Drug Prices Falling

MarketWatch reports tonight that this year is showing the smallest year-to-year increase in retail drug prices since 1995.

I happened to catch a buddy who is an FDA lawyer/biomedical engineer and before that, worked for the National Institutes of Health and one of Big Pharmas. She attributes the slowdown in price increases to three things in roughly this order of importance:

Fear of the high odds of an incoming Democratic administration and an attempt to forestall price regulation

Lack of new biotech products (the article mentions biologics, which are genetically engineered, but recall that blockbusters like interferon came from biotech companies)

Increased competition from generics (or in other words, more drugs coming off patent)

Interestingly, the article does not mention any politically-motivated self restraint, but focuses on generics and thinner retailer margins.

From MarketWatch:

For decades, as Americans increasingly bemoaned the state of their runaway health-care costs, drug prices figured prominently in the equation.

Until this year, that is.

Now, for the first time in more than 30 years, U.S. retail drug prices are falling or leveling off, posing an unusual opportunity for the government and consumers alike to make some significant cost savings.

Industry and health-care policy experts say the trend is partly a result of aggressive discounting among retailers. But most of the changes are taking place because the pharmaceutical industry’s best-selling drugs now face competition from cheaper generic drugs.

Many more top-selling products are set to face competition in the next four years as they lose their patents or exclusivity rights, which could usher in a period of flat or falling drug prices for some time to come.

“Massive blockbuster products that have built up the industry over the last 10 years are expiring now,” said Tim van Biesen, a partner at consulting firm Bain & Co. who specializes in health care.

That should save consumers billions of dollars in out-of-pocket expenses, insurance premiums and taxes used to pay for drugs. And the trend bodes well for ongoing efforts to take some pressure off of Medicare’s costs in the coming years.

It’s all the more remarkable for a cornerstone segment of the economy that, for years, has outstripped other increases in consumer prices and been a hot-button topic in the debate over fixing the nation’s health-care woes.

According to the Bureau of Labor Statistics, retail drug prices have fallen in seven of the past nine months and are up just 0.4% in the past year. That’s the smallest increase in drug prices since 1974. Just a year ago, drug prices were rising at a 4.8% pace.

The big change has come at the manufacturing level. Generic drugs, which are chemically identical to brand-name drugs, are between 30% and 80% cheaper. Wholesale drug prices have been flat or falling for six of the past 11 months; wholesale prices are up 2.7% in the past year, half the 5.4% rise recorded in 2006, according to the BLS.

Retailers
“Patients are the net beneficiaries,” van Biesen said, “and for this next period through 2011 we expect this phenomenon to continue: flat to maybe declining aggregate prices for drug spending,” although some individual drug prices may continue to rise.

Innovations have also come at the retail level. Wal-Mart, Target and other big-box retailers have fought to gain market share by selling many of the most popular generic drugs for as little as $4 for a month’s supply. Competition from online pharmacies, coupled with health-care providers selling more generics, have also kept prices down.
Best-selling drugs losing patents

During the late 1980s and 1990s, a wave of pharmaceutical innovations led to the creation of effective prescription drugs to treat common and chronic health problems, from high cholesterol to allergies to arthritis to depression.

Lots of people suffer from these ailments, and the treatments call for one, two or three pills a day. Total spending on prescription drugs has increased by 54% since 2001, compared with a 43% increase in spending on health care other than drugs, according to the federal Centers for Medicare & Medicaid Services.

Prescription drugs accounted for about 10% of the $2.2 trillion spent on health care in 2006, the agency said.
“Most commonly used drugs are not yet available in generics, and we’ve seen those prices continue to increase,” said Marc Steinberg of Families USA, a liberal health-care advocacy group.

But that’s changing.

Since hitting the market in the 1990s, brands such as Zocor, Nexium, Lipitor and Plavix have became household names and enriched giant pharmaceutical companies. U.S. sales of the top 20 drugs reached about $67 billion in 2006, according to data from IMS Health, a health consulting company.

But of the top 20 best-sellers, most will lose their patent protection in the next four years.

Of those, two lost their patent protection in 2006. Four more will lose patent protection next year, and another seven will face competition between 2009 and 2012. In the coming years, dozens of the other best-selling drugs will also lose patent protection.

