Drug Costs... Why?

[Bflotomny]

There are a number of reasons that drug costs go up; but none have to do with economics. It may be that there are other drugs in the therapeutic class that have introduced recently and are charging more, to pay for “research”.

The number one reason for the high costs of drugs in the US vs. the world is because only in the US is pricing left to the market. Other civilized countries have cost controls in place for drugs sold.

Here in the US we could achieve the same if Medicare (the largest purchaser of drugs) negotiated with the producers. This is what happens with the Veterans Administration. There are 22 or 23 VISN’s or Veterans Intergraded Service Networks (hospitals clinics etc) in the US. Each VISN has a team that evaluates new drug choices based on scientific evidence and the appropriateness of a drug for there patients. But the price is the same for all VISN’s. Now my experience with the VA’s drug choices has not always been the newest or most advertised on the evening news but based on solid research the drugs did what was expected.
Of course Aunt May or Uncle Bob would not be able to talk there provider into an expensive drug they saw on TV (Viagra etc). This same system if used by Medicare would substantially reduce drug costs.

The other reason for high costs is promotional cost. Since 1997 drug costs have risen each year driven by DTC advertising. Before that drug reps were the only way a new product was promoted. Consider the cost of 2-3000 reps vs a minute of advertising each night on the evening news.

 

[Fermion]

Having had first hand experience in the drug development business, the answer to why drugs are so costly is quite complex. One factor is that it takes years (and many costly failures along the way) to bring a new drug to market. DW invented a drug which took over 12 years to move from conception to market (pretty typical time frame for a drug to go through development, clinical trials, and regulatory approval). With such a lengthy development process, it leaves pharma companies only a few years to recover their costs and make their profit before the patent expires and generics hop in on the band wagon.

And there is survivor bias too as a lot of companies spend 12 years going from conception to market only to fail at the last minute and go bankrupt and go away.

Imagine how much an Iphone would cost if it took 12 years to develop a single model.

 

[travelover]

...........Here in the US we could achieve the same if Medicare (the largest purchaser of drugs) negotiated with the producers. ..........

And why can't Medicare negotiate drug prices? Could it possibly have anything to do with how campaigns are financed here in the US of A?

 

[limeyx]

Sorry for getting off topic, but I thought there is no clear proof that talcum powder causes ovarian cancer. Also women who do not use talcum powder get cancer too. So, what establishes the link?

Jury of 12 people ?

 

[Fermion]

It is not quite so cut and dried like XYZ country has drugs cheaper than we do.

Canada has cheaper drugs than the USA. India has far cheaper drugs than Canada. I think some market like Romania was getting certain HCV drugs for free.

The USA might not have the top healthcare in the world. I think we are way down the list, but I wonder if perhaps we likely do use the most drugs of any country. I bet we do. Actually from that point we should be getting a volume discount compared to other countries.

 

[euro]

It is not quite so cut and dried like XYZ country has drugs cheaper than we do.

Canada has cheaper drugs than the USA. India has far cheaper drugs than Canada. I think some market like Romania was getting certain HCV drugs for free.

The USA might not have the top healthcare in the world. I think we are way down the list, but I wonder if perhaps we likely do use the most drugs of any country. I bet we do. Actually from that point we should be getting a volume discount compared to other countries.

At the end of he day, drug companies are (for the most part) publically traded businesses that need to generate value for their shareholders. Just like in any other business, this means that pricing will be determined by 1.) What the market will bear, and 2.) what regulations will allow

While we tend to rail against high drug prices, most of us are happy to accept the dividends or cap gains from drug companies in our mutual fund portfolios. Well, someone has to pay for those profits and at the moment it's mostly the US. Also, we tend to insist on avoiding government interference (regulation) to the point that we specifically don't allow Medicare to negotiate pricing. This is good for free market principles, but it turns out to be very costly to us if most or all other countries don't play by the same rules (and decide to control prices).

 

[Fermion]

That is a good point about other countries not playing by the same rules.

Some countries essentially force the drug manufacturers to sell their products at a very low cost or the country will ignore patent protections and produce the drug themselves. They will claim this is for reasons of national emergency or similar.

