3 takeaways from a summer of pharma price gouging

by Daniel Hoffman

Published Sept. 16, 2016, 11:37 a.m. ET

During the summer a lot of media attention has focused on the dramatic price increases of certain medications. Some of those medications are not new, "miracle" cures. In the case of Mylan's EpiPen, for example, the medication is decades old. Part of the outrage is due to the fact that Mylan was able to achieve monopoly power for its product from a political fix that prevented competitors from launching their own brands with other injector pens.

Here are a few lessons to be learned from this summer of shocking drug prices.

1. The drug price increases that pilfer American pockets don't come mainly from "outlier" companies.

Big Cap pharmas point their fingers at the Mylans, Valeants and Turings and try to label them as eccentric companies that unjustifiably tarnish "responsible" drug companies with staggering percentage increases to drug prices. Don't believe this misdirection. The enormous price hikes by so-called outlier companies don't squeeze most people as much as the routine, smaller percentage boosts by top tier pharmas such as Pfizer.

According to Deutsche Bank analysts, Pfizer in January raised the list prices on more than 100 of its products by an average of 10.6 percent. An even bigger hit to consumers comes from some Pfizer increases that are smaller in terms of percentage, but bigger in absolute dollar amounts. These include price increases on Pfizer's pain medication Lyrica (up 9.4 percent) and a 5 percent increase on breast cancer drug Ibrance. According to data published early this year by the information supplier Wolters Kluwer, most prices on existing Pfizer products were scheduled for 2016 price increases between 9 and 20 percent.

The CEO of another Big Cap pharma, Allergan's Brent Saunders, denounced outlier companies and pledged pricing restraint right after Labor Day. Despite this recent display of public concern, Allergan boosted the prices for 40 of its brand drugs by an average of 9.1 percent in January.

The Truveris consulting firm found that drug prices for all of 2014 rose 10.9 percent, but prices on patent-protected brands increased an astonishing 15 percent during that year. This overall pattern of predatory pricing comes mainly from the "restrained" increases of "responsible" drug companies.

2. The market for prescription medications cannot bring Americans affordable prices because rigged legislation and patent protection insulate pharma companies from rigorous price competition.

As Melody Peterson wrote in the Los Angeles Times, "eight of the 10 drugs that had the biggest percentage price hikes in 2014 were generic medicines made by multiple manufacturers."

The pharmaceutical industry lobbied hard so that Medicare, the country's largest payer for prescription drugs, could not use its buying power to negotiate drug prices. Beyond that, as a study published last year in the Mayo Clinic Proceedings concluded, U.S. drug prices are higher than those of any other advanced nations because a market that fails to regulate prices allows pharmas to charge whatever they can get away with.

3. Pharma's unconscionable price increases are not justified by the need for research funding to develop new drugs.

A study published in the Journal of the American Medical Association late last month found "little evidence" that drug prices reflect R&D costs. The authors wrote that, instead, "prescription drugs are priced in the United States primarily on the basis of what the market will bear."

Beyond that, researchers at Carleton University in Canada last year looked at the correlation between drug price levels and R&D spending in the 31 countries of the Organisation for Economic Co-operation and Development (OECD). They found that lower prices do not reduce the emergence of new drugs. If anything, the authors suggested that the opposite result is likely – price controls would prompt drug companies to develop more groundbreaking drugs.

The Carleton researchers found that in the current U.S. market, "80 percent of new patented drugs...provide no significant, additional therapeutic benefits...compared with existing alternatives." This preponderance of me-too new drugs results from the fact that the laissez faire market here allows drug companies to price later brands that possess virtually indistinguishable clinical profiles at the same level as the first entrants in their respective classes. This situation merely incentivizes drug companies to "develop non-innovative and less risky 'me-too' drugs instead of new innovative medicines for unmet needs." Higher prices just encourage drug companies "to invest in marketing instead of R&D."

The idea that high drug prices are needed to fund the development of tomorrow's medications is merely a flimsy excuse for larger profits.

Finally, the recent publicity has prompted members of Congress and other politicians in both major parties to criticize pharma companies for exploiting American consumers and taxpayers. Drug company executives claim the publicity and the criticism are misinformed and can only hinder the search for newer, better medications. At the same time, they tell investors that the current ruckus will cause them no real harm and eventually fade away.

This reveals the ultimate lesson from the summer's fuss over drug price increases. The pharmaceutical industry's political power is so formidable and is so deeply entrenched in the country's culture and economy, that it can get away with looting Americans and remain unconcerned about facing any consequences.

People that don't like this state of affairs should do something about it.