For Prescription Drug Makers, Price Increases Drive Revenue

Boosts outpace inflation and often are imposed even when demand for a medication falls

By Joseph Walker, Wall Street Journal, October 05, 2015

Demand for a drug called Avonex has declined every year for the past 10.

Not a problem for its manufacturer. U.S. revenue from the drug has more than doubled in that time, to $2 billion last year.

The key: repeated price increases. The multiple sclerosis drug’s maker, Biogen Inc., raised its price an average of 16% a year throughout the decade—21 times in all.

It is an example of drug companies’ unusual ability to boost prices beyond the inflation rate to drive their revenue, even when demand for the drugs doesn’t cooperate.

A result of this pricing power is that across 30 top-selling drugs sold by pharmacies, U.S. revenue growth has far outpaced demand in the past five years, according to a Wall Street Journal analysis of corporate filings and industry data. Revenue growth averaged 61%, three times the increase in prescriptions.

Attention has focused lately on new drugs with eye-popping prices and on a few whose price a new owner abruptly raised several-fold. But what many drug companies rely on for sales growth is a pattern of steady increases, year in and year out, on older medicines. Wholesale-price increases for the 30 drugs analyzed by the Journal averaged 76% over the five-year stretch from 2010 through 2014. That was more than eight times general inflation.

For 20 leading global drug companies last year, 80% of growth in net profits stemmed from price increases in the U.S., according to a May report by Credit Suisse .

Pricing power helps some in the pharmaceutical industry to compensate for sluggish demand, new competition or weak product pipelines. “Pricing has covered up a multitude of other disappointments over the past 15 years” in the sector, said Geoffrey Porges, a biotech analyst at AllianceBernstein LP.

This is no cause for cheer, of course, to certain other market participants, notably the many large companies that pick up the tab for their employees’ prescriptions. Drug pricing has helped drive up spending on benefits at Lowe’s Cos., said Bob Ihrie, a senior vice president at the home-improvement retailer.

“It’s one thing when you read about a new drug in the newspaper, and all the costs of launching it. But when it’s drugs that have been on the market and you see these price increases, you go, ‘Why would this be?’ ” Mr. Ihrie said. “I feel like we’re really being taken advantage of.”

Pharmaceutical companies defend their pricing as helping to finance development of innovative medicines, an expensive and risky enterprise they say wouldn’t attract investment without the potential for large returns when a new drug succeeds.

Many in the industry also say a focus on drug prices is shortsighted because it overlooks drugs’ role in helping to contain overall health-care costs by preventing disease complications.

Robert Zirkelbach, a spokesman for Pharmaceutical Research and Manufacturers of America, a trade group, said that eventually, prices for all drugs will decline sharply when they lose patent protection and go generic.

Avonex maker Biogen has noted the central role of price boosts in the drug’s success. “For 2014 compared to 2013, the increase in U.S. Avonex revenues was primarily due to price increases, partially offset by a decrease in unit sales volume of 10%,” Biogen said in its 2014 financial report. A similar note has appeared in its annual reports since 2005.

But Biogen points to the way this revenue funds its quest for new medicines. The company spent an average of $1.19 billion annually on R&D from 2005 through 2014, or 24% of total revenue. Besides Avonex, the company has brought out two other multiple sclerosis drugs and is studying a treatment to repair nerve damage from the disease.

“Over the past two decades, which is the life of Avonex, we’ve done more than any other company to improve the treatment of multiple sclerosis,” said Daniel McIntyre, a Biogen senior vice president. “The reality is that revenues from therapies available today make this possible.”

Users and payers

What gives the pharmaceutical industry so much pricing power? Part of the reason is the patent protection drug makers have on new products, which keeps competitors from offering copies for up to two decades. “It’s easier for consumers to substitute a car that meets their needs than it is to substitute a patented drug because no one else can make it,” said Fiona M. Scott Morton, an economics professor at Yale University.

Another part of the answer is the insurance-based health system, in which consumers rarely feel the full brunt of price increases.

In most markets, products are ordered, paid for and consumed by the same party, notes Sara Fisher Ellison, a Massachusetts Institute of Technology economist. But prescription drugs are ordered by a physician, used by a patient and usually paid for by a third party, either an insurer or a large employer.

Neither doctors nor patients typically have much of a sense of drugs’ prices. That blunts what economists call price sensitivity, the tendency of higher prices to curb demand.

“It confuses incentives and dampens the normal economic dynamics,” Ms. Ellison said.

In addition, some drugs long on the market develop customer loyalty that provides a price umbrella. If patients who started on a drug such as Avonex a decade ago are happy with it, they or their doctors may see no reason to switch to a new one that comes along.

At an investment conference in 2009, Biogen’s then-CEO James Mullen was asked whether the company could keep raising Avonex’s price. He said he was surprised at “how unresistant the market has been to price increases.”

Mr. Mullen declined to comment.

Until about a year ago, price increases were garnering little public attention because spending on drugs had moderated. U.S. expenditures for most prescription drugs grew by an average of 2.7% from 2007 through 2013, according to data from the Centers for Medicare and Medicaid Services. That was a slower growth rate than in several previous years, due largely to greater use of generics as some big-selling drugs lost patent protection.

The moderating price effect from generics now is tapering off. Pharmacy-benefits manager CVS Health Corp. said drug spending by its customers jumped 12.7% last year, more than triple the prior year’s rise.

