I thought the pharma business, like any other, was built on the bedrock precept of: charge what the market will bear, until you’re forced to pull back the sticker price due to competition, etc., and then pivot to another product, where you can jack up its price, and so on.
Earlier this week (February 27, 2017), Johnson & Johnson said the average list price of its drugs rose less than 10% each year since 2012, noting that the net price paid for the drugs, which includes discounts and rebates, was significantly lower, according to Reuters.@JNJnews said the average list price of its drugs rose less than 10% each year since 2012 Click To Tweet
But isn’t that a statement guaranteed to alarm analysts and investors? Almost sounds like J&J is giving certain medicines away. How do you make a profit with that mindset?
Well, think back to January 11, 2017 when then President-elect Donald Trump pledged to change the way the federal government purchases prescription drugs, a striking, largely unforeseen warning to the drug industry that he apparently is serious about keeping his campaign promises to address drug costs.
He gave the subject near-top billing in his first press conference, slamming the pharmaceutical industry for overseas production and promising, in vague terms, to open up more price negotiations for medications.
“Our drug industry has been disastrous. They’re leaving left and right,” Trump said at the news conference at Trump Tower, according to STAT News. “We have to get our drug industry coming back.”
In his remarks, Trump said he would establish “new bidding procedures” for drug purchases. “They’re getting away with murder,” he said, referring to drug companies. “Pharma has a lot of lobbies and a lot of lobbyists and a lot of power.” For good measure he added, “We’re going to save billions of dollars over a period of time.”
Needless to say, Pharma took notice and then a funny thing happened. Companies started to restructure their marketing pitches, bragging about tepid price increases past, present and future.
Getting back to J&J, the company, which makes Remicade for rheumatoid arthritis and the blood thinner Xarelto, said the 2016 average increase in list price for its drugs was 8.5%, while the net price change was 3.5%.
The highest average price increases at the company over the five-year period were in 2015, when the average list price rose 9.7% from the previous year and the average net price increase was 5.2%.
The company said it generally limits its annual aggregate list price increase to single digit percentages. Did you hear that, Mr. President?
Merck released a report on its own pricing history last month, revealing slightly larger average increases over the five year period than J&J.
Sanofi SA, maker of top-selling insulin Lantus, last month reported that its 2016 list prices increased by 2.3% on average, but its average net price dipped 0.5% because insurers got discounts that averaged 50%. Merck & Co. in January reported its annual net price increase since 2010 has ranged from 3.4% to 6.2%, roughly half its list price increases, while its average discount to payers climbed to 41% in 2016.
Allergan CEO Brent Saunders kicked off the trend last fall when he announced the Botox maker had ended big-list price hikes and would stick to single-digit increases. Novo Nordisk and AbbVie later followed suit.
Other companies, including GlaxoSmithKline and Takeda Pharmaceuticals, say they’ve been keeping annual list price increases below 10%, though they’re not making pledges. And Eli Lilly is reducing prices for most of its insulins up to 40% for people who pay the full price.
These moves might translate to smaller price increases, according to Edward Jones analyst Ashtyn Evans.
“I think in the near term, we are certainly going to see smaller price increases. We’ve already seen that this year,” Evans says. “But it’s possible that if the headlines die down and the government doesn’t take action, that they could creep back up again.”
J&J is just one of the big drugmakers all trying to quash the furor over high drug prices by revealing more information about their pricing and even pledging to keep a cap on increases.
But no one should expect to be paying less for medicine anytime soon, experts say, though the drugmakers’ response to public pressure may help slow the rise in prices for some drugs.
The political and public anger over drug prices has been stirred by a few factors: Sky-high prices for new drugs, enormous increases for many existing drugs, and changes in insurance coverage that make patients pay a bigger portion of the drug bill.
The drug industry’s top two lobbying groups have been running advertising campaigns that reinforce a point the industry has long pushed: Medical breakthroughs that improve or save patients’ lives are very difficult–and expensive–and high prices are needed to fund research into new treatments.
Now, in the new operating landscape, individual companies are making their own cases to the public in hopes of showing that at least they aren’t as bad as some other guys, points out Linda Johnson at AP.
Erik Gordon, a professor and pharmaceuticals analyst at University of Michigan’s Ross School of Business said those drugmakers promising to hold future price hikes below 10% will be able to lock in substantial increases while still saying they kept their pledge.
“If it works, it’s brilliant,” Gordon says. “They’re doing everything but the obvious, simple thing–just lower the price.”
