Revenue from a prescription.

The average pharmacy reimbursement across all payers in 2007 was $69.91 per prescription. Of this amount, about 80% ($56.06) represents the amount that the pharmacy pays to the manufacturer or a wholesaler to purchase the drug. The remaining 20% ($13.85) is used by the pharmacy to pay for operating and overhead costs such as salaries, rent, utilities, computer systems, complying with state and federal regulations and other expenses. From this amount, pharmacy retains a net profit of less than 2% ($0.84) per prescription.



S G & A = Selling, General & Administrative expense (i.e. marketing and administrative costs.)

Graphs of IMS Health industry sales data

IMS Health is an international consulting and data services company that supplies the pharmaceutical industry with sales data and consulting services. In addition to their work analyzing the U.S. industry, they look at international trends.

Total U.S. prescription market over 7 years.

Top therapeutic classes by U.S. sales for 2008.

Top pharmaceutical products by U.S. sales for 2008.

Top pharmaceutical corporations by U.S. sales for 2008.

Top prescription drug distribution channels by U.S. sales for 2008.

U.S. direct to consumer advertising spending over 5 years.

Fortune 500 2009 currently has the industry ranked 3rd most profitable in the nation, with profits at 19.3% of revenues. The industry is behind internet services and retailing (19.4%) and network and other communications equipment (20.4%.) (http://money.cnn.com/magazines/fortune/fortune500/2009/performers/industries/profits/)

3 Quick Reasons for high Drug Prices

Patents - New drugs are protected by patents, and after tweaking the drug or making simple changes manufacterers can often get 20 years of exclusivity. This type of monopoly allows for total control of prices.

Insurance - Different insurance companies cover different pills. But, if brand name drugs are more popular even with higher prices, insurance companies will cover them. This way a consumer doesn't actually feel the pinch in their wallet personally but the cost is still there.

Medicaid - Despite their huge buying power they can't negotiate prices. This means the government is essentially paying sticker price for something they could bargain down.

What does this mean?

Pharmaceutical manufacturing was the most profitable industry in the U.S. from 1995 to 2002, and continues to be on the top of this list. They have huge profit margins hovering around 18%. These profits are after research and development costs and go straight to investors. Is the drug industry really looking out for the public's health or just money like most companies?

"Price Controls On Prescription Drugs Could Have Adverse Effect On Life Spans, Study Says"

Ready for the kicker? If you read down to the bottom, it suggests that "a better approach to moderating prescription drug prices would be to cut drug insurance copayments by 20%, which by 2060 would increase life expectancy in the U.S. by half a year because more people would take needed drugs and drug industry profits would motivate further innovation."

And where exactly do they think this loss in copayment monies is going to be subsequently recouped? Ahh, right, by the consumers, who, will instead of paying this 20% "out-of-pocket," will lose it directly from their paycheck.

Paul Dragsten Interview

In this podcast we interview Paul Dragsten. Paul is the Vice President of Research and Development for Biomedical Frontiers, a small Minneapolis based bio tech company working on an orphan drug to treat thalassemia, a genetic defect that causes them to make defective hemoglobin.

Policies abroad

According to a 2004 study in the "Quarterly Journal of Economics," spending on pharmaceuticals in Organization for Economic Cooperation and Development (OECD) countries has increased by an average of 32% in real terms since 1998, reaching more than US $450 billion in 2003. The kicker? The growth in pharmaceutical spending varies greatly between countries. For example: In the US, the annual growth of 9.6% was nearly three-times the growth rate of spending in Germany, at 3.5%.

Of course, that's not to say that other countries have found the way of the Buddha. In fact, in 2008, the UK completely scrapped its pharmaceutical price regulation scheme (PPRS). Under the PPRS, companies were allowed to set their own prices when launching new medicines, but in return must keep their UK-earned profit margins within an agreed limit. Any excess profits had to be refunded to the state-run National Health Service (NHS).

As of January this year, however, the UK put an immediate price freeze on drug prices, followed by a 5% price cut. Ironically, like many in the US, some UK experts were hoping to move toward a value-based pricing system (VPB). But again, much like the US, value means different things to different people.

In Canada, the government has established the Patented Medicine Prices Review Board, which is responsible for regulating the prices companies charge for their patented medicines to ensure that they are not excessive. And, like the UK's NICE and the US's new Comparative Effectiveness Research Institute, Canada has their Common Drug Review. Of course, rumor has it that the US's CERI has little clout - with not enough funding to conduct independent studies and no oversight authority.

