This is probably far from breaking news -- or in any way shocking -- but prescription drug prices are soaring. If you've filled a prescription recently, you probably don't need that affirmation.
According to an analysis conducted by healthcare data company Truveris earlier this year, prescription drug inflation topped 10% in 2015, spearheaded by an average price increase in branded pharmaceuticals of 14.77%. The analysis also reported a 9.21% spike in specialty drugs that treat complex or rare diseases.
A separate study from AARP's Rx Price Watch Report only confirms these findings. Between 2005 and 2013, AARP found that the cumulative annual cost of branded, specialty, and generic drugs rose more than 170% for older Americans. As of 2013, annual prescription drug costs had crossed $11,000 per AARP's findings.
And, of course, we have plenty of real world examples. In September, the "Bad Boy of Pharma," Martin Shkreli, drew unwanted attention after his company, Turing Pharmaceuticals, acquired a rare disease drug known as Daraprim and promptly raised its price by roughly 5,500%. Mind you, Daraprim was a 62-year-old drug, and Turing did nothing to change its formulation or manufacturing process.
Valeant Pharmaceuticals (NYSE:VRX) has also caught heat for its pricing practices. Valeant acquired cardiovascular drugs Nitropress and Isuprel from Marathon Pharmaceuticals in Feb. 2015 and subsequently hiked the price of both drugs 525% and 212%, respectively, according to The Wall Street Journal. As with Turing, no formulary or manufacturing changes were made to either drug, which, as you can imagine, drew the ire of the public and lawmakers.
This Big Pharma has raised its prices five times in two years -- can you name it?
But what if I told you that a well-known Big Pharma has been regularly hiking drug prices in plain view and no one seems to be taking notice? In fact, this drug giant has increased its list prices, based on data from Morgan Stanley analyst David Risinger, five times since June 2014. This company's average list price increases are as follows:
- June 2014: an average increase of 7.4%
- January 2015: an average increase of 8.8%
- June 2015: an average increase of 8.5%
- January 2016: an average increase of 10.4%
- June 2016: an average increase of 8.8%
Added together, this works out to a cumulative increase over a two-year span of approximately 52% in list prices. Keep in mind that these increases don't account for gross-to-net discounts and rebates offered to pharmacy-benefit managers and insurers, but it's unclear if those discounts are being passed along to the consumer. Based on Risinger's best guess, PBMs and insurers are probably paying an extra $0.50 for each $1 in list price hikes.
Furthermore, based on Morgan Stanley's research, Bloomberg points out that this drugmaker's list prices rose an average of 11% per year between 2012 and 2014. As a rough estimate, since the beginning of 2012 average list prices for this mystery drug company have risen by around 90%!
Can you name this pharma giant?
If you said Pfizer (NYSE:PFE), give yourself a pat on the back.
Bloomberg data shows that in 2015 Pfizer increased the list price of 133 of its 600-plus drugs by at least 10%. This compares to Merck (NYSE:MRK) and Bristol-Myers Squibb, which enacted 10%+ drug price hikes in 38 and six drugs, respectively. Then again, Pfizer also sells three times as many drugs worldwide as Merck, so these statistics could be a tad misleading.
Nonetheless, Pfizer has been able to increase the prices of older branded drugs to reduce the pain felt from patent expirations. Between mid-2012 and mid-2015, price increases wound up adding $1.07 billion in cumulative revenue based on estimates from investment firm SSR. SSR's data shows that Lyrica's list price rose by almost 52% between mid-2012 and mid-2015, contributing to $208 million of the aforementioned $1.07 billion in added revenue, while Viagra's list price increased by 72%, tacking on $166 million in extra revenue over the three-year period.
A new norm or the end of an era?
On one hand, price increases are something of a norm for Pfizer and the drug industry as a whole. Given that only half of these price increases are making their way to PBMs and insurers after discounts and rebates, and that we're not witnessing Turing- or Valeant-esque increases from Pfizer, some pundits would suggest that these price hikes are tolerable, if not normal.
Remember, drugmakers in the U.S. would argue that they have a lot of expenses to cover. In addition to covering the costs to develop a drug, drugmakers are also attempting to cover research and development costs from all failed studies in the discovery, lab, preclinical, and clinical stages, as well as anticipate future R&D investments. On top of these expenses, drugmakers also need to cover marketing and legal expenses, as well as subsidize the sale of drugs in emerging markets where they would otherwise not be profitable.
Exclusivity is the other big reason why drugmakers are able to get away with large price increases. From the moment the FDA approves an investigational new drug for human clinical trials a 20-year clock starts ticking. In many instances drugmakers are able to keep generic drugs off the market for around a decade, if not longer.
Then again, Pfizer's price hikes could be deemed excessive by some lawmakers on Capitol Hill and may provide the impetus for prescription drug reform.
Democratic presidential nominee Hillary Clinton earlier this month offered up the idea of creating a federal task force whose job would be to act as a watchdog for excessive drug price hikes. This federal body would work to penalize those drugmakers that unjustly increased the price of existing therapies, and would work to find cheaper alternatives to high-priced brand-name therapies.
Clinton, earlier in her campaigning, also tossed around the idea of shortening the patent period to allow for the introduction of cost-lowering generic drugs even earlier. The concern with this particular fix is that it could cause a knee-jerk reaction that pushes prices even higher to ensure that drugmakers collect ample profits before generic drugs are introduced. It could also result in less innovation and/or drugmakers moving their R&D overseas.
For the time being, the future of drug pricing in the U.S. is probably going to remain uncertain, which isn't exactly comforting for consumers or investors.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of and recommends Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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