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A 5,455 percent price increase? Expect more of it

After Pope Francis's visit to the U.S., possibly the biggest news item this week has been the depraved price increase that Turing Pharmaceuticals posted for its drug, Daraprim.

After Pope Francis's visit to the U.S., possibly the biggest news item this week has been the depraved price increase that Turing Pharmaceuticals posted for its drug, Daraprim. Although the 5,455 percent that Turing hiked Daraprim's price is astounding, the absolute daily price is less than that of many other drugs and the practice of gouging prices on specialty drugs is consistent with practices across the industry.

Daraprim is actually a 62-year old generic, pyrimethamine, used for treating a parasitic infection that hits patients whose immune systems have been compromised by conditions such as AIDS or cancer. Prior to Turing's wanton price increase, pyrimethamine sold for a cost of $13.50 a day. Generics companies stopped making and selling the medication because it did not offer them sufficient profit at that price. Without any competitors, Turing CEO Martin Shkreli saw an opportunity to exercise monopoly-pricing power.

Despite the huge percentage increase, Daraprim's daily price of $750 is still less than those of several other brands such as the infamous Sovaldi for hepatitis-C, listed by Gilead at $1,000 a day. Although the deal price for some of those brands can amount to 20-30 percent less than the list, and even Shkreli says he will moderate Daraprim's price in response to public outrage, the fact remains that drug prices across the board have been soaring.

On Tuesday, analyst Vincent Meunier at Morgan Stanley reminded investors that prescription drug spending in the U.S. is now almost 16 percent of total healthcare spending and has grown by more than 13 percept this year, far more than the 6.8 percent average rise during each of the past five years.

In 2014 Medicare's drug costs increased 11 percent and that added spending contributed to an overall cost rise of 2.3 percent for each beneficiary in the program. Daraprim is a generic, a sector where the percentages of price increases have been enormous. For example, this past February Valeant in a single day raised the prices on two generics it bought from another company by 525 percent and 212 percent, respectively.

Specialty drugs drive most of the drug price inflation, both patent-protected and generic. Although specialty drugs make up only 1 percent of all US prescriptions by volume, they account for more than 31 percent of prescriptions by cost. Medicare's costs for specialty drugs grew by more than 45 percent in 2014.

The pharmaceutical industry's lobby and its flacks try to explain away these price increases as necessary for continuing R&D and, despite the blood curdling cost, they see drug expenses as a good value by virtue of preempting higher subsequent costs. But the abject falsity of those explanations has been apparent for some time.

Pharma's socially irresponsible price increases actually are due to three, long-term, constant factors and three current trends.

The three constant factors consist of (1) the government-granted monopoly power enjoyed by pharma, (2) the unmitigated greed and, (3) the Trump-like egos of its senior managements.

First among the more current trends that explain pharma's price increases is the fact that the bountiful profits from emerging countries that managers promised investors for more than a decade are not materializing.

Emerging markets (EMs) account for a big chunk of pharmaceutical revenue. For example, they account for 34 percent of sales at Sanofi and 26 percent at Novartis. In China, potentially the largest EM, the government has started a determined effort to reduce health-care spending. Even where drugs have already made it onto approved lists, buyers can use those prices as the starting point for a second round of bidding. At the same time, the government there has set targets mandating that hospitals get drug spending within a set percentage of their total budget. The reforms have removed incentives that pushed high levels of drug use and the selection of expensive products at Chinese hospitals. In their place, policies now favor using cheaper generics and brands made by Chinese companies, rather than those from international pharmas.

The second current trend that prompts pharma's price gouging is the increasing difficulty faced by companies in promoting their brands to the industry's traditional customer base. Individual prescribers still constitute the vast majority of pharma's customers, but here in the U.S., where pharma companies earn most of their profits, more than half of physician practices – for the first time – restrict reps' access to prescribers. In some specialties, only one in 5 doctors are rep-friendly. In 2012 only 35 percent of U.S. physician practices put tight restrictions on pharma sales staff, but as of this spring, 53 percent limit reps' access.

Hospital-based Integrated Delivery Networks (IDNs) continue to buy medical practices and those organizations face-growing prospects that their revenues will be based on cost-effectiveness outcomes instead of self-managed fees for service. That makes IDNs reluctant to let their employee physicians fall under the influence of pharma reps that seek to promote high-priced brands.

In some of the specialties such as oncology, where pharma is focusing its product development, practices have become especially restrictive to drug reps. Seventy-three percent of oncology practices now limit reps' access to prescribers.

Finally, in many therapeutic categories outside of oncology, an inexorable trend that prompts price gouging is the collapsing me-too pillar of pharma's business model. That consists of a system in which the second, third and later product entrants into a therapeutic class are able to price their brands comparable to the first competitor, despite the fact that the followers' clinical profiles appear no better. The arrangement amounts to cartel pricing as part of an oligopoly. For decades the industry maintained that "it takes the me-too's to pay for the breakthroughs."

Thanks to aggressive formulary management by Pharmacy Benefits Managers (PBMs) such as Express Scrips, CVS/Caremark and Optum, that practice is being disrupted in categories such as diabetes and respiratory. The presence of many competitors allows PBMs to demand price discounts. Late-to-market brands that lack better outcomes must either offer price reductions or run the risk insurers won't cover them.

More astonishing than the price increase of Daraprim was CEO Shkreli's explanation for it.

"I'm a capitalist," he told CBS reporter Don Dahler. "I'm trying to create a big drug company, a successful drug company, a profitable drug company."

Shkreli is a former hedgefund manager and there was a time when pharma's George Mercks, Josiah Lillys and William Upjohns would have considered his approach to their industry as inexcusable. Sad to say it, but these days Shkreli is the sort of guy that many of pharma's current CEOs want to be when they grow up.

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