And then there's China: China slashed drug prices 19 times between 1997-2006. Their latest regulation requires a 5-step procedure before fixing medicine prices, including production cost investigation, expert evaluation and hearing opinions from the public. Furthermore, the new rules forbid drug price regulators from taking gifts of any forms or receiving invitations for banquets and traveling abroad from drug manufacturers.

Ahh...The perks of having a centralized, all-powerful governing body.

Value-based pricing: the future of drug pricing?

Value-based pricing (VBP) ideally takes advantage of Obama's newly funded cost-effectiveness analysis initiative. Basically, how much value does a given product offer to society. VBP is viewed by many as the future of pricing because it combines cost containment with reward for innovation - makes sense, right? Considering in an ideal world, pharmaceutical companies would manufacture drugs with the intent purpose of improving if not prolonging people's lives - adding value to people's lives.

Of course, manufacturers argue that VBP is incompatible with getting an actual return on investment. And what if a product fails to show a high enough degree of added value and it's recommended that a drug be priced not necessarily commercially viable?

Seems like a pretty intelligent thing to me. Maybe, this would keep companies from continuing to focus their so-called "innovative research" on developing me-too drugs, and force them to develop truly innovative therapies.

Despite advances in biomedical sciences, the flow of new drugs is slowing to a trickle.

• Coporate policies discourage innovation
• Mega mergers, i.e. Pfizer/Wyeth, Merck & Co/Schering-Plough and Roche/Genentech in 2009
• Over-dependence on blockbuster drugs
• Concentration on marketing over R&D

See "Drug discovery in jeopardy" from The Journal of Clinical Investigation

Some quick facts from the Kaiser Family Foundation.

1. Spending in the US for prescription drugs was $216.7 billion in 2006, more than 5 times the $40.3 billion spent in 1990.
2. The US Department of Health and Human Services projects US prescription drug spending to increase from $216.7 billion in 2006 to $515.7 billion in 2017, a 138% increase in 11 years.
3. Although prescription drug spending has been a relatively small proportion of national health care spending (10% in 2006, compared to 31% for hospitals and 21% for physician services), it has been one of the fastest growing components, until recently growing at double-digit rates compared to single-digit rates for hospital and physician services.
4. Drug spending as a percent of overall health spending is projected to increase from 10% in 2006 to 12% in 2017.
5. From 1997 to 2007, the number of prescriptions purchased increased 72% (from 2.2 billion to 3.8 billion), compared to a US population growth of 11%.
6. Retail prescription prices increased an average of 6.9% a year from 1997 to 2007 (from an average price of $35.72 to $69.91), more than two and a half times the average annual inflation rate of 2.6% over the same period.
7. The average brand name prescription price in 2007 was over 3 times the average generic price ($119.51 vs.$34.34).
8. Spending for consumer advertising in 2007 was over 4 times the amount spent in 1996($3.7 billion vs. $0.8 billion), while 2007 physician advertising was almost 2 times the 1996 amount ($6.7 billion vs. $3.5 billion).
9. From 1995 to 2002, pharmaceutical manufacturers were the nation’s most profitable industry (profits as a percent of revenues). They ranked 3rd in profitability in 2003 and 2004, 5th in 2005, 2nd in 2006, and 3rd in 2007, with profits of 15.8% compared to 5.7% for all Fortune 500 firms in 2007: Prescription drug sales were $286.5 billion in 2007.

NIH’s funding of small public and private biotech research: Yet another twist in the financial and bureaucratic morass plaguing our health care system

Through the National Institutes of Health, taxpayers in 2001 poured some $16-or-more billion into non-federal researchers working in universities, medical centers, hospitals, and research institutions throughout the country and abroad. Of the 47-some $500-million-blockbuster drugs that made it to the market by 1997, the NIH has government-use or ownership rights to at least four of those drugs. And yet, they have never actually received any royalties of sorts from their investments.
Certainly, much of their initial investment covers little of the advanced production of these drugs, but certainly the nascent idea deserves patent protection, and ergo, adequate reward. Unfortunately, the NIH has admitted that tracing these ties and even capitalizing on them isn’t just complicated, but vehemently lobbied against by not just Big Pharma, but by smaller research institutions that argue these claims would only “stymie innovation” – where have we heard this before?

