Prescription Drugs--Outlandish Pricing

Posted by Stephen Weinberg, MD FACC FACP

Let's take a look at the pharmaceutical industry and try to discern why prescription drugs are so expensive.

Worldwide, the industry has revenue of about $1T, of which $350B comes from the US. Globally, the amount of profit is about $210B annually or 21% of revenue. This is the most profitable industry in the world. The industry spends about $250B per year on sales and marketing and only $93B on research and development.

The cost of developing a new drug is about $2.6B and the patent will last 20 years from the time the actual chemical is discovered and placed under patent. It could take 10 years to get the drug onto the market, leaving only 10 years to make back the money spent on the discovery of the chemical and the studies needed to bring the drug to market. After that time, the drug can be produced as a generic. Of all the chemicals discovered, only a small fraction actually become a salable drug, further increasing the cost of development.

The cost of prescription drugs in the US is greater than twice that of other industrialized countries. Many drugs are far more expensive in the US. Some examples are seen here:

So, the question simply, is why are the prices so high in the US compared to the rest of the world?
There are several reasons for this.

First, other countries have national panels that determine whether the medication to be sold in their country has value above the other medications in their class and if the cost is worth it. The pharmaceutical companies know this and they price their new medications so that they are competitive with existing drugs to enable them to be sold. What this means is that a new drug must demonstrate additional value at a competitive price in order to be accepted by the country of interest. This is not the case in the US. Any drug approved by the FDA can be sold here and the manufacturer depends upon their marketing skill to get the drug into general circulation. Remember, the sales and marketing budget is $250B annually.

Second, the US does not negotiate prices as a nation, or even as Medicare, for the costs of medications. The other industrialized countries negotiate pricing after they decide if the drug is of value. With the US population of 330M, we would have extraordinary negotiating clout as compared to many other countries with much smaller populations. An example is Canada with 1/10 the population of the US and they pay substantially less for drugs. Medicare, with 55M people would have more leverage than Canada with 36M. We cannot negotiate pricing, as a country or as Medicare, as a result of the "compromise/deal" achieved with the pharmaceutical industry in 2003 when Medicare Part D was established under the Bush administration.

Third, it was also established under the Part D law that the US population could not purchase drugs from other countries, legally. Currently, only 2% of drugs are purchased outside of the US, despite the fact that they are produced by US manufacturers.

Fourth, manufacturers generally sell to intermediaries like pharmacy benefit managers (PBM) and provide them with rebates as an inducement to use their drugs. This amounts to more than $40B annually in the US. This enormous sum is not passed on to the patient to lower the cost of the medications and the entire transaction is non-transparent. So the PBM's are making money on the mark up of the drugs plus the rebates.

Fifth, pharmaceutical companies will commonly extend their patent timelines by introducing combination drugs and extended release formulations of the drug. This allows them to sell the medication without competition. It is interesting that they will often "discover" the additional formulations close to the patent expiration date.

Sixth, manufacturers will pay generic manufacturing companies to not produce their patented medication when it comes off patent for 1 or more years. This will allow the original company to reap additional profit without competition.

In the next post, I will detail other reasons for the exorbitant prices of drugs and provide some easy solutions that can be adopted to control the costs and get pricing in the US to be more reasonable and competitive with the other industrialized countries of the world.

At the "end of the day", it is important that we all understand what is happening and then put pressure on Congress to do the right thing and fix the problem.

More to come. Stay tuned...