After the doctor has finally diagnosed your problem — whether it's high blood pressure or low serotonin levels — nothing is worse than drug price sticker shock. How could a prescription possibly cost so much? It's nearly ten times as much as that other drug that supposedly does the exact same thing.
Is this just an example of pharmaceutical industry greed? Maybe. But there are also some perverse market incentives in the drug business that keep prices high, preventing patients from getting the drugs they need - and from not getting the ones they don't.
Let's start with a thought experiment: We need to design a class of prescription medications capable of generating maximum monetary return. Before we begin, however, let's give this new drug category a name. How about "antisepreddants?" For the purposes of our thought experiment, "antisepreddants" can treat an imaginary condition called "sepreddion." Here's our drug information sheet:
Although antisepreddants may not cure sepreddion, they can reduce your symptoms. The first antisepreddant you try may work fine, but if it doesn't relieve your symptoms, or if it causes side effects that bother you, you may need to try another; remember, all antisepreddants have pros and cons, and until you try one, you won't know exactly how well it will work for you.
Some people need to try several antisepreddants before finding the medication (or combination of medications) that works best for them. There are a number of antisepreddants available that work in slightly different ways, and have different side effects.
Most [of the dozens of antisepreddants] work equally well to relieve symptoms, so choosing the right one generally involves [differentiating between] subtle differences [in each medication]. And remember: because some antisepreddants can take as long as eight weeks or more to reach full effect, this trial and error process can take time.
- Adult use of antidepressants almost tripled between the periods 1988—1994 and 1999—2000
- Between 1995 and 2002, the use of these drugs rose 48 percent
- From 1999 to 2009, the number of prescriptions purchased in the United States increased by 39%, while the population grew just 9%
- In 2005, Antidepressants were the most commonly prescribed class of drug in the United States, accounting for 118 million prescriptions annually
- By 2007, that number had increased to almost 121 million prescriptions annually
Every one of our imaginary drug class's features is taken from the Mayo Clinic website titled "Antidepressants: selecting one that's right for you."
Listed on the right are some statistics — collected from IMS Health, the U.S. Centers for Disease Control [PDFs for 2005, 2007], CNN, and the U.S. Census Bureau — that you won't find on the Mayo Clinic's website. But our drug class description, plus these statistics, help explain the commercial value of our "antisepreddant" line of drugs. We've created a consumer expectation that patients need to try many, slightly different drugs. The more new drugs we can supply patients with, the more they'll buy. In addition, the newer the drugs, the more profits for companies who still hold the patents on them and set prices.
Before we go any further, I want to emphasize that depression is a real condition, and I don't mean to suggest that antidepressants aren't a viable or effective option for its treatment. What I do mean to call attention to is the fact that recent years have seen an explosion in the use of prescription drugs like antidepressants, which are offered in a wide variety of slightly different brands — sort of like different brands of slightly different soap. And while this trend isn't surprising in the soap aisle at the supermarket, it's curious to find it happening with medicine prescriptions.
Given that there are literally dozens of antidepressants already on the market — many of which exist in cheap, so-called "generic" forms — how can pharmaceutical companies continue to charge so much money for their newer antidepressants? Especially when many of these new pharmaceuticals provide little to no measurable improvement over any of their predecessors?
Consider the popular antidepressant Celexa. Celexa is manufactured by Forest Pharmaceuticals, Inc. In August of 2002, a year before the company's patent on Celexa expired, another drug manufactured by Forest Pharmaceuticals, Lexapro, was approved by the FDA for the treatment of major depressive disorder. Forest Pharmaceuticals considers Lexapro an "upgrade" to Celexa, even though many patients still find that Celexa is more effective for them. This "upgrade" from Celexa to Lexapro is a textbook example of something called "evergreening" –- a long-term strategy pharmaceutical companies use to extend the lifetime of a drug (i.e. the amount of time that they control the patents and can therefore charge a lot of money for it).
