Two recent studies have thrust drug pricing into the healthcare spotlight. The first study, from the IMS (Intercontinental Marketing Services) Institute for Healthcare Informatics, found that global oncology spending totaled $91 billion (£54 billion) in 2013 with an average annual increase of 5.4% over the past 5 years . While this is only a small portion of global healthcare costs, a second study, from a Bloomberg analysis performed by DRX (Destination RX), identified a concerning trend that dozens of drugs have more than doubled in price since 2007 . While this includes drugs for diabetes, high cholesterol, and neurological diseases, cancer drugs are the most criticized for their prices. Of the 12 cancer drugs approved by the FDA in 2012, 11 cost over $100,000 and the average cost per month for a cancer drug is $10,000 .
Do pharmaceutical companies really make that much money?
The standard reaction to this news is that companies are taking advantage of patients by charging exorbitant prices and raking in the profits. Just last month, a Scientific American blog titled “The Quest: $84,000 Miracle Cure Costs Less Than $150 to Make” reinforced this notion. However, despite these steep prices, pharmaceutical companies only average an 18.4% profit margin according to Yahoo! Finance (for comparison, Apple has averaged a 23% profit margin over the past 5 years). Additionally, patients are rarely responsible for the full cost of these drugs. On average, patients pay $9,000 for a year of cancer treatment with insurance paying $115,000.
Why are prices so high?
The truth is that drug development is a long, inefficient, and expensive undertaking. In round numbers, a drug takes 10 years and $1 billion to develop, and this investment is reflected in the final price. Additionally, despite numerous scientific breakthroughs in recent years, there is a tremendous amount of uncertainty surrounding drug development. Drugs designed against novel targets have a 90% failure rate, and only a third of drug candidates entering Phase III clinical trials were approved between 2003 and 2010. These late stage failures are especially costly since clinical trials account for over half of drug development budgets. In fact, when total research and development costs are included, pharmaceutical companies spend an average of $4 billion per approved drug .
Drug companies aren’t the only ones to blame
Changes in the healthcare system are shifting patient treatment from physician offices to hospitals. This increases overall spending because hospitals have higher overhead costs and therefore charge insurance companies more than twice as much for the same therapy as a physician’s office does. Furthermore, Medicare is legally forbidden to reject drugs based on price, causing the U.S. to have much higher drug prices than other countries where the government can negotiate prices. The New York Times recently reported that $250 buys a single Advair Discus inhaler in the U.S., but will buy 7 in France. The same amount will purchase 2 bottles of Rhinocort nasal spray in the U.S. compared to 51 bottles in Romania .
So what does this mean?
Rising health care costs are the biggest driver of national debt and are already causing serious consequences in the industry. Regulatory agencies such as the National Institute for Health and Care Excellence (NICE) in the U.K. are rejecting expensive drugs (like Roche’s Kadcyla) that provide marginal benefits compared to current standard of care. Also, a California panel classified Gilead’s Sovaldi as “low value” and may restrict use to the sickest patients due to the cost, and the Memorial Sloan-Kettering Cancer Center rejected use of Sanofi’s Zaltrap, citing poor benefit to cost ratio. Physicians and insurers are embracing comparative effectiveness studies to determine whether these blockbuster drugs are worth their price tags. Clifford Hudis, president of the American Society of Clinical Oncology, said, “It is not the absolute cost of any individual drug, it is the lack of a direct linear association between their price and their benefits. ” From Express Scripts CMO Steven Miller, “We will identify which drugs can be pitted against each other and make some really tough formulary decisions. ” By restricting usage and reimbursement, the hope is to drive drug prices back down.
What happens next?
