Drug Costs

Headlines Overstate Drug Pricing Data

January 8, 2019 8:51 am

Two news items battled for headlines during the first week of the new year: the partial federal government shutdown and price increases on a handful of medications.


The Wall Street Journal last week offered context on the latter issue, noting drug “pricing trends … actually have moderated of late” and exploring how those trends will affect investment and, ultimately, innovation.


According to Leerink Partners, the number of new year price increases on existing drugs fell 31 percent and was at its lowest level since 2014. The average price increase this year only was 2 percent. Reporter Charley Grant said the data “is the latest sign that the pharmaceutical industry isn’t chiefly to blame for high health-care costs.” (Click here, here, and here to read APMI’s blog posts on pricing trends.) While using different statistics, a recent Bloomberg story also noted price increases were smaller than in the past.


The Journal and Bloomberg articles also provided important context on the pricing debate, looking at the issue from the investment side and noting how this public pressure could affect efforts to develop new life-saving drugs. Bloomberg’s Rebecca Spalding and Riley Griffin put it this way: “Washington wants drug prices to fall. Wall Street wants stock prices to rise. For some of the world’s largest pharmaceutical companies, pleasing both sides could be a problem.”


Drug-company margins have narrowed significantly. Leerink Partners found the industry’s growth rate will moderate 2 to 4 percent. The industry’s returns on research and development (R&D) spending was 1.9 percent in 2018, down from 10.1 percent in 2010.


Based on these numbers, The Journal‘s Grant suggests the industry might have a harder time attracting investors’ attention in 2019. Indeed, back in July 2018, Leerink Partners analyst David Larsen said, “We believe that if [Trump administration] policies are implemented, then longer term the rate of list price inflation will slow, which is generally a headwind for the entire supply chain.”


A “headwind for the entire supply chain,” of course could be a euphemism for impact on R&D spending. According to Axene Health Care Partners, the 10 largest pharmaceutical companies spent about 17 percent of their revenue on research in 2016, compared to 3 percent for aerospace and defense, 9 percent for computing and electronics, and 12 percent in health care overall. As the Axene report explains, this “large upfront outlay and considerable uncertainty in the drug-development process means that a very high return is sought by investors in drug companies to compensate for these risks.” Smaller margins and investors might take their dollars elsewhere. The Bloomberg report suggested that lower margins could cause increased consolidation in the industry.


As lawmakers put pressure on drug manufacturers, they must consider how investors will react, and what that will mean for patients’ access to care and new medicines.