Wallowing in the Mire of Drug Pricing

Hip waders on, we went slogging in the muck and mire of drug pricing.

A November 25, 2019 study in Neurology titled, “Qualitative Study on the Prices of Drugs for Multiple Sclerosis: Gaming the System” by authors Daniel M. Hartung, Lindsey Alley, Kirbee Johnston and Dennis Bourdette, all with the Oregon Health and Science University (OHSU), found evidence that drug pricing was based on revenue maximization and corporate growth objectives, not costs of production.

The distinct smell of confirmation bias wafted up from each page.

So, here is how the OHSU researchers gathered their information: “Four leaders in biotech who have been directly involved in multiple sclerosis disease-modifying therapy pricing or marketing volunteered to participate in 30-minute semi-structured interviews conducted via telephone. An expert in qualitative methods moderated and analyzed the interviews alongside the principal investigator. Brief, pre-interview online surveys were also administered to provide additional context and insight for discussion. Interviews were audio-recorded and professionally transcribed.”

Sales guys?

And what did these researchers and their “professional transcribers and qualitative (not quantitative) experts” conclude?

“Contrary to prevailing narratives that underscore drug development costs, findings from our interviews suggest that the existing price ecosystem, overall corporate growth, international pricing disparities, and supply chain–related distortions may play a more central role in drug pricing decision.”

The U.S. Drug Pricing Eco-System…

Most every pharma company tries to maximize sales and profits. Doesn’t matter if they are based in the U.S., the EU, China, India or Japan. Business is business.

So why does an EU prescription for a multiple sclerosis drug, for example, manufactured by a sales maximizing Swiss pharma company cost so much more in the U.S.?

We dug deeper and here are insights from other studies and experts.

… as described in a JAMA Study

A November 2017, study in JAMA Internal Medicine looked at the development costs for 10 FDA approved cancer drugs from 2006 to 2015. Its authors were from Memorial Sloan Kettering and the Oregon Health and Science University. They collected cost data from Securities and Exchange Commission filings for companies that had only one cancer drug approved but had on average three or four other drugs in development.

Pharma companies, they learned, took an average of 7.3 years to get FDA approval, at a median cost of $648 million per drug. Two drugs cost over $1 billion to get through the FDA.

The researchers then compared the revenue from the approved drugs to the costs of development. The median revenue was $1.658 billion per drug—roughly 3x development costs.

That sounds right to us. The difference, of course, paying for marketing and sales expenses, drugs in the R&D pipeline and to stay competitive in the capital markets (where institutional investors critically examine each company’s revenue growth rates and return on capital).

Probably the truest quote we found in our research came from Raymond Gilmartin, a former Merck CEO, who was quoted in The Wall Street Journal saying: “The price of medicines is not determined by their research costs. Instead, it is determined by their value in preventing and treating disease.”

And the culprit behind high drug prices is…

Peter Bach, M.D. and director of the Center for Health Policy and Outcomes at Memorial Sloan Kettering gave some very interesting testimony on January 29, 2019 before the U.S. Senate on the causes of comparatively high drug prices in the U.S.

He blamed the U.S. supply chain.

He told the senators that “Pharmaceutical products are often marked up in percentage terms as they pass through the supply chain.”

More expensive drugs, in other words, bring larger profits to the distributors, the hospitals and everyone else in the supply chain.

“This pattern applies to wholesalers and pharmacies. It also applies to physicians and hospitals when they use expensive infused drugs covered by Medicare Part B.”

The reimbursement formula for Medicare Part B drugs, said Bach, also includes a mark-up over the average price of the drug.

Bach also compared the prices of the top 20 best-selling drugs in the United States to the prices in Europe and Canada and found that cumulative revenue from the price difference on just these 20 drugs more than covers all the drug research and development costs conducted by the 15 drug companies that make those drugs—and then some.

Why do drugs cost more in the U.S.? To paraphrase a very old cartoon, we have met the enemy and he is us.