The pharmaceutical industry is fully aware that something must be done about drug development costs. Many companies are maximizing value from their research investments by focusing on specific areas of strength and shedding underperforming fields. This was a major driving force behind the recent mega-merger between Novartis and GlaxoSmithKline. Companion diagnostic tests for therapies targeting specific genetic mutations are also playing a greater role in identifying and successfully treating specific patient subgroups, thereby increasing efficacy and reducing failed treatment costs. Furthermore, providers and payers are demanding evidence that new drugs provide a significant health benefit compared to existing therapies.
This is only a small part of the big picture
Despite all of the focus over pricing, drugs only account for 10% of the $2.7 trillion health care bill in the U.S.  Health care costs are rising twice as fast as GDP, account for over 25% of federal spending (more than defense or social security) and are also rising faster than per capita income. Making matters worse, the increased spending does not translate to better health care. The Institute of Medicine estimates that 30% of health care cost is due to ineffective treatments. One promising approach is personalized medicine, which tailors treatment regimens to a patient’s specific genetic characteristics. Additionally, efforts need to be taken to increase disease prevention and early screening. Only 10% of health care spending goes towards prevention despite the fact that every dollar spent on prevention saves $5 in future costs . Finally, 70% of health care spending is attributed to lifestyle-related diseases, so after all of this discussion, perhaps the most important thing we can do as patients to combat rising prices is to not smoke, eat healthy, and exercise.
 Tor Constantino (2014) ‘IMS Health Study: Cancer Drug Innovation Surges As Cost Growth Moderates’ IMS Health 6th May, Retrieved [20th May 2014] from http://www.imshealth.com/portal/site/imshealth/menuitem.762a961826aad98f53c753c71ad8c22a/?vgnextoid=f8d4df7a5e8b5410VgnVCM10000076192ca2RCRD&vgnextchannel=736de5fda6370410VgnVCM10000076192ca2RCRD&vgnextfmt=default
 Robert Langreth (2014) ‘First Million-Dollar Drug Near After Prices Double On Dozens Of Treatments’ Bloomberg 30th April, Retrieved [20th May 2014] from http://www.bloomberg.com/news/2014-04-30/drug-prices-defy-gravity-doubling-for-dozens-of-products.html
 Bernard Munos (2013) ‘We The People vs. The Pharmaceutical Industry’ Forbes 29th April, Retrieved [20th May 2014] fromhttp://www.forbes.com/sites/bernardmunos/2013/04/29/the-pharmaceutical-industry-vs-society/
 Matthew Herper (2012) ‘The Truly Staggering Cost Of Inventing New Drugs’ Forbes 10th February, Retrieved [20th May 2014] fromhttp://www.forbes.com/sites/matthewherper/2012/02/10/the-truly-staggering-cost-of-inventing-new-drugs/
 Elisabeth Rosenthal (2013) ‘The Soaring Cost of a Simple Breath’ The New York Times 12th October, Retrieved [20th May 2014] fromhttp://www.nytimes.com/2013/10/13/us/the-soaring-cost-of-a-simple-breath.html?ref=health
 Robert Langreth (2014) ‘Cancer Doctors Join Insurers In U.S. Drug-Cost Revolt’ Bloomberg 7th May, Retrieved [20th May 2014] fromhttp://www.bloomberg.com/news/2014-05-07/cancer-doctors-join-insurers-in-revolt-against-drug-costs.html
 Drew Armstrong (2013) ‘Express Scripts Pushes Price Competition for Gilead Drug’ Bloomberg 10th December, Retrieved [20th May 2014] fromhttp://www.bloomberg.com/news/2013-12-10/express-scripts-pushes-price-competition-for-gilead-drug.html
 Centers for Medicare and Medicaid Services (2014) ‘National Health Expenditure Data’ CMS.gov 6th May, Retrieved [20th May 2014] fromhttp://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NHE-Fact-Sheet.html
 Trust for America’s Health (2008) ‘Prevention for a Healthier America: Investments in Disease Prevention Yield Significant Savings, Stronger Communities’ 17th July, Retrieved [20th May 2014] from http://healthyamericans.org/reports/prevention08/
Written by Christopher Van