Unhealthy healthcare: Big Pharma

Posted: 26 August 2016 in Uncategorized
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As I’ve been discussing over the course of the past week, the U.S. healthcare system is a nightmare, at least for workers and their families. It costs more and provides less than in other countries. Employees are being forced to pay higher and higher fees (in the form of premiums, deductibles, and other charges). And it relies on a private health-insurance industry, which is increasingly concentrated and profitable.

What about the other part of the system, the actual provision of health care? I’m thinking, in particular, of the pharmaceutical industry (which I focus on in this post) and hospitals (which I’ll take up in a future post).

According to a recent study by the Wall Street Journal, consumers in the United States nearly always pay more for branded drugs than their counterparts in England (39 higher and 1 lower), Norway (37 higher and 3 lower), and Ontario, Canada (28 higher and 2 lower). Thus, for example, Lucentis (which is used for the treatment of patients with wet age-related macular degeneration and other conditions) costs $1936 in the United States but only $894 in Norway, $1159 in England, and $1254 in Ontario. The same is true for many other drugs, from Abraxane (for treating cancer) to Yervoy (for treating skin cancer).

Part of the reason is that, in other countries, public healthcare systems have substantial negotiating power and are able to bargain with pharmaceutical companies for lower prices (or, in the case of Canada’s federal regulatory body, to set maximum prices). The U.S. market, however, “is highly fragmented, with bill payers ranging from employers to insurance companies to federal and state governments.” In particular, Medicare, the largest single U.S. payer for prescription drugs, is legally prohibited from negotiating drug prices.

Pharma

On the other side of the market, the U.S. pharmaceutical industry has become increasingly concentrated through a wave of numerous and increasingly large merger-and-acquisition deals. According to Capgemni Consulting, since 2010, approximately 200 pharmaceutical and biotech deals have taken place per year in the United States. 2014 saw several of the largest deals in the pharmaceutical industry to date, including the $66-billion purchase of Allergan by Actavis, Merck unloading its consumer health unit to Bayer, GSK and Novartis’s multibillion-dollar asset swap, as well as Novartis’s animal health unit sale to Eli Lilly.

Although high-profile, major acquisitions outweigh other deals by value, over 90 percent of deals were relatively small in size (less than $5 billion). Clearly, the motivation in these smaller deals is different.

Failure of bigger pharmaceutical companies to consistently develop new drugs and pressure from shareholders to deliver returns have forced large pharmaceutical companies to look outside for innovative drugs. This has resulted in new drug approvals emerging as a major trigger for acquisitions.

Most-profitable-industries2

The fragmented, unregulated system of drug purchases in the United States, combined with growing concentration of the pharmaceutical industry, means that health technology—with a 20.9 percent net profit margin—is now the most profitable industry in the country.

High drug prices are one of the key factors behind rising U.S. healthcare costs, and one of the main reasons why American workers pay more and yet receive poorer healthcare than in other rich countries.

Addendum

As if to confirm my analysis of the role of the pharmaceutical industry in creating a nightmarish U.S. healthcare system, we now have the examples of the Epipen and Pfizer.

As Aaron E. Caroll explains, the story of EpiPens is not just about how expensive they’ve become; it also reveals “so much of what’s wrong with our health care system.”

Epinephrine isn’t an elective medication. It doesn’t last, so people need to purchase the drug repeatedly. There’s little competition, but there are huge hurdles to enter the market, so a company can raise the price again and again with little pushback. The government encourages the product’s use, but makes no effort to control its cost. Insurance coverage shields some from the expense, allowing higher prices, but leaves those most at-risk most exposed to extreme out-of-pocket outlays. The poor are the most likely to consider going without because they can’t afford it.

EpiPens are a perfect example of a health care nightmare. They’re also just a typical example of the dysfunction of the American health care system.

And then we have Pfizer’s purchase of part of AstraZeneca’s antibiotics business, which doesn’t involve the development of any new drugs but (for $550 million upfront plus an unconditional $175 million in January 2019, and possibly a further $850 million plus royalties), Pfizer will have the right to sell three approved antibiotics and two drugs in clinical trials in most markets outside the U.S. and Canada, plus an additional drug (Merem) in North America.

Comments
  1. hampshirehog says:

    The WSJ figures for ‘England’ should be taken with a pinch of salt. Buying medicines is actually a devolved function here, and it’s not clear whether the WSJ understands that.

  2. […] hampshirehog on Unhealthy healthcare: Big Pharma […]

  3. […] Unhealthy healthcare: Big Pharma by David F. Ruccio on occasional links and commentary. […]

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