Big pharma won’t stop raising prices in 2017 — it’ll just do it smarter

January 3, 2017

By Emma Court

Big pharma won’t stop raising prices in 2017. But it will start doing it smarter.

Critics found it easy to vilify Mylan Inc. MYL, +0.03% as a heartless corporation making a lifesaving product — the EpiPen treatment for allergic reactions — economically out-of-reach for children. And the industry has learned its lessons from the fallout, experts say.

Pharmaceutical companies were once able to decry price hikers as a few “bad actors” that weren’t representative of their industry, but that was in 2015. Mylan was firmly one of their own, and plenty of others were making big price increases in 2016, Sanofi SNY, -0.30% AbbVie Inc. ABBV, -0.69% Pfizer Inc. PFE, -0.09% Bristol-Myers Squibb Co. BMY, +0.27% and Valeant VRX, +0.80% among them.

But after several years of public backlash over big price increases, the industry may need them more than ever. Despite the passage of a law that should speed up drug approvals, drugmakers are facing a new year that heralds fewer new products, less pricing power and formidable new commercial pressures.

“You don’t want to kill the goose that lays the golden egg,” said David Balto, an antitrust attorney in Washington, D.C., who served as Federal Trade Commission policy director during the Clinton administration. “Traditional drug manufacturers are seeing the penalties of bad press attention and are being more cautious than they’ve been in the past.”

Here’s how experts say drugmakers will try to boost prices while avoiding the spotlight.

Focus on high-need diseases, and set initial prices high

At about $81,000 for a course of treatment, Gilead Sciences Inc.’s GILD, +1.17% Sovaldi — nicknamed the “$1,000 pill” — is considered the most expensive drug in the U.S.

Some, including the drugmaker, argue that the price tag is justified. They note that a cure wasn’t previously available for hepatitis C and say the drug is cheaper than the infectious disease’s assorted costs over the years.

That model may become the norm. Drugmakers can charge the most in particularly underserved or deadly disease areas, such as rare diseases and oncology.

Setting high prices does risk the initial public outrage Gilead faced over Sovaldi. But the company can then follow by setting small price increases — a pharmaceutical strategy known as “skimming” — and perhaps avoid subsequent scandal, experts say.

Arguing that a drug is truly innovative and so, worth the cost is “industry’s best pricing defense” next year, said Leerink Partners analyst John Sullivan. “The focus has been on price increases rather than price levels, and this dynamic will be important to monitor going forward,” he said.

Health insurers and employers are willing to pay for pricey “orphan drugs” because they usually have no competition, according to Sullivan.

”There are rare diseases where there’s 1,000 patients in the country taking a particular drug that costs half a million dollars a year — what are you going to do, cut them off?” said Irina Koffler, managing director and senior analyst at Mizuho. “Then you may need to hospitalize them or pay for other medical interventions. The alternative may be more expensive or worse.”

Evidence suggests this pricing strategy has already begun. Older cancer drugs had much bigger price hikes — around 23% — than the 6% increases seen on newer drugs, according to an Oct. 6 analysis published in JAMA Oncology.

Companies are guiding their research and development investments into cancer and rare disease treatments “because they view these areas as ones of relative pricing freedom,” said Geoffrey Porges, Leerink Partners’ director of therapeutics research and managing director of biotechnology.

Rare disease treatments tend to have starting prices of $300,000 to $400,000 a year and cancer treatments start at $10,000 to $20,000 a month, said Porges.

But it’s not foolproof. You’re “still going to get some outcry from that price tag,” said Leigh Purvis, AARP’s director of health services research. “I don’t know exactly how effective that method is.”

Increasing prices on non-vital drugs

This fall, Novum Pharma reportedly jacked the price of its Aloquin dermatologic cream by 128% overnight — to $9,500. Another drug, the erectile dysfunction treatment Stendra, has seen a 129% price increase over the last 2½ years, according to drug price-comparison website GoodRx.

They are two examples of major price hikes seen in the lifestyle and dermatology categories of late, said Michael Rea, founder and chief executive officer of Rx Savings Solutions, a software company that works with employers and health plans so patients can comparison shop.

Two skin disorder creams ranked among the branded drugs with the highest percentage increases in retail price over the last decade, according to an AARP report released this week that was co-authored by Purvis. The two Valeant-manufactured creams, which have had price hikes of more than 2,000%, were joined by an insulin product and two medications for mental illness.

