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High Pharmaceutical Prices More Than Supply and Demand

By   /  April 17, 2014  /  20 Comments

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In October 2012, doctors at Memorial Sloan-Kettering Cancer Center released a statement to the New York Times indicating that they would opt out of administering a new drug to their patients. They argued that at $11,063 a month, the drug Zaltrap was unreasonably priced and that a similar drug, just as effective as Zaltrap, was available at only half the price. The move sparked much controversy. Indeed, behind this debate were questions regarding these price variations and actual causes of high pharmaceutical pricing.

In 2012, the FDA approved a new drug treatment for cystic fibrosis. The medication, Kalydeco, had an initial price of $294,000 a year. Although obviously not the cheapest on the market, the drug was also not the most expensive. According to acclaimed author Berth Werth’s 2013 article in MIT Technology Review, some drugs cost almost $600,000 a year. It is no surprise that patients suffering from cancer and other serious illnesses often bear overwhelming financial burdens due to treatment. Werth writes that today, the median monthly price of a given cancer drug is just below $10,000. High drug prices like these have brought pharmaceutical companies under intense scrutiny and have many patients wondering what they are really paying for. Because of the recent increase in spending on direct-to-consumer advertising, pharmaceutical sales have come to illustrate a dynamic interplay between two parties—the pharmaceutical industry (pharma) and the consumer. However, several additional factors including international markets, government assistance, and cost of development must first be addressed in the discussion of drug pricing.

The United States plays a distinct role in the world pharma economy. Drug prices are remarkably higher in the United States than they often are elsewhere in the world. For example, a drug used to treat Lupus costs about $35,000 per year in the United States. The same drug costs only $16,000 per year in the United Kingdom. This trend carries on throughout the pharma industry, with American drug prices sometimes several times higher than those overseas. As a result, the United States, comprising only about 5% of the world’s population, accounts 40% of worldwide industry revenue. In essence, the U.S. is subsidizing foreign pharmaceutical purchases and paying a bulk of the charge so that other countries can buy drugs much lower prices. The market is thus rendered open to more nations who would otherwise not be able to pay the higher prices for these products. Meanwhile, prices in the United States push the limit, reflecting an inflated value that Americans are expected to be able to cope with.

Government and insurance companies complicate drug pricing often driving costs upward. Researchers from MD Anderson Cancer Center, Hagop Kantarjian and Leonard Zwelling, write in a 2013 Cancer commentary that beyond Obamacare, the government has several factors in place that can either increase or stagnate drug prices, making the market more volatile. Medicare, for instance, has instituted an average sale price (ASP) cap, placing a limit on the prices of generic drugs that the agency will reimburse. The limit is set at 6%, meaning that manufacturers are only allowed to increase drug prices by 6% over a six-month period. As a result, many generic drug prices plummet to a value at which manufacturers see no reasonable sales profit, causing these companies to go out of business. This phenomenon creates a shortage of generic drugs and gives patented drugs a firm hold on the market. Consequently, drug prices increase.

It is still important to determine the actual value of the pharmaceutical products patients buy. According to experts, finding these values is more difficult than just crunching numbers. Because of Medicare, Medicaid, and private insurance policies, patients are usually only paying a fraction of the often-exorbitant sticker price. Even though drug companies ultimately target the patient with their products, the government and insurance companies actually receive the most financial consideration. Thus, the price of a drug does not always signify the value of the drug, but rather, the price that the economy can bear. In the words of Henri Termeer, the former CEO of the Genzyme biotechnology company: “It’s not a science, it’s a feel”.

Yet, the inability of some generic drug companies to remain in the market demonstrates the difficulty of making a profit in the industry. The average price of producing a drug is now around $5 billion. This value places the high drug prices into perspective. While the giants of patented pharmaceuticals can post higher prices, generic drug companies must operate within a smaller profit margin. While prices are still increasing, many companies have hit an economic wall, and pharma’s returns on research and development spending have declined for the fourth year in a row. Although the government and insurance agencies alleviate some of the price burden, they merely serve to hold in place a highly complex and dynamic market of pharmaceutical sales.



http://www.nytimes.com/2012/10/15/opinion/a-hospital-says-no-to- an-11000-a-month-cancer-drug.html
Werth, Barry. “A Tale Of Two Drugs.” Technology Review 116.6 (2013): 58-65. Academic Search Premier. Web. 23 Feb. 2014.

Werth, Barry. “A Tale Of Two Drugs.” Technology Review 116.6 (2013): 58-65. Academic Search Premier. Web. 23 Feb. 2014.

Kantarjian, H. and Zwelling, L. (2013), Cancer drug prices and the free- market forces. Cancer, 119: 3903–3905. doi: 10.1002/cncr.28330

Werth, Barry. “A Tale Of Two Drugs.” Technology Review 116.6 (2013): 58-65. Academic Search Premier. Web. 23 Feb. 2014.

http://www.pmlive.com/pharma_news/ pharmas_return_on_r_and_d_spend_continues_to_slide_524156



Kevin Ig-Izevbekhai
Kevin Ig-Izevbekhai is a sophomore in Silliman College at Yale University.

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  • Published: 3 years ago on April 17, 2014
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  • Last Modified: January 7, 2015 @ 1:54 pm
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