Inside Prescription Drug Pricing

Topics: Costs and Prices, Prescription Drugs

As prices for prescription drugs have skyrocketed, drugmakers have faced scrutiny from consumer advocates and lawmakers demanding increased transparency and lower costs. Several recent polls show that the issue is on the minds of many U.S. residents, and it will likely play an influential role in the 2016 presidential election season. 

American Health Line staff writer Julia Haskins spoke with Bryan Birch -- CEO of prescription drug analytics and technology company Truveris -- to learn more about this complex issue. In part one of the conversation, Birch takes us behind the scenes of drug pricing.

Question: What are some of the major factors that go into determining the price of a drug?

Bryan Birch: The answer would be different based on whether it's a generic, a brand or a specialty medication.

For a generic drug, it's really the amount of supply and manufacturers for each one of the small molecule drugs. I'll give you a real-world example: Lipitor's generic is called atorvastatin. Because that is so widely used, there are more and more generic drug manufacturers that produce atorvastatin, and that regulates price nicely because you have more competition. Some of the other not commonly used generic drugs -- those drugs whose brand patent has worn off -- may not be as affordable as if there was a lot of competition because there won't be a lot of competition for low-volume generic drugs.

The FDA rightly started to really scrutinize the manufacturing processes of these drugs, especially for overseas generic manufacturers. In recent years, that has artificially stunted the volumes coming into the United States. As of Dec. 31, 2014, there was a backlog in the FDA of about 3,000 generic drugs waiting for approval. For the first time in decades, there was actually generic drug inflation over the past three or four years. That was caused by basically the lack of supply in the market, either from quality issues or from competition just consolidating.

Q: How does the process work for brand-name drugs?

Birch: From a branded perspective, the patents really come into play here. When a drug is patented, it will receive say a 15-year patent when it goes into clinical trial. If it takes seven or eight years to get out of clinical trials, that means the drug manufacturer only has say five to seven years left to make its research and development investment back on the drug.

What a lot of people in the U.S. aren't aware of is that patent legislation that exists in the United States can actually increase the amount of the cost of drugs if there isn't a sufficient enough patent left on the branded product. In order for them to recoup, if they only have three years, they basically have to increase prices. If they have seven years or 10 years left on a patent, that price is going to be different.

Q: Is the patent process the same for biosimilars?

Birch: On a specialty drug, they also have patent concerns, but it's less so. There's really no drawn pathway for a biosimilar because when a branded small molecule drug loses its patent, generic manufacturers basically use small molecules to replicate that drug, which is called a generic equivalent to the brand. When a specialty drug loses its patent, there is no bioequivalent because a lot of these drugs are made with plant material or biologic matter. If they don't have the exact plant material or biologic matter, it's not an equivalent drug, so they call it a biosimilar. When a specialty drug receives a patent -- even when that patent expires -- there's really not a strong way to get that biosimilar drug to market, so that leaves them with further patent protection and prices can fluctuate during that time.

The other factor is that a lot of specialty drugs require special handling and administration, follow-up, nurses get involved, it depends if it's injected, if it's self-injected, if it's injected at the doctor's office, does it require refrigeration -- all of those things add up. And of course, there is the question of how big the market is for the specialty offering. The bigger the market, the less the cost is going to be. For the most part -- whether it's a specialty drug or a branded drug -- drugs take $3 billion plus to come to market. It's very expensive to do this.

Q: While there are certain factors that can't be controlled when pricing medication, is there anything that drugmakers realistically can do to cut down on costs?

Birch: The one thing that I believe could be done and folks don't necessarily talk about would require a little bit of worldwide cooperation: Changing patent laws to allow 10 years of marketability for a drug. And in conjunction with that, if pharma manufacturers equalized world price between [developed] countries to reduce costs.

Let me explain that a little bit: Drugs that are available in the United States for $100 are available elsewhere in [developed] countries for $60. Long story short, it's because we can afford it, maybe others can't. So if they equalize the price and brought ours over a five-year period, we would change the patent law to give them marketability for 10 years to level out the prices for the United States. And in exchange for that, they would have to equalize world prices over a five-year period. So to get England to $80 and then us to $80 over five years, instead of $60 and $100, respectively.

Q: Why haven't we gotten to a point where this is possible?

Because it hasn't been, dare I say, regulated. How in the world, literally the world, can the pharma manufacturers be charging a lower price to wealthy countries like Germany, England, Canada, those type of places, versus the United States? What I believe would stabilize prices and reduce it a little bit is to give them a longer patent life upon marketability, and then further, have world equalization amongst [developed] countries. No one's really brought up the issue that I'm aware of. I haven't heard discussion around it in the Legislature or the FDA or the government. But that would help.

Q: There has been discussion of other proposed legislation to drive down drug costs, such as the Prescription Drug Affordability Act. What are your thoughts on a plan that involves bringing in cheaper drugs from foreign countries?

Birch: What the manufacturers will do in that instance is they will limit the supply to those countries. If they want to send them out of the country, to the U.S., then they won't have them for their own population. Just doing that, I'm not sure that is going to work.

What that bill is trying to do is basically what I'm discussing here in world equalization amongst [developed] countries. We should be paying very similar prices, not 60% more in the United States. The patent laws haven't changed for like 40 years, and world markets have changed, so I think it's worth a look.

Q: There's been a lot of debate about the cost of blockbuster hepatitis C drugs. What would it take to make these drugs accessible to more low-income individuals?

Birch: Having run managed care companies in the past, I would say having government-subsidized Medicare and Medicaid enrollees going into managed care and having the managed care entities basically control those decisions and control the access to those drugs in a competitive way.

There are a lot of state governments that have put older Medicaid enrollees into managed care, and they say if you don't select [a plan], we're going to select one for you. A lot of the Medicaid recipients in the United States are in managed care today, about 12 million of the 45 million Medicare recipients, so we're moving in the right direction there. As long as there's ample choice where a member could select and call and say 'I have Hep C, do you cover Harvoni or Sovaldi?' and then they select a plan that covers them.

That's where the free markets will work well, because if a managed care company wants to get additional volume, they will offer certain access to medical care and those members will then enroll. And if they treat them well, they'll be there for a lifetime, as long as they're government- subsidized members.

I would say, expand the private sector and make sure there's enough competition within the private sector to get the government-subsidized enrollees of Medicare and Medicaid into managed care companies. That way they can compete and win on customer satisfaction, access and quality of care.

This interview has been condensed for clarity and length.

Click here for part two of the Q&A, which focuses on strategies for consumers >>>