Pricing — The Cost of Doing Business

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Denise Myshko

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PICK UP A NEWSPAPER , TURN ON THE TELEVISION, OR LOG ONTO THE INTERNET and almost every week, a politician, agency, or consumer group can be found criticizing the pharmaceutical industry’s pricing, promotional, or marketing practices. Central to the controversy, more often than not, is the cost of phar maceutical products and the impact this cost has on healthcare expendi tures and on consumers’ wallets. “Drug companies have products to sell and they want to maximize their value within each segment of the mar ket,” says Jim Czaban, an attorney in the Washington, D.C., office of Heller Ehrman White & McAuliffe. “Criticisms of the industry’s drugpricing policies often are politically motivated. When people say drug pricing is not rational, it’s often a code for their political references.” PRICING THE COSTOF DOING BUSINESS Distinguishing between value and price is central to the debate surrounding prescriptiondrug costs BY DENISE MYSHKO DR.DAVID WEBSTER 39 PharmaVOICE M a r c h 2 002 clinicaltrial costs. “The difficulty in recruiting patients into clinical trials in an era when drug development programs are expanding, and the increased focus on developing drugs to treat chronic and degenerative diseases, has added significantly to clinical costs,” Dr. DiMasi says. Included in the drug cost analysis are expenses of project failures and the impact that long development times have on invest ment costs. The estimate also accounts for out ofpocket clinical costs, outofpocket discov ery and preclinical development costs, clinical success and phase attrition rates, as well as the cost of capital. “Bringing new drugs to market has always been an expensive, highrisk proposition, and our latest analysis indicates that costs have continued to skyrocket,” says Tufts Center Director Dr. Kenneth I. Kaitin. “The single largest challenge facing drug developers — both pharmaceutical and biotechnology com panies — is to contain R&D costs and reduce development times without compromising clinical test design. It’s a tall order.” Critics of the study claim that the pharma opment. An expense that, according to Phar maceutical Research and Manufacturers of America (PhRMA), is integral in setting industry pricing. The November figure of $802 million is triple Tuft’s 1987 estimate of $231 million. (The $802 million is based on 2000 dollars and the earlier estimate was done a decade ago and is based on 1987 dollars.) Dr. Joseph A. DiMasi, director of econom ic analysis at the Tufts Center and the princi pal investigator for the latest study, attributes much of the increase in the total cost of new drug development beyond inflation to rising PRESCRIPTION DRUG PRICES ONTHE RISE # # # # THE AVERAGE PRICE OF A PRESCRIPTION CONTINUES TO INCREASE, FUELED BY INCREASES IN MANUFACTURER PRICES FOR EXISTING DRUGS AND BY PROPOR TIONATELY HIGHER PRICES FOR NEWER, BRANDNAME DRUGS. MANUFACTURER PRICE INCREASES INRECENTYEARSHAVE BEEN HIGHERTHAN INTHE MID1990S. The overall average retail prescription price was $45.79 in 2000, more than double the average price in 1990 ($22.06). Increases in average retail prices reflect both price increases for existing drugs and shifts in use to newer,more expensive medicines. The average retail price of a prescription for a brandnamedrugwasmore than3 times that of a generic drug in 2000 ($65.29 compared to $19.33). This price differential between average brand and generic prescription prices has increased over time, from just less than 2.9 times in 1996 to 3.4 times in 2000. The average retail prescription price increased more than 3 times the rate of gen eral inflation (CPIall items) and more than twice the CPI for medical care from 1998 to 2000 (9.2% compared with 2.8% and 3.8%, respectively). The average annual percent increase in retail prescription prices from 1998 to 2000 was 30% higher than the increase from 1991 to 1998. Price inflation in the form of manufacturer price increases for existing drugs decreased in the mid1990s, but recently increased from 1.6% in 1996 to 3.9% in 2000.However, since 1993, manufacturer price inflation for existing drugs has remained low relative to increases in prescription expenditures over all (17.4% in 2000) or average retail prescrip tion prices (7.9% in 2000), which reflects shifts in use to newer,moreexpensivedrugs. Prescription use continues to show steady growth. A variety of factors influence this growth, including increased availability of and dependence on medications for treat ments, increases in promotion of prescrip tion drugs by pharma manufacturers, improved access to drugs through insur ance coverage for prescriptions, and an aging population. The number of prescriptions dispensed in retail pharmacies has grown at an average annual rate of 6.0% since 