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Why so many new drugs use exorbitant pricing

The increasing frequency with which unremarkable, new drugs use exorbitant pricing invites some informed speculation here.

By guest blogger Daniel Hoffman:

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This week an industry contact asked me why a new antipsychotic medication was planning to charge each patient $14 a day for therapy, when his analysis showed the new brand is no more effective than currently available competitors that cost substantially less.  In fact my caller told me that around the office, he and his colleagues use a distorted version of the brand's name that incorporates several letters from the actual name and combines them with a slang term for feces.

While I am not privy to the drug maker's pricing and marketing deliberations, the increasing frequency with which unremarkable, new drugs use exorbitant pricing invites some informed speculation here.  As many new drugs lack substantial superiority over older, cheaper medications, the marketers naturally despair of capturing a large share of the therapeutic class in which their new brand will compete.  The insurers and other, third-party payers will constrain most patients to use the less expensive medications.  Consigned thereby to small, niche patient segments, the new product marketers reason that if they can demonstrate some clinically meaningful advantage for just a small number of outlier patients, they can then charge an arm and leg to those patients and their insurers.  The exemplar category is oncology, where drug makers feel comfortable charging $50,000 - $100,000 for a drug that will extend the lives of a few patients by an extra three months each.

Some pharma companies justify the steep price premiums by claiming the costs of developing their howling dog products have grown so steeply.  The fact remains, however, that a major reason for the higher development costs lies in the fact that in order to show even the marginal differences needed to justify the steep prices for a small fraction of patients, the developers have to enroll tens of thousands of patients in their late-stage clinical trials.  Enrolling 25,000 patients in a Phase 3 trial, at an average total cost of $25,000 per patient, amounts to a $625 million bill.

Some pharmas believe that niched premium pricing is a necessary step in conditioning payers and patients for the day when personalized medicine arrives.  In that millenial era of the future, patients will be diagnosed and typed according to their respective genetic configurations and then prescribed the brand of medicine deemed appropriate for their particular genotype.  If the market for treating each condition must be shared by a dozen or more genotype-based brands, the likelihood of any single statin or single antiplatelet drug achieving the $13 billion sales of a Lipitor or the $9-plus billion of a Plavix appears remote.

In 2004 Fred Hassan, then the CEO of Schering-Plough (since acquired by Merck), said Americans should accept health care costs rising from 13% of GDP, as they were then, to 18% or even 20%.  Apparently in his view, the good society is one where average citizens willingly redistribute upward any wealth they possess to enrich the fiduciary officers of large drug companies.  Paying $90,000 a year for medications with exiguous benefits is one way of making people do exactly that, especially when such money goes for...turds.

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