If you've picked up a prescription from your local pharmacy recently, you probably don't need me to tell you that prescription drug prices have handily outpaced wage growth and the rate of inflation in the U.S. for some time now.
Cancer drug prices are headed into the stratosphere
According to Segal Consulting, prescription drugs are estimated to rise by 11.6% in 2017 for those under the age of 65, which follows an average price increase of 11.3% in 2016 for this same age group. Seniors don't have it much better, with projected increases in drug prices this year of 9.9%, following the 10.9% they rose in 2016.
A separate report from AARP confirmed the pain seniors are dealing with when it comes to drug costs. Between the end of 2005 and the end of 2015, the Consumer Price Index for All Urban Workers rose by an aggregate of 21.6%. This measurement suggests that a diverse basket of goods and services would be 21.6% more expensive after 10 years. However, prescription drug prices rose by 172.1% over the same period. The magnitude of prescription drug hikes is what's really eroded the purchasing power of Social Security benefits over the last decade.
But when we're talking about drug inflation, nothing stands out more than cancer drugs, which often have six-digit annual costs. Last year, when I examined the approximate annual cost of 20 recently approved cancer drugs, 17 had annual costs in excess of $104,000. It's possible two of the remaining three did as well, but insufficient cost data existed at the time, because drugmakers, pharmacy-benefit management companies, and insurers, tend to be pretty secretive when it comes to wholesale list prices for prescription drugs.
10 reasons cancer drugs cost so much
How on Earth can a $100,000-plus price tag be justified? Here are 10 reasons that describe why cancer drugs cost as much as they do.
1. They're specialized therapies
To begin with, cancer drugs are often specialized therapies. More and more these are drugs that aren't being administered as global chemotherapies designed to wipe out both cancerous and healthy cells.
Instead, cancer drugs are being developed that target a specific mutation or biomarker within the body. Yes, this means certain cancer drugs are exclusionary and will only work for select patients of a particular cancer type. However, it often means a higher response rate, which can, in turn, lead to a partial or complete response and an improvement in the quality of life (and perhaps life expectancy). What patients are paying for is often this specialization and the fact that because it's targeted at a specific biomarker, a cancer drug's patient pool is narrower that previous-generation cancer drugs.
2. Lengthy patent protection periods
Add to the previous point that cancer drugs, along with practically any drug that works its way through the drug development process in the U.S., has a lengthy patent protection period. From the time a biotech or pharmaceutical gets the green light from the Food and Drug Administration to begin human clinical trials, a 20-year clock begins to tick. This clock generally prevents generic drugs from entering the marketplace at substantial discounts in price to branded therapies. This usually leaves drugmakers with a decade or longer to market their pricey medicines without the fear of cheaper generic competition.
Also, added protections are given to drugs that treat orphan diseases, which are defined as affecting 200,000 or fewer patients in the United States. If a cancer-drug maker focuses on an orphan type of cancer, then it would receive these extra protections from competition.
3. A need to recoup unsuccessful trial expenses, from discovery to clinical trials
The cost to develop a new drug is exceptionally expensive, with an analysis by the Tufts Center for the Study of Drug Development pegging the total direct and indirect costs (i.e., time costs) combined as $2.56 billion. Drug companies are looking to recoup these costs when they price their cancer drugs.
But there's more to it than just recouping their costs to develop a drug that made it to pharmacy shelves. In addition, drugmakers have to account for their expenses in the hundreds or thousands of studies that failed in the discovery stage, in-vivo and ex-vivo laboratory stage, preclinical stage, and clinical phases 1, 2 and 3. High cancer drugs prices allow these costs to be recouped, and they fuel further research.
4. No universal health plan in the U.S.
Among the more than 30 countries in the Organisation for Economic Co-operation and Development (OECD), just two don't have a universal health plan in place: the U.S. and Mexico. Because the U.S. lacks a universal health plan -- and make no mistake, the Affordable Care Act is not a universal health plan -- its lawmakers are unable to cap drug pricing.
This isn't to say the government couldn't attempt to reform drug-pricing practices in the U.S., but it would be highly unlikely with Republican lawmakers generally favoring free-market economics, and therefore the ability of drugmakers to price their own products as they see fit.
5. Insurers won't step up to the plate
On top of not having a universal health plan, the U.S. is also filled with insurance companies that essentially have no backbone. There are thousands of approved medicines, but insurers often exclude just a few dozen from their approved formularies because of price. The reason? Insurers don't want to face the wrath of their members for excluding a popular or effective drug, which could lead to a drop in membership.
