The New Drug War

The following is an excerpt from Navigant Healthcare’s Pulse Weekly. Click here for a complete copy of this week's article. 

I was working in New York City in July, 1977 when it happened: a lightning strike at a Hudson River substation that resulted in a two-day black out, looting of 1,616 stores, 1,037 fires, and 3,776 arrests.

I recall the sweltering heat, loss of TV coverage, airports that shutdown, a Mets-Cubs game suspended, restaurants that closed and patrons sprawled in hotel lobbies unable to climb stairs to their rooms.

I was staying at the Americana on 7th Avenue: my room was on the 48th floor, so I didn’t try the ascent. Thirsty, I found a street vendor who sold bottled water at $4. “Seriously?” I asked. In vintage New York parlance, he replied, “Yeah Bud. Take it or leave it before they’re gone.”

I remember the feeling of being fleeced–$4 for a bottle of water was outrageous, even in NYC. It seemed unfair that someone could take advantage of circumstances to make an honest buck. But that’s the way markets work. It wasn’t illegal, but it left a bad taste.

Last week, Hillary Clinton’s tweet about a drug company “price gouging” sparked widespread attention to drug prices. As reported, her tweet stemmed from Turing Pharmaceutical’s price increase for one dose of Daraprim, (used to treat a rare infection, Toxoplasmosis) from $13.50 to $750—a 5400% increase. Its CEO, Martin Shkreli, explained that the company will use the money it makes from its sales to research new treatments.

Forbes reported: “Heated arguments over price increases aren’t new to the pharmaceutical industry, but Shkreli helped turn himself into a true lightning rod for criticism with his brand of brash, pugnacious, insulting behavior. Turing represents the latest in a string of controversies for Shkreli, a 32-year-old hedge fund veteran. Responding to the white-hot anger yesterday, he backed away from the extreme price increase, but he didn’t say what the new, lower, price will be.”

Background: In August, Turing acquired exclusive U.S. rights to pyrimethamine (Daraprim) from Impax Laboratories for $55 million. It was sold for $13.50/pill pre-acquisition. Turing raised its price, catching the attention of Healio, on September 17. Then followed coverage by USA Today September 18 and the New York Times September 20. Through the weekend, Gawker, Fiercebiotech, the Daily Beast and other social media weighed in with scathing coverage. Last Tuesday, the 32-year-old Shkreli announced a cutback in his planned price increases.

The reality is that drug prices have been increasing faster than other health costs for several years. And it’s across the board from generics to the large molecule (biologics) classes. No laws have been broken; it’s just the way the drug market works. But we might be reaching the tipping point for a new war on drugs—not illicit drugs, the drugs most Americans use.

As a society, the majority of Americans believe our drugs are safe and effective. Last year, we filled more than 4 billion prescriptions. Our elderly average 28 prescriptions for themselves annually. Our dependence on and confidence in our prescriptions is widely confirmed. But polls show the majority think drug prices are out of control. And up to 37% in our population lack the resources to get their prescriptions filled on a regular basis, if at all. So we like our drugs if we can afford them, and there’s growing sensitivity that “price gouging” might be standard operating procedure in the industry.

As a market, the U.S. is important to the drug manufacturing industry representing almost 40% of total global sales. This year alone, the FDA has already approved 66 new drugs including 7 each in cardiology, cancer, and infectious diseases. In 2014, total U.S. revenues increased to $374 billion—a 13% increase over 2013 climbing from 10.5% to 12.6% of total health spending since the Affordable Care Act passed in 2010. Drug company stocks have fared well but they’re volatile; 3 of the top 10 manufacturers saw revenue decreases from 2013 to 2014, so profitability isn’t a sure bet.

But the Turing story line might be the spark that starts the drug prices war. The success of Gileads’ Solvaldi, which costs $84,000 for a 12 week course of treatment for hepatitis C, helped the company more than double its revenues last year and drew widespread attention. Then, when the FDA approved the PKSD9 “super statins” in July with an expected price tag of $10,000 annually per year, social media, business news and payer concerns amped up. And now the Turing scenario.

