Drug prices surge as generics, niche treatments eat profit

Earl Harford, a retired professor, recently bought a month’s worth of the pills he needs to keep his leukemia at bay. The cost: $7,676, or three times more than when he first began taking the pills in 2001. Over the years, he has paid more than $140,000 from 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,” said Harford, 84, of Tucson, Ariz. “They haven’t improved the drug; they haven’t done anything but keep manufacturing it. How do they justify it?”

As the pharmaceutical industry, led by Pfizer Inc.’s proposed $100 billion takeover of AstraZeneca Plc, is in the throes of the greatest period of consolidation in a decade, one reality remains unchanged: Drug prices keep defying the law of gravity.

Since 2007, the cost of brand-name medicines has surged, with prices doubling for dozens of established drugs that target everything from multiple sclerosis to cancer, blood pressure and even erections, according to an analysis conducted for Bloomberg News. While the consumer price index rose just 12 percent in the period, one diabetes drug quadrupled in price and another rose by 160 percent, according to the analysis by Los Angeles-based DRX, a provider of comparison software for health plans.

Starting prices for new drugs are escalating as well. Today, a cholesterol-lowering treatment for certain rare cases costs $311,000 a year and a cystic fibrosis medicine—developed partly with funding from a charity—costs $300,000 annually. Fifteen cancer drugs introduced in the last five years cost more than $10,000 a month, according to data from Memorial Sloan Kettering Cancer Center.

Analysts, meanwhile, predict the first $1 million drug treatment may be just around the corner.

Pricing power

The recent wave of acquisitions may push prices even higher, suggests Robert Kemp, an economist at the University of Louisiana at Monroe. The more drugs a company has in a specific therapeutic area, he said, the more ability it may have to maintain higher prices when negotiating with payers.

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

Desperation is one driver for the increases, with drugmakers raising prices on products that remain under patent to offset sales dropped from blockbusters that have lost patent protection. Opportunity is another, as companies with older drugs boost prices when rivals show up, either to match the price of the newer drug or to make up for lost prescriptions.

Generic drugs

While generic drugs pushed by insurers and the government now make up 86 percent of all medicines used in the United States, that hasn’t reduced total spending on prescription medicines. In 2012, Americans spent $263 billion, or 11 percent more than the $236 billion spent in 2007, according to U.S. 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,” said Sharon Frazee, vice president for research at Express Scripts Holding Co., one of the country’s largest pharmacy benefit managers.

Last year, increases in prices for existing branded prescription drugs accounted for $20 billion of the industry’s 2013 sales growth, offsetting $19.3 billion in revenue declines due to patent expirations, according to the IMS Institute for Healthcare Informatics. Discounts and rebates counteracted some of the price increases, according to the report.

Spending ‘in line’

Drug spending growth is “in line” with other medical spending, said 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 said.

“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 help fund new drugs still in testing, she said.

The downside is financial strain on patients. “Every day in my clinic there are patients who start discussing they can’t afford this drug or that drug” because it costs too much, said Hagop Kantarjian, a leukemia doctor at M.D. Anderson Cancer Center in Houston, who wrote an article in the medical journal Blood in which a group of 100 hematology doctors protested the “unsustainable” costs of leukemia drugs.

In some cases, insurers and pharmacy benefit managers are pushing back, by forcing some medicines onto reimbursement ledges that require patients to pick up more of their cost. Doctors, meanwhile, are for the first time exploring ways to better educate patients on the gains and costs they can expect from the drugs they prescribe.

‘Cost effectiveness’

Last month, Bloomberg News reported that the world’s largest organization of cancer doctors, the American Society of Clinical Oncology, was 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.

Numerous drugmakers had multiple drugs whose price rose at least 75 percent in the period analyzed by DRX, including Merck & Co., Novartis AG, and Eli Lilly and Co. Wholesale prices in the U.S. for some doses of nine drugs sold by New York-based Pfizer Inc. rose more than 75 percent since 2007, DRX found. That includes a former top-seller, the cholesterol medicine Lipitor which lost U.S. patent protection in 2011.

