How Did Things Get This Bad? Look in the Mirror, US Pharma

Feb 29, 2016

Tom NortonAs the US pharmaceutical industry continues to ponder its “winter of discontent”, there has to be a lot of head-shaking going on in the C-suites of many U.S. pharmaceutical companies. Essentially, the question that leaders of industry have to be asking themselves is, “How did things get this bad?”

Perhaps, U.S. Pharma, a long look in the mirror will help answer this question…

To begin, how did we get here?…Frankly, I think all of this started on December 6th, 2013 following the approval of Gilead’s revolutionary Hep C product, Sovaldi, and the subsequent announcement that the product would be priced at $84,000 per therapy. Numerous patient and professional medical groups immediately responded with public outrage over the pricing of the drug and started a national campaign against Gilead.

In response, statements like this one regarding Gilead’s pricing on June 14, 2015 were released by industry:

“If you look at the catalog price, which
is like the sticker price on the car,
no one actually pays that.
 
The more realistic, actual cost, the
price people are paying – it’s in the
cost-effective zone.”
  Dr. Benjamin Linas, Boston Medical Center

 

Needless to say, as the public watched Gilead rack up record Sovaldi profits, equivocations like the above only further angered them. In the end, following over 24 months of persistent public questioning over “the general pricing of pharmaceuticals”, this issue has now basically spiraled out of control for the American industry.

Unhappily, in the midst of this continual outcry over pricing, the industry has been forced to endure the emergence of “spokespersons” like “pharma bro” – aka Martin Shkreli, former CEO of Turing Pharmaceuticals, who most recently was forced to testify before Congress. Why was he called to Washington, D.C.? To answer the questions of the House Oversight and Government Reform Committee as to why an ancient prescription med, Daraprim used today in HIV and cancer treatment, had sustained a 5000% price increase at Shkreli’s direction…  

I would guess most Rx executives around the country anticipated that Shkreli’s performance during the hearing would not be a good moment for the industry. However, it’s fair to state that Shkreli outperformed even the worst pre-hearing predictions. His nadir was reached while leaving Capitol Hill when he tweeted out the following:

“Hard to accept that these imbeciles represent the people in our government.”

 

In a related amazing moment, PhRMA, the industry association, totally disavowed Turing Pharma in a Twitter statement that stated simply:

@TuringPharma does not represent the values of @PhRMA member companies.”

 

Amazing…because PhRMA regularly “circles the wagons” in support of Rx members, or even non-member Rx firms, when they get into scrapes on the Hill. However, in this memorable moment, Turing’s pricing actions were apparently viewed as so egregious that PhRMA literally walked away from an Rx “brother”, and never looked back.

So, through more than two years of recurring, difficult episodes like these, all aimed squarely at the industry’s pricing policies, where does the business stand today?

Unfortunately, just about any thinking pharmaceutical executive will concede that this concern over the “high price of drugs” is now completely “baked” into the broader national dialogue. It is so ingrained in the American psych that we now have national campaigns for President of the United States regularly bashing the American Rx business on a daily basis.

Democrats Bernie Sanders and Hillary Clinton regularly lead off their respective rallies disparaging “the incredibly high price of drugs in America” and substantiate their hot, anti-industry rhetoric with the alleged pricing misdeeds of Gilead, Turing, Lilly, Jazz, Valeant, etc.

The industry also has come to realize that the current leader in the Republican primaries, Donald Trump, has “pricing issues” with the business, too. Trump has repeatedly called for Medicare Part D drugs to be purchased through a competitive bidding scheme run by the federal government. Interestingly, various conservative groups inside the Beltway have tried to denigrate Trump’s “heretical” federal purchasing position within Republican circles. But, predictably, Trump has brushed these off and made his latest call for direct Medicare bidding by the industry during an MSNBC interview on Feb. 17, 2016.

All of this said, clearly some of the most uncomfortable moments for the business came in January and February of this year when two reports on U.S. industry pricing practices were released.

