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Price hiking: US pharma’s elephant in the room

Published on 26/10/16 at 11:47am

Mylan’s recent EpiPen price inflation scandal has reignited a seemingly never-ending debate on the power of drug companies to charge prohibitive prices without reprisal. In a piece originally published in the November issue, Matt Fellows delves into the issue to find out the root of the problem.

Pharmaceuticals are an expensive business for all involved, but it’s an arena that’s getting more expensive all the time, and in an ostensibly inorganic manner. There are price readjustments - the expected, unavoidable and arguably necessary product of ever-shifting markets - and then there’s price hikes.

Today, Americans pay by far the highest drug prices in the world: the US now pays $370 billion on prescription drugs, a figure that is rising at the fastest rate in the last decade, and each citizen pays on average $858 on prescription drugs, compared with an average of $400 per person across 19 other industrialised nations. And a sizeable portion of that cheque is down to these huge and often arguably unjustifiable rises in price. The industry is stained with a history of these controversial moves, and sadly it shows no signs of stopping any time soon.

It’s an issue that, maybe more than any other, raises one of the biggest and most pressing ethical questions at the heart of pharma, and one that, while it sparks impassioned outrage in those in the industry and beyond, is not as high on the national debate agenda as it perhaps should be. Former Democrat presidential candidate and Vermont senator Bernie Sanders has done much to bring the issue under the public lens in recent times, with it featuring heavily in his campaign and beyond. On his website, he calls out the issue: “Access to health care is a human right, and that includes access to safe and affordable prescription drugs. It is time to enact prescription drug policies that work for everyone, not just the CEOs of the pharmaceutical industry.

“Tens of thousands of Americans now spend more than $100,000 a year on prescription medications. Drug costs are out of control because that’s the way pharmaceutical companies want it. Other countries have national health insurance plans that negotiate better prices for all of their residents. In this country, however, drug lobbyists have been able to block all of these common-sense solutions that we must work to pass into law. That is unacceptable and that has got to change.”

Sanders has committed himself to fighting on the frontlines of this battle; besides the issue taking centre stage on his campaign trail, he has continued to fight passionately against these injustices up to the present day. In October he called out Ariad pharmaceuticals for hiking the price of its chronic myeloid leukaemia treatment Iclusig; the drug originally cost $9,580 a month in 2012, but a series of four hikes since then has brought that price to $16,561 a month, meaning the annual price tag for treatment of the drug has ballooned to a whopping $199,000. This already stratospheric rise in price was made even more detestable when it came to light that the drug’s safety data was shaky at best, showing a risk of “serious and life-threatening blood clots”, even causing it to be pulled from the market in 2013, and has been shown to only be suitable for use in a small subset of patients.
On discovery on the scandal, Sanders launched a social media tirade to raise awareness of Ariad’s actions and paired with Maryland US representative Elijah Cummings to pen a letter to the firm, questioning the validity and morality of the move. The attack even had some pretty hard-hitting financial effects: Ariad’s shares dropped 7% that day, and while it was able to recoup some of its losses, it has been estimated the company lost as much as $387 million in one day.

The self-proclaimed "small, research-driven biotechnology company" retaliated with a statement defending its decision, noting its belief that its product’s price tag is justified, and that even with such a high asking price, the company has still not seen a return on its investment: "We recognise oncology drugs are expensive, but we believe in the importance and efficacy of our products. Importantly, to achieve its mission, Ariad has invested more than $1.3 billion in R&D and accumulated losses of approximately $1.4 billion since the company was founded which have not been recovered."

Covering costs

Ariad’s response shows glimmers of a common defence of pharmaceutical companies in these situations, which is to assert that these price hikes are enacted to bring revenues up only to meet rising expenditures such as R&D and manufacturing costs. This was the very same tactic employed by Mylan this year, who has become the latest pariah in the US price hike saga. The company has come under fire for its 400% price increase of its flagship EpiPen epinephrine auto-injector, a necessary and potentially life-saving drug for over three million patients in the US alone. After acquiring the rights to product in 2007, the company has raised the asking price from around $57 for a single auto-injector to over $500 for a twin pack.

When forced to appear before US congress to explain the move, Mylan CEO Heather Bresch, who was also on record as having taken a 671% pay rise over the same period as the hike, attested that the EpiPen does not generate significant profits for the company; according to Bresch, Mylan makes only $50 on each EpiPen, despite the company’s sales standing in excess of $11 billion and a 90% market share. However, it was found later that the actual profit stands at $83 per pen, 66% higher than Bresch claimed. Mylan conceded the error claiming Bresch’s mistake was due to her inclusion of a 37.5% tax rate; a standard procedure for analysing profitability. But this is not consistent with the company’s 7.4% corporate tax rate last year with a negative effective tax rate in the US, suggesting an intentional misrepresentation of the facts.

The pharmaceutical industry itself argues that this necessity to cover high expenditures with high pricing is very real, and that this crisis is much less of a problem that people think: "The entire health-care system in the United States is more expensive than other countries," said Robert Zirkelbach, a spokesman for the Pharmaceutical Research and Manufacturers of America trade group. He continued to explain that "the difference in prices here in the US compared to other countries is often vastly overstated" because these comparisons do not take into account discounts drugmakers give to various payers via access schemes.

And this was the defence Mylan first jumped to when it was exposed for hiking the price of its EpiPen, pointing to its savings programmes which offered the product at reduced prices, particularly in schools.

