Why do new medications cost so much?

In response to a reader’s request, I will address the cost of medications for MS. She asked specifically about Obamacare causing this, but the issue is much bigger and more complex.

What do you pay for when you buy a brand name medication? Why do they go up in price so dramatically? How can we get them cheaper?

To provide a definitive “white paper” to explain all this would be hundreds of pages. If you will permit me, I will instead outline for you in a more understandable fashion, although you must give me the leeway to make some statements which are not explained in more detail.

First, let it be said that I am a great admirer of the pharmaceutical industry and capitalism in general. No other industry has performed for humanity in this way. The fact that you have at your disposal thousands of very cheap medications is due to enormous investments in scientific research and plain hard work to show these drugs work. These costs are mostly manpower and factories. Once feared conditions are now routine – hypertension, diabetes, arthritis, ulcers, pneumonia, cardiac disease, and many types of cancer. Moreover, you are likely to get these medications at pennies on the dollar of what they originally cost.

The current cost to bring a new medication to market is about $1 billion, give or take a few hundred million. Why so much? Manpower, safety testing, and almost all government regulation. All major companies require extremely rigorous testing with thousands of people over many years, and all this data is carefully collected in a rigid setting using somewhat expensive and out of date methods (required by the governments). And it takes 7-10 years to get to market. About 50% of drugs which enter phase III testing will fail for safety or efficacy. To get approval, there must be both. So more or less a new drug has to clear several billion dollars of revenue. What amazes me is that so many companies will place enormous amounts of capital at risk. Very few blockbuster profits have been made, but the system produces continual innovation. In a large number of cases, the brand name drugs are superior to, or have no comparable drug, in the generic market place.

How do drugs become generic? Patent law specifies a monopoly on a new product (an involved process on it’s own) for a minimum of 17 years, and in some cases 20 years. So after this time, other companies are free to try to produce their own versions. Since many drugs are chemicals which can be made in large bulk and packaged using available technologies, there is a huge economy to competition and scale.This results in pharmacies giving them away to get you and come in and shop for milk , cheese, and butter, and over the counter cough and cold remedies, which make much more money.

So why are brand name drugs expensive – we said monopoly is one reason, but that money in large part goes to reward the risks and investment taken to produce the drug. About 1/3 of revenues go into production costs, 1/3 back into research and development, and 1/3 marketing/distribution/profits. Sounds reasonable? Well why then does the cost keep going up? There is the problem.

Any good business charges what the market will bear. But is healthcare really a market? Yes and no. Insurers and consumers have influence by choosing products, but if products are limited, or if they are quite different, these are not as powerful. Moreover, a large part of the cost is borne by a third party – insurance, or ultimately governmental funding. So only a percentage is passed on to the consumer.

How do drug companies increase profits? Well, they can either sell more drug, or raise the price. Market is limited and there is competition. They sell more drug by providing incentives to patients to use their product, e.g. copay rebates. These rebates may expire. Insurance companies may force someone to change products.

How does increasing the price help? Well in some cases they get many times more money from the insurance than from the consumer. Some companies like Bayer (Betaseron), have adopted this strategy to provide a 100% rebate of copay to the consumer. Other companies like Pfizer/Serono (Rebif) try to get insurance companies to do the work for them and sell their drug to the pharmacy/insurance at a lower cost and don’t provide the consumer assistance.

What about people on Medicare Part D, TRICARE, Medicaid? Well, the manufacturer is not permitted by the government to give you assistance unless you meet some economic criteria (near poverty). The insurer wants to, but the government calls it a “kickback” (corrupt practice).

So what was behind the recent run up in drug prices? In 1993, when Betaseron came to market it cost about $17000 a year. Now that drug is $47000 a year. Did costs go up? No. The same factories have been making the drug for 20 years. But new drugs came to market, and when they did they needed to recover their costs of development, and had some advantages, and no competition, so they set their prices higher. What happened then? Well, those companies with older products were able to raise their prices because now the market would bear it.

The most dramatic examples have occurred when the US government instituted Medicare Part D prescription coverage. Previously, many of these patients were given subsidized or free drug. Since now the government would foot the bill, this is the greatest bonanza a company would hope for, and because the government was promising with one hand to help pharma, and the other hand to beat them if they did not control costs, Pharma took the initiative and dramatically raised costs for fear in the future government would not permit them to do so.

The other major recent event was the advent in late 2010 of a new and improved therapy known as Gilenya by giant Novartis. Novartis priced this drug at a highly criticized and outlandish cost of nearly $50,000, and subsequently jacked it up even higher. Why? they only have 6 years to recover the costs of a 20 year research program, and the drug is twice as good as many of the drugs on the market. This was nearly twice the cost of the other drugs. So everyone else raised their drug prices too.

One last factor driving costs is that the patent on Copaxone is expiring in 2013, and three other companies are lined up to knock it off. It is a very cheap to make, 1960s technology, and TEVA pharmaceuticals has been wildly profitable due to the recent increased revenues, low production costs, and captive market, since unlike interferon-beta, no glatiramer products compete in the market. The actions of TEVA can only be described as nonadmirable and most would consider it an abuse. At the same time, they started provided much less assistance. Most of my colleagues have interpreted it as greed, pure and simple, the worst of capitalism. TEVA also embarked on a landmark course of suing other companies to stop them from doing what is legally permitted. Ironically, in the past, TEVA has usually been the one knocking off other drugs and getting sued. Both US Food and Drug Administration and the European counterpart have stated that Copaxone can be simply knocked off as a generic drug. TEVA has unfortunately suffered a major failure in drug development of laquinimod (another subject to blog about).

So my advice is that if Rebif is costing you too much, go talk to Bayer about Betaseron. You’ll likely get a better deal. Bayer has been rebating everyone’s copay and the other companies don’t do this.

Beginning 2013, the advent of multiple competing versions of generic glatiramer acetate (Copaxone) will mean you will have pressure to use this drug instead of Rebif, Betaseron, Extavia, Avonex, Gilenya, and Tysabri, since the cost will be much lower. Patients new to MS will be required to do glatiramer and “fail” regardless of whether your doctor thinks this is right for you.

I am of the opinion that Copaxone (glatiramer) does not work well for many MS patients, so I do not relish this development. I do however have faith that our capitalistic system will continue to perform for people with chronic disease. However, the excesses which occur along the way will likely result in more regulations, which will simply be passed on to the consumer and taxpayer.

Obamacare? Well it is the government taking over healthcare. How well do you think that is going to work?

Samuel F. Hunter, M.D., Ph.D. is a neurologist specializing in neuroimmunology and neuroimaging, and has a remarkably broad background in pharmacology, image analysis, medicine, and neurosciences. He directs the Advanced Neurosciences Institute, Novel Pharmaceutics Institute, and NeuroNexus Center for research and education in Franklin, Tennessee, a suburb of Nashville. He participates and directs a multiple sclerosis clinic and many research trials for multiple sclerosis and its related conditions. He consults or performs contract research and consults for many pharmaceutical companies. Dr. Hunter works for many pharmaceutical companies, does research for them, and patient education under their auspices.

Copyright 2012, Dr. Samuel F. Hunter

Advertisements
Leave a comment

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: