First of Four Parts…

The Pharma Companies In the Crosshairs

During last year’s presidential campaign, candidate Donald Trump said that if elected, he would save the federal government billions by forcing the pharmaceutical companies to negotiate—that is, lower—their prices.

On January 11, 2017, President-elect Trump said that the pharma companies were “getting away with murder” in their pricing, and reiterated his demand for new competition policies aimed at bringing down costs.

On January 31, President Trump met face-to-face with top executives and offered a more nuanced exposition of his thinking. First, he reiterated his oft-expressed point about the value of market forces:

US drug companies have produced extraordinary results for our country, but the prices have been astronomical. . . . We have to get the prices down. . . . Competition [is] the key to lower drug prices.

Second, Trump demonstrated that he fully understood the life-saving value of medical innovation: “New drugs have led to longer, healthier lives—we all know that—but we have to do better accelerating cures.” (This author has taken note of Trump’s advocacy of a “Cure Strategy” many times, including here and here.)

“Big Pharma” ought to take all of Trump’s words to heart, because the President is putting forth a balanced package that includes a carrot, as well as a stick. By contrast, most other politicians, at least the ones who are most vocal, are brandishing only the stick.

In the meantime, today, Big Pharma certainly is getting sticked. And many would say that the industry deserves every last whack. We can quickly review the parade of horrible headliners—from just the past year—that have been hauled before Congress for a televised whupping:

*Turing Pharmaceuticals LLC acquired the anti-bacterial drug Daraprim, which has been used since 1953, and immediately raised the price from $13.50 a dose to $750 a dose—a 5550 percent increase.

*Valeant Pharmaceuticals International bought the rights to a 30-year-old drug, Syprine, used to treat Wilson’s Disease, in 2010 and raised the price by more than 3000 percent. Prices for other drugs from that company were raised between 300 percent and 700 percent.

*Mylan Pharmaceuticals hiked the price of its epinephrine injector EpiPen, used to treat emergency allergic reactions, by 600 percent.

*Kaléo Pharma, which competes with Mylan, raised the price of its epinephrine injector, Evzio, by 650 percent. Indeed, it’s, uh, interesting that Mylan and Kaléo seemed to have been raising their prices in lockstep.

*Marathon Pharmaceuticals jacked up the price of its decades-old drug, Emflaza, which treats Duchenne’s Muscular Dystrophy, by 50,000 to 70,000 percent.

We must quickly declare that there are two sides to each of these stories. For example, the stated prices of these drugs is just that—the stated price. The actual price paid, after haggling by insurance companies or pharmacy benefit managers, is often much, much lower.

However, because of the initial “optics” of the price hikes, the political damage has been done, and the political consequences have been felt. Citing the most recent horrible headliner, Marathon, Axios’ Bob Herman explains:

Several years ago, Marathon’s drug price hike would have floated under the radar. But this is the clearest example yet of what will happen if drug companies price medications beyond what is acceptable by the public and Congress.

Indeed, pharma-bashing has burnished the cable-TV presence of such top Democrats as Sen. Bernie Sanders, Sen. Elizabeth Warren, and Rep. Elijah Cummings, of Maryland.

Meanwhile, some Republicans are catching up. For instance, Rep. Greg Walden of Oregon, chairman of the powerful House Energy and Commerce Committee, recently declared, “For those in industry who think it’s OK to corner a market, drive up prices and rip off consumers, know that your days are numbered.” And in fact, bipartisan legislation to address the drug-pricing issue is reportedly coming soon.

In the meantime, the public is right there with the lawmakers. A 2016 Gallup Poll found that the pharmaceutical industry ranks 24th in popularity among 25 institutions surveyed; it ranked behind, even, such legendary low-rankers as advertisers and lawyers. Only the federal government rated worse.

To be precise about it, the drugmakers enjoy positive feelings among just 28 percent of Americans, while 51 percent feel negatively; that’s a net negative of 23 points.

The biggest reason for this unpopularity, of course, is prices. According to a Kaiser Family Foundation poll, a full 73 percent of Americans think that the cost of prescription drugs is “unreasonable.” When further asked why drug prices are so high, 76 percent blamed the companies themselves, as opposed to other possible miscreants, such as trial lawyers and government regulators.

We might pause to observe that many experts believe that these latter miscreants are a far greater cost-problem than most people realizes; today, the cost of bringing a single new drug to market is $2.6 billion, and that cost has risen 145 percent over the previous decade—thank you, litigators and regulators. And yet the public doesn’t know this, and so long as the news is only about jacked-up prices, it never will.

Without a doubt, the US spends a lot of money on medical drugs; in 2015, the total was $324.6 billion. But then, just about every dollar-total in the US is enormous.

