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Drug Costs

Examining the Cost of Drugs

By | Drug Costs, Healthcare Access, Healthcare Costs, Rising Cost | No Comments

drugprices

In a previous blog post, I discussed the complicated nature of drug pricing and the public relations issues that the biotech and pharma industries face. Issues include high-priced drugs and accusations of price gouging as well as unusually or unnecessarily high profits stemming from supposed greed within the biotech and pharma industries. In this blog, I want to provide a few examples of profits, how these profit margins compare to other industries, and the ethics of profiting from potentially life-saving and necessary therapies.

As I pointed out previously, drug pricing is unusually complex. While it is true that manufacturer pricing tends to be a black box, that is, pharma companies closely guard how they price their products, this price is rarely passed on, in full, to the patient. Instead, insurers cover what co-pays do not which is typically a fraction of the whole cost. The involvement of insurance companies as well as government entities (Medicare and Medicaid) are also undoubtedly taken into consideration for drug pricing. Other complicating factors such as intellectual property, foreign market pricing, and drug development costs must be factored in to how drugs are priced by the manufacturer.

In large part due to this lack of transparency, consumers have griped about drug pricing and pointed to pharma profits as being too high, excessive, or, perhaps, unethical.   

An article posted by the BBC [1] in 2014 took the pharma industry to task by highlighting Pfizer’s 2013 profit margin of 42% as evidence of their greed and profiteering. However, as stated in the same article, this figure is inflated due to Pfizer’s spin-off and profit from their animal health branch, Zoetis, which netted Pfizer $10.5B that year. Neglecting this influx of cash, their profit margin came in at 24% which the author claims as “spectacular”. While higher than some industry peers, or other biotech/pharma companies, this is not atypical from profit margins of other industries according to BusinessInsider [2] listing “Software and Tech” at 26.9% and “Beverage and Tobacco” at 29.2%. In terms of industry peers, BI lists pharma and biotech’s average profit margin at 19.3% which is generally in line with most other S&P500 sectors.

In terms of sales, from 2010 to 2013, Pfizer’s sales revenue dropped from $67B all the way to $52B, a drop of over 22% [3]. Since 2013, Pfizer’s profit margin has dipped as low as 9.4% in the 4th quarter of 2014 [4]. In fact, by their financials, in addition to the cash influx from Zoetis, Pfizer cut roughly $5B from their liabilities in 2013 by reducing “Unusual Expense” which inflated their net income for the year, thus boosting their profit margin. So, while their overall revenue was declining, their net income shot up for one year, and the BBC decided to pick this anomaly as their benchmark.  

In terms of increasing profits year over year, a recent article from Forbes [5] suggested that biotech and pharma companies are facing an uphill battle to increase yearly profits. From their calculations, the top 15 biotech companies only posted a year over year profit increase of 2.4%; dramatically lower than annual profits Apple posted between 2010 and 2012 at 78.5% 66%, 44.6%, and 9.2%, respectively [6]. So, while their sales and revenues are in the billions of dollars, their revenues, over a yearly basis, are not increasing as dramatically as the public may perceive them to be.

The underlying issue here, however, is the ethicality of profiting, no matter to what extent, at the expense of patients in need. The argument boils down to if an average profit margin of 19.3% for the biotech/pharma industry is too high and ethical to do so. On one hand, cutting-edge therapeutics should be provided to patients in need at the lowest cost possible. Therapies should never be a burden to the patients that require them. After all, if the cost is too prohibitive to even get it to a patient, what is the point of developing a therapy? On the other hand, these industries are still composed of businesses that rely on profits to continue to develop innovative technologies, attract the best qualified, most intelligent talent to the their organization, and deliver on the promise to save lives and improve global health.

Of course there’s always room for criticism and room for improvement. Non-profit entities have shown promise for reducing costs associated with drug development and reducing risk for larger companies, but their effectiveness has yet to be proven as the number of non-profit companies remains low. Also, many companies such as Pfizer and Abbvie participate in prescription assistance programs that provide their drugs for free to needy patients unable to afford them.[7,8] In these cases, the drug industry has provided ways to reduce the price burden on the patient.

The Center for Healthcare Innovation remains unbiased, objective and neutral. In future posts, I will continue to look at drug pricing and focus on the issue of high-priced drugs and how this affects public perception of pharma as well as increases costs throughout the healthcare system.

References

  1. http://www.bbc.com/news/business-28212223
  2. http://www.businessinsider.com/sector-profit-margins-sp-500-2012-8
  3. http://www.marketwatch.com/investing/stock/pfe/financials
  4. https://ycharts.com/companies/PFE/profit_margin
  5. http://www.forbes.com/sites/johnlamattina/2015/03/23/big-pharma-but-not-such-big-money/
  6. http://www.wikinvest.com/stock/Apple_(AAPL)/Data/Revenue_Growth/2012
  7. http://www.pfizer.com/health/financial_assistance_programs/patient_assistance_programs
  8. https://www.pparx.org/prescription_assistance_programs/list_of_participating_programs

Drug Pricing Debate Heats Up as Turing Pharma Raises Price 5,000%

By | Drug Costs, Health Insurance, Healthcare Providers, Rising Cost | No Comments

9:30

Drug pricing continues to be a prevalent issue affecting many Americans’ daily lives. In fact, high drug costs are one of the most important issues affecting Americans. This issue recently made headlines after Turing Pharmaceuticals acquired the rights of Daraprim and raised prices from $13.50 a tablet to $750 overnight. That’s a 5,000% increase – Imagine if the price of a $4 gallon of gasoline rose to $222 per gallon. Daraprim is used to treat a parasitic infection called toxoplasmosis that can be life-threatening for people with weakened immune systems like newborns and those with cancer or AIDS. The drug has been on the market and approved by the FDA since 1953, so many are outraged that, after six decades, a drug price suddenly surges more than 5,000%. Even with insurance, people could be paying around $150 per pill, according to the HIV Medicine Association.