1992, reaching almost 3.0 billion prescriptions in 2000.This compares to only a 1.4% growth in the population for the same time period. Prescriptions dispensed per capita have increased by almost half in the past 8 years, from 7.3 prescriptions per capita in 1992 to 10.8 in 2000. Source:The Henry J. Kaiser Family Foundation,an independent, national health philanthropy dedi cated to providing information on health issues; Prescription Drug Trends — A Chartbook Update Kaiser Family Foundation November 2001. # # # According to some industry analysts because there is an overlay of strict regulatory require ments, which includes adhering to stringent R&D guidelines, and an amortization of prod uct value (the patent life of pharmaceutical products), the formula is not cutanddry. The debate surrounding pharmaceutical pricing intensified in November when the Tufts Center for the Study of Drug Develop ment released its latest estimate on the cost to develop a new drug — $802 million. The pharmaceutical industry has traditionally used the Tufts’ research as a way to benchmark one of its primary expenses — research and devel IT’S NOT THAT PRICES are high because R&D is high, but rather because prices are high, companies are more willing to do R&D to develop therapies for indications that are hard to crack. DR.THOMAS NAGLE PRICING and value PharmaVOICE ceutical industry overestimates its R&D costs by as much as 75%. The updated Tufts study used the same methodology as the 1991 study, which also was prepared by Dr. DiMasi. In July 2001, Public Citizen published a detailed report, Rx R&D Myths, critiquing Dr. DiMasi’s original study. It demonstrated that the actual aftertax cash outlay for developing a new drug, including failures, was $110 mil lion — about 75% less than PhRMA’s 1991 $500 million estimate. (See box on this page, for more details.) The pharmaceutical industry has long used the Tufts’ research in its discussions about pricing. Statements and brochures put out by PhRMA consistently defend the industry’s T wo major industry constituents have very different points of view relating to the actual cost of research anddevelopment. On one side is The Tufts Center for the Study of Drug Devel opment,which has long been recognized as the leading resource for evaluating R&D cost metrics. On the other, is the national consumer advocacy group Public Citizen, which refutes the Tufts’ study, claim ing the research overstates the actual costs associated with pharma ceutical R&D. POINT: In November 2001, The Tufts Center for the Study of Drug Development announced that the average cost to develop a new prescription drug is $802 million. That figure is the major conclusion of a recently completed indepth study conducted by the Tufts Centerbasedon information obtaineddirectly from researchbased drug companies.These data update a similar study done by the Tufts Center a decade ago, when the average cost to develop a new drug was estimated to be $231 million, in 1987 dollars. AMONGTHE STUDY’S KEY FINDINGSWERETHE FOLLOWING: . The full capitalized resource cost of new drug development was estimated to be $802 million (2000 dollars).This estimate accounts for the cost of failures, including research on compounds aban doned during development,as well as opportunity costs of incurring R&D expenditures before earn ing any returns. . When compared to the results for previous studies,the R&D cost per approved new drug increased 2.5 times in inflationadjusted terms. . After adjusting for inflation, the outofpocket cost per approved new drug increased at a rate of 7.6% per year between the 1991 study and the current study.The annual rate of growth in capitalized cost between the two studies was 7.4% in inflationadjusted terms. The Rising Cost of Drug Development . While costs have increased in inflationadjusted terms for all R&D phas es, the increases were particularly acute for the clinical period. The infla tionadjusted annual growth rate for capitalized clinical costs (11.8%) was more than five times greater than that for preclinical R&D. The Tufts Center for the Study of Drug Development based its conclu sions on detailed survey data on 68 drugs obtained directly from 10 drug companies. Because drug development is a complex process involving long lead times and substantial technical risks, a reliable estimate of the cost of development accounts for the expense of project failures and the impact that long development times have on investment costs. For more information about the study and its methodology, please log onto:www.tufts.edu/med/ COUNTERPOINT: According to Public Citizen, the Tufts Center for the Study of Drug Development once again significantly overstates real research and development costs. In a July 2001 report titled,Rx R&DMyths:TheCase Against The Drug Industry’s R&D “Scare Card,”Public Cit izen states that major U.S. drug companies and their Washington, D.C., lobby