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Derm Drugs:The Price is Too Darn High!

By Jacob Levitt, MD, FAADVice Chairman, Program Director, and Associate Professor

The Mount Sinai Medical Center

Department of Dermatology

New York, NY

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Disclosures

• I have served on Advisory Boards for:• Amgen

• Janssen Biotech

• Genentech

• Medac

• Ranbaxy

• Pfizer

• From 2004-2010, I was a vice president and majority shareholder in Taro Pharmaceutical Industries Ltd.

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Acknowledgements

• Barrie Levitt, MD, FACC• author of: A Prescription for Success in Pharmaceuticals (in press)

• A book on how to run a pharmaceutical company

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Drug Prices are Rising

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Drug Prices are Rising

•Brands

•Generics

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U.S. Health Care Market

•2013 health care spend = $3.8 trillion (Forbes)

•$300 billion on Rx drugs annually (almost 10% of total spend) (IMS)

• > 80% of prescriptions written are filled generically (IMS)

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Increasing Prices in the Topical Market

• From 2008 to 2015, esp. after 2010

•Across generic topical suppliers• Actavis• Fougera (division of Sandoz – Novartis)• Perrigo• Taro (subsidiary of Sun Pharmaceuticals)• Teva Pharmaceuticals

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ARS: How much does generic clobetasolointment 60g cost out of pocket?

A. $10

B. $50

C. $100

D. $500

E. $1000

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ARS: How much does generic clobetasolointment 60g cost out of pocket?

A. $10

B. $50

C. $100

D. $500

E. $1000

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Actavis Clobetasol

$-

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

2008 2009 2010 2011 2012

Year Price2008 $ 20.21 2009 $ 20.52 2010 $ 20.42 2011 $ 7.22 2012 $ 281.37

1,292%

Price increase

cf: US Inflation Rate 10%

(2009 -2014)

Source: IMS data

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Taro Desoximetasone 0.05% cream

$-

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

$350.00

2008 2009 2010 2011 2012

Year Price2008 $ 7.26 2009 $ 9.45 2010 $ 17.61 2011 $ 81.90 2012 $ 328.60

4,426%

Price increase

cf: US Inflation Rate 10%

(2009 -2014)

Source: IMS data

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Fougera Desonide

$-

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00

2008 2009 2010 2011 2012

1,034%

Price increase

cf: US Inflation Rate 10%

(2009 -2014)

Year Price2008 $ 10.15 2009 $ 20.28 2010 $ 36.11 2011 $ 57.34 2012 $ 115.14

Source: IMS data

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Fougera Fluocinonide

961%

Price increase

cf: US Inflation Rate 10%

(2009 -2014)

Year Price2008 $ 5.16 2009 $ 4.25 2010 $ 4.44 2011 $ 13.94 2012 $ 54.72 $-

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

2008 2009 2010 2011 2012Source: IMS data

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A problem just for patients?

• Nobody wants to pay for expensive drugs!

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ARSWhat percent of your prescriptions require Prior Authorizations (PAs)?

A.1%

B. 5%

C. 10%

D.20%

E. 30%

F. >50%

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ARS: For 1 day of practice, how many hours of employee work does a single physician generate in your office from prior authorizations?

A.1 hour

B. 5 hours

C. 10 hours

D.15 hours

E. 20 hours

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Higher Drug Prices Don’t Just Cost Our Patients!

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Examples Outside Topicals

• Generics: Between July 2013-14: • Pravastatin - 577% increase

• Divalproex – 797% increase

• Digoxin - 828% increase

• Doxycycline 4,400% ($3$135)!!! And that’s SMALL POTATOES!

• Brands: In 2012:• 11 of 12 oncology drugs cost > $100,000/year

• Prices doubled in past decade

• Imatinib (Gleevec) initially $30,000/year, now $90,000/year• For Novartis, revenue of $4.7 billion in 2012.

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More Participants

• AIDS• 1989: AZT cost $8,000/year… then the most expensive Rx drug in history

• Cystic Fibrosis• Ivacaftor (Kalydeco, Vertex Pharmaceuticals)

• Costs $311,000/year

• Hepatitis C• Ledipasvir/sofosbuvir (Harvoni) at $1125 per pill $189,000 for 24 weeks

• Sofosbuvir at $80,000 to $160,000 for a 3- to 6-month course• in Egypt and India, the drug company provides the full course of treatment for $900

• It seems that the U.S. healthcare participants subsidizes foreign healthcare participants

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How? &

Why?

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Setting the Price of a Brand

• Recoup costs• R&D

• Manufacturing

• Prices of competing therapies

• Set price to take sales from market share of competitors

• What market will bear

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Purpose of Generic Drugs

•Reduce costs to patients and insurers

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Generic Drugs

Legal Definition:

• Same active ingredient, dose, form, strength as the brand

• Same extent and rate of absorption (+/- 20%) or clinical bioequivalence

• Drug approved by FDA by means of an ANDA (Hatch Waxman Act)

Functional Definition:

• Formularies mandate generic price ≤ 80% brand price @ introduction

• Otherwise mandatory substitution is denied

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Standard Reasons For High Generic Prices…

• Competitors drop out Drug Shortages (none or single-source)

• Reasons for Dropouts & Barriers to New Competitors:• Raw material shortages• New FDA regulatory requirements for or delays in approval• Lack of product profitability• Technical difficulties with manufacturing• Problems with analytic methods• Product stability problems

•…Don’t Explain It• Present both before and after runaway price escalation

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Let’s play a game…

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ARS:Brand price is $1000/bottle. Your breakeven price is $50/bottle. You are the first generic to market. What would your price be?

