Chances are that if you've filled a prescription recently, you probably don't need a lecture about how rapidly rising drug prices are weighing on consumers' pocketbooks. According to HR Consultancy Segal, specialty drug prices rose nearly 19% in 2016, and they're projected to rise by another 18.7% in 2017. Though specialty medicines comprise less than 1% of all prescriptions written by doctors, they account for approximately 35% of all prescription drug costs.
When looking at the bigger picture (beyond just specialty drugs), things are just as terrifying. Data from the Organisation for Economic Co-operation and Development (OECD) from 2011 found the average health expenditure per capita in the U.S. to be north of $8,500. Comparatively, this was more than 50% higher than the next-closest country (Norway), and 156% higher than the average of the 34 OECD countries examined.
Why U.S. drug developers have exceptional pricing power
There are a bounty of reasons why drugmakers have been able to maintain such exceptional pricing power over the years, 10 of which were previously examined.
For example, when pricing their products, drug developers are aiming to recoup a number of costs. In addition to the costs to develop approved products, drug developers need to cover the costs of previously failed clinical, preclinical, and discovery-stage drugs. They're also looking to recoup the costs of marketing and manufacturing their drugs, and any legal costs that may arise from protecting their intellectual property.
Aside from recouping development costs, drugmakers are also taking advantage of the current healthcare system. The U.S. offers the highest prescription drug demand in the world, and arguably the fastest access to new drugs (e.g., Reimbursement approvals for newly approved therapies in the EU are done on a country-by-country basis). The basic rules of economics suggests that high demand should push product prices higher.
Lastly, a big win for drugmakers is that Medicare is barred from negotiating drug prices on its behalf, meaning the program primarily designed to protect seniors is getting a smaller discount to list price than its sister program Medicaid.
However, the fun and games could be about to end for U.S. drugmakers.
Donald Trump just leveled drugmakers
During his first press conference with the media on Wednesday following his election win on Nov. 8, Donald Trump made his opinion on drug-pricing well-known by uttering four words that completely floored the industry and Wall Street analysts. Those words were that drugmakers are "getting away with murder."
Here's the full context of Trump's tirade on drug-pricing following his comment that pharmaceutical and biotech companies are getting away with murder:
"Our drug industry has been disastrous. Pharma has a lot of lobbies and a lot of lobbyists and a lot of power and there's very little bidding on drugs. We're the largest buyer of drugs in the world and yet we don't bid properly, and we're going to start bidding, and we're going to save billions of dollars over a period of time."
Though Trump's drug policy hasn't been laid on the table, he has, on occasion, implied two particular fixes to reduce the price of prescription drugs in America.
First, as was implied with his seven-point healthcare reforms released in March 2016, Trump has advocated for allowing consumers to purchase prescription drugs from overseas markets. Since U.S. drugmakers price their products differently depending on the country they're operating in, allowing U.S. citizens to import drugs from overseas markets that are presumably cheaper could allow the consumer to save money.
Secondly, Trump's call for a "bidding" platform suggests that he'll allow the federal government to use its might to negotiate on behalf of Medicare. Individual insurance companies with a few hundred thousand members probably won't have as much luck in negotiating drug prices as the entirety of Medicare would considering it has roughly 56 million eligible members.
Trump's comments hit specialty drugmakers especially hard this past week. For instance, hepatitis C drug developer Gilead Sciences (NASDAQ:GILD) has a wholesale cost of $84,000 on Sovaldi and $94,500 on Harvoni for a typical 12-week treatment. Even with significantly larger gross-to-net discounting from Gilead, the cost to the average American and the healthcare system to treat HCV patients could be too much to bear.
Likewise, drugmakers like Amgen (NASDAQ:AMGN) and Celgene (NASDAQ:CELG) could feel the pressure. Amgen's injectable, next-generation LDL-cholesterol-lowering drug Repatha is priced at a wholesale annual cost of $14,100, while Celgene's multiple myeloma drug Revlimid costs more than $100,000 annually. Even with discounting to insurers, the growing prevalence of these ailments could push the U.S. healthcare system to the brink.
Not so fast, President Trump
But changing the healthcare system in the U.S. isn't something that can be done with the flip of a switch, which is something Donald Trump may learn the hard way.
For instance, Trump can freely suggest the idea of allowing consumers to import drugs from overseas markets, like Canada, but turning this idea into a reality would take a lot of work. The reason U.S. consumers aren't allowed to import drugs at the moment has to do with the tight regulatory oversights of the U.S. Food and Drug Administration concerning the manufacturing of approved drugs. Imported drugs wouldn't have that same rigorous FDA oversight, which would require a complete restructuring of the FDA and its duties.
Similarly, Trump could find that trying to give negotiating power to Medicare is an uphill battle. Even though Republicans are in charge of both houses of Congress, Trump's party is a strong believer in free market economics. In other words, price-capping drug developers, or getting the federal government more actively involved in the drug-pricing environment, is probably going to be shunned by most congressional Republicans. Even though a Kaiser Family Foundation survey found that 87% of respondents want Medicare to have the power to negotiate its own drug prices, a Republican Congress is unlikely to push drug-pricing policy in that direction.
Another equally important issue that Trump has yet to address in his ongoing discussions on drug pricing is what many pundits consider to be the source of the problem: initial pricing following approval. Though drug-price hikes after a drug has been on the market for years are an irritant to consumers and insurers, it's the initial five- and six-digit annual costs for hepatitis, cancer, and cholesterol drugs that are crippling the system. Without a plan to control initial drug pricing, Trump's contention that he'll deal with drug prices is probably all talk.
Drugmakers should definitely be on notice that Trump isn't going to sweep drug price reform under the rug, but they also shouldn't be immediately concerned given the challenges and complexities stacked against Trump.
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 Celgene and Gilead Sciences. The Motley Fool has a disclosure policy.