group, the Pharmaceutical Research and Manufacturers of America (PhRMA), have carried out a misleading campaign to scare policy mak ers and the public. PhRMA’s central claim is that the industry needs extraordinary profits to fund expensive, risky and innovative R&D for new drugs. According to Public Citizen,the R&D scare card — or canard — is built on myths, falsehoods and misunderstandings, all of which are madepossible by the drug industry’s staunch refusal to open its R&D records to congressional investigators or other independent auditors. ACCORDINGTOPUBLICCITIZEN,THETUFTSCENTERSTUDYHASTWO DRAMATIC FLAWS. . First, the study is not representative of real drug industry R&D because noneof the 68drugsused in theTufts study received any government sup ACCORDINGTOTHE TUFTS CENTER FOR THE STUDY OFDRUG DEVELOPMENT: The full capitalized resource cost of new drug development is estimated to be $802 million. This estimate accounts for the cost of failures, including research on compounds abandoned during development. # # POINT The single largest challenge is to contain R&D costs and reduce development times without compromising design. IT’S ATALL ORDER. DR.KENNETH I. KAITIN 41 PharmaVOICE M a r c h 2 002 PRICING and value pricing policies, stating pharmaceutical prices are justified in light of the risk, high cost, and time involved in drug development; the need to cover costs for those products that don’t come to market; the eventual loss of patent protection and competition from generics; the need to fund future research; and the intrinsic value pharmaceuticals provide. “Research and development is an important factor in pricing,” says Irwin Lerner, CEO of Reliant Pharmaceuticals LLC. “The costs, the risks, and the time to get a reasonable return on that investment — these all play some role in the pricing of a product. It isn’t necessarily the determinant role, but it certainly is a major fac tor in calculating or coming up with the ulti mate price for the product.” Mr. Lerner stresses that several factors determine a pharmaceutical product’s price, but R&D costs cannot be ignored, especially when the average company spends somewhere between 18% to 25% of revenue from sales on R&D. “That is a ratio of research to sales unmatched by any other industry,” he says. In 2001, PhRMA member companies invested an estimated $30.3 billion in R&D — a 16.6% increase from the 2000 level. In 2001, pharmaceutical and biotechnology companies added 32 new treatments to the nation’s medicine chest — 24 drugs and 8 biologics. According to PhRMA, the increase in R&D spending, which was estimated at $2 billion in 1980, can be attributed to inflation, and an increase in investments in biotechnolo gy and genomic research, which have resulted in better medicines, says Jeff Trewhitt, a spokesman for PhRMA. “Anytime an indus try increases R&D spending that much, it will be reflected in the price,” he says. Others disagree to the extent R&D costs affect pharmaceutical pricing. “Research costs are sunk costs and really do not have much influence on the final price of the drug,” says Stuart Schweitzer, Ph.D., professor, health ser vices, and director, Ph.D. and M.S. programs, at the UCLA School of Public Health. “Drug prices are determined by the value of the drug not by R&D costs,” he says. “Even if a drug costs more to research, the company doesn’t stand a chance of recouping those costs port — a fact admitted by the study’s author, Dr. Joseph A.DiMasi,at a Nov. 30,2001,briefing on the report.Many, if not most,drugs brought to market receive financial support from the government at some stage in their dis covery and development.Therefore, the Tufts study focuses on a skewed sample of drugs and inflates the actual cost of R&D for the average drug. A National Institutes of Health (NIH) internal document, dated Febru ary 2000 and obtained by Public Citizen last year, showed that all the top five selling drugs in 1995 received significant taxpayer backing in the dis covery and development phases. . Second, the Tufts Center study exaggerates the actual R&D expenditures for its sampleofdrugs.Specifically,the newTuftsCenteresti mate of $802 million includes significant expenses that are tax deductible and theoretical costs that drug companies don’t actually incur.For example, roughly half of Dr.DiMasi’s estimate ($399 million) is the “opportunity cost of capital” — a theoretical calculation of what R&D expenditures might be worth if they were invested elsewhere. Dr. DiMasi calcu lated actual outofpocket R&D costs for drugs in the study at $403 million per new drug. Those outofpocket expenditures are pretax costs, however.Drug companies can and do deduct 34% of their R&D expenses under federal tax law.Therefore, the actual aftertax cash outlay for each drug in the new Tufts study is about $240 million, according to Public Citizen. But it must be stressed that the average R&D cost