About the only drugs that won’t soon face stiff competition from generics are the biologic drugs, a category that’s harder to replicate because they were developed in a biotech-engineering. The FDA has no process for approving biologic drugs, such as Aranesp, Epogen, Enbrel or Procrit, but legislation is moving through Congress to create a pathway. Many of these drugs are used in hospital or clinical settings, and aren’t typically purchased at the corner pharmacy.

Massive entry

Last year, patents expired for three key brands: anti-cholesterol drugs Zocor, made by Merck & Co. (MRK ) , and Bristol-Myers Squibb Co.’s (BMY ) Pravachol, along with Pfizer’s (PFE) anti-depression drug Zoloft. That initiated a massive entry of cost-reducing generic drugs to market that is expected to climax when Lipitor, Pfizer’s best-selling cholesterol-lower drug, loses its patent in 2010.

“Drugs that people are using today are continuing to get more expensive,” Steinberg said.

But comparatively few blockbuster drugs are coming through the pipeline in the next few years.

The major drugs set to be approved are largely niche drugs to fight cancer. They’re important drugs for patients and companies alike, but it’s still unclear how significant their impact will be on total spending.

Although drug prices aren’t rising as fast as they once did, the impact on the overall consumer price index is minimal, said Stephen Cecchetti, an economics professor at Brandeis University. In part, this is because the CPI only tracks out-of-pocket expenses, such a co-payment. Most drug purchasing is done by health insurance companies, hospitals clinics, and the government, which ultimately pass along the costs to patients.

“It’s certainly nice to see these prices going down but it’s not going to have an impact on the economy as a whole,” said Jack Calfee, resident scholar at the American Enterprise Institute. “It’s just not big enough.”

One of the biggest beneficiaries from generic drugs has been the Medicare Part D drug plan. “The drug benefit has cost much less than anyone predicted, and this is one of the reasons,” Calfee said. And as more drugs go off patent, he said, that trend will continue.

Prescriptions

Another trend that has affected retail drug pricing: more prescriptions being written. “What’s been going up isn’t price as much as usage,” Calfee said.

In the past year, the slowdown in drug-price inflation has shaved two-hundredths of a percentage point off the increase in the CPI. The CPI is up 2.66% in the past year; excluding drugs, it’s up 2.68%.

But lower drug prices should help to keep insurance premiums and hospital fees down.

They also stand to allow Americans’ tax dollars to go further. Express Scripts, the pharmacy benefit-management company, figures that Medicare would save $23 billion by 2010 from generics replacing brand-name drugs losing patent protection.
Patients could save lots more money if they’d switch to available generics or over-the-counter drugs, said Gary Claxton, vice president of the Henry J. Kaiser Family Foundation. “They are leaving money on the table,” he said.

For instance, Nexium is the nation’s second-best selling drug at $5.1 billion in U.S. sales in 2006. But other remedies are available for heartburn, including Prilosec, which is available without a prescription and is also made by AstraZeneca Pharmaceuticals (AZN) (UK:AZN) .
Once Prilosec lost its patent protection in 2002, AstraZeneca began steering patients to the more expensive Nexium, which has the same active ingredient as Prilosec. On the Prilosec Web site, for instance, consumers will find information about Nexium, not Prilosec.

Other brand-name drugs to treat high cholesterol, hypertension, depression, asthma and arthritis may have equally effective generic competitors.

Speaking of one best-selling drug, “I don’t understand why insurers are paying for it as much as they are,” Claxton said. “Employers aren’t pushing the insurance companies hard enough.”

Advocates seeking relief for elderly patients and other consumers are likely to keep up their vigilance, saying that high costs of drugs will continue to shape policy debates.

“As people shift more to generics, the prices can go up, but the out-of-pocket spending goes down,” said John Rother, AARP’s policy director. Rising drug prices contribute to the increasing health-care costs in the U.S., he said, adding, “The concern about the very high prices Americans pay for drugs compared to people in any other country is going to continue.”

Flat or declining aggregate drug prices may indeed lessen some of Medicare’s burden on the federal budget.

But, as Rother pointed out, not everyone can switch to generics, and brand-name drugs are still aggressively priced. “What’s going on here is more about shifting patterns of utilization than about prices,” he said. “And while the averages may be improving, the individual situations in many cases are not.”

For the data-minded, here is a good chart in the body of the article listing blockbuster drugs coming off patent and their sales volume that unfortunately was a tabbed table and hence couldn’t be included as an image.