Big Pharma's Bitter Pills

Price Pressure Becoming Pharmaceutical Industry's Bitter Pill as Breakthrough Drug Therapies Break the Bank

With spending on health care growing faster than the growth of the overall economy, the health care sector has been favored by investors. However, rising costs have been a double-edged sword as broad-based efforts to control spending gained political traction. Of particular concern have been drug costs, which are expected to increase 6.5% per year between 2015 and 2022, faster than the 5.8% expected increase in overall health care costs and much higher than the current 1.1% inflation rate.1 At what point do breakthrough drug therapies fail to justify their high cost, and who decides?

One of the results of the upward march in drug costs has been increasing restrictions on access. US-based formulary managers have been culling drugs from their formulary lists for years as part of an effort to control drug expenditures. For example, Pharmacy benefits manager CVS Caremark excluded 27 drugs from its formulary for 2014. Some of these included some highly anticipated new therapies. For example, a new treatment for Chronic Obstructive Pulmonary Disease (COPD), Breo Ellipta, was excluded in favor of current branded products, such as Advair and Symbicort. They did this despite the improved once-a-day dosing regimen that Breo Ellipta (the so-called 'son of Advair') allows. As the Chief Medical Officer of the country's largest drug benefit manager Express Scripts Steven Miller points out, drugs that make dosing easier may not justify a higher price assuming equally effective alternatives exist.

Reimbursement pressures add to the challenges the industry is facing. Gilead's recently launched hepatitis C drug is one example. The drug is effective, well tolerated, and its dosing is simple: one pill a day for 12 weeks. The problem for many formulary managers is that the price is set at $1,000 per pill, amounting to $84,000 for a course of treatment. The drug is a breakthrough in treating hepatitis C, yet there is significant resistance from payers. Quoting Dr. Sumit Dutta, Chief Medical Officer for Catamaran Corp., "We're seeing the shift, where payers are finally going to say, 'It's $84,000, and the other therapy is $50,000 – what am I getting?'"² Likewise, California's advisory panel on state drug coverage recognizes the impact economics has on coverage despite therapeutic advancements. It has called Gilead's drug a "low value" therapy in response to its steep price. Their report notes that, even if they confine treatment to those patients with liver damage, it would still cost the state a mammoth $6.3 billion. Expanding access to all hep-C patients is hardly possible without bankrupting the system.

National payers are also becoming increasingly price sensitive. For the first time ever, Australia is monitoring patient performance to see if a drug is worth its cost. With respect to their coverage of cancer drug Yervoy, the chair of the Pharmaceutical Benefits Advisory Committee Australia asked, "Do we get the survival benefit in the community that we saw in the trials?" Yervoy's high cost combined with an average incremental survival benefit of 3.9 months is causing payers to question the economic value of this $120,000 therapy. Many European countries already implement policies comparing cost with benefit. Germany's AMNOG law requires pharmaceutical firms to offer proof that new drugs deliver benefits over existing therapies. The UK's National Institute for Health and Clinical Excellence incorporates economic considerations before approving drugs for reimbursement by its government.

Paradoxically, drugs are key in helping to control overall health care spending. Consider that patients with the chronic conditions in the chart at right saved $3 to $10 in non-drug spending for each dollar spent on the drugs themselves. This results in savings of $1,200 to $7,800 per patient per year.

Another study looked at the impact on overall Medicare spending upon the introduction of the Part D drug program in 2007. The researchers found increased access to drug therapies produced an overall savings of $13.4 billion for the first full year of the program.³

Innovations contribute to better quality health care and better cost control. For example, the arrival of genetic testing allows for the identification of a preferred course of treatment for a variety of conditions. In cancer, mutations can have a huge impact on the success of a drug therapy and offer insights into what treatment to administer and how a patient might be expected to respond to a drug. That cancer treatments can run around $100,000 makes the cost and advancement of personalized medicine more cost effective despite the additional expense. Even Gilead's Sovaldi makes for a challenging ethical and economic argument: pay for a liver transplant or pay $84,000 for the drug therapy?

Unfortunately, innovation is costing us more and more as drug development has become increasingly difficult and more expensive. The Biopharmaceutical Research Industry points out that it takes 10 to 15 years to bring a drug to market and costs $1.2 billion in research and development.4 The amount quoted likely relates to a landmark 2000 study done by J.A. DiMasi. However, including the cost of drug failures pushes up the cost significantly. Looking at R&D spending relative to drug approvals provides a glimpse of the costs that drug companies must recoup:

Company Total R&D Spending 1997-2011 ($Mil) Number of Drugs Approved Avg. R&D Cost 
per Drug ($Mil)
AstraZeneca 58,955 5 11,800
GlaxoSmithKline 81,708 10 8,200
Sanofi 63,274 8 7,900
Roche 85,841 11 7,800
Pfizer 108,178 14 7,700
Johnson & Johnson 88,285 15 5,900
Eli Lilly 50,347 11 4,600
Abbott Laboratories 35,970 8 4,500
Merck 67,360 16 4,200
Bristol-Myers Squibb 45,675 11 4,200
Novartis 83,646 21 4,000
Amgen 33,229 9 3,700
Sources: InnoThink Center for Research in Biomedical Innovation; Thomson Reuters Fundamentals via FactSet Research Systems via article "The Truly Staggering Cost of Inventing New Drugs."

The reality is that reimbursement pressures will continue to grow despite climbing research costs and therapeutic advancements. But what will be the impact on innovation? If drug companies reduce their prices amid climbing costs, does it hinder their enthusiasm for R&D spending? At the venture capital level, where many new products are born, will investors still be willing to put up money for a product that may take 10 years to come to market in an increasingly hostile pricing environment, or will they prefer to put their capital elsewhere?


¹ CMS' National Health Expenditure Projections 2012–2022.

² Armstrong, Drew. Gilead getting resistance from payers on pricey drug. January 28, 2014.

³ J.M. McWilliams, et al. "Implementation of Medicare Part D and Nondrug Medical Spending for Elderly Adults with Limited Prior Drug Coverage." JAMA 2011; 306(4): 402-409

4 2013 Profile, Biopharmaceutical Research Industry. Pharmaceutical Research and Manufacturers or America.


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