for each new drug brought to market is significantly less than $240 mil lion because that figure applies only to the drugs used in the Tufts study. According to Public Citizen, the drug industry’s own data show how Dr. DiMasi’s sample of drugs is skewed toward the most expensive new products. Dr. DiMasi puts clinicaltrial outlays at $282 mil lion per drug, which accounts for 70% of his $403 million in total outof pocket expenditures. ButaccordingPhRMA,clinical trials accounted for only 29%ofall industry R&D expenses in 1999 (the latest year for which such data is available). According to Public Citizen, The Tufts Center figure is important because it is used by the drug industry to defend its extraordinary profits and rising prices. In its last study on the cost of developing a newdrug,completed in 1991,theTufts Center — which receives 65%of its funding from drug companies — pegged the figure at $231 million. PhRMA used that in its calculations to conclude that the cost of devel oping a new medicine, including successes and failures, had grown to $500 million.PhRMA then claimed that any attempt by federal or state governments to moderate drug prices would harm R&D innovation. The updatedTufts study used the same methodology as the 1991 study, which also was prepared by Dr. DiMasi. In July 2001, Public Citizen published a detailed cri tique, Rx R&D Myths, of the original Dr. DiMasi study. It demonstrated that the actual aftertax cash outlay for developing a new drug, including failures, was $110 million — about 75% less than PhRMA’s $500 million estimate. Public Citizen’s analysis was based on a major study analyzing Dr. DiMasi’s report prepared by the congressional Office of Technology Assessment (OTA). PhRMA commissioned the accounting firm Ernst & Young to respond to the Public Citizen report.Ernst &Young failed to rebut Public Citizen’s separate findings that were based on PhRMA data, which showedR&D costs for all newdrugsbrought to market (including failures) to rangebetween$71 million and $150 million.This analysis (contained in Section II of Rx R&D Myths) was not based on Dr. DiMasi’s methodology but on PhRMA’s own claims abouthowmuch the industry spendsonR&Dcomparedwith thenum ber of new drugs approved by the Food and Drug Administration. Public Citizen, a national, nonprofit consumer advocacy organiza tion founded in 1971, represents consumer interests in Congress. For more information on Public Citizen’s findings log onto: www.citi zen.org. ACCORDINGTO PUBLIC CITIZEN,THETUFTS CENTER STUDY HASTWO DRAMATIC FLAWS. It is not representative of real drug industry R&D because none of the 68 drugs used in the Tufts study received any government support It exaggerates the actual R&D expenditures for its sample of drugs. COUNTERPOINT # # PRICING and value 42 M a r c h 200 2 PharmaVOICE through higher prices if there is no real value to their product.” In the long run, Dr. Schweitzer says, “Companies that come up with mediocre drugs that were expensive to produce will eventually go out of business. The companies that stay in business are the companies that are able to cover all of their costs. But that doesn’t determine the price at which drugs are set. It’s the other way around.” Others agree. “Research costs do not drive pharmaceutical prices,” says Thomas Nagle, Ph.D., chairman of Strategic Pricing Group Inc., a marketing consulting firm that special izes in pricing and valuebased strategy. “That is just a silly idea. It’s actually the other way around: Pharmaceutical prices drive the amount of research and how much the compa ny is willing to spend to develop new drug therapies. It’s not that prices are high because R&D is high, but rather because prices are high, companies are more willing to do R&D to develop therapies for indications that are hard to crack.” competition,” he says. “Between 2002 and 2005, many brandname drugs with annual sales of up to $40 billion a year will lose patent protection. This is a regular part of doing busi ness, but companies have to sustain the R&D engine.” The biggest factor in determining the price of a drug, consultants say, is its value in the marketplace. But some maintain that the industry has been deficient in its efforts to communicate to the public the value of medi cations. “When the industry has defended itself, companies all too consistently have pointed to high R&D costs,” Dr. Nagle says. “But there isn’t a lot of sympathy for companies that complain about costs. What companies need to do is flip the equation around and focus on value. They need to remind the public that before drug companies invested in AIDS ther apies, for example, people were dying. The industry has given life back to these people.” PhRMA consistently tries to educate the public about the costeffectiveness of drug therapy versus other alternatives, but too many people choose not to listen. “Pharmaceuticals are cheaper than other healthcare