Price boosts represented more than 80% of this increase, CVS said.

Similarly, Medicare’s spending on its prescription-drug benefit rose 8% last year on a per capita basis, after several years of averaging less than 1%. A leading reason for the surge was “price increases for both brand-name and generic drugs,” Medicare’s board of trustees said in a recent report.

The Journal examined 30 of last year’s top drugs by revenue that are sold by U.S. pharmacies, looking at data from the start of 2010 through the end of 2014. The analysis used corporate financial statements, prescription figures from IMS Health Holdings Inc. and wholesale-pricing data provided by Truven Health Analytics. It excluded drugs that weren’t yet on the market in 2010 or for which full data weren’t available.

For 18 of these 30 drugs, both revenue and the number of dispensed prescriptions for them rose. But revenue rose twice as fast as prescriptions.

For the cancer drug Gleevec, from Novartis AG, prescriptions rose 2% over the five years, but the wholesale price doubled, to $102,000 for a year’s supply at the end of 2014. The price increases helped to drive Novartis’s U.S. revenue from the drug up 69% over the period, to $2.17 billion in 2014.

Gleevec is a strikingly effective drug that has been approved for more cancers since its 2001 launch for chronic myeloid leukemia, or CML. Asked about the price increases on Gleevec, Novartis said it is “a life-changing medicine” whose “success is funding the next generation CML innovations.”

Drug makers often give rebates from the wholesale prices—also called list prices—to large purchasers such as insurers and pharmacy-benefit managers. Even so, the wholesale prices are a meaningful measure because they are the starting point from which rebates are given.

In competitive markets such as asthma and diabetes therapy, which have multiple drugs that can be substituted for one another, manufacturers often give especially large rebates as they seek better positioning on insurers’ “formularies” of covered drugs.

Take insulin, of which there are several brands, among them Humalog from Eli Lilly & Co. The company gave rebates averaging 56% of its list price last year, Credit Suisse estimates.

A spokeswoman for Eli Lilly said that although it doubled Humalog’s price over five years, steep rebates meant that its net price rose only 3%.

Shallower discounts

With a drug that is harder to substitute for, such as Amgen Inc.’s arthritis treatment Enbrel, discounts are shallower. Amgen raised Enbrel’s wholesale price 88% over the five years. The rebates it provided averaged 21% last year, Credit Suisse estimates.

Over the five years from 2010 through 2014, U.S. prescriptions for Enbrel rose 2% while Amgen’s revenue from it went up by a third.

Some rebates are locked in. Medicaid and the Veterans Health Administration are legally entitled to rebates of at least 23.1% and 24%, respectively, on purchases of patent-protected drugs. Drug companies must also pay additional rebates to the two health programs if their drug prices exceed inflation.

Among the 30 retail drugs the Journal examined, 10 produced revenue increases for their makers last year despite lower demand.

Prescriptions for these drugs declined an average of 17%. But their wholesale prices went up an average of 80%. After discounts, revenue from the drugs rose 22%.

For two drugs in the 30, both revenue and demand fell. But revenue fell less.

For a different category of drugs—those usually administered in doctors’ offices, such as intravenous cancer drugs—prescription volumes aren’t reliably tracked by commercial databases. To assess these, the Journal identified last year’s 10 top-selling such drugs and analyzed 2010-2013 data on how much Medicare reimbursed doctors for them. Medicare bases these reimbursements on the average price that drug makers report receiving from customers, excluding certain government buyers such as the Veterans Health Administration and Medicaid.

For four of the doctor-administered drugs, the number of billing claims from doctors fell, yet Medicare’s outlays to doctors rose because prices went up.

For example, Medicare payments for Neulasta, an infection-fighting drug sold by Amgen, rose 12% over the four years, while claims from doctors who used it fell 8%.

The manufacturer reported that the average net price it received for this 13-year-old drug rose 24% over the four years, undergirding Medicare’s higher payouts.

An Amgen spokeswoman said the company prices its products to “reflect the economic value that is delivered to patients, providers and payers.”

Avonex, the drug with 21 price increases during a decade of falling demand, reached the U.S. market in 1996. It was just the second drug shown to delay symptoms of the most common form of multiple sclerosis.

The injected drug had been beaten to the market by one called Betaseron, now sold by Bayer AG. Both are genetically engineered versions of a protein called beta interferon. Avonex needed less-frequent injections and soon claimed half the market.

When former CEO Mr. Mullen was asked about the price increases at the 2009 investment conference, he said, according to a transcript: “If there’s price increases that can be taken and delivered to shareholders, we’ll go get it, but I do think we got to make sure we take a long enough view and you don’t start to put this thing in a box, where you get the backlash.”

Today, Avonex is among the least-popular MS drugs, said Clyde Markowitz, a specialist in the disease at the Hospital of the University of Pennsylvania, but it is still used by patients who have had good results. While costs for all MS drugs have skyrocketed in the past decade, Dr. Markowitz said, Avonex’s price growth has been extraordinary.

“It’s absolute insanity, what’s happened,” he said. “For a drug that’s 20 years old, and they just keep jacking up the price.”

Write to Joseph Walker at joseph.walker@wsj.com

http://www.wsj.com/articles/for-prescription-drug-makers-price-increases-drive-revenue-1444096750

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