Evergreening is just one of many strategies that drug companies employ to make money on "new" drugs that aren't really new. But why would they do that? Wouldn't it make more sense for these companies to compete in the pharmaceutical market by actually producing innovative drugs that cure conditions we can't treat yet? Unfortunately, this market, and the many regulations governing it, are currently set up in a way that often discourages the kind of innovation that leads to novel treatments.
How did our medical system ever reach this point?
Building A New Drug
For all the research that is funded in hopes of discovering new therapeutics, the fact remains that very, very few of the chemical compounds we discover will make it to a clinical trial, and fewer still will make it to a drugstore; it's estimated that of the drugs that do make it to human trials, just one in five will actually receive FDA approval and be brought to market.
But just how expensive is this R&D process? Well, it turns out that's been the subject of some debate in recent years. Numerous analysts have sought to estimate the average cost of bringing a new drug to market, and those estimates range anywhere from 55 million to around 2 billion dollars per drug.
Where you land in the debate over the true cost of R&D seems to depend largely on whether you see pharmaceutical companies as benevolent entities working towards the betterment of human health and happiness, or heartless megacorporations run by amoral, mustache-twirling fat-cats perpetually looking for a way to turn a buck. And, as is the case with most debates of this nature, the real answer almost certainly lies somewhere in between these two extremes.
The Nature of Patents and Profits
Whether or not you personally believe the cost of research and development to be expensive, it's safe to assume that drug companies will attempt to make up as much of this cost (and others) as possible when pricing any drugs that have already made it to the market. And while the amount of capital that drug companies pour out in the interest of developing new drugs may be somewhat hazy, the amount of money that these companies see flowing in — and the effects of generic-drug competition on that inflow — are much more clear cut.
When a major pharmaceutical company develops a new drug, it can place multiple characteristics of said drug under patent. These characteristics can be anything from the incorporation of a newly-discovered chemical into the drug's formula, to a novel method of drug-delivery.
Generally speaking, obtaining a patent in the pharmaceutical industry is no different from obtaining a patent in any other field; the benefits afforded a pharmaceutical company for the discovery and implementation of a new chemical compound are the same as those afforded Eli Whitney for his patent on the cotton gin, or Buckminster Fuller for his patent on the structure of the geodesic dome. For twenty years after being granted the patent, companies retain the exclusive rights to producing that drug, and can therefore charge pretty much whatever they want for it.
From a financial perspective, having a patent on a drug is one of the most valuable chips in a pharmaceutical company's pocket. Once the patent(s) protecting a prescription drug expire, other companies can start making their own versions of the drug — these generic drugs almost always enter the market at a significantly reduced price. Take Prozac, for example. A thirty day supply of the brand name version of Prozac can run upwards of $130. The generic version? Three dollars. As you might expect, competition provided by the generic drug typically has the almost immediate effect of driving the profits on brand name drugs into the ground.
For a better idea of the kind of financial impact generic drugs can have on pharmaceutical revenues, have a look at this chart, borrowed from an article published in 2007 in the New England Journal of Medicine. According to the article:
[The figure] shows the change in the average relative price of a drug as the number of generic versions increases. The average relative price is the average price of a generic version divided by the price of the brand-name drug. Data are from an FDA analysis of retail sales data from IMS Health [a leading pharmaceutical-industry market research company].
What the figure illustrates is how patent expiry results in falling drug prices. Falling drug prices, in turn, translate into falling profits.
But with retail prescription prices increasing at an average of 3.6% annually (which, I should mention, is much faster than the average national inflation rate of 2.5%) could generics really be taking that big of a bite out of pharma company profits? According to Richard Frank, a professor of Health Economics in the Department of Health Care Policy at Harvard Medical School and author of the NEJM study cited above, the answer is, unequivocally, yes.
The passage of the Hatch-Waxman Act in 1984 injected price competition into the prescription-drug industry by making it easier for generic-drug manufacturers to bring a product to market. This was accomplished by permitting generic-drug makers to skip clinical trials, allowing them to seek FDA approval of their generic-drug formulations before the relevant patents on their brand-name equivalents expired.