alternatives,” Mr. Trewhitt says. “For example, the average operation to correct an ulcer costs about $28,000. The average antiulcer drug costs about $900 a year. Increasingly, as drugs become more effective, patients are being stabilized and sustained on medicine alone, eliminating surgery and nurs inghome confinement.” The pharmaceutical industry hasn’t been as effective as it could be in addressing criticism, says David L. Webster, Ph.D., founder and president of The Webster Consulting Group Inc. “The industry has set up an argument that puts itself in a very small box. Prices are high because of R&D — but that’s not the only rea son. By sticking to that argument, companies expose themselves to a lot of criticism. It’s easy to point out that the industry also spent a lot of money on things other than R&D.” A study by Families USA in July 2001 refutes the claim that high drug prices are need ed to sustain research and development. This study says companies spend more than twice as much on marketing, advertising, and adminis tration as they do on research and development. The study also is critical of the large compensa tion packages for senior industry executives and of the industry’s high profits. The Henry J. Kaiser Family Foundation released a study in November 2001 that con cluded that pharmaceutical industry profits exceeded R&D spending (24% of revenue compared with 14% on R&D spending). This study indicated that profits as a percentage of revenue have been more than four times the THERE IS ONLY ONE FACTOR — what will the market bear. It makes no sense to suggest that companies price their products according to the cost of R&D. DR.EDWARD M.FEAVER “Tufts has very good researchers, but they aren’t economists,” Dr. Nagle says. “They don’t understand how prices are set. They’ve done a good job of tracking R&D costs, they just don’t understand the implications. Most researchers, most politicians, or people in gen eral don’t understand what drives prices.” Advocacy groups, especially Public Citi zen, have criticized Tufts’ estimates, particu larly the inclusion of opportunity costs, which it says are theoretical. For example, according to Public Citizen, roughly half of Dr. DiMasi’s estimate is the “opportunity cost of capital” — a theoretical calculation of what R&D expenditures might be worth if they were invested elsewhere. Critics have pointed out that the Tufts’ estimate includes expenses that are tax deductible. PhRMA, however, points to a study by Ernst & Young, which says the cost of capital in pharmaceuticals is especially important given the risks the industry takes. “The methodology used by Tufts has with stood the test of time,” Mr. Trewhitt says. “Tufts developed this methodology 15 to 20 years ago. Since then, a number of academics, business groups, and even a congressional agen cy have embraced the methodology and use the data to update (estimated R&D costs).” ECONOMICS 101 Some industry experts say, however, that pricing is simply a matter of what people are willing to pay. “There is only one factor — what will the market bear,” says Edward M. Feaver, Pharm.D., president and CEO of Prescription Solutions, a pharmacy benefit manager. “Phar maceutical manufacturers have moved away from trying to price a product based on return, or investment or risk/reward, and instead they price a product based on what the consumer is willing to pay. “I used to buy into the argument that researching new drugs is a risky venture,” Dr. Feaver says. “But looking at the returns those drugs have brought companies over the past 10 to 15 years, that argument appears irra tional. It makes no sense to suggest that com panies price their products according to the cost of R&D.” Mr. Trewhitt attributes part of determin ing a product’s price to the issue of patent expiration. Shareholders, he says, want a large return on their investment not only because of the risks associated with drug development, but also to make up for the drop in sales that occurs once a patent expires. “Within two years of patent expiration, 75% of a product’s market is lost to generic 44 M a r c h 200 2 PharmaVOICE PRICING and value median rate for all Fortune 500 companies in the late 1990s. Conversely, PhRMA points to a study that cites that three of 10 products are not profitable (this study was performed in 1994 based on products in the 1980 to 1984 time frame). “The No. 1 issue with respect to pricing is the industry’s image with the public,” Dr. Webster says. “It’s an issue of credibility and trust. And every time the pharmaceutical industry puts out public relations related to pricing that are not credible, the industry’s image is taken down one more notch. It makes people much more willing to seriously consid er price regulations. At the core, the industry’s arguments are accurate. But it’s also not credi ble to say if pricing were cut R&Dwould evap orate. That is not the