Two Democrat presidential hopefuls, Bernie Sanders and Hillary Clinton, both expressed outrage over this sharp drug price hike and have proposed plans to reduce drug costs and to prevent seemingly drastic arbitrary drug price increases if elected.  Sanders drew Turing into an ongoing congressional investigation of drug price increases as Daraprim is not an isolated case of drug price spikes. Sanders along with his colleague, Elijah E. Cummings, stated that “Americans should not have to live in fear that they will die or go bankrupt because they cannot afford to take the life-saving medication they need.” Clinton echoed this sentiment by stating, “nobody in America should have to choose between buying their medicine and paying their rent.” Even industry representatives showed outrage.  In what was perhaps one of the most stinging criticisms, John J. Castellani, President and CEO of the Pharmaceutical Research and Manufacturers of America (PhRMA), the drug industry’s trade group, disavowed the company and Shkreli.  “PhRMA typically does not comment on matters related to individual company products or product pricing decisions,” he said in a statement. But, “Turing Pharmaceutical is not a member of PhRMA and we do not embrace either their recent actions or the conduct of their CEO.”

Turing CEO Martin Shkreli defended the new pricing of the drug by stating that the increase in revenue will be used to further research treatments for toxoplasmosis with fewer side effects, as well as allowing the company to invest in marketing and education to raise awareness of the disease. “This isn’t the greedy drug company trying to gouge patients, it is us trying to stay in business. This is still one of the smallest pharmaceutical products in the world,” he said. “It really doesn’t make sense to get any criticism for this.” He went on to say that Daraprim only has about an 80% success rate for treating toxoplasmosis, with also some possible toxic side effects. With increased funding for research and development, he believes that Turing can make a better drug with a higher success rate.  He went on to argue in an interview with CBS News that there “hasn’t been one pharmaceutical company focused on [the disease] for 70 years,” and this increase in funding will help the company dedicate itself to finding a cure to toxoplasmosis. He further stated that it would be losing money if it didn’t raise the drug price and now at the current price they are making “a reasonable profit, not excessive at all.”

Other professionals in the industry vehemently disagree. “Patients shouldn’t be taxed and charged for future research and development. Patients should pay for the drug they’re getting and what they need in the situation that they are” Oncologist Dr. David Agus said. He further added that “it’s predatory practice and it’s inappropriate.”

Shkreli emphasized the importance of the profitability success of his drug company which can be applied to other companies as well. “There’s no doubt, I’m a capitalist. I’m trying to create a big drug company, a successful drug company, a profitable drug company,” he said. “We’re trying to flourish, but we’re also — our first and primary stakeholders are patients, there’s no doubt about that.” However, the NASDAQ biotech index went down 4.41 percent on Monday September, 21st after headlines regarding this issue spread.

Questions of how the patients using the life-saving drug before or new users can obtain it if they cannot afford the new prices were prevalent immediately following Shkreli’s decision. After facing backlash, Shkreli made an announcement that if someone cannot afford the drug, the company will “give it away totally for free,” according to Bloomberg. He went on to state that the company would not deny someone a drug based on their inability to pay for it.

Dr. Judith Aberg, Chief of the Division of Infectious Diseases at Mount Sinai, raised concerns that hospitals may find the drug too expensive now after the price increase to keep in stock, which could result in treatment delays. She went further to say that “this seems to be all profit-driven for somebody and I just think it’s a very dangerous process.”

The case of Turing demonstrates that drug pricing still remains a hot bed issue. In December 2013, the FDA approved a new drug, Sofosbuvir, for the treatment of Chronic Hepatitis C.  The drug, commonly known as Sovaldi, was developed by Gilead Sciences, a U.S. biotechnology company.  The initial price tag of a 12-week treatment of Sovaldi was reported as approximately $84,000, or nearly $1,000 per pill.  This resulted in considerable media attention and an ensuing pricing controversy.  Editorials and op-eds sprung up around the country debating Sovaldi’s price tag and the broader debate over fair drug pricing.  Some politicians expressed outrage over the cost of new drugs, while others argued for free market pricing and rewards for the considerable R&D costs that biopharmaceutical companies incur when bringing a new drug to market.  The often niche drug pricing debate had officially spilled over into the mainstream conversation.  Payers, policymakers, pharma, patients, and providers all voiced strong— and sometimes contrasting— opinions.

To be sure, the issue of drug pricing is a hotbed issue that won’t go away anytime soon.


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