In contrast with something like a cardiovascular drug, products like these tend to have insurance coverage limits or may not be covered, Rea said. But people may still be willing to pay as prices go up, experts say.

“While it may not be life-threatening, it really registers from a psychological standpoint,” he said. “If you’re treating a skin condition, say you have acne, you might really be self-conscious about it.”

Of course, increases on these products run the risk of a basic economic rule: Patients can say “I don’t value it enough, I’m going to stop taking it, or taking it less,” Leerink’s Porges said.

Shifting the conversation to PBMs

Mylan’s Bresch has repeatedly sought to shift blame for price increases from the company to pharmacy-benefit managers, which serve as middlemen in the complex pharmaceutical pricing system.

The role of PBMs is to leverage drugmakers against each other and bring drug prices down. But rapid consolidation over the last decade has made them more powerful. A handful of players — Express Scripts Holding Co. ESRX, +1.38% UnitedHealth Group Inc. UNH, +0.19% and CVS Health Corp. CVS, +1.58% — now dominate the market.

PBMs benefit employers, health plans and insured consumers by negotiating drug prices down from the list or retail price. But debate about their role has focused around the cut PBMs get of the negotiated rebates, with critics arguing that they benefit from higher drug prices.

“PBMs are both part of the problem and part of the solution,” said Porges. They’re key to negotiating with manufacturers but “aren’t necessarily always aligned with their customers’ interests because of the structure of the rebates.”

At a fourth-quarter guidance call last week, management for Express Scripts Holding Co. ESRX, +1.38% — the largest PBM in the U.S. — emphasized the “significant discounts” the company negotiates for clients and said they expected to make $1.8 billion in client savings possible next year.

Short seller Andrew Left alluded to the PBM debate when he targeted Express Scripts this month. His firm, Citron Research, claimed on Twitter that Express Scripts will be targeted by the president-elect in the effort to bring down drug prices. (Read more about how Trump’s comments brought down shares of biotech and pharmaceutical companies.)

Even if it’s done under pressure, drug manufacturers are still the ones raising prices, Purvis said.

“How much of that is finger pointing and a very clear attempt to shift the conversation?” she said. “Who’s the starting line, who’s the person who’s setting a price?”

Reducing the costs consumers see

The EpiPen furor was in many ways prompted by a changing health insurance landscape. Drug prices are going up, but structural shifts in health insurance have exposed consumers to more of the cost of their prescription drugs than ever before.

Drugmakers have responded with programs such as copay savings cards, which provide a discount on out-of-pocket costs for patients with commercial insurance. A partnership announced in December by Eli Lilly & Co. LLY, +0.12% and pharmacy-benefit manager Express Scripts provides up to 40% discounts on insulin for patients with the highest out-of-pocket costs.

But critics say these programs upset incentives put into place by health insurers and benefit drugmakers themselves at the expense of overall health costs.

“At the end of the day, the consumer is always paying for it, in some form or fashion,” said Rx Savings Solutions’ Rea. “They may think they’re getting a really good deal but in reality, it’s costing them more money.”

A patient might use the card to lower their out-of-pocket costs, for example, but the drug could cost their health plan more — leading to higher premiums, which the patient pays.

Recent research has supported some of these claims, including a National Bureau of Economic Research paper published in October. And more such programs may be on the horizon, market watchers say.

Self-regulating to stave off external regulation

In early September, Allergan AGN, +0.28% CEO Brent Saunders did something new and rare for a pharmaceutical company’s leader, disavowing those who’d made “aggressive or predatory price increases” and pledging that Allergan would make only single-digit percentage increases once a year.

In December, Novo Nordisk A/S NVO, +0.06% became the second major drugmaker to do so.

The election of Donald Trump had some critics saying Saunders had severely miscalculated the political environment. Despite a recent comment by Trump about planning to “bring down drug prices,” his administration is not expected to prioritize drug price regulation.

Two doesn’t quite make a trend, of course. But when he made his pricing pledge, Saunders pushed for other drug companies to “formulate their own self-policing actions” for the good of both companies and their patients.

Critics say self-regulation is really aimed at keeping price hikes out of the news and regulators’ field of vision. At the least, experts say, voluntary self-regulation suggests pharmaceutical companies view pricing as an issue that’s here to stay.

“There was a time when 10% [price increase] would have been unthinkable,” said Purvis. “And now to them that’s an example of holding a line and good behavior.”

This story was first published on Dec. 19, 2016.