Welcome to 2017, where price transparency has become a top priority for drug developers following the targeting of Valeant Pharmaceuticals (NYSE:BHC) and Mylan (NASDAQ:MYL) for their pricing practices last year.
For those who may not recall, embattled drug developer Valeant Pharmaceuticals was raked over the coals by Congress after it was determined that the company had acquired two mature cardiovascular products, Nitropress and Isuprel, in February 2015 and promptly increased the list price of these drugs by 525% and 212%, respectively. Moreover, nothing was changed in the formulation of either drug or in the manufacturing process. Now-former CEO J. Michael Pearson admitted that he and his team made "mistakes" when pricing Nitropress and Isuprel.
Not too long after, Mylan found itself in hot water over its pricing for a pack of EpiPen, the injectable drug designed to treat patients having a severe allergic reaction. In 2007, EpiPen cost a little over $100 for a pack of two. By 2016, the price had risen to $609 for the same pack of two EpiPens. Between 2013 and 2016, the price of the product more than doubled. In an interview with CNBC's Squawk Box, CEO Heather Bresch said, "The system incentivizes higher prices on the brand, and if you don't play in the system, in the system that's broken today, your products aren't going to get to patients." In October, Mylan agreed to a $465 million settlement with the Justice Department for overcharging the Medicare and Medicaid programs.
Put simply, no company wants to be the next one put on display, especially with President Donald Trump suggesting that he'll target drug pricing during his tenure in the Oval Office.
Merck provides a sneak peek into its drug-pricing practices
Recently, three large drugmakers -- Johnson & Johnson (NYSE:JNJ), AbbVie (NYSE:ABBV), and Merck (NYSE:MRK) -- announced that they would be providing more transparency to consumers, regulators, and investors as to how and why they price their drugs the way they do. Johnson & Johnson is slated to release its price increase information in mid-February, while AbbVie has pledged to keep its drug prices increases below the 10% threshold. Merck, however, beat everyone to the punch.
Last week, Merck released its drug-pricing data, including its list price increases, average discounting and rebates, and net price increase, for every year between 2010 and 2016. In Merck's own words:
Merck has increased prices, and in our view, we have been responsible in our approach. But we want to allow the public to judge for themselves by providing information for people to better understand our pricing practices -- including the rebates and discounts that we provide to payers (insurers, pharmacy benefit managers, the government).
We decided to provide information publicly -- specifically, how much Merck increased list prices across our portfolio each year, and how much net prices increased across our portfolio once you take discounts, rebates and returns into account. We also decided to share Merck's "discount" rate in the U.S. -- the average discount on Merck's sales of its medicines and vaccines in the U.S.
Here's the provided snapshot of Merck's list price changes, net price changes, and average discounts between 2010 and 2016:
As you can see, the superficial list price increases do appear pretty large. These predominantly 9.2% to 10.5% list price increases are what the public often gravitates to when hearing about price increases from drugmakers. However, Merck's willingness to disclose the net increase in its prices following discounts, rebates, and returns adds a new dimension. With the exception of 2012, Merck's price increases were all below 6%, which does seem fairly reasonable, albeit still substantially higher than the national rate of inflation and wage growth.
This may not be enough to satisfy skeptics
Merck's pricing practice disclosure might seem like a genuinely proactive response to consumers' concerns (and it very well could be). However, Merck may have also been coerced to disclose its pricing practices following an announcement last year that it had received a civil investigative demand from the U.S. Attorney's office in Eastern Pennsylvania seeking information about Merck's contracting and pricing of Dulera aerosol inhalant. Even though Merck is cooperating with the investigation, it clearly put the company in an unwanted spotlight.
Perhaps the bigger issue is that Merck's pricing disclosure may not satisfy regulators or consumers. For example, while Merck's disclosure does cover its aggregate pricing practices, it doesn't offer a deeper breakdown on an individual drug basis. In other words, regulators and consumers are still left guessing when it comes to the pricing power Merck has when it comes to its oncology portfolio or with its top-selling drugs. We also aren't able to examine how Merck is handling the pricing practices of mature therapies, which seem to be at the heart of the current pricing debate.
Another factor that's difficult to measure, but which Merck has left out of its pricing disclosure, is how it initially prices its new therapies. Most consumers don't realize that initial drug-pricing practices are just as problematic, if not more of an issue, than the rising prices of mature drugs.
There's also a real concern that Merck's disclosure could put even more pressure on the company's near-term pricing practices. With transparency comes the likelihood of more watchful eyeballs on the company's pricing practices, which could potentially constrain its margins.
Don't get me wrong: Transparency from drugmakers is a good thing, and Merck took a good first step in disclosing its price increases between 2010 and 2016. But it's possible that Merck's disclosure may not be enough to satisfy concerned consumers and regulators.
Sean Williams has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Valeant Pharmaceuticals. It also recommends Johnson and Johnson and Mylan. The Motley Fool has a disclosure policy.