For Prescription Drug Makers, Price Increases Drive Revenue
Demand for a drug called Avonex has declined every year for the past 10. Not a problem for its manufacturer. U.S. revenue from the drug has more than doubled in that time, to $2 billion last year. The key: repeated price increases. The multiple sclerosis drug’s maker, Biogen Inc., raised its price an average of 16% a year throughout the decade—21 times in all.
It is an example of drug companies’ unusual ability to boost prices beyond the inflation rate to drive their revenue, even when demand for the drugs doesn’t cooperate. A result of this pricing power is that across 30 top-selling drugs sold by pharmacies, U.S. revenue growth has far outpaced demand in the past five years, according to a Wall Street Journal analysis of corporate filings and industry data. Revenue growth averaged 61%, three times the increase in prescriptions.
Attention has focused lately on new drugs with eye-popping prices and on a few whose price a new owner abruptly raised several-fold. But what many drug companies rely on for sales growth is a pattern of steady increases, year in and year out, on older medicines. Wholesale-price increases for the 30 drugs analyzed by the Journal averaged 76% over the five-year stretch from 2010 through 2014. That was more than eight times general inflation.
For 20 leading global drug companies last year, 80% of growth in net profits stemmed from price increases in the U.S., according to a May report by Credit Suisse. Pricing power helps some in the pharmaceutical industry to compensate for sluggish demand, new competition or weak product pipelines... Pharmaceutical companies defend their pricing as helping to finance development of innovative medicines, an expensive and risky enterprise they say wouldn’t attract investment without the potential for large returns when a new drug succeeds.
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What gives the pharmaceutical industry so much pricing power? Part of the reason is the patent protection drug makers have on new products, which keeps competitors from offering copies for up to two decades. Another part of the answer is the insurance-based health system, in which consumers rarely feel the full brunt of price increases... Neither doctors nor patients typically have much of a sense of drugs’ prices. That blunts what economists call price sensitivity, the tendency of higher prices to curb demand.
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The Journal examined 30 of last year’s top drugs by revenue that are sold by U.S. pharmacies, looking at data from the start of 2010 through the end of 2014. The analysis used corporate financial statements, prescription figures from IMS Health Holdings Inc. and wholesale-pricing data provided by Truven Health Analytics. It excluded drugs that weren’t yet on the market in 2010 or for which full data weren’t available. For 18 of these 30 drugs, both revenue and the number of dispensed prescriptions for them rose. But revenue rose twice as fast as prescriptions.
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Among the 30 retail drugs the Journal examined, 10 produced revenue increases for their makers last year despite lower demand. Prescriptions for these drugs declined an average of 17%. But their wholesale prices went up an average of 80%. After discounts, revenue from the drugs rose 22%. For two drugs in the 30, both revenue and demand fell. But revenue fell less.
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http://www.wsj.com/articles/for-prescription-drug-makers-price-increases-drive-revenue-1444096750
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