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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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July 7, 2010

Drug Prices in the US: Not So High After All?

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Posted by Derek

So, who has the highest prescription drug prices in the industrialized world? Why, the US, of course - everyone knows that. (Our generic prices are among the lowest, but not everyone knows that). And how much more do we pay than those fortunate folks over in Europe? Why, double or more, right?

Wrong, apparently. There's a new study coming out from the London School of Economics, comparing prices of 68 drugs between the two regions. And what they find is that US prices are about 25% higher than Europe - but no more than that:

But the study confirms data released recently by several pharmaceutical groups, including AstraZeneca and GlaxoSmithKline. This data – confirmed informally by senior industry executives – suggests profits in the US are only marginally greater than in Europe.

Past studies of drug price differences – including by the US General Accounting Office and by congressional officials – have suggested that US prices are at least one and a half times those of European prices.

Mr Kanavos says such comparisons are flawed, often comparing European list prices with US factory gate ones, which do not take into account the discounts negotiated between manufacturers and health insurers in the US. He says some previous studies have also taken unrepresentative samples.

Can this be correct? We'll have to check out the LSE study when it appears, but what if it is indeed on target? The Financial Times article mentions that this is embarrassing for the drug companies, who have maintained that the high US prices are needed to make up for lower prices elsewhere. But if the industry could have argued all along that prices aren't so high, why wouldn't it have done so to try to defuse the issue? Perhaps because no one wanted to go into great detail about all the various negotiated discounts along the supply chain? Speculation is welcome in the comments.

But it also seems embarrassing for people who've loudly been arguing the other side of the issue as well. What if the drug companies aren't as greedy as they look? And what if the European pricing regime, whose virtues have been pitched to me many times, wouldn't save much more money?

We'll take this up again when the study emerges. Until then, let the arguing commence! And thanks to FiercePharma for the tip to the story.

Comments (21) + TrackBacks (0) | Category: Business and Markets | Drug Prices


COMMENTS

1. darwin on July 7, 2010 7:19 AM writes...

Big Rx became a demonized target the moment that DTC marketing campaign commenced. We crapped in our own den.

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2. Anonymous on July 7, 2010 7:30 AM writes...

A 25% difference on a multi billion dollar industry is still billions of dollars, and probably 2-3% of overall US health care spending. That's not exactly a big deal, but it's not chump change either.

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3. magetoo on July 7, 2010 7:42 AM writes...

I'm just some guy on the Internet, but if prices are "really" 25% higher, and "profits in the US are only marginally greater", then surely something is wrong? What is it that they are spending money on, to make up for that 25% initial advantage? (Marketing?)

(Also, there seems to be an unclosed italics tag after "Financial Times".)

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4. dani147624 on July 7, 2010 8:15 AM writes...

After the words "Financial Times" the <i> tag haven't been closed properly with a </i>, instead another <i> was written. As a result now everything under it is written in italics (including comments, other articles).

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5. dani147624 on July 7, 2010 8:19 AM writes...

After the words "Financial Times" the <i> tag haven't been closed properly with a </i>, instead another <i> was written. As a result now everything under it is written in italics (including comments, other articles).

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6. dani147624 on July 7, 2010 8:20 AM writes...

Whoops, sorry for double posting, I didn't notice it sent it. Also didn't notice magetoo has already pointed out the problem before me.

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7. metaphysician on July 7, 2010 8:59 AM writes...

My guess is, its not so much "where is the extra money going in the US?" and more "are they actually making any profit on foreign sales?"

Bear in mind that the profit/loss dynamic is complicated in this case because the vast majority of the cost is upfront, so I'm sure figuring out actual profit margins on individual marketed drugs probably requires a team of accountants.

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8. LeeH on July 7, 2010 9:12 AM writes...

I'm not surprised that the negotiated prices though insurance companies are not that much above what the Europeans are paying. One big problem is that large numbers of prescriptions for non-generics are filled at non-negotiated rates, thanks to the Bush drug prescription plan for many and others that are not covered by insurance at all. This is a nice way for large pharma to make up for their "losses" to the generics.

I'd like to see a study that shows prices adjusted using a weighted average for each country, based on how many prescriptions are filled at a given price.

Derek, your question regarding why the drug company didn't bring this up before, I believe, suggests that it's farther from the truth than what was previously believed.

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9. Will on July 7, 2010 9:45 AM writes...

I would be curious to know the 68 drugs compared - were they ones for which either generic or competing other brands were available (eg statins, SSRI, etc) or did they look at compounds that have no competition whatsoever (such as Embrel, but maybe there are other products like that out now)

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10. pharmaguy on July 7, 2010 9:52 AM writes...

As Derek mentioned, US generic prices are overlooked. The vast majority of prescriptions in the US are for very low cost generics - the #1 drug company in the US by volume is Teva. Although the EU has price controls for new drugs - older drugs often have longer protection (patent + data) thus fewer generic competitors to drive down prices.

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11. Mark on July 7, 2010 9:55 AM writes...

This actually makes complete sense. I'm on the commercial side of biopharma and when we do revenue projections, we always make the assumption that the average EU price would be ~75-80% of what the price would be in the US.