So a drug company can either let the country do this or they can try to get what they can out of a country even if it really does not cover the costs of the drug research. If every country played such hard ball negotiations, I do not believe there would be enough money for the extensive expensive drug research and trials unless we all agree to greatly reduce the testing and time it takes to bring a drug to market and agree with the increased risks associated with that.

If we could put a drug out there after only phase I trials, you would see a huge drop in drug prices.

 

[euro]

That is a good point about other countries not playing by the same rules.

Some countries essentially force the drug manufacturers to sell their products at a very low cost or the country will ignore patent protections and produce the drug themselves. They will claim this is for reasons of national emergency or similar.

So a drug company can either let the country do this or they can try to get what they can out of a country even if it really does not cover the costs of the drug research. If every country played such hard ball negotiations, I do not believe there would be enough money for the extensive expensive drug research and trials unless we all agree to greatly reduce the testing and time it takes to bring a drug to market and agree with the increased risks associated with that.

If we could put a drug out there after only phase I trials, you would see a huge drop in drug prices.

Agreed! There will be less money for new research and therefore we will see slowdown of new treatments in the near future. I believe that it is inevitable that the industry will go through such a down cycle before societies realize that there are reasons to maintain a strong Pharma sector (i.e. We will ASK for new drugs for various illnesses and there won't be any available). At the moment, the consumers in the US are "holding down the fort" by arguably subsidizing the rest of the world. However, this is slowly changing and I for one am convinced that we will find out soon what happens to the Pharma Sector once the US subsidies come to an end. I predict that it won't be pretty.

 

[Amethyst]

Wow, great news. Thanks for the report.

Amethyst, regarding your question on the success of the Forteo my DW has been on, we met with DW's doctor (endocrinologist) today and based on DW's latest bone scan, she (the Doc) thinks that DW has improved significantly and will be putting her on Prolia later this year. There have been no additional spinal compression fractures and her back seems to have been absent of the pain associated with the fractures (4 of them) and a cracked rib. This is after a period of 7 months to date since getting on the Forteo.

 

[Chuckanut]

A

While we tend to rail against high drug prices, most of us are happy to accept the dividends or cap gains from drug companies in our mutual fund portfolios. Well, someone has to pay for those profits and at the moment it's mostly the US. Also, we tend to insist on avoiding government interference (regulation) to the point that we specifically don't allow Medicare to negotiate pricing.

I must disagree. We accept the dividends because they are there and to refuse them would do nothing to lower our medical costs. If I could eliminate drug company dividends from my portfolio and get a guarantee of prices the same as Canada for me and mine, I would do it in a heartbeat.

Medicare negotiating drug prices is not government interfering in the free market - It is no more interference than my local city getting bids to fix pot holes in the road.

 

[Fermion]

Medicare negotiating drug prices is not government interfering in the free market - It is no more interference than my local city getting bids to fix pot holes in the road.

But if your local city found out that workers from China would fix the potholes for $1 an hour, local unions and other entities would cry foul. Would the Chinese workers have to obey OSHA? Would they get work visas? You might find that pothole fixing companies in the USA operate under a lot more rules and regulations than you think and have fairly high expenses compared to pothole fixing companies in other countries.

 

[euro]

I must disagree. We accept the dividends because they are there and to refuse them would do nothing to lower our medical costs. If I could eliminate drug company dividends from my portfolio and get a guarantee of prices the same as Canada for me and mine, I would do it in a heartbeat.

Medicare negotiating drug prices is not government interfering in the free market - It is no more interference than my local city getting bids to fix pot holes in the road.

Well, unfortunately, that's not how this works - you don't get to negotiate your own deal (unless you own 50%+ of the company). Can't tell Ford you'll exchange dividends for a new Bronco either.... Now, if you could motivate the majority of shareholders to forego the dividends, then you might indeed see an impact.

 

[Chuckanut]

But if your local city found out that workers from China would fix the potholes for $1 an hour, local unions and other entities would cry foul. Would the Chinese workers have to obey OSHA? Would they get work visas? You might find that pothole fixing companies in the USA operate under a lot more rules and regulations than you think and have fairly high expenses compared to pothole fixing companies in other countries.

