Working out how profitable drug firms are is not a simple matter. Their net margins of 11%, less than restaurants and one-fifth those of railways, do not exactly scream price gouging. But a fairer picture can be reached by adding back interest costs, adjusting for leases and, crucially, by also treating research and development expenses as an investment that is depreciated gradually over time. According to a recent study by Aswath Damodaran of New York University’s Stern School of Business, on this basis drug firms’ margins are 24%, higher than most other sectors.

Drug firms retort that the returns on that R&D investment will not be as good as they used to be. They have to spend ever more prospecting for blockbuster molecules. The alternative is to pay top dollar to acquire biotechnology firms which have already identified them. On June 17th Pfizer said it would pay $11.4bn for Array BioPharma, which has developed therapies for cancer. In April Bristol-Myers Squibb approved a $74bn purchase of Celgene.

It’s about profits; it always has been and will continue to be about money. The winds of change are blowing and eventually, pharma will have its day of reckoning.

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