complete truth. It would certainly decline somewhat, but R&D would not evaporate. Companies would have to reduce everything: marketing budgets, manu facturing budgets, lobbying budgets, etc.” Companies need to be up front about the fact that they are in a competitive business, Dr. Webster says. “We operate in a competitive freemarket environment and I think companies have made the point very well that we’re all better off because of that,” he says. “But companies face many challenges in a profitmaximizing environment. Companies have to compete for CEO talent, for example.” WHO PAYS? The debate surrounding pharmaceutical prices persists even though the cost of drugs accounts for about 10% of total spending on healthcare in the U.S., which was $1.3 trillion in 2000, according to the Centers for Medicare & Medicaid Services, or CMS, (formerly the Health Care Financing Administration) in Baltimore. Although drugs are just a small piece of total healthcare spending, they are a fastgrow ing portion. In 2000, prescription drug spend ing rose by 17.3%, the sixth year in a row of doubledigit increases, according to CMS. As prescription spending increases, the cost of purchasing drugs is being passed along to patients and employers. In 2001, prescription drug costs for employers increased by 16.8%, according to consultant William M. Mercer. In 2002, employers expect a 15% increase, a sign that while prices are still rising for employers the rate of increase is slowing. “We’re used to a system in which the ben efit of drugs far outweighs how much they cost,” Dr. Schweitzer says. “Drug companies never used to charge for the full value of prod ucts. Now they do. Pharmaceutical companies have gotten smarter and they’ve hired economists to calculate the benefits of their products. And they are using those calcula tions as guides to determine prices.” Many employers pass on the higher drug costs to their employees through increased payroll deductions, higher copayments, and changes in benefit design. Growing in popu larity is a threetier drug plan, where the employee pays the least for a generic drug, a little more for a brandname drug, and the highest copay for a brandname product not on formulary. The use of such programs has increased from 6% in 1998 to 35% in 2000, according to a study conducted by the Phar macy Benefit Management Institute Inc. Managedcare companies and PBMs play the primary role in influencing a product’s price. “The best price often is established at the managedcare or PBM level,” Dr. Feaver says. “These intermediaries mandate where a prod uct’s price falls within a therapeutic class. This best price often becomes the benchmark.” Patients, today, for the most part have been sheltered from the true cost of pharmaceuti cals, Dr. Feaver says. Even though employers are shifting more of the cost onto employees, this shift hasn’t been drastic enough for con sumers to accept controls. “Our hands are tied in trying to negotiate a better price, especially when there is such a premium placed on access,” Dr. Feaver says. “Times have changed,” Dr. Webster says. “Managed care and forprofit hospitals now dominate, the American consumer is now much more comfortable with the fact that healthcare is a forprofit enterprise.” The Kaiser Family Foundation study reports that the proportion of prescription drug expenditures paid out of pocket by con sumers declined during the 1990s from near ly twothirds (59%) in 1990 to a projected onethird (34%) of all prescription spending for 2000. The decline in outofpocket spending represents a shift primarily to private insur ance, which grew from 25% of expenditures in 1990 to a projected 44% of expenditures in 2000. For uninsured patients, there can be catastrophic healthcare costs associated with certain drugs. “For example, a transplant patient faces several thousands of dollars of maintenance costs a year just for medication,” Dr. Schweitzer says. “Patients can really become impoverished because of drugs. That never used to be the case.” A study released in November by Harris Interactive, a market research and consulting firm, found that one in five adults (22%) had not filled at least one prescription in the past year because of the cost. One in seven adults (14%) said during the past year, they had taken smaller doses than prescribed because of the cost. And 16% said they had taken a med ication less frequently than prescribed to save money. Some within the industry say while phar maceutical spending is increasing, this is not necessarily because of higher prices. According to Richard Manning, Ph.D., and Alison Keith, Ph.D., both of Pfizer Inc., growth in pharmaceutical spending is being driven by an aging population, advances in science that bring to market new and better treatments, and changes in treatment proto cols and clinicalpractice standards. Mr. Trewhitt says the industry faces tremendous internal and external