Drug Prices in US Continue to Soar; Are Profits Too High?

Roxanne Nelson, RN, BSN

March 03, 2020

As the price tags of new drugs continue to escalate relentlessly, those high prices put a heavy economic burden on many patients and put some drugs entirely out of reach.

In the meantime, the pharmaceutical industry is making hefty profits off these new drugs. But is industry making too much of a profit?

This question is addressed in three papers and two accompanying editorials published today in the Journal of the American Medical Association.

"One in 4 people in the US has difficulty paying the cost of their prescription medications," notes JAMA deputy editor Gregory Curfman, MD, in one of the editorials.

The collection of articles in this issue "paint a concerning picture about the relationships among rising drug prices, pharmaceutical industry profits, uncertainty about pharmaceutical R&D costs, and lobbying and political donations to gain influence with legislators.

"We anticipate that publication of this information will further stimulate the ongoing national debate on prescription drugs and help rein in increasing drug prices while sustaining innovation in drug development, which is so critical to the health of individuals both in the US and around the world," he adds.

How Do Profits Compare?

One study looked at the actual profits of pharmaceutical companies and then compared them with other large corporations. The authors, led by Fred Ledley, MD, from the Center for Integration of Science and Industry, Bentley University, Waltham, Massachusetts, found that, overall, pharma companies had higher profit margins than companies in other  industries.

The investigators compared the annual profits of 35 large pharmaceutical companies with those of 357 companies that were listed in the S&P 500 Index from 2000 to 2018.

Using information from annual financial reports, they determined that a statistically significant differential profit margin favoring pharmaceutical companies would be evidence of greater financial profit. The main outcomes were revenue and three measures of annual profit: gross profit (revenue minus the cost of goods sold); earnings before interest, taxes, depreciation, and amortization (EBITDA; pretax profit from core business activities); and net income or earnings (difference between all revenues and expenses).

During the study time period, cumulative revenue from all 35 pharmaceutical companies was $11.5 trillion, with a gross profit of $8.6 trillion, EBITDA of $3.7 trillion, and net income of $1.9 trillion.

The 357 companies outside of the pharma industry reported cumulative revenue of $130.5 trillion, gross profit of $42.1 trillion, EBITDA of $22.8 trillion, and net income of $9.4 trillion.

On analysis, the authors found that the median annual profit margins of pharmaceutical companies were significantly higher compared with the other corporations (gross profit margin: 76.5% vs 37.4%; difference, 39.1%; P < .001; EBITDA margin: 29.4% vs 19%; difference, 10.4%; P < .001; net income margin: 13.8% vs 7.7%; difference, 6.1%; P < .001).

The differences were smaller when the models were controlled for company size and year, and when only those pharmaceutical companies that reported research and development expenses were included in the analysis. 

"These analyses also showed that there was considerable complexity underlying the differential profitability of pharmaceutical companies," write the authors, adding that "data on the profitability of large pharmaceutical companies may be relevant to formulating evidence-based policies to make medicines more affordable."

In an accompanying editorial, David M. Cutler, PhD, from the Department of Economics, Harvard University, Cambridge, Massachusetts, writes that a limitation of the study was that the authors "did not account for capital expenditures (such as a buying a drug from another company)" when looking at net income. "That is more common in the pharmaceutical industry than in other industries and may have tilted the results to finding an underestimate of costs and thus an overstatement of net earnings among pharmaceutical companies," he writes.

But even when these expenses are excluded, the "positive return differential" still isn't evidence that the profit is too high, he maintains, and he points to the economics involved in drug development. "Like several other industries, the pharmaceutical industry has very high fixed cost and very low marginal cost," writes Cutler. "It takes substantial investment to discover a drug or develop a complex computer code, but the cost of producing an extra pill or allowing an extra download is minimal."

The way that these fixed costs are recouped is for companies to charge above cost for the product once it is developed. "If these upfront costs are not accounted for, the return on the marketed good will look very high," he says.

Bringing the Drug to Market

Another study used audited financial disclosures from publicly traded companies to evaluate not only the costs involved to bring a successful product to market, but also the expenses incurred by the many failures at various stages of development.

Led by Olivier J. Wouters, PhD, London School of Economics and Political Science, United Kingdom, this team estimated the cost of bringing a new drug into the marketplace. They looked at drugs that were approved by the US Food and Drug Administration (FDA) between 2009 and 2018, using data from the US Securities and Exchange Commission, the Drugs@FDA database, and the NIH's database of clinical studies, ClinicalTrials.gov, in addition to published data on clinical trial success rates.