‘Necessary incentives’

“We believe our prices reflect the value of our medicines and provide the necessary incentives for ongoing R&D investments,” said Andrew Topen, a Pfizer spokesman, 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.”

Additionally, Topen wrote that the list price doesn’t reflect discounts to government, managed care organizations, and other commercial health plans.

The economics of prescription drugs are unlike other markets. Patents protect against competition by copycat drugs for years and the U.S. Congress forbids one of the biggest buyers of medicines, Medicare, the U.S. health program for the elderly, from negotiating prices with drug companies directly.

The result: Drug price inflation “is about as fast as it has ever been for as long as it has ever been,” said Richard Evans, an analyst at SSR Health in Montclair, NJ.

‘Dirty secrets’

How drug companies price medicines “is one of the industry’s dirty secrets,” said Bernard Munos, a former Eli 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.”

The revenue from higher prices has helped companies hit by steep declines as patents ended on blockbusters, like Lipitor. Patients have also gained from important new treatments for diseases such as multiple sclerosis, cystic fibrosis and rare forms of cancer—including diseases that at one time were neglected because the patient populations were viewed as too small to be profitable.

The DRX survey examined average wholesale price, a benchmark based on wholesaler list prices that doesn’t include discounts negotiated by health plans. It is roughly equivalent to a sticker price a person might pay at a pharmacy if he didn’t have insurance, said Jim Yocum, executive vice president for DRX.

Negotiated prices

Big health plans often negotiate prices that are 15 percent to 20 percent less than the wholesale price, he said.

Representatives for many drug companies, when asked for comment by Bloomberg News, said they don’t set the wholesale price and therefore couldn’t confirm the DRX numbers. Average wholesale price, though, is appropriate for comparing price rises as changes generally reflect real increases, Yocum said.

Prices for whole categories sometimes increase when expensive new drugs enter a market. It makes business sense for brand companies to match one another’s higher prices and price increases rather than to try to compete on cost, Kemp, the health economist, said.

Additionally, as products lose revenue because of competition, drugmakers will sometimes raise prices to make up the difference. For example, prescriptions for Biogen Idec Inc.’s 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, growing by 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 around $1,177 per injection.

Price increases

Thanks in significant part to price increases, Avonex’s U.S. sales grew 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,” said Kate Niazi-Sai, a spokeswoman for Biogen. The company invests in research in difficult neurologic diseases, she said.

Insulin products for diabetes had some of the bigger price increases, the survey found. The market is dominated by three companies. Since late 2007, U.S. prices have jumped at least 160 percent for various forms of Lilly’s Humulin, according to the DRX analysis.

When told that one concentrated form of Humulin more than quadrupled in price since 2007, a Lilly spokesman said it 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, have increased as much as 160 percent in the U.S. for one form, and 97 percent for another.

‘Market conditions’

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 align the cost of Lantus within the market for other competing drugs, Sanofi CEO Chris Viehbacher said in a Feb. 10 interview.

Even cancer pills that were already among the most expensive medicines have experienced rapid price hikes.

Novartis AG’s Gleevec drug for chronic myeloid leukemia—the drug Earl Harford 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. After discounts, the typical health plan still pays around $264 per pill, according to the DRX analysis.

‘Competitively priced’

Gleevec “remains among the most competitively priced drugs in its class,” said Eric Althoff, a spokesman for Novartis, in an e-mailed statement. Most patients on the drug pay less than $100 per month out of pocket, he said. Novartis has assistance programs for patients who cannot afford treatment, he said.

Some doses of another leukemia drug, Sprycel from Bristol-Myers Squibb Co., also doubled in price during that period, while prices for lung cancer drug Tarceva, from Roche Holding AG, rose 90 percent during that time, according to the DRX survey. Another commonly used dose of Sprycel rose 68 percent since 2008, DRX found.

Bristol-Myers prices its drugs according to the value they deliver to patients, and the investment required to support ongoing research, said Laura Hortas, a company spokeswoman, in an e-mail. Charlotte Arnold, a spokeswoman for Roche, said pricing is “based on many factors” including how well the medicine works and how much money the company needs to invest to keep discovering new medicines.