For more details, check out this NIH report.

Lowering prescription drug prices not likely to curb R&D

The cost to produce a drug, often surmised to be ~$800 million, is probably much less (some experts say ~$240 million). Here's why:

1. Part of the problem with the $800 million figure is that it includes opportunity costs, not just cash outlays. Heck, if every company took into account where money may have been effectively spent, certainly most expenditures would be inflated.
2. Also, this number does not include tax deductible monies.
3. Moreover, this number is for those more innovative drugs in the market - not the more often produced "me-too" drugs.

Huge profits (pharmaceutical companies' margins are upwards of 18% compared to most companies' 2-5%). Companies could very well maintain healthy returns, perhaps not upwards of 18%, with lower drug prices.
Lower prices would induce demand, making drugs more affordable to those who couldn't otherwise pay for them. European countries control costs, and their companies (including giants Glaxo and AstraZeneca) are highly profitable and innovative.
Research & development costs will likely become less expensive with technological advances. A chunk of pharmaceutical R&D is already subsidized by taxpayer-funded research (yes, we pay twice for our medications).
Almost twice as much money is spent on drug advertising and marketing, which is not only excessive, but only leads to increased drug spending. Money used to develop and market "me too" drugs could be better diverted to developing more innovative drugs.

Pharmaceutical representatives - "essential for physicians "?

Merck & Co.'s withdrawal of its arthritis drug Vioxx in fall of 2004 is one of the most notorious examples of premature adoption of a drug proving fatal. At the time of its removal from the market in September 2004, more than 100 million prescriptions had been dispensed. Around two million people were taking the drug, and with annual sales of nearly $2.5 million it was the model of a blockbuster. By the end of its run, between 88,000 and 139,000 heart attacks or strokes could be attributed to the painkiller according to estimates given by Dr. David Graham, an FDA analyst (http://www.adrugrecall.com/newsletter/feb05/vioxx-heart.html).

Merck pulled the drug after a clinical trial showed that it doubled the risk of heart attacks and strokes.

In March 2000, as early as one and a half years after the drug had been on the market, results of the Vioxx Gastrointestinal Outcomes Research (VIGOR) study had reported at least a fourfold higher risk of heart attacks for subjects on the drug when compared with a standard arthritis treatment like Advil or Aleve. Further discussions and investigations of these risks followed.

And yet, most of the drug's millions of prescriptions were dispensed after the drug's risks were public knowledge. How could this have been?

Direct to consumer advertising certainly played an important role - in 2000 Merck reportedly spent around $160 million on their Dorothy Hammill campaigning (http://todaysseniorsnetwork.com/excessive_ads.htm) The popular industry claim that such ads are educational is even more dubious considering that the FDA advisory panel assembled to address the drug's issues recommended pulling these ads.

The FDA itself is often subject to the whims of "big pharma," and was only able to get some form of warning label on the product as far into its lifetime as 2002. The FDA's expedited approval of Vioxx and Celebrex, both a part of a class of drugs known as COX-2 inhibitors, involved giving the drugs "priority" reviews. This meant that the drugs fulfilled an unmet need in the market or showed an improvement over other arthritis treatments on the markets. This was not the case, as their results could feasibly be obtained with drugs already available on the market. Regardless, the COX-2 inhibitors received expedited review and subsequent approval.

While direct to consumer ads have become a part of our daily lives, what concerned consumers may not be aware of is the role played by the company's pharmaceutical representatives in shaping the debacle's outcome. Documents released following an inquest from the Committee on Government Reform suggest that Merck used its sales force to shift focus away from the increasing knowledge of Vioxx's risks. Through physician interaction that provided questionable information and aggressive personal marketing, Merck managed to sustain the sales of its drug. These activities are outlined in a CGR memorandum by Rep. Henry A. Waxman (D - CA) from May 5th, 2005 (http://oversight.house.gov/documents/20050505114932-41272.pdf).

Chief among these physician tactics was an attempt at damage control from Merck's own VIGOR study. Merck's sales force was directed to show physicians a "cardiovascular card," a pamphlet that made the drug appear 8 to 11 times safer than smilar drugs. References to the VIGOR findings were omitted, and the card's information was based on pre-approval studies deemed inappropriate by the FDA due to small sample size and short duration.

