Whenever we see the word “drug,” we often think of illegal substances responsible for strengthening militant cartels and funding illicit drug wars. Such negative connotations are unfortunate, because drug therapies provide simple, noninvasive and effective methods to diagnose and treat diseases.
Sadly, the benefits of drug therapies are offset by their rising costs. From a recent Medscape article, imatinib (brand name: Gleevec), which is used to treat chronic myelogenous leukemia, cost $30,000 annually in 2001; today, the same drug costs $90,000 per year. New cancer therapeutics cost more than $100,000 per course of treatment.
A nucleotide analog called sofosbuvir (brand name: Sovaldi) is an effective treatment for hepatitis C, but it costs about $84,000 for 12 weeks of treatment. According to a Wall Street Journal article, Valeant Pharmaceuticals International bought the rights to two heart drugs, Nitropress and Isuprel, before increasing their prices by 212 percent and 525 percent respectively.
Soaring drug prices are unsettling for patients and their families, healthcare providers and insurance companies. A sizeable fraction of the cost is attributed to advances and complexity in drug discovery.
Drug discovery is a multistep, reductionist and laborious process that spans over 10 years and costs billions of dollars per drug. First, a specific biological target is analyzed and new chemicals are synthesized. At least 10,000 compounds are screened to detect appropriate test chemicals based on structural and biochemical properties.
The intricacy of drug discovery explains why drugs are limited and expensive. Extensive knowledge and teamwork are required to develop curative treatments for complicated diseases. Incentives to engage in research are essential, so knowledge is protected by intellectual property rights and subsidized by private and government funding.
From the Uruguay Round Agreements Act, drugs have a 20-year patent life from the date when the patent application was filed.
Regrettably, generic drugs often acquire an unpleasant vibe from the patient population, due to misleading fears that generics are of poorer quality than brand name drugs. The FDA requires generic drugs to have the same active ingredient, dosage form, strength and administration route as branded drugs.
The Hatch-Waxman Act of 1984 allows generics to acquire FDA marketing approval by submitting bioequivalence studies and filing an abbreviated new drug application. Moreover, the first company that files an ANDA for a particular drug acquires 180 days of exclusive rights to market the generic alternative to the branded drug.
Since bioequivalence studies are cheaper than clinical trials, research costs are reduced in marketing generic drugs. After the 180-day period, more companies can produce generic drugs, and increased competition sharply reduces drug prices. Despite the stigma, generic drugs are cheaper than branded drugs while exerting identical functions.
The chemical synthesis of small molecules promotes easy proliferation of generic drugs. Another production method involves biotechnology, whereby living organisms and their derivatives are used to make compounds. Drugs acquired from biotechnology are called biopharmaceuticals, which include hormones and monoclonal antibodies.
Biopharmaceuticals are complex molecules; so generic alternatives called biosimilars have some structural differences. The Patient Protection and Affordable Care Act (i.e. Obamacare) allows the FDA to approve biological products that are shown to be highly similar to brand name biopharmaceuticals. Wall Street analysts expect biosimilars to sell at discounts ranging from 20 percent to 30 percent.
According to another Wall Street Journal article, generic prices have risen by an average of 5.1 percent over the past two years. Richard Evans proposes that generic drug companies have suffered from poor financial performances. These companies cooperate to increase revenue in order to compensate for low sales (e.g. low prices or fewer drugs sold).
Evans reassures that generics inflation is only temporary, as the number of firms needed to cooperate is too large and financial woes will diminish. Yet, his explanation suggests that cooperation can briefly strengthen market power and trigger price increases.
Market power is quantified by a measure called the Lerner index, which depends on the price elasticity of demand. A relatively elastic demand resulting from the availability of generics reduces the market power of branded-drug companies, so the Lerner index is small and drug prices fall.
Pharmaceutical companies protected by 20-year patents reduce the generic threat. The lack of substitutes corresponds to an inelastic demand, so the Lerner index becomes closer to 100 percent and drug prices skyrocket. Since 2008, prices of branded drugs have risen by 127 percent compared to 11 percent increase in the consumer price index.
Strong market power helps pharmaceutical firms to overstate drug prices, because price hikes allow firms to boost sales easily without having to engage in costly research. Price hikes also pay for advertising, shareholder returns and administrative duties. Firms may also sharpen their market power through mergers and acquisitions of smaller rivals.
Patent protection and market power are also predominant in areas outside the United States, which implies that drug prices should be uniform geographically once exchange rates are taken into account. Instead, drug prices are significantly cheaper in regions like Europe, Japan and the Commonwealth of Nations.
Medscape reports that cancer drugs are about 20 percent to 40 percent cheaper in Europe than in the United States. As previously mentioned, imatinib costs more than $6,000.
In a New York Times op-ed, Peter Bach states that geographic price differentials occur because American pharmaceutical firms exploit loopholes in complex laws such that insurers are forced to include all expensive drugs in their policies. Other firms engage in anticompetitive practices by buying inexpensive generic drugs and kicking new firms out.
Drug prices are negotiated at an individual level, which means prices are usually unchecked. Britain and Germany exercise stricter control over firms by enacting various price controls and continuously comparing new drugs with existing drugs in the market. Stringent regulation protects consumers and smaller firms by suppressing anticompetitive practices.
The complicated disaster of the American healthcare system allows firms to place unnecessary burden on insurance companies. Incessant cost deferral is prevented by single-payer healthcare systems, where only the government pays for all healthcare costs. Premiums will disappear, physicians will regain autonomy over patient care and households will save money.
While profit incentive is necessary to drive medical research, wasteful expenditures and anticompetitive practices harm the society. Stricter regulations and improved healthcare systems not only promote cheap curative medicines but also foster a healthier and stronger community.