The first, by Truveris was published in the Washington Post on January 11th.  It stated that the average 2015 price increase for all U.S. Rx pharmaceuticals was over 10% last year. Obviously, that’s quite a bit higher than the reported average U.S. inflation rate for 2015, which was 0.12%.
 
The second report, definitely the more damning of the two, was undertaken by DRX. Published by Bloomberg on February 2nd, it was presented with this rather provocative headline:

“Shkreli Was Right: Everyone's Hiking Drug Prices”

 

Among many other pricing statistics, the DRX report included the following information on specific Rx drug price increases that occurred between December 2014 and January 2016:
 

 
Overall, Bloomberg stated the DRX study found that, “US Rx prices more than doubled for 60 (products) and at least quadrupled for 20 (more products) since December 2014.”
 
Considering both of these reports, I’d guess we would have to concede that perhaps Shkreli, in his earlier statements, had a point—the US drug industry has been substantially raising its prices with great regularity.
 
So, as the General Election in November approaches, and the U.S. public continues to press for reductions in the “outrageous pricing” of American Rx drugs, is it time for U.S. pharma to consider a new course of action to curtail the current public throttling it is receiving and move the industry into a better public policy position?
 
Rhetorically, the industry’s primary defense currently consists of these two premises: 

  1. American Rx’s aren’t really that expensive when you factor in volume discounts, managed care pricing, etc.
  2. The U.S. drug business needs to raise prices to discover new and needed medicines, a PhRMA message that has been an ongoing since at least 1991.

 

Granted, both of these are reasonable sound bites, and basically supported by facts. However, the clear problem for the business is that the public, the media, and especially the leading national political campaigns are not interested in hearing these bromides any more. They simply reject these as credible rationales for the way that U.S. pharmaceuticals are priced.
 
So, back to the frank “look in the mirror” idea for the Rx industry…  
 
Is it possible that US pharma, in an honest, introspective moment, might decide that, indeed, it is the root of its pricing problem? And with that in mind, could the business perhaps consider reprising a strategy that worked pretty well in the past when it responded to similar pricing challenges? In that earlier iteration, it was described as “maintaining drug price increases at CPI”.
 
Ridiculous you say?
 
Not really.  About a quarter century ago, during another moment when the industry was experiencing an all-out pricing assault, it actually fell back to this CPI increase position. A New York Times article published on September 30, 1993 describes how the Rx industry managed the moment:


“Under attack by Congress and the President and his wife, Hillary, 17 large drug makers have promised to keep their price increases, on average, in line with the consumer price index.”


The CPI policy actually worked fairly well for a couple of years, allowing industry to recover some of its damaged credibility and to move forward. On a broader level, the plan also provided practical cover for the business as it returned to Capitol Hill to advocate on behalf of the Rx industry.
 
So, is this an idea the U.S. drug business should seriously consider again in 2016? Conceptually, yes, but I am sure, as there were in 1993, numerous caveats would have to be worked out. And why think about an approach like this at all? Because as in 1993, if the American Rx industry doesn’t deal directly with this massive “drug pricing issue”, things are likely to get much worse on a macro scale.
 
As a foreshadowing of what may occur, think for a minute about what happened last fall—by simply tweeting out her concern over the pricing of U.S. pharmaceuticals, Hillary Clinton unleashed a nasty Wall Street pharma sell off, particularly in the biotech sector. Let’s suppose that Hillary Clinton wins the U.S. Presidential election. If the industry’s pricing policy hasn’t changed significantly, will Hillary stand down on her drive to rein in the pricing practices for the U.S. Rx industry? No, of course not.
 
So, unless U.S. pharma takes full stock of itself, now, and voluntarily deals directly with the “drug pricing” issue by adopting some fresh thinking that drastically modifies the direction of this Rx pricing conversation, 2016 could easily end up being the beginning of several very difficult years for the U.S. drug industry.
 
Look in the mirror, U.S. pharma. It’s time.

Tom Norton, NHD Smart Communications of Illinois, Inc
 

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