Even though it's not a cancer product, Gilead Sciences' (NASDAQ:GILD) Sovaldi and Harvoni, which are both used to treat hepatitis C, are great examples. These drugs revolutionized the treatment of hepatitis C by providing an effective cure, but their wholesale cost for a standard 12-week treatment are $84,000 and $94,500, respectively. Despite protests from the public and grumbling from Congress over these high costs, insurers were far too worried about excluding these drugs from their formularies and risking the loss of a lot of patients, so they kept them both on their approved-drug lists.
6. Cancer immunotherapy combinations
A somewhat behind-the-scenes reason cancer drug prices are soaring is that the foundation of how certain late-stage cancer types are treated has changed. Cancer immunotherapies, which are drugs designed to stimulate the immune system to recognize and attack cancer cells, are becoming a mainstay in some advanced cancers.
More specifically, cancer immunotherapies have been shown in some instances to work better with existing cancer drugs as a combination therapy, as opposed to a monotherapy. While this can increase the objective response rate and improve quality of life for patients whose tumors have specific biomarkers, it also means having to pay for two cancer drugs instead of one. That's an easy way to double your cancer drug costs overnight.
7. Demand is higher in the U.S. than anywhere else
Now for the obvious: Supply and demand always matter. When it comes to demand, no country has more of an appetite for pharmaceutical products than the U.S. -- and that includes all pharmaceuticals, not just cancer drugs.
A 2014 analysis from PBS found that the U.S. spends more per capita on drugs than any other OECD country by a mile, and that it ranked first in the use of a number of medicine types. For example, American demand is tops on the list for antipsychotics, drugs for dementia, respiratory problems, and rheumatoid arthritis. If demand for prescription medicines is high, including cancer drugs, list prices will follow that demand higher.
8. Legal expenses to protect their IP
Let's also not forget that drugmakers often have to spend quite a bit on legal matters. This can include lawsuits against the company from patients, as well as the protection of their intellectual property from competitors. Corporate legal proceedings can sometimes takes years to hash out, which can mean millions or billions in annual legal costs, depending on the size of the company, or the legal problem in question.
For instance, a little more than a week ago, Bristol-Myers Squibb (NYSE:BMY), which has one of the leading cancer immunotherapies on the market with Opdivo, filed a lawsuit against Roche (NASDAQOTH:RHHBY) subsidiary Genentech that suggests its more recently approved cancer immunotherapy, Tecentriq, exploits treatment patterns used by Opdivo. Bristol-Myers is seeking as of now unspecified damages, but since Tecentriq is expected to be a blockbuster drug, we could be talking about billions in annual revenue. High cancer-drug prices fuel this IP defense.
9. Fast access to new therapies
Compared with other countries, Americans are also paying a high price for substantially quicker access to new medicines. Once the FDA approves a new drug, be it a cancer drug or one to treat diabetes, it becomes immediately available for sale. The one exception would be drugs considered addictive or with the potential for abuse, which may have to wait for scheduling from the U.S. Drug Enforcement Agency.
On the other hand, countries with universal health plans don't work this way. In Europe, once the European Medicines Agency has given the thumbs-up to a cancer drug, the drugmaker must then negotiate on pricing and rebates with each and every EU country. It's a tedious process that can delay the launch of a drug by months, or years, relative to the United States.
10. A relatively high standard of living
Finally, drugmakers believe they can get away with slapping six-digit price tags on cancer drugs in the U.S. because the standard of living is relatively high, especially when it comes to income.
In 2011, the Pew Research Center took a look at how Americans stacked up next to the rest of the world on the basis of income. Whereas 15% of the global population was considered poor (living on $2 a day, or less), and 56% was low income (living on $2-$10 a day), just a combined 5% of the U.S. population fit this mold. Comparatively, a "high-income individual" is described as one living on $50 or more a day. Just 7% of the global population met this definition compared to 56% of Americans in 2011. Drugmakers view this wealth as all the reason they need to pass along high cancer drug prices.
Cancer drug inflation shows little signs of slowing, which means you should be prepared for these costs by saving more, getting insured, and investing for your future.
Sean Williams has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has the following options: short August 2017 $75 calls on Gilead Sciences. The Motley Fool has a disclosure policy.