Zooming drug prices in US

A molotov cocktail of higher demand and lowered supply is believed to have caused an explosion in generic drug prices in the US, making affordable healthcare yet more inaccessible, say Bhavik Narsana, Partner, and Arijeet Mukherjee, Associate, Khaitan & Co1

Pricing of drugs has been one of the most talked about topics in the recent times in India, whether it is a company’s strategy on pricing or the regulator controlling the prices of drugs. Unlike the Indian pharmaceuticals market, the American market does not have price control regulations i.e., it is a freely competitive market where prices of drugs are determined by market forces of supply and demand.

In the US, the price control of the drugs has been opposed mainly on the grounds that this would cut revenues and consequentially affect innovation. There are advantages and disadvantages in regulating drug prices. Controlling prices would probably lower the prices, cutting pharmaceutical company’s revenues and with that it will also affect its ability to carry out research and development activities for new drugs. Therefore, it becomes a choice between lower drug prices versus jeopardising long-term innovation. Regulators face a challenge of striking the right balance between the two.

In the American scenario i.e., the unfettered free market scenario, various factors such as demand and supply of products, closing down of production plants, etc. (discussed later in this article) have had an effect on the price of generic drugs.

US pharma market

The American pharma market is the largest and most developed market in the world. For several years this market has been characteristic of cutting edge innovation, research and development. In 2013, it was estimated that certain American drug companies have spent around $51 billion in research and development.2 American corporations also happen to hold intellectual property rights on most new medicines.3

In 2012, the pharma market of North America was roughly worth $348 billion,4 making it the largest pharma market worldwide. American pharma giants such a Pfizer, Abbott, Merck, Wyeth and Bristol-Myers Squibb have made their global presence felt and are considered amongst the largest healthcare companies worldwide.

Though the American pharma industry figures seem impressive, the availability of affordable healthcare in America has remained, for most, an unachieved American dream. It is an open secret that despite having one of the largest pharma bases in the world, the healthcare costs in the US are amongst the world’s highest. In 2011 itself, the per capita healthcare expenditure of the US was above $8,500,5 much higher than any other industrialised country.

The primary reason for the burgeoning healthcare expenses are the costs of drugs in the US, stated to be one of the highest in the world. Recently, the prices of generic drugs in the US have skyrocketed. This increase in prices in some cases is more than 800 per cent, a case in study is that of the drug ‘Xyrem’ manufactured by Jazz Pharmaceuticals and used for Narcolepsy symptoms. This drug has seen a price rise of 841 per cent from 2007 to 2014, which means that what used to cost about $2 in 2007 now costs over $19.6 This multifold increase in prices of drugs pushes affordable healthcare out of the reach of millions of Americans.

Recently, a Congressional investigation has been initiated into why the prices of these generic drugs are on the rise. On the scanner of this investigation are three Indian manufacturers: Dr Reddy’s, Sun Pharma and Cadila Healthcare.

Supply and demand

In a free market, price is a function of supply and demand. In the present situation in the US, the generic drug prices are spiraling out of control in America due to an upward push in demand and a downward push in supply.

The demand for generic drugs has gone up due to their price competitiveness. Generic drugs not only cost lower, but sometimes cost just a fraction of what their branded counterpart costs.

The introduction of Patient Protection and Affordable Care Act, 2010 also popularly known as ‘Obamacare’ would lead to greater emphasis on the prescription of generic drugs to reduce healthcare costs and increase access to healthcare. In 2013 nearly 86 per cent i.e. four out of five prescriptions in the US were for generic drugs.7 This coupled with an increased presence of generic alternatives to branded drugs in the market have put an enormous upward pressure on the demand curve.

To have price stabilisation, an increased demand of generic drugs must be met with an increased supply. However, the supply has not increased or remained the same, rather the supply has fallen. Such fall of supply may be attributed to the recent increase by the US FDA of its investigation and enforcement activities in relation to generic manufacturers located outside the US. A case in example is Ranbaxy, which supplies generic drugs to the US, has recently had four of its manufacturing plants banned by the US FDA.8

India may have the maximum number of US FDA approved plants outside the the US, but India is not the only country facing the ire of such US FDA inspections and enforcements. Manufacturing facilities in Australia, Canada, the UK, Brazil, China, Austria, Germany, Netherlands, Ireland, and Spain have also been hauled for non-compliances.9 The US imports around 40 per cent of the finished drugs and nearly 80 per cent of the active pharma ingredients it needs, with plants being banned and warning letters being issued, the supply has gone down.

This molotov cocktail of higher demand and lowered supply is believed to have caused the explosion in drug prices in the US, making affordable healthcare yet more inaccessible.

User fees for generics

In 2012, the Generic Drug User Fee Amendment (GDUFA) was brought into the Food and Drug Administration Safety and Innovation Act.

The GDUFA was designed to speed up access to safe and effective generic drugs to the public and reduce costs to industry. The law requires the generic drug industry to pay user fees to supplement the costs of reviewing generic drug applications and inspecting facilities. Additional resources will enable the agency to reduce a current backlog of pending applications, cut the average time required to review generic drug applications for safety, and increase risk-based inspections.10

For the first time US FDA was to receive funding from the generic drug industry. It was estimated that this ‘user fee’ would generate about $299 million each year from 2013 to 2017, which would supplement the resources of the US FDA and help in assessment of the generic drugs. The implementation of this ‘user fee’ was supported on the ground that a well-resourced US FDA will be able to inspect and approve generic drugs expeditiously.

Though the system of ‘user fee’ was applauded by many, it is widely believed that this may be a factor contributing to rising prices of generic drugs in the US. As generic firms pay higher user fees for getting an approval, in a free and uncontrolled market they pass this cost to the ultimate consumers, thereby increasing the prices of the generic drugs, which ironically is contrary to the main intent of levying user fees in first place.