These provisions not only made bringing a generic drug to market more economically feasible, they also ensured that generic options could be made available the instant that patent(s) on brand-name drugs expired. This had a dramatic impact on the pharmaceutical industry: in 1984, generic products accounted for fewer than 19% of all U.S. prescriptions; today, industry analysts estimate that this figure is closer to 70%.
According to Frank, generic drugs "save consumers and purchasers of prescription drugs tens of billions of dollars per year." And while he notes that these economic benefits are largely viewed as a success story, he also says the impact of generic-company competition on so-called "originator companies" (the companies that research, develop, and patent new drugs) cannot be discounted.
Consider, for example, that analyses published in June of this year by EvaluatePharma — a leading pharmaceutical and biotech analysis firm — estimate that patent expirations between 2010 and 2016 will result in over $113 billion in sales being lost to generic substitutions.
"Clearly," writes a team of investigators in an in-depth analysis of the pharmaceutical industry, published in Nature in 2010, "...generic competition has created increased pressure for innovative products." It bears mentioning that at the time of its publication, every single one of this review's authors was an employee and shareholder of Eli Lilly and Company, one of the world's most profitable pharmaceutical companies. (More on this later.) But just because pressure for the development of truly innovative drugs exists doesn't mean that they're actually being produced. On the contrary, in the last several years, numerous studies have concluded that R&D productivity has been declining for quite some time.
The "Evergreen" Drug Problem
Frank, author of the NEJM article, speaks to the negative effects that competition between generic and name-brand drugs had had on R&D productivity:
Manufacturers of both brand-name and generic drugs have responded to the provisions of the Hatch–Waxman Act in ways that advance their own economic interests...some effects that are considered socially undesirable, such as a [brand-name manufacturers'] development of a new formulation of a product to extend patent life, can be seen as one cost that is incurred to collect the very large [economically favorable benefits] of the law.
In other words, competition from generic brands has inspired brand-name drug manufacturers to produce new versions of old drugs in the process we mentioned earlier called "evergreening." You'll recall that evergreening is a long-term strategy used by pharmaceutical companies to extend the lifetime of a drug franchise by make up for any future financial losses it will suffer when that drug (not to mention any of their other drugs) is no longer protected under patent laws.
Remember Celexa and its upgrade, Lexapro? In 2003, just one year after Lexapro hit the market, the patent on Celexa expired. When it did, it went from generating over $1.2 billion a year in total sales, to generating less than $1.4 million in just two years. Fortunately for for Forest Pharmaceuticals, Lexapro's sales were more than able to make up for Celexa's losses, earning close to $1 billion in 2003; $1.6 billion in 2004; and $1.8 billion in 2005. Last year, Lexapro ranked 12th on a list of the top 200 prescription drugs by sales, bringing in close to $2.5 billion.
Health policy professor David Light agrees with Frank. In a recent paper for the journal BioSocieties, Light and economist Rebecca Warburton write that current laws encourage major pharmaceutical companies to develop many new drugs that are just tweaks on the old ones, rather than rewarding them for focusing on drugs that are measurably superior to their predecessors. The researchers note that while this particular method of drug development may appear to translate into profits in the immediate future, in the long run it actually hurts major pharmaceutical companies by snuffing out the innovation necessary for real medical breakthroughs.
Even the team of analysts employed by pharma giant Eli Lilly and Company recognizes the lack of innovation in contemporary drug development practices:
The unprecedented combination of reduced R&D output in the form of successfully launched truly innovative [new medicines], coupled with diminishing market exclusivity for recently launched new medicines and the huge loss of revenues owing to generic competition over the next decade, suggest that we may be moving closer to a pharmaceutical 'ice age' and the potential extinction of the industry, at least as it exists today.
Given that nearly everyone seems to agree that the vast majority of newly-developed drugs are failing to offer much in the way of groundbreaking medical value, one is left wondering if Light's assessment of the industry is correct. Our current set of regulations and laws have driven the pharmaceutical industry to develop more and more patented drugs. But often, it's not for the sake of producing medical value. Instead, it's in the sole interest of preserving the commercial value of the major drug producers' pharmaceutical lineups.
Top illustration by Keturah Stickann via Flickr.