It’s shaping up to be another rough year for the drug industry.
At his first press conference since being elected, on Jan. 11, President Donald Trump said drug companies are “getting away with murder,” and suggested that the US government needs to negotiate drug prices.
Biotech and pharma stocks fell on the comments and haven’t really recovered. Investors might fear that a tweet from the president attacking a company over a high drug price could hit at any moment.
It’s not just Trump, of course: the public’s been upset about the rising cost of drugs for the past few years. The outrage started with “bad apples” that were taking extreme measures to jack up prices, but slowly expanded to hit companies where list-price increases are routine. Several politicians, both Democrat and Republican, have spoken out about this.
So, during the JPMorgan Healthcare Conference in San Francisco this month, Business Insider spoke to drug company executives about how their jobs would be impacted if the price increases that the industry takes every year — sometimes twice a year or even quarterly — stopped being standard practice.
- Some insisted it wouldn’t change their jobs or their companies because their growth is driven by volume instead of price increases
- Others brought up the need to start pricing better right off the bat when a drug gets on the market
- Many pointed to the discrepancy between high-rising list prices and either declining or similar net prices thanks to other players in the supply chain
Keeping investors interested
Drug development is a risky business, and often hypotheses don’t pan out and a drug fails in clinical trials. It means investors need other reasons to back companies, and routine price increases are a way to ensure that those investors will stay interested.
Removing price hikes from the business model could mean that research and development budgets within major drugmakers could get hit, as well as investor interest in very early-stage projects that could be a decade or two away from reaching the market, some executives warned.
“There’s a wellspring of innovation that needs to be fed coming out of the academic community in order for us have the foundation to build up the therapies of tomorrow,” Scott Brun, head of AbbVie Ventures, the drugmaker’s venture arm, told Business Insider. “You need people willing to invest in that, or they’re going to invest in something else.”
To do that, he said, there are some questions that would need to be answered, including making sure those investors have enough certainty to stick around despite the risks associated with development. If investors do leave to fund more sure bets, he said, “I think we will all lose as a consequence there.”
List price increases don’t always translate to growth
Another common defence on the issue of drug prices is to point to all the other parts of the system of getting a drug to a patient. It’s true, drugmakers are part of a complex system, filled with middlemen who all get a piece of a drug’s sale, and they say that system means they don’t actually profit off of price hikes. So, stagnant drug prices, without any other change to the system, would just erode their profits to the pharma companies.
Drugmakers pay rebates out to pharmacy benefits managers and insurance companies, and those rebates are increasing in part just so the companies can ensure their drug is kept on the list of approved drugs for a certain treatment.
Enrique Conterno, the president of Lilly’s diabetes unit, offered up an example. Lilly makes Humalog — an insulin that’s seen it’s price steadily increase. Conterno said that the net price for Humalog, or what the drugmaker actually collects, was down 24% in the third-quarter of 2016, from the third-quarter of 2015.
Right now, there isn’t a great alternative to the middlemen though, both for the drugmakers and the employers and insurance companies who count on pharmacy benefits managers.
“I was asked a question why doesn’t the whole industry just price at a different level and not do all these rebates,” Horizon Pharma CEO Tim Walbert said. “And I think everyone would give the same answer: If I could just make my medicine and get it to the consumer directly, we all would.”
Many executives Business Insider spoke to said their businesses are driven by the volume of prescriptions they make for patients, rather than price increases.
So even if list prices were to stay the same after they were originally set, the growing payout to the middlemen would mean profit erosion at the drugmaker.
Setting an initial price so high that doesn’t need to be increased
In the debate over drug prices, there have been two kinds of drugs that have grabbed headlines: the new drugs start out with astoundingly high prices (think of the hepatitis C treatment that has a $84,000 list price), and old drugs that have seen their price climb — suddenly or steadily over the years — (like the EpiPen, or the prices of insulin).
One response to a hypothetical world without price increases would simply be to set an initial price that is so high that it will just reflect any foregone hikes. There are some drugs that are already priced this way, but right now the prices for those are extraordinary — think hundreds of thousands — and Big Pharma’s trade organisation, called PhRMA, has a new ad campaign that launched Monday to try and explain where these come from.
“It’s really a question of what is the initial price,” said Jan Lundberg, Lilly’s executive vice president of science and technology and the president of Lilly Research labs. “Our aim is to have differentiated products that can motivate a very good starting price and that’s what we clearly do.”
Sean McCarthy, CEO of CytomX, a biotech that’s developing safer ways to administer cancer immunotherapies, echoed that the initial price setting is a key issue.
“I think that we need to pay a lot more attention to where we initially set price.”
Alex Wong/Getty Images
Secretary Health and Human Secretary nominee Tom Price
Will we see legislative changes to the way drugs are priced?
In this hypothetical situation, the conversation was more around self-policing and changes at the company level. But Trump has said he wants to have the US negotiate prices and importing drugs from Canada, which would mean that that the way drugs are priced drastically changes.
But negotiating drug prices for Medicare wasn’t something Trump’s HHS pick Tom Price would commit to in a hearing Wednesday despite being pushed on it by Democratic senators. Analysts have noted that it’s not a part of the Republican’s healthcare plan, but with drug pricing striking such a chord with Trump, it’s only a matter of time before a tweet or another soundbite sends biotech stocks into even more uncertainty.
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