A total of 355 new drugs and biologics received approval during the study period, and research and development (R&D) expenditures were available for 63 (18%) products that were developed by 47 separate manufacturers.

When the data were controlled for the expenses incurred by failed trials, the median capitalized R&D investment to bring a new drug to market was estimated at $985.3 million, with an estimated mean investment of $1.335 billion.

When categorized by therapeutic types (for those with five or more drugs), the mean estimated expenditures ranged from $765.9 million for nervous system agents to $2.771 billion for antineoplastic and immunomodulating agents.

Writing in an accompanying editorial, Kenneth C. Frazier, JD, Chairman/President/CEO, Merck & Co Inc, comments that this study "contributes new perspectives on the costs associated with drug research and development."

However, he emphasized that "regardless of the precision of numerical estimates, one conclusion is clear: drug development is fraught with the risk of failure and ever-increasing development costs; these factors contribute to disturbing projections of further declines in research and development productivity across the industry and the influence that could have on the innovation ecosystem."

Net Pricing Trends

A third study in the same issue looked at a different aspect of drug costs. Inmaculada Hernandez, PharmD, PhD, of the University of Pittsburgh School of Pharmacy, Pennsylvania, and colleagues evaluated the extent to which manufacturer discounts have offset increases in the list price of branded pharmaceutical products sold in the US.

They conducted a retrospective descriptive study using 2007–2018 pricing data that was obtained from the investment firm SSR Health for branded products that came on the market before January 2007 (n = 602 drugs). The net prices of the drugs were estimated by compiling company-reported sales for each product and number of units that were sold in the US.

During the 11-year study period, list prices rose by 159% (or 9.1% per year); at the same time, net prices increased by 60% (or 4.5% per year). Discounts increased from 40% to 76% for Medicaid and from 23% to 51% for other payers. Overall, the increases in discounts offset 62% of list price increases during this period.

Of note, there were considerable variations across the different therapeutic classes. Treatments for multiple sclerosis (n = 4) showed the greatest increase in both list (439%) and net (157%) prices, whereas the list price of lipid-lowering agents (n = 11) increased by 278% and net prices by 95%. List prices of tumor necrosis factor inhibitors (n = 3) increased by 166% and net prices by 73%; list prices of insulins (n = 7) increased by 262% and net prices by 51%.

The list price increases were lowest (59%) for oncologic agents (n = 44), but as discounts only offset these increases by 41%, it translated into a 35% increase in net prices.

"The widening gap between list and net prices is increasingly discussed in policy-making and among researchers, but there have been little data to inform these discussions," write the authors. "Although discounts partially offset list price increases of branded products from 2007 to 2018, there was still a substantial increase in net prices over this period."

Frazier, the Merck chairman, noted in his editorial that this analysis provides a reasonable overall approximation of net pricing trends but does not asses the most critical pricing issue, which is the patient's out-of-pocket costs.

"Manufacturer discounts from list prices are generally not passed on to patients, and many patients are exposed to the full list price of drugs before they reach their deductibles, out-of-pocket spending caps, or both," he writes. "The drug rebate system must be reformed so that patients benefit directly from the discounts and other pricing concessions that currently benefit the insurers and pharmacy benefit managers.

"The current system perversely creates incentives that favor choosing products with higher list prices, a practice that further penalizes patients with high deductibles or high co-insurance plans," he added.

Studies: Ledley's study was supported by the National Biomedical Research Foundation and he has disclosed no relevant financial relationships. Hernandez is funded by the National Heart, Lung, and Blood Institute and reported receiving scientific advisory board fees from Pfizer outside of the submitted work. Wouters has disclosed no relevant financial relationships.

Editorials: Cutler has disclosed no relevant financial relationships. Frazier reports being the Chairman and Chief Executive Officer for Merck & Co Inc; serving as a board member for the Pharmaceutical Research and Manufacturers of America; and serving as a board member for Weill Cornell Medicine.

JAMA. Published online March 3, 2020
Studies : Ledley et al, Abstract; Wouters et al, Abstract; Hernandez et al, Abstract

Editorials:
David Cutler
Kenneth Frazier
Chaarushena Deb, Gregory Curfman

 

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