Disproportionate rebates

In America there is a system of rebates wherein insurance providers / pharmacy chains / government programmes such as Medicaid (for families and individuals with low income and resources) and Medicare (mainly for persons above 65 years) negotiate with pharma manufacturers and are given a rebate. In the past, this rebate has been a substantial chunk of the cost.11 However, it is believed now that rebates have not increased proportionately to the increase in prices of drugs, thereby not countering the effects of price increase. Further, these rebates are only usually offered to the insurers and government programmes, and not to the individuals.

This rebate and price increase disparity is having a rippling effect and experts believe that this is further pushing up the cost of health insurance and co-payments in America.

Obamacare demand

Generics have played an important financial role in the American pharma markets, as per the Generics Pharmaceutical Association situated in Washington, the use of generic prescription drugs instead of their branded counterparts have saved the US healthcare system around $931 billion from 2001 to 2010.12 There is an increasing reliance on generic drugs pushing up their demand, in 2013 alone nearly 86 per cent i.e. four out of five prescriptions in the US were for generic drugs.13

Once all the provisions of Obamacare are brought into effect, it would drive a demand for generic drugs even further as generics would be more sought after due to their price advantage. In the absence of an increased supply to meet this demand, the prices for generics may spiral further; however, they will continue to remain lower than their branded counterparts.

The India nexus

This scenario of increase in drug prices in the US has a strong India connect.

Three of the companies under Congressional scanner are Indian generic pharmaceutical companies (Dr Reddy’s, Sun Pharma and Cadila Healthcare).

Around 40 per cent of the generic drugs in the US come from India and with Obamacare coming in this figure is set to rise further.14

India has the largest number of US FDA approved plants outside the US.

US FDA inspection and actions have targeted many Indian production plants, affecting supply in the American market.

The levy of ‘user fee’ in the US is said to affect Indian generic companies as well.

Capitalising on the generics demand, many mid and small- level Indian pharma companies are entering the American market.

This Indian nexus with the drug price increase in America ensues that the steps the American government takes on this issue will have ramifications on the Indian generic manufacturers as well and the large workforce it employs.

What’s next

An interesting debate has opened up with the Congressional investigation into the generic drug price increase issue: would the investigation report recommend price control and would the US, the campaigner of free market philosophy, join the league of countries which regulate drug prices. In the past the pros and cons of price control in the American drug industry has been debated heavily and even studies carried out to see the effects of price regulation in OECD countries on the US.15

If the Congressional investigation finds a discrepancy in drug pricing, it would be interesting to see what would be the next step that would be taken and how the landscape of the world’s largest pharma market changes.

References:

1. Bhavik Narsana is a partner and Arijeet Mukherjee is an Associate in in Khaitan & Co, Mumbai, they are members of Khaitan & Co’s pharmaceutical and life sciences specialty practice. They can be contacted at [email protected].
2. “2014 Profile of Biopharmaceutical Research Industry” by Pharmaceutical Research and Manufacturers of America. Please see (http://www.phrma.org/sites/default/files/pdf/2014_PhRMA_PROFILE.pdf)
3. “The Pharmaceutical and Biotech Industries in United States”. Please see (http://selectusa.commerce.gov/industry-snapshots/pharmaceutical-and-biotech-industries-united-states)
4. As per IMS Health Market Prognosis, June 2013. Please see (http://www.imshealth.com/deployedfiles/imshealth/Global/Content/Corporate/Press%20Room/Total_World_Pharma_Market_Topline_metrics_2012-17_regions.pdf)
5. Centre for Disease Control and Prevention data. Please see (http://www.cdc.gov/nchs/fastats/health-expenditures.htm)
6. Drug Prices Soar for Top Selling Brands” by Bloomberg. Please see (http://www.bloomberg.com/infographics/2014-05-01/drug-prices-soar-for-top-selling-brands.html#humulin-r-u-500)
7. “The Reality of Prescription Medicine Costs in Three Charts” by Pharmaceutical Research and Manufacturers of America. Please see (http://www.phrma.org/catalyst/the-reality-of-prescription-medicine-costs-in-three-charts.)
8. USFDA. Please see (http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm382736.htm)
9. “US Regulatory Warnings on Drug Producers Extend Well Beyond India”. Please see (http://www.thepharmaletter.com/article/us-regulatory-warnings-on-drug-producers-extend-well-beyond-India)
10. USFDA. Please see (http://www.fda.gov/ForIndustry/UserFees/GenericDrug UserFees/default.htm)
11. “Inside The Secret World of Drug Company Rebates”. Please see (http://www.forbes.com/sites/matthewherper/2012/05/10/why-astrazeneca-gives-insurers-60-discounts-on-nexiums-list-price/)
12. “An Economic Analysis of Generic Drug Usage in the US” by Generics Pharmaceutical Association. Please see (http://www.tevagenerics.com/assets/base/pdf/Savings,AnEconomicAnalysis.pdf)
13. “The Reality of Prescription Medicine Costs in Three Charts” by Pharmaceutical Research and Manufacturers of America. Please see (http://www.phrma.org/catalyst/the-reality-of-prescription-medicine-costs-in-three-charts)
14. “Obamacare Has Hidden Benefits – For India”. Please see (http://www.bbc.com/news/world-us-canada-24407452)
15. “Pharmaceutical Price Controls in OECD Countries Implications for U.S. Consumers, Pricing, Research and Development, and Innovation” by US Department of Commerce International Trade Administration. Please see (http://www.ita.doc.gov/td/chemicals/drugpricingstudy.pdf)