Greedy Drugmakers? Change Could Be Coming

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A recent survey by the Kaiser Family Foundation reports that roughly three-quarters of all Americans think drug prices are unreasonable, and they overwhelmingly blame those high prices on the biopharma companies responsible for making them.

The findings could suggest that new pricing schemes, such as pricing based on how well drugs work, could gain ground. If they do, it could spell an end to biopharma's profit-friendly run for investors.

What's the big deal?Medical innovation has led to the creation of complex biologic medicines that are created from living organisms. Those complex biologics have been, until recently, immune to the threat of less expensive generic formulations, and as a result, the amount of money being forked over by healthcare payers and patients for these drugs has been sky-high.

Therapies used to treat cancer and rare diseases are among the most expensive of these biologic medicines, and their costs are often measured in the six figures annually.

According to a Study by the Memorial Sloan Kettering Cancer Center, seven of eight cancer drugs approved since 2014 carry price tags near or above $10,000 per month. Included in that list are Bristol-Myers Squibb's immuno-oncology drug Opdivo, a member of an entirely new class of drugs being studied across more than 50 trials, and Pfizer's Ibrance, a therapy for advanced breast cancer.

Cancer drug prices are undeniably high, but they pale in comparison to the annual costs associated with biologics being used to treat rare diseases like Fabry disease and paroxysmal nocturnal hemoglobinuria, or PNH. Enzyme replacement therapies like Sanofi's Fabrazyme can cost $200,000 per year, and Alexion Pharmaceuticals' Soliris has the distinction of being the most expensive drug on the planet, with a annual price tag of $536,000.

Are Americans fed up?The Kaiser Foundation study found that 73% of all Americans surveyed believe drug pricing is unreasonable, including 72% of Americans who aren't even taking any prescription medicines.

Across those who believe prices have gotten too out of whack, 76% think it's because drugmakers set the prices too high, and 10% think it's the fault of insurers for setting patient co-pays too high.

Mostly, people think drugmakers' pricing is the result of greed for increasingly higher corporate profit, but Americans also recognize that pricing is influenced by the high cost of developing drugs, many of which must be studied in thousands of patients and can take years to evaluate. Other factors that could influence drugmakers' pricing include marketing budgets and lawsuits.

Regardless of who may be at fault for premium drug prices, the majority of Americans believe insurers shouldn't balk at paying for them. About 7 in 10 respondents believe insurers should foot the bill on high-cost drugs if a doctor recommends it, even if it leads to higher insurance premiums for everyone.

Is a revolution coming?The general distaste for corporate money-making at the expense of patients could lead to a significant shift in how drugs are paid for.

According to America's Health Insurance Plans, an industry trade group representing insurers, spending on prescription medicine surged 13% to $374 billion last year -- the biggest percentage increase in over a decade.

In a bid to stem the trend of increasingly higher prices, a bevy of ideas are being tossed about, including one that would tie a drug's price to how effective the drug is at curing disease.

Express Scripts, the nation's largest pharmacy benefit manager, hopes to ink deals with drugmakers that would set cancer drug prices based upon how successful the drug is in treating specific patient populations.

For example, if a drug has a far better track record of success in lung cancer than it does in pancreatic cancer, then that drug would cost more when used in lung cancer patients than when used in pancreatic cancer patients.

Such a pay-for-performance concept makes a lot of sense on the surface, to payers, but it may not win support among drugmakers that are used to being paid the same amount of money for a drug regardless of the indication being treated.

Tying it togetherThere's little debate among patients and health insurers that drug pricing trends are unsustainable, but drugmakers are quick to remind people that developing drugs is expensive, especially given how many drugs fail during clinical trials.

According to the Tufts Center for the Study of Drug Research, the industry spends roughly $1.4 billion for every approved drug that reaches the market. That number is so high because 90% of drugs entering phase 1 trials fail at some point in the pipeline. That could suggest that innovation leading to a quicker way of identifying and discarding therapies unlikely to work could offer some price relief.

It's unlikely that any one solution, be it pay-for-performance or something else entirely, will put the brakes on drug prices, but given the potential impact on the industry, investors should keep a close eye on how these discussions pan out.

The article Greedy Drugmakers? Change Could Be Coming originally appeared on

Todd Campbellhas no position in any stocks mentioned. Todd owns the equity research firm E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned.The Motley Fool recommends and owns shares of Express Scripts. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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