What’s it mean? And what’s ahead? The new war on drugs is on drug prices. Drug manufacturer pricing models, business practices and patent control leverage will be in the spotlight. How the industry calculates its costs for drug development needs re-thinking, and the role the federal government plays in funding the basic early stage research upon which drug companies depend needs to be factored into the calculus. Policymakers will weigh in no doubt: if health insurer premium increases are regulated and providers are expected to assume risks for the total costs of care in bundled payments et. al., how can unpredictable drug prices be included?

Granted, the issue of drug pricing is complex. Drug manufacturers defend pricing against criticism by affirming their risks in drug development and their case is legitimate. The top 30 global drug makers invested more than $100 billion in their R&D efforts last year alone, or almost 16% of their total revenues globally. But the facts are the facts, and the tidal wave of public opinion is turning against the industry’s pricing. And in all fairness, the tag “price gouging” might be applicable for some drugs that do not contribute to a substantial change in the course of treatment, while other prices reflect novel therapies heretofore not discovered. Like any sector, drug manufacturers are not all alike. And the tag “price gouger” might apply only to a few, though all increasingly suspected.

There’s no simple fix to drug pricing. Price controls might be popular in theory, but in practice, they dissuade investment in novel therapeutics resulting in mass consolidation as the bigger manufacturers gobble up promising compounds from capital-starved early stage discoverers. And other solutions—like allowing purchases across national boundaries, or changes to patent laws that protect inventors—need further study. Our drugs work well, but they’re expensive and sticker shock is mounting.

The issue of drug prices will likely garner increased media attention and social media buzz. Health plans, clinicians, benefits managers and regulators will harness the public’s frustration to force solutions that don’t impair the industry but limit its pricing flexibility beyond formulary designs and price transparency. And it will be prominent in Campaign 2016 rhetoric.

My bottled water experience in the middle of the night in New York City in 1977 left a bad taste. Philosophically, it was a lesson in how markets work; practically, I have pondered how controls on ticket scalping might apply in similar situations.

Are drug prices leaving a bad taste? Yes. It’s an issue not likely to be resolved soon, but clearly one that will be high on the list of issues facing incoming Pharmaceutical Research and Manufacturers of America (PhRMA) CEO Stephen J. Ubl.

In the court of public opinion, the war on drug prices has begun.

Paul

PS: A correction – In last week’s Pulse Weekly, I referenced Google’s “acquisition” of Oscar Health Insurance Corp. More accurately, Google Capital invested in the company, which has a market value of $1.75 billion and operates in New York and New Jersey.

Sources: Gottlieb, Martin; Glanz, James (August 15, 2003). “The Blackouts of ’65 and ’77 Became Defining Moments in the City’s History”New York Times. Retrieved May 20, 2010; http://www.bbc.com/news/world-us-canada-34320413;A Timeline of the Turing Pharma Controversy,” Forbes, September 23, 2015; Bob Herman, “How drug prices and payment reform are changing the pharmacy benefit business,” Modern Healthcare, September 28, 2015CenterWatch Inc., August 2015; Statista Inc. 2014. Top 30 pharmaceutical companies – R & D Spending; IMSHealth, Medicine in the U.S. 2014 Edition, Page 40;http://phrma.org/media-releases/stephen-j-ubl-to-lead-phrma-as-next-president-and-ceo;http://www.commonwealthfund.org/~/media/Files/Publications/Issue%20Brief/2010/Jun/1408_Morgan_Prescription_

The opinions expressed in this article are those of the author and do not necessarily represent the views of Navigant Consulting, Inc. The information contained in this article is a summary and reflects current impressions based on industry data and news available at the time of publication. Any predictions and expectations noted herein are inherently uncertain and actual results may differ materially from those contained in this article. Navigant undertakes no obligation to update any of the information contained in the article.

©2015 Navigant Consulting, Inc.