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19th of July 2018

Economy



The drug pricing playbook: how pharma companies keep costs high

David Crow in New York

July 12, 2018 Print this page

It did not take long for Pfizer to perform a U-turn.

Less than 48 hours after Donald Trump took to Twitter to say the company “should be ashamed” of raising prices on 100 products, the drugmaker demurred and said it would defer the increases.

Pfizer’s capitulation also followed a series of thinly veiled warnings from Alex Azar, the health secretary, who said its decision to raise prices this month would “be remembered for creating a tipping point in US drug pricing policy”.

The company said it would defer the increases until the end of the year or until Mr Trump implements his “blueprint to strengthen the healthcare system” — a complex string of measures announced in May, aimed at lowering drug prices.

Below, the Financial Times explains four of the most common strategies for drugmakers seeking to raise prices and to keep them high.

1. Raise prices twice a year

Before the issue of high drug prices shot to the top of the political agenda, it was commonplace for drugmakers to increase prices twice a year, once in January and then again in the summer.

These increases guaranteed that prescription medicines would become more profitable as the years rolled by. However, as drugmakers have come under greater scrutiny, many companies have refrained from raising prices in the summer.

Until Tuesday night’s about-face, the most notable exception was Pfizer, which was one of just four branded drugmakers to make a second round of increases this year, according to Morgan Stanley.

Although the “twice a year” strategy appears to have fallen out of favour, it has been one of the main drivers of drug price inflation over the years. The average wholesale price for a 100mg tablet of Viagra, Pfizer’s erectile dysfunction drug, went from $12.03 in 2007 to $88.45 as of July 1.

Pfizer says it now intends to return the price of Viagra back to its pre-July level of $80.82 “as soon as technically possible”, along with the other products that were increased on July 1.

Line chart showing average wholesale price of a 100mg Viagra tablet. Pfizer has raised the price of some of its drugs twice a year.2. Raise prices every year

This is the new normal. Since the start of 2017, most drugmakers have raised prices annually, and have pledged to keep such increases to the single digits (which has turned out to mean just over 9 per cent).

But these increases — which outstrip US inflation of about 2 per cent — are still too large, according to David Mitchell, a campaigner at Patients For Affordable Drugs. “It’s not as if there is new clinical data showing the value of the drug has gone up 9 per cent,” he said.

Although the practice garners less attention than the price gouging made famous by Martin Shkreli— who raised an Aids medicine by 5,000 per cent — increasing the price of a top-selling medicine every year does much more to push up overall healthcare costs.

“The impact on the system of a 9 per cent increase for a blockbuster drug can be far greater than one of these ‘take your breath away’ increases on a drug for a small population,” said Mr Mitchell.

AbbVie, which makes Humira, the world’s top selling medicine, has raised the average wholesale price of a 40mg syringe from $792.14 in 2007 to $2,923.22 — a cumulative increase of about 270 per cent.

AbbVie declined to comment.

Line chart showing  average wholesale price of a pre-filled syringe with 40mg of Humira. Since 2017, AbbVie has raised the price of its drugs once a year rather than twice.3. Corner the market

“A quick way to produce hefty profits is to find your way into a monopolistic type situation where you own all of the competition,” said Michael Rea, chief executive of Rx Savings, which makes software to help employers and insurers reduce the amount they spend on drugs.

This is the strategy made infamous by Shkreli: find a medicine that faces little or no rivalry and increase the price dramatically. Most large pharma companies now avoid this tactic for fear of reputational damage, but it is still prevalent in some pockets of the industry.

For instance, the average wholesale price of a 5mg tablet of Millipred, a steroid used for multiple illnesses, has gone from 40 cents in 2008 to $16.87 — an increase of more than 4,000 per cent.

The drug was discovered in the 1950s and has been off-patent for years, but Cerecor, which makes the drug, can charge such a high price because it is the only manufacturer of the 5mg pill.

Cerecor said most of the increases were imposed by Zylera, which it recently acquired. It added the 2018 increase had been implemented to bring a 100-pill bottle in line with the 50-pill bottle.

Line chart showing average wholesale price of 5mg tablet. Millipred has no competition. Its price has risen by more than 4000% over the last decade. 4. Stymie competition

Pharmacy benefit managers, which control drug spending for insurers and employers, keep a list of the drugs they are willing to pay for. These lists, known as “formularies”, are ostensibly designed to exclude more expensive medicines.

However, Mr Rea of Rx Savings said some drugmakers with expensive products would try to buy preferred slots on formularies — and thus keep their cheaper rivals off the lists — by offering larger rebates to PBMs.

He added: “Most people believe formularies are based on effectiveness, value or cost. The reality is a drug’s position can sometimes be based on the profitability of the rebate.”

Pfizer has sued Johnson & Johnson, which makes Remicade, an arthritis drug, accusing it of thwarting its cheaper “biosimilar” version, Inflectra, by forcing hospitals to sign “exclusionary contracts”.

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