Merck also saw to it that its representatives did not discuss the results of the VIGOR study, stymieing discourse with physicians. The company sent a bulletin urging its sales force to avoid initiating discussions about the study. This came after the FDA voted that physicians should be made aware of the risks.

Finally, After a New York Times article (http://www.nytimes.com/2001/05/22/business/doubts-are-raised-on-the-safety-of-2-popular-arthritis-drugs.html) from early 2001 raised concerns about the drug's safety, Merck told its sales force to warn doctors that patients on other anti-inflammatory medications "were eight times more likely to die from cardiovascular causes than patients on Vioxx."

It's obvious that drug company representatives exist to promote products, but what emerges here is a new image of the role of representative - one of a company cheerleader that sought to give misleading information to physicians and maintain blockbuster sales figures. Even an isolated incident such as this is enough to warrant a re-examination of drug representatives' profession. Vioxx and these other COX-2 inhibitors were plagued with issues from their inception in the late 90s, but the efforts made by drug sales representatives in their proliferation cannot be understated.

In light of such egregious oversights and unethical damage control efforts, can one really believe Pharmaceutical Research and Manufacturers Association of America (PhRMA) when they say that the efforts of their representatives are "essential for physicians, allowing physicians to have sufficient information about new drugs so they can prescribe them appropriately" ?

Interview with Alan Cassels

In this podcast, we interview Alan Cassels, a drug policy researcher for the University of Victoria, we look at how marketing and research and development can influence prices.

Ways to reduce your drug costs

• Do you really need the medication?
• Go generic.
• Buy in bulk, i.e. a 90-day supply vs. a 30-day supply.
• Comparison shop - Walmart, $4?!
• Look for discounts, ex. Walgreen's has a Prescription Savings Club
• Go Canada - take advantage of lower drug prices across the border, either online, or in person.
• Some major pharmaceutical companies have programs that provide free medication to individuals who cannot afford them, e.g. Astra Zeneca has its own Prescription Savings programs.
• Ask your doctor if you can safely split your pills.
• Diet & exercise.

Interview with Rep. Sharon Treat

In this podcast we interview Rep. Sharon Treat, and look at how Maine handles drug price controls, and what the federal government is doing for prices as well.

Birth of a Drug

Interview with Merrill Goozner

In this podcast we interview Merrill Goozner and look at some general information on what influences drug prices.

Potential Initiatives for Containing the Costs of Medicines

• Reference Pricing: one 'reference drug' is chosen from a group of drugs that are equally effective and safe. The price for the reference drug is covered, but if people want a more expensive drug from that group they have to pay the difference in price.
• International Price Comparison: comparisons that make procurement of medicines of assured quality for the lowest possible price possible (International Drug Price Indicator Guide).
• Therapeutic Substitution: a pharmacist-initiated act by which a pharmaceutical or therapeutic alternate for the physician-prescribed drug is dispensed without consulting the physician.
• Paybacks: a way of measuring health services research and its societal benefits (or payback)
• Price-Volume Agreements: public authorities and a manufacturer will work together to try and predict the volume of drug sales. If the actual volume of sales exceeds the prediction, prices are usually lowered.
• Rebates: money given back after the purchase of certain drugs, usually either a percentage of total cost for purchasers who meet certain requirements.
• Usage Restrictions: certain drugs are not covered by programs, due to lack of research, proof of effectiveness.
• Risk-Sharing Agreements: a pharmaceutical company may agree to share the risk on new drugs when there's uncertainty on whether it's effective or worth the cost. They may do this by helping to pay for a drug while it's still new in the marketplace.
  

Subsidy Plan Seeks to Cut Malaria Drug Cost
The New York Times, April 17, 2009
A new campaign to save lives and prevent drug resistance by driving the price of the best malaria medicine down to as little as 20 cents was announced Friday by international health agencies and European governments.

Quick fact: According to the World Health Organization, each year nearly 500 million people become infected with malaria, and nearly three million — mostly children — die from it.

Reducing the Cost of Prescription Drugs
In March 2009, Senator Dorgan introduced bipartisan legislation with Senators Olympia Snowe (R-ME), John McCain (R-AZ), Debbie Stabenow (D-MI), and others to bring down the high cost of prescription drugs in this country.

Bill Summary

How Does Drug Advertising Affect Prices?

This interview with Jeff McCullough explores whether advertising for pharmaceutical drugs is good or bad, and how it can affect drug costs.