True, but I would still want competitive bids. I would consider my local government wasteful if it simply picked a company and paid whatever price they demanded for filling pot holes. We might pay more to have an American company fix the pot holes, but that does not mean we have to pay top dollar.

 

[FIREd]

Many drugs are somewhat unique (i.e. they are not interchangeable, as competitors may have different efficacies and risk profiles; Some people may do well on some cholesterol drugs and not on others for instance). And, unless they are available on the generic market, drugs are offered exclusively by a single supplier. I think that it would be difficult to get competitive bids in many cases.

 

[W2R]

Many drugs are somewhat unique (i.e. they are not interchangeable, as competitors may have different efficacies and risk profiles; Some people may do well on some cholesterol drugs and not on others for instance). And, unless they are available on the generic market, drugs are offered exclusively by a single supplier. I think that it would be difficult to get competitive bids in many cases.

I was in that situation with my cholesterol drug. Last spring it went generic, and the monthly cost to me (after insurance paid their share) dropped from $142.89 to $15.16. This was totally unexpected!

The $127.73 that this saved me each month, is even more than I saved by cancelling cable TV. Let's see; between cancelling cable, generic cholesterol drugs, dropping my landline, and going to a cheaper cell phone service, I am saving roughly $309/month which is $3708/year.

 

[Totoro]

Small sample from the net profit by top 25 Pharma companies:

• Roche: 18%
• Pfizer: 14%
• Novartis: 15%
• Sanofi: 14%
• Merck: 13%

That's after tax, net. Those are margins you'll typically see in a not so competitive market. Never mind what you'll see when you split off low margin bulk products and look at the real blockbusters, or some niches.



Yes, drugs are expensive to develop. No, that's not the main reason drugs cost so much. It's market failure. If your life is on the line, there is no bargaining power as an individual, and various regulations do not make it easy to compete for new entrants.



Also, alot of R&D costs as claimed in the P&L are actually marketing costs.

 

[Chuckanut]

Many drugs are somewhat unique (i.e. they are not interchangeable, as competitors may have different efficacies and risk profiles; Some people may do well on some cholesterol drugs and not on others for instance). And, unless they are available on the generic market, drugs are offered exclusively by a single supplier. I think that it would be difficult to get competitive bids in many cases.

Very true, but like my old grand pappy used to say "Never let the perfect become the enemy of the good".

The high cost of medical care needs to come down and I doubt if it will be done via one big reduction in one area. It will be small efficiencies here and there that will have to do the job. It's not an easy job, but those who manage our medical systems don't get paid big $$'s because the job is easy.

 

[FIREd]

Small sample from the net profit by top 25 Pharma companies:

• Roche: 18%
• Pfizer: 14%
• Novartis: 15%
• Sanofi: 14%
• Merck: 13%

That's after tax, net. Those are margins you'll typically see in a not so competitive market. Never mind what you'll see when you split off low margin bulk products and look at the real blockbusters, or some niches.



Yes, drugs are expensive to develop. No, that's not the main reason drugs cost so much. It's market failure. If your life is on the line, there is no bargaining power as an individual, and various regulations do not make it easy to compete for new entrants.



Also, alot of R&D costs as claimed in the P&L are actually marketing costs.

As I wrote above, these companies develop a somewhat unique product which enjoys a very high barrier of entry from competitors (expensive and financially risky R&D process, lengthy regulatory approval process). So, for a few years after a product reaches market (and until the patent expires), they find themselves in a quasi monopolistic position, which they exploit on behalf of their shareholders. Whether it is right or wrong probably should not be discussed here.

 

[travelover]

............. So, for a few years after a product reaches market (and until the patent expires), they find themselves in a quasi monopolistic position, which they exploit on behalf of their shareholders. Whether it is right or wrong probably should not be discussed here.

And afterward if they can make a minor tweak and extend the patent. Or pay off competitors to withhold a generic from the market.

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FTC charges drug makers with alleged deal to keep generic drugs off market | Consumers Union

 

[Fermion]

If it is so insanely lucrative, why are all companies not drug companies? Instead of starting up Snap or Facebook or Google, just start up a drug company...guaranteed top profits!

