Drug Costs

Who Shares Drug Profits?

November 27, 2018 10:35 am

We’re getting perilously close to the beginning of winter, so it’s probably not the right time for a lemonade stand analogy, but bear with us …


When deciding the price for his or her product, a young entrepreneur likely only considers what mom or dad paid for the supplies, if they consider any input prices at all. Parents generally don’t expect to be paid as a supplier and the neighborhood kids don’t try to extract a fee to distribute the lemonade on their side of the street. (Though nothing prevents them from setting up a competing stand.)


The real world, of course, is decidedly more complex. Especially when the product isn’t lemonade, but life-saving medicines. As Axios recently acknowledged, “[t]he system for setting drug prices in the U.S. is a labyrinth,” involving not only the patient and the manufacturer, but “pharmacies, doctors, hospitals and assorted middlemen,” as well. As a result, “[t]he cost of a drug depends on many factors.”


According to Eric Pachman, co-founder of 46brooklyn Research, if a generic drug costs $3 to make, but sells for $15, a price that is five times the drug’s cost, the $12 “profit” is split between at least four entities: the manufacturer, the pharmacy, the wholesalers and the company that manages a patient’s insurance plan’s drug benefits. The last entity in that line actually gets the largest sum, $5.50—or nearly half the profit, Pachman says.


A 2017 Berkeley Research Group report found pharmaceutical manufacturers realize 39 percent of initial gross drug expenditures while other participants in the supply chain receive the rest. Like Axios, that study noted the pharmaceutical marketplace is “complex,” involves “a variety of stakeholders and myriad rebates, discounts and fees—some of which are paid after a prescription drug is dispensed to the patient.”


Those rebates make the question of drug pricing particularly complex. As this blog has noted in the past, each year drug manufacturers provide millions of dollars in rebates and discounts. On average, biopharmaceutical companies allow rebates for more than one-third of the list price of branded medicines. Those rebates and other discounts saved $153 billion in 2017 alone.


The value of these rebates and discounts is growing. The Berkeley Research Group found “the share of gross drug expenditures realized by brand manufacturers has declined (from 41 percent in 2013 to 39 percent in 2015), while the share realized by non-manufacturer entities has increased.”


We wish it was still summer because the facts surrounding the drug supply chain deserve more sunshine.