However, writing for Bloomberg, Robert Langreth , Blacki Migliozzi & Ketaki Gokhale note that this is not a valid defence for such monolithic hikes: “Even very large discounts don't erase the price differentials the US and other countries. After an estimated discount of 60%, AstraZeneca still charges more than twice as much in the US for Crestor, a cholesterol pill, compared to Germany, and in other countries the price is even lower, according to the analysis of IHS data.

“Sanofi gives US discounts of about 50% on Lantus, a long-acting insulin, SSR Health found. It still costs 30% more in the US than in China, the second-most expensive country. After an estimated 50% discount in the US market, GlaxoSmithKline's Advair asthma inhaler costs at least twice as much in the US compared to other countries analysed.”

Just because you can…

Of course no discussion on price hikes could consider itself even halfway well-rounded without visiting the infamous Turing Pharmaceuticals price hike of malaria and toxoplasmosis drug Daraprim in 2015, which would be comical if its implications weren’t so perturbing. Ex-CEO and self-appointed “pharma bro” Martin Shkreli became possibly the most-hated man in pharma, and maybe even the US, literally overnight when he jacked up the price of the 62-year old treatment from $13.50 to $750 per pill, a rise of over 5000%. Shkreli defended his company’s decision by stating: "This drug was doing $5 million in revenue and I don't think you can find a drug company on this planet that can make money on $5 million in revenue. Most costs are much higher than that." "Half of our drug we give away for $1,” he added. “So I think that shows our commitment to patients."

Again we see the same tried and re-tried arguments: that these hikes are only enacted to combat much higher expenditures, and that access schemes more than mitigate the predatory and seemingly malicious price gouges that the rest of the patient population is forced to pay; even if that arguments stands up, surely it is indicative of a deep-rooted problem in the fiscal infrastructure of US pharma? But it is another of Shkreli’s comebacks which is the most inflammatory and perhaps most emblematic of the inherent problematic ethical attitude at the core of the industry:

"If there was a company that was selling an Aston Martin at the price of a bicycle, and we buy that company and we ask to charge Toyota prices, I don't think that that should be a crime."

This is evidence yet again of the contemptible logical failing which pharma executives are permitted to entertain time and time again: a life-saving drug is not analogous to a luxury sportscar; these products are not extravagant items exclusively available to those who are wealthy enough to afford the privilege of stable health. These are crucial, necessary tools which could determine life or death for some, and patients have a right to be given access to them at a fair and reasonable price; the ability for companies in the industry to entertain this attitude even passively reinforces a culture which promotes prohibitive pricing and resulting poor health as the norm. As Forbes put simply in its coverage of the EpiPen debacle: “Why did Mylan hike EpiPen prices 400%? Because they could.”

The root of the problem

The blame for the frightening state of the US prescription drugs market must undoubtedly be shouldered in part by big pharma and their vulturine hikes, and their ability to enact them is clearly a problem with first and foremost with regulation, but while it may be tempting to think that the problem lies squarely on said firms’ unbridled freedom to set these outrageous prices, the real issue may be a little more complicated.

An analysis published in the August 23/30 issue of the Journal of the American Medical Association suggests that drugmakers are enabled to charge such high prices not simply because they are flat-out unopposed in doing so, but because they are able to, more covertly, exploit ‘market exclusivity’ regulations which are intended to mitigate the expenses of developing breakthrough treatments – the very same argument so often employed by pharma firms as justification.

Senior author Ameet Sarpatwari of Harvard Medical School and the Harvard T.H. Chan School of Public Health explains that this is made possible because the US’ largest health insurers, Medicare and Medicaid, aren’t allowed to negotiate prices; a third of the nation is covered by these programmes, but the firms are mandated by federal law to pay whatever the drugmakers charge. “Without giving them that power, we’re sort of shooting ourselves in the foot,” Sarpatwari says. “It is one of the reasons why we don’t have as low prices as we could during that exclusivity period.”

This exclusivity period can last between five and 12 years, judged by the US Food and Drug Administration (FDA) on approval of a drug, during which no low-cost generic alternative can be sold. By exploiting this, drug manufacturers can employ techniques such as ‘evergreening’ – renewing market exclusivity by patenting a trivially-altered product – and ‘hard switching’ – halting availability of a product on the verge of going generic only to replace it with new product, thereby ensuring new patients are prescribed the new high-cost version rather than the cheaper generic.

These problems for patients, and indeed the nation, don’t start and end with unaffordable prices; this is having a very real effect on observable health across the country: “That is hitting consumers hard,” Sarpatwari notes. “The higher the cost of the medication, the poorer the adherence to the medication because people can’t afford to take their medicines.”

So what needs to change?

As we’ve seen, the core problem clearly lies in regulation, but it’s a complicated and interconnected beast. Sarpatwari and his colleagues believe that the first step is for congress to empower insurance providers like Medicare and Medicaid with the ability to negotiate prices with drug providers, doing away with their neutered stance as they stand now. Another step, they explain, would be to obligate the FDA to take more enforced and discretionary measures on determining drug exclusivity rights. But these actions, while essential and potentially liberating, are likely the first in a long road in bringing the US healthcare industry back in touch with the needs of its people. With both US presidential candidates uncharacteristically agreed on the drug pricing crisis, we can all keep our fingers crossed that whoever finally takes the mantle in November commits to making these overdue changes a reality.

 Matt Fellows

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