To my knowledge there is nothing stopping anyone with a few billion dollars from forming their own drug company and making low cost drugs. To start any other type of company is just settling for lower profits, right?

 

[Totoro]

Google is even more profitable.

And there are many pharma winners, they just don't make as many headlines.

Eight entrepreneurs who built huge pharma business away from limelight

Today, the pharmaceutical and healthcare industry accounts for a quarter of India's 100 richest families.

And to be clear: I have no value judgment on this. Only that from a consumer perspective the market (competition) isn't working as well as in some other sectors.

 

[Fermion]

And to be clear: I have no value judgment on this. Only that from a consumer perspective the market (competition) isn't working as well as in some other sectors.

It isn't working from a consumer perspective?

Let us look at one of the "high price" targets for current rant against drug prices, HCV cures.

A decade ago the standard treatment for Hep C involved six+ months of nasty drug cocktails with bad side effects and the cure rate was under 50%. This treatment still cost over $200,000. Alternative in late state was liver scarring needing a transplant at $500,000 to $1,000,000.

Then we had Pharmasset come up with Sovaldi. Gilead bought them for 11 billion while the drug was still in trials and spent some more money bringing it through phase II/III and launch. The list price was some $85,000, which from a consumer standpoint was far cheaper than the $200,000 to $1,000,000. Even better, the cure rate jumped from 50% to 90+% and the treatment time dropped from 6 months to 3 months. Competition has now brought several other similar drugs to market with prices as low as $25,000 and treatment times of as little as 8 weeks with cure rates above 95%.

$200,000 down to $25,000 in less than five years sounds like the drug industry is working pretty well?

 

[Sojourner]

Let's see; between cancelling cable, generic cholesterol drugs, dropping my landline, and going to a cheaper cell phone service, I am saving roughly $309/month which is $3708/year.

So then the real question becomes, how are you going to spend that extra $309/month? I ask because it's something I would be asking myself were I in your shoes. Are you going to just keeping living and spending exactly as before, thereby leaving a larger estate and happier heirs one day? Or will you ramp up your "fun" spending a little bit and maybe buy some more expensive comfort/luxury items from time to time? This is something I struggle with pretty consistently (i.e., how to deal with "found money"), so I'm always very curious how others approach it.

 

[W2R]

So then the real question becomes, how are you going to spend that extra $309/month? I ask because it's something I would be asking myself were I in your shoes. Are you going to just keeping living and spending exactly as before, thereby leaving a larger estate and happier heirs one day? Or will you ramp up your "fun" spending a little bit and maybe buy some more expensive comfort/luxury items from time to time? This is something I struggle with pretty consistently (i.e., how to deal with "found money"), so I'm always very curious how others approach it.

I'm working on ramping up my spending! My heirs will get plenty either way. I bought my first Dyson vacuum recently, definitely not a particularly frugal purchase, but it hardly put a dent in my excess. Got to work harder at this (fairly enjoyable!) task. Any suggestion not related to travel or vehicles are quite welcome.

 

[Totoro]

$200,000 down to $25,000 in less than five years sounds like the drug industry is working pretty well?

I stated the market (competition) isn't working _as well as in some other sectors_. I'm not saying it isn't working at all.

For every one of your examples there is an Epipen or Daraprim equivalent. There is regulatory capture blocking others from entering with generics easily. There are dosage and packaging issues preventing imports from other countries, stimulated by the manufacturer. Example: if a product has German packaging, you may not be allowed to sell it in France. There is sort-of bribery giving doctors incentives to prescribe brand names.

Sometimes rules prohibit substitution where it would be possible. 20mg doses in one package, 30mg in another .. no substitution possible anymore. Increase regulatory barriers after your first product is approved, suddenly it's too expensive to get a competitor in the market. Off-label medication is another symptom: some drugs work well for a certain disease but cannot prescribed since it wasn't specifically tested for it. It doesn't get tested because (again) approval is too expensive.

That's a handful of examples, I don't even know a small sliver of all the tricks in the medicine book.

Producing a drug is dirt cheap and scale effects not that great, so you can't get these type of margins unless other factors are at play that slow down and stave off competition.