Pricey Pharmaceuticals "Free Market"

Pricey Pharmaceuticals

By Thomas M. Biancaniello M.D.

EpiPen photo GoodRxThe news has been ripe with reports of steep rises in drug prices and the potential effect on patient needs.  Most recently there has been an uproar over the price of EpiPen which is sold as two pre loaded syringes to inject epinepherine (Adrenalin) into the thigh to potentially save the life of a patient having a severe life threatening allergic reaction called anaphylaxis.  This caught everyone’s attention because many parents are purchasing Epipens for the beginning of school. EpiPens expire after a year and must be replaced when they reach the expiration date or when the adrenaline turns pink or brown.

We have all learned that in a “free” market supply and demand determine prices. The supply side determines the basic pricing.  How much does it cost to produce the drug?  Companies frequently cite the high cost of research, development and clinical trials as explanations for the high cost which they pass on to the purchaser.  Our FDA is vigorous in requiring a three phase clinical trial process to approve a drug for general use.  

Phase 1, use in healthy volunteers determine the drug’s most frequent side effects and also how it is metabolized and excreted. This typically involves 20-80 healthy voluteers.  If there is no unacceptable toxicity the process moves to Phase 2 which determines effectiveness – does it help the patient in the way it was designed for?  Often this requires up to 300 patients with continued monitoring for safety.  Phase 3 gathers more information on effectiveness and toxicity as well as dosage, at this point the drug is used in combination with other drugs and with different populations of patients sometimes up to 3,000 patients. 

Patents (granted by Patent and Trademark Office are for 20 years) and exclusivity (granted by FDA for 3-7 years for most) can protect the developer of a new drug from the marketing of a generic equivalent so the company can recover its investment in research and development.  In addition to this, of course, there is the cost of producing the drug (acquiring the resources needed, manufacturing and distributing).  After all is accounted for, the company determines what its profit should be.

What are the demand factors?  1^st is the number of patients who can be treated with the drug.  The more common the affliction, the larger the market (cardiovascular, diabetes, cancer, infections).  Conversely, it can be difficult to get drugs developed for rare conditions or limited populations because the company may never recoup the costs.  2^nd, who is paying for the drug?  If the insurance companies or government do not consider the drug to be indicated or necessary for the patient, the patient has to pay out of pocket. 

Finally, are there group purchasers who can negotiate down the price for the patient?  If there are large purchaser groups in the market such as hospital systems or large insurance networks, there may be pressure on the pharmaceutical companies to accept lower profit margins. 

Unfortunately, the largest purchaser, Medicare is not permitted by law to negotiate drug prices.  

Back to the EpiPen, only one company (Mylan) makes the product. The price of EpiPen has gone from about $100 in 2007 to about $600 for the standard 2-pack (~461% increase). Without a large group purchaser with the power to bargain, the only remedy to exorbitant price increases is the power of public opinion or governmental action to exert pressure to lower the price and reduce profits.  

It is ironic that two senators have daughters on the opposite side of supply and demand tug of war.   Sen. Joe Manchin (D.-W.Va) is the father of Mylan CEO Heather Bresch.  Ms. Bresch’s salary has gone from $2.45 M in 2007 to $19 M in 2016 (675% increase).  Sen. Amy Klobuchar’s (D.-MN) daughter needs to carry an EpiPen. Sen. Klobuchar has asked the Federal Trade Commission and the Senate Judiciary Committee to investigate.

Stay tuned, things could get interesting.

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Thomas Biancaniello, MD is a Professor of Pediatrics (Cardiology) Columbia University Medical Center, Former Chief Medical Officer, Stony Brook University Hospital, Emeritus Professor of Pediatrics and Medicine, Stony Brook University 

Comments

[Michael Ryan]

Thanks for clarifying an issue which has generated so much heat and confusion.