J&J’s price touting, and don’t be fooled that it’s anything else, is far less than some of the mind-boggling price increases that have been criticized over the past year, like the 547% jump over 9 years in the price of Mylan NV’s EpiPen emergency allergy auto-injectors.
But J&J’s increase is still more than double the US rate of inflation, which means its prices rose far faster than prices for other goods and services.
Pfizer Inc., the biggest US drugmaker, says there’s no need for such pledges. Like the industry trade groups, it blames the furor on a handful of “irresponsible” companies that raised prices many times over for older products, the way Turing Pharmaceuticals, Valeant Pharmaceuticals and EpiPen maker Mylan NV have done.
Ed Schoonveld, a former pricing director at three drugmakers and now a managing partner at consultants ZS Associates, said no matter what pledges companies make, overall drug spending will continue to rise as costly new therapies emerge and the population ages.
And high prices will continue to shock the public: Last month Marathon Pharmaceuticals LLC triggered a huge backlash by announcing it would charge $89,000 a year for its muscular dystrophy drug Emflaza, an old steroid that some patients had been importing from other countries for roughly $1,000 per year. Marathon has since delayed Emflaza’s launch while it talks with patients and advocacy groups about ensuring access to the drug.
So, is the pharmaceutical industry finally chucking its deeply ingrained, price-hiking mindset?
Well, the answer to that question lies in the mind of the utterer.
Allergan revealed that its own average gross price hike was 6.7% in 2016 with a net of 2.5%–roughly in line with overall inflation, which is CEO Brent Saunders’ long-term goal. The big pharma CEO told Fortune in a recent interview that President Trump’s populist tendencies and tough drug-industry criticisms make it necessary for biopharma to hold itself to account and self-regulate before lawmakers make any drastic policy changes.
“I didn’t pass this social contract, nor would I advocate for another company to do their own thing, because they’re worried about a [Trump] tweet or one bad action,” Saunders said. “I think the real issue is, the system we have today encourages capital money to be put at risk to try to solve unmet medical need. If the government intervenes and takes over… I worry that the fragility of the innovation and the types of risks that we have to take will start to disappear.”
Another report released Monday underscores the reality that gross price increases may continue to significantly outpace inflation, which has lingered at around 2%.
What’s really going on? Just good-ole Pharma Marketing 101.
On the one hand, J&J is pledging to restrain price increases on its products. Hooray for price-increase restraint.
But there’s the other hand. And it erases all the luster from the Pharmas’ upright-ish, price-restraint halo.
A faith-based investor group’s attempt to learn more about drug pricing is hitting a wall as several corporations are moving to stiff-arm shareholder votes on the issue. This comes even as large drugmakers are putting out “transparency reports” of their own to share high-level pricing information.
The Interfaith Center on Corporate Responsibility is asking 18 pharma companies to detail price increases on their top-selling branded drugs and the reasoning behind them. The group has proposed resolutions for US drugmakers to put to a shareholder vote and sent letters to those outside the US to request the information.
Donna Meyer, Mercy Investment Services’ director of shareholder advocacy, said that Merck & Co., Pfizer, Johnson & Johnson, Amgen, AbbVie, Biogen, Bristol-Myers Squibb, Eli Lilly, Gilead and Vertex each pushed back on the resolutions, according to FiercePharma.
The US companies largely resisted on two grounds, Meyer said. They said drug pricing is complex and that consumers wouldn’t understand it, and that disclosing the information would put them at a competitive disadvantage.
On pricing complexity, Meyer said, “They’re right.”
“Our retort to that is they should be part of the solution, rather than adding to the problem,” Myer continued. “It’s ridiculous that we have such a complex system for drug pricing” that the consumer cannot understand the product and value, she said.
So where are we? Where else…. We’re all waiting for a tweet from Mr. Trump on his reaction to the pharma price-restraint pledges and other pious, goody two-shoeing. That should be interesting, especially if Trump, the politician (after his more sunny sounding address to Congress Tuesday night), responds in a more traditional manner by applauding the companies’ pricing assertions and pledges. Just don’t expect to see drug prices moderate permanently, anytime soon.Steve's Take: #Pharma is big business and price-gouging 101 will continue as usual Click To Tweet
First and foremost, Pharma is a commercial, not a nonprofit, industry. Price increases, sometimes big ones, are far too ingrained and endemic. Once all the political vitriol subsides to its customary residence in the mainstream media, it will be Price-Gouging 101, as usual.