A.$999

B. $900

C. $800

D.$500

E. $100

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ARS:You are now the second generic. Brand is $1000. First generic got license from the Brand and, in order to get on formularies, price at $800. Your breakeven price is $50/bottle. What will you charge?

A. $800

B. $790

C. $700

D. $600

E. $500

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ARS:Brand is $1000. First generic got license from the Brand and, in order to get on formularies, price at $800. Second generic came in at, say, $600. Your breakeven price is $50/bottle. You are now the third generic. What will you charge?

A. $800

B. $700

C. $600

D. $590

E. $500

F. $200

G. $51

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Back to our show….

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The Theory Underlying Generic Drugs

• Generic companies will price their products below the brand price

• Presumes competitors’ goal is to get 100% market share

• Anticipates competition via continual price reduction

• Mandates sacrifice of profit on the altar of sales (IRRATIONAL!)

• A cognitive bias we all share

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Two Problems with the Generic Price Theory

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Two Problems with the Generic Price Theory

• Companies may focus on profit not market share

• Lower prices may not be passed on to the consumer

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WHY Companies

May Focus On

Profit Over Market Share

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Market Share (Units) vs. PriceMarket Share (Units) vs. Profit

($2.00)

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

-$100,000

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Pri

ce

Pro

fit

Units in 000's

Profit Price

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Consider the following 2 scenarios:

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Scenario I

• Brand sells at a high price

• Generic enters at 80% of brand

• Multiple generics fight for market share by lowering price• This may be irrational as we have learned

• Low equilibrium generic price results

• If one manufacturer were to raise his price…• No one would buy from him

• Customers will buy at the lowest price

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Scenario II

• Brand enters at high price

• Generics enter at 80%

• Multiple generics enter at high price hoping for a reasonable fraction of the market & good profit

• High equilibrium generic price

• What if one person dares to raise the price?• Everyone else raises theirs, market share stays the same, and profits

remain high

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Scenario I in Today’s Market

Scenario I was:

• Low equilibrium generic price

• What if one person raised the price?

• No one would buy from him, low price competitor keeps • the whole market

• Competitors would raise their price. • Everyone keeps their market share at a higher price.• Where is the ceiling?

• We are still exploring the ceiling.

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Is There Price Fixing In the Generic Marketplace?

• Pharma is inbred

• Many persons move from one company to another• E.g., Fougera/Sandoz, Perrigo, Taro, etc.

• Marketing philosophies move with the people • Not anti-trust collusion per se

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How Lower Prices ARE NOT

Passed onto the Consumer

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Health Insurance

• Before 1965:

• Patients paid out of pocket for drugs (small role of health insurance) keeps prices down

• Patients shopped from pharmacy to pharmacy for the best price

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Health Insurance• Before 1965:

• Patients paid out of pocket for drugs (small role of health insurance) keeps prices down

• Patients shopped from pharmacy to pharmacy for the best price

• After 1965:

• Medicaid, Medicare, and increasing availability of health insurance

• One party (physician) instructs a second party (patient) to purchase a prescription drug. A third party (government or insurance company)pays for it.

• Impairs negative feedback control by patients on prices

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Price Controls by Executive Order 11615 (1971)

•To prevent inflation, President Nixon froze prices for 90 days.

•Thereafter, in anticipation of another price freeze, manufacturers and middlemen maintained high invoice prices and used rebates to compete on price.

•Discounts from high invoice prices became the standard.

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Let’s compare two “perceptions” of pricing

• Traditional Pricing

• Mark-up culture

• General Public’s assumptions

• Actual Generic Drug Distribution

• Rebate culture

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Traditional Pricing

• Drug costs $3 to make.

• Manufacturer marks up drug to “middleman” for $30, earning $27.

• The middleman (distributor) marks up drug to patient for $50, earning $20.

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Who are the middlemen?

Manufacturer

Pharmacy Chains (CVS, Walgreen’s, Walmart)

Consumer

Manufacturer

Wholesalers (AmerisourceBergen, Cardinal Health, McKesson)

Pharmacy Chains (CVS, Walgreen’s, Walmart, Private Pharmacy, etc.)

Consumer

One Middleman Two Middlemen

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Contract Prices Hidden by Rebates

• Generic Drug X costs $3 to make

• Manufacturer invoices the drug to the middleman for $100

• Manufacturer marks down to a confidential contract price with the middleman of $30

• Manufacturer pays middleman a $70 REBATE to get to the contract price

• Middleman can mark up drug to patient for $120

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Patient Perspective

• Manufacturer appears to be the bad guy since the consumer pays $120

• Manufacturer makes same profit, i.e., $27, either way

• Middleman makes $90

keeps markup ($20) + the rebate ($70)

on the back of the consumer

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So what have we revealed...

1. Generic pricing theory that lower price means more market share means more profit is a cognitive bias that gives us unreasonable expectations from rational profit seekers in a capitalist market. The rational behavior for a manufacturer is to raise prices for optimal profit rather than lower prices to take market share.

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2. Health insurance dissociated the negative feedback of patients on price.

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3. At the same time, inflationary pressures resulted in the evolution of an invoice system to distributors with opaque rebates and high end-consumer prices. In the absence of negative feedback, prices rose.

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In Summary…

• Competitors are not lowering prices

• Rebates in the supply chain are not passed on to consumers

DRUG PRICES ARE HIGH

Q.E.D.

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Some solutions?

• Price transparency

• Make it illegal to rebate off of high WAC pricing

• Lower barriers to generic competition

• Government subsidies to drug developers but require pricing caps after costs plus some reasonable profit is achieved

• Force pharmacies to stock the lowest priced drug in the market

• Cap mark up beyond a certain percentage

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Thank you for your attention!