With the election of the 45th president of the United States just two months away, the focus on issues important to the American public is intensifying. Chief among those issues is the rising cost of prescription drugs.
According to the "Rx Price Watch" report released by AARP, the combined annual cost of branded, specialty, and generic drugs for older Americans jumped more than 170% between 2005 and 2013. By 2013, the average older American was shelling out $11,341 per year for their medications. The blame for this steep rise in medicine costs has fallen squarely on the drugmakers themselves.
Inherent advantages favor drugmakers
Costs are rising because certain inherent advantages grant pharmaceutical and biotech companies practically unparalleled pricing power.
For starters, drugmakers rely on the exclusivity provided by the U.S. marketplace when pricing their products. Drugs typically receive 20 years of patent exclusivity, with the clock starting when an investigational new drug receives clearance to begin human clinical trials.
Secondly, drugmakers cover a lot of expenses by consistently raising the price of existing drugs or by pricing new drugs quite high. Drugmakers seek to cover not only the development costs of the products that make it to pharmacy shelves, but also the costs of drugs that didn't meet their primary endpoints in clinical trials, as well as countless preclinical and discovery-stage therapies that didn't succeed. Additional expenses include the legal costs of defending patents and the marketing costs of selling approved therapeutics.
But perhaps the two biggest advantages for drugmakers are that the U.S. has no universal healthcare plan and that insurers have little negotiating power. Without a universal health plan, Congress is unable to control how drugmakers price their products. As for insurers, leaving a drug off an approved formulary could anger members and drive them to different networks.
The faces of rising prescription drug prices
For example, Valeant Pharmaceuticals acquired cardiovascular drugs Isuprel and Nitropress in February 2015 and almost immediately increased their prices by 525% and 212%, respectively. What's disturbing about this is that Valeant didn't alter either drug's formulation or manufacturing process. It simply boosted the prices because it could. While not all of Valeant's drug acquisitions result in hefty price increases, a combination of strong pricing power and mergers and acquisitions has been Valeant's go-to formula for success.
More recently, it was revealed that Mylan, the company behind severe allergic reaction drug EpiPen, had increased the price for this potentially life-saving product by more than 400% over the past decade. While Mylan CEO Heather Bresch has expressed frustration with rising prescription drug prices, she also told CNBC's Squawk Box last month that "The system incentivizes higher prices."
Clinton offers a (partial) solution
Understanding that this is a growing issue for the American public, Democratic presidential nominee Hillary Clinton offered up a solution late last week that could at least partially resolve prescription drug inflation.
Clinton proposed creating a federal task force whose job would be to monitor drug prices in an effort to penalize those that pass along unjustified increases to consumers. This federal body would also be tasked with seeking cheaper alternatives to high-priced drugs. This task force would be especially handy at corralling drugmakers that, like Valeant, have a propensity to acquire new therapies and then increase their prices without making material changes to the formulation or manufacturing process. It could also curb prescription drug inflation at companies like Mylan, where double-digit-percentage annual price increases seem to be the norm.
But Clinton's initial plan isn't perfect. While it would help dissuade drugmakers from following Valeant's path and getting themselves into a world of possible legal troubles, the task force doesn't address what could be called the root cause of prescription drug inflation: new specialty drugs.
New drugs designed to treat cancer and hepatitis C have been priced through the nose, and without changes in the way drugs' prices reflect their benefits for patients, Clinton could have a hard time making a big impact on the prescription drug inflation rate.
Public displeasure toward hepatitis C giant Gilead Sciences (NASDAQ:GILD) has been on display since it brought Sovaldi to pharmacy shelves in December 2013. Sovaldi and Harvoni, which was approved less than a year later, are listed at $1,000 and $1,125 per pill, respectively. Even as gross-to-net discounts for insurers have increased, these are steep prices for the healthcare system to pay for a disease that affects about 3 million Americans. Of course, both medications have generally delivered an effective cure of 90% or greater for a disease that, over time, can lead to serious comorbidities or even death.
Similar nosebleed pricing can be observed among cancer immunotherapies, which have been loosely priced at an annual wholesale cost of around $150,000.
This won't be an easy fix for Congress or the eventual president of the U.S. Drugmakers will fight to keep their pricing power, as it helps to subsidize their ventures in emerging markets and funds additional research and development. Any potential pricing controls could cost the domestic industry jobs and send research dollars abroad.
More immediately, though, Valeant Pharmaceuticals and Mylan shareholders have good reason to be concerned about their margins if Hillary Clinton becomes our next president.