This translates to a 25-33% higher price in the US. It all depends on exactly what EU country you are comparing as well, because the prices can vary quite widely as well.

Mark

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12. pharmaguy on July 7, 2010 10:01 AM writes...

Pharma doesn't discuss it because a) they still need to address the high initial price difference b) They don't want EU govts to realize they are over-paying for older drugs... The EU has the laws to adjust pricing - the US does not.

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13. Lethe on July 7, 2010 11:30 AM writes...

Perhaps what this really points out is that the horrible, unconscionable rape of drug companies' rightful profits at the hands of evil, evil government-run health programs is overstated, and that the defenders of the "free market," who got the vapors when the drug companies didn't immediately declare war on medical reform in the US, should perhaps reconsider their positions.

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14. John Thacker on July 7, 2010 1:16 PM writes...

Lethe:

Defenders of the free market were instead pointing out all along that the US drug companies were far from "declaring war" on the healthcare reform, instead advertising heavily in favor of it and helping write the bill.

Yet some of the people who bash Medicare Part D because Bush was involved welcome this latest incarnation.

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15. startup on July 7, 2010 1:24 PM writes...

I've been meaning to ask this for a while, - do you know why many drugs (allergy, heartburn) go OTC when the patent expires? I know the cynical answer, but is there more to it?

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16. qetzal on July 8, 2010 9:23 AM writes...

Ditto what magetoo said (#3). A price that's 'only' 25% higher doesn't necessarily imply only "marginally greater" profits. Depends on the COGS. E.g., if the 'real' EU price is only slightly above COGS, and the 'real' US price is 25% higher (with the same COGS), the US profit could be MUCH higher.

However, I've heard that COGS is typically about 25% of price. If so, the discrepancy between relative price and relative profit would be fairly small. But I don't know if that's really true,.

Mark or anyone else - do you know?

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17. MT on July 9, 2010 5:40 AM writes...

Americans may complain that they pay the most for pharmaceuticals but don't often see the fact that this in turn prioritizes their indications for research attention. If malaria or ebola was a US specific disease you can bet your bottom dollar that there would be excellent medications for these. If obesity was a major African, European or Asian problem do you really think 3 obesity drugs would be looking for US approval this year?

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18. GC on July 11, 2010 10:57 PM writes...

In the US, legal cost account for a majority of the 25% difference and the reason the profit difference is marginal.

An educated guess?????

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19. Jonadab the Unsightly One on July 12, 2010 7:22 AM writes...

> I would be curious to know the 68 drugs compared

I'd be more interested to know the methodology by which the drugs in question were selected for the study. He says "some previous studies have also taken unrepresentative samples", does he? Does that mean he's carefully constructed his own sample to be "more representative", i.e., to cough up the answers he wanted?

What really bothers me, though, is the word "unrepresentative"... unrepresentative of *what*? Unrepresentative of the average drug on the market (irrespective of sales figures)? Unrepresentative of the drugs the average person buys (taking sales volume into account irrespective of price)? Unrepresentative of the drugs that make the pharmaceutical companies most of their money (irrespective of other factors)? I suspect studies could show significantly different answers depending on the sample. How was the sample for this study constructed? What does it really represent?

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20. Jonadab the Unsightly One on July 12, 2010 7:50 AM writes...

> If malaria or ebola was a US specific disease
> you can bet your bottom dollar that there
> would be excellent medications for these.

I don't know about excellent. That probably would depend on how tractable the diseases in question really are. I would have grave reservations about characterizing the available cardiovascular drugs as "excellent", for example, and don't even talk about stuff like Alzheimer's.

Nonetheless, if malaria were a common ailment in the US there would be something on the market for treating it, that's sure. Something expensive and still under patent protection, most likely, eh? (And the disease wouldn't have to be US *specific*, just _prevalent_ in the US. Whether people in sub-Saharan Africa also get the same disease is, not to put too fine a point on it, a less influential factor.)

It is undeniable that the US spends a fair amount of money on meds. This should not surprise anyone. We're the third most populous country in the world, and our GDP per capita is way ahead of the two countries with larger populations. (And no, Europe does not have a larger population and a higher per-capita GDP. It has either one or the other, depending on which countries you include, but not both.)

We're a big market. Arguably the biggest market, or certainly one of the three or four biggest. Of course we spend a lot of money on drugs. We *buy* a lot more of them, and that's probably especially true of the expensive ones.

Do the drugs also cost more here? Maybe they do, I don't know. Like I said, show me the methodology used to construct the study's sample.

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21. Shannon Dealy on July 12, 2010 2:30 PM writes...

I am not certain how valid such a comparison is, since they are taking into account discounts provided to health insurers. It is important not to forget the tens of millions of American's without health insurance who presumably are paying the massively higher amounts that make the difference in prices between the studies. You are really comparing three different groups and the insured and uninsured should be broken out separately. I recently had a prescription filled and was told that it is normally $200, but my insurance company discount made my price only $80. Note, my insurance company wasn't paying any of this, they had simply negotiated a much better price for me than if I were uninsured.

Essentially the result here is that drug prices are massively higher in the USA, but if you can afford insurance, you get a better deal. In the end, I don't really care if the insurance company is paying for the medication or negotiating a discount, it is about how much I pay for health care with or without insurance.

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