In fact, a more useful metric is the proportionate share of the total that’s spent on healthcare by the whole country. And here we see that drugs count for only about 10 percent of the National Health Expenditure, which in 2015 totaled $3.2 trillion. (Medical equipment, durable and non-durable, accounts for another four percent of GDP.)

In fact, if we think about drugs within the context of healthcare overall, we quickly realize that of all the possible kinds of health therapies, taking effective medicine is almost always better than, say, surgery and an extended stay in the hospital. In other words, we would better off if medicine was more of a factor in the healthcare equation.

Yet in the meantime, in this supersaturated political environment, Big Pharma is a juicy target. Last year in California, liberal activists put up a ballot referendum, Proposition 61, which would have price-capped drug prices in the Golden State. Industry-backed opponents of the measure outspent proponents by a 7:1 margin, eking out a 53:47 victory.

Yet now that the smoke has cleared, we might survey the ruins: The pharma industry spent at least $109 million in opposing Prop 61, and what, exactly, does it have to show for the expenditure? Yes, it missed the ballot-bullet, and yet it’s $109 million poorer, and probably even less popular.

So the ideological left in California is sure to make another run at the industry, in the form of another referendum, or action by the Democratic governor, or the Democratic legislature—or all three. Meanwhile, progressives in other states, notably Ohio, are cooking up similar price-controlling proposals.

In belated response to such threats, the industry is trying to clean up its act. For instance, in January, Pfizer CEO Ian Read drew a bright line between the larger, more established companies, and the newer and more piratical upstarts. As Read put it, “Most of the problem of reputation is coming from those that I don’t consider part of the ethical pharmaceutical business”; Read then name-checked Mylan, Turing, and Valeant.

More recently, the case of Marathon has been so egregious—and so harmful to the industry’s image—that the leading pharma trade association, PhRMA, has begun to take action that goes beyond words. Under the February 15 headline, “Pharma Lobby May Boot Company That Introduced High-Priced Drug,” Bloomberg News reported that PhRMA is taking a hard look at possibly ejecting Marathon from its membership. According to Stephen Ubl, CEO of PhRMA, Marathon’s “recent actions are not consistent with the mission of our organization.”

Translation: PhRMA is thinking about a membership purge—always a difficult step for a member-based organization.

Now if we step back a bit, with history in mind, we can be reminded that, as a general rule, when an industry finds itself afflicted with “bad apples,” its first instinct is to police itself. That is, self-regulate.

Yet it may be too late for self-regulation: Here’s a thought sure to send a chill up and down the spine of pharma, courtesy of Bloomberg columnist Joe Nocera: He predicts that pharma companies will be seen in the same bad light as the tobacco companies and the banks. Those two industries, we recall, were confronted by scads of bad press and were, as a result, litigated or regulated to new heights—or, some would say, new depths.

By this reckoning, it’s easy to see trouble ahead for pharma. One possibility is direct price regulation, akin to the old Interstate Commerce Commission, which was created by Congress in 1887 to regulate railroad rates. (The ICC, which many economists blame for bankrupting just about every rail carrier that it red-taped, was abolished in 1996.) More recent regulatory models are the public-utility commissions in every American state—and those aren’t going anywhere.

The problem with such regulation, of course, is that it tends to squelch innovation. And yet, if present trends continue, the industry’s self-regulation notwithstanding, new governmental rules are inevitable.

So before the situation gets out of hand, we might pause to consider the stakes—for each one of us. And here President Trump seems to have the right policy perspective: Yes, we need reasonable drug prices, and yet we also need new medical cures.

After all, the right drug can save lives. And while drugs can be expensive, it’s worth remembering that being sick—or being dead—is even more expensive.

Mass-Producing Medical Miracles

A case in point is the drug Sovaldi, which reliably cures Hepatitis C, a liver-wasting disease that can cause disability, even death. When Sovaldi was introduced in 2013, its maker, Gilead Sciences, caused a ruckus by announcing that it was charging $1000 a pill, or $84,000 for the needed 12-week regimen. That was a high price, for sure, and political fireworks ensued, and yet nothing changed the fact that the drug worked—it was a cure. And a cure was cheaper than a lifetime on, say, the federal SSI program for the disabled. Indeed, if Hep C victims can be healed and returned to the taxpaying workforce, it’s a win-win, for both patients and taxpayers.

In fact, over the past four years, the familiar combination of price-haggling and new competitors entering the market has served to drive down prices for Hep C treatment. Today, there are no less than 31 drugs on the market to treat Hep C, and some are rated even higher than Sovaldi.

So how do we get more success stories like that? How do we get more private-sector-generated drugs that serve the public interest? More cures that save lives, and save money?

We’ll take that up those questions in the succeeding installments.