challenges in terms of its pricing practices. “Investors and shareholders want a decisive Drug prices are determined by the value of the drug not by R&D costs. Even if a drug costs more to research, the company doesn’t stand a chance of recouping those costs through higher prices if there is NO REALVALUETO THEIR PRODUCT. DR.STUART SCHWEITZER PRICING and value return on investment to justify the gamble they have taken,” he says. “And make no mis take: it is a gamble. There is a very highfail ure rate in biomedical research and pharma ceutical companies can lose millions of dollars on a single project. And investors and stock holders know that.” A SHIFTING MARKET The “market” for pharmaceuticals is com plex — often shaped by shifting influences and a consortium of various constituents. “The market is really determined by the nature of the disease, the prevalence and inci dence of the disease, and in assessing that, there are all the constituents who are involved in trying to ameliorate the condition,” Mr. Lerner says. “There is the consumer, who suffers from the problem. There are the learned interme diaries — the physi cian and the pharma cist. And then there are the managedcare organizations and hospitals.” Dr. Nagle says the definition of the market changes depending on who benefits most from the product. “In the case of a sepsis drug in a hospital setting, it is the hospital that receives the most 46 M a r c h 200 2 PharmaVOICE P roponents of directtoconsumer advertising say these ads empower consumers to work with doctors to chart a path toward proper care. Opponents, however, maintain that the ads only confuse consumers and drive up healthcare costs. Since 1997,when the FDA issued new guidelines for DTC,consumer adver tising of prescription drugs has grown significantly and is now a visi ble part of healthcare. Pharmaceutical companies spent $2.4 billion onDTCadvertising from January2001 throughOctober2001,accord ing to ScottLevin Associates and Competitive Media Reporting. A Henry J. Kaiser Family Foundation study, estimated that phar ma companies spent $15.7 billion on all promotion of drugs in 2000, or 14% of revenue.The study compared the pharmaceutical indus try’s promotional spend against that of consumerrelated indus tries.The study found that the percentage of sales revenue spent on promotion by the game and toy industry was 12%; soap and deter gent, 10.7%; tobacco, 3.9%; and department stores, 3.7%. INCREASED SPENDING ONDTCHAS BEEN CRITICIZED FOR DRIV ING UPPRESCRIPTION DRUGPRICES. But many within the industry say there is no clear connection between higher levels of advertising and increased product prices.DTC advertising,they say, isn’t a factor in product pricing and they argue that the main objective of DTC is to increase awareness of and help educate consumers about prescrip tion drugs,aswellashelp facilitate communicationbetween thephysi cian and the patient. Critics maintain that DTC advertising increases costs,misinforms consumers,and encourages overconsumption. According to Dr. Merrill Matthews Jr., in a report written for the Institute for Policy Innovation (IPI), it is not advertising that increases the costs of drugs, it is the lack of it.”DTC advertising creates a com petitive market, which forces drug companies to keep prices lower than they otherwise would in order to gain market share.” According to Dr. Matthews, the annual growth in marketing dol lars for the pharmaceutical industry has remained relatively consis tent, despite the recent influx of DTC ads. “What’s changing is the focus of marketing dollars: from doctors to patients, as the healthcare DTC Promotion:A Handy Scapegoat industry transitions from a doctordirected system to a patientdirected one,”Dr . Matthews says.”DTC advertising isn’t the cause of this transition, it’s a result of it. Anyone who understands the WalMart model knows that advertising in a competitive market lowers prices,not raises them.” Irwin Lerner , CEO of Reliant Pharmaceuticals LLC, agrees:”DTC does not raise prices. The economic function of advertising is to increase competi tion and increase awareness of products to potential consumers. But awareness and usage are not synonymous, there still must be a learned intermediary.” In a recent article, Economic Realities in Health Care Policy, written by Richard Manning, Ph.D., and Alison Keith, Ph.D., both of Pfizer Inc., it is argued that the cost of advertising is recouped through increased sales volume rather than through higher prices. “What advertising and marketing do are make people aware of the value of a therapy,”says Thomas Nagle,Ph.D.,chairman of Strategic Pricing DR.DAVID WEBSTER THE NO.1 ISSUE with respect to pricing is the industry’s image with the public. It’s an issue of credibility and trust. PRICING and value value from that product, since the hospital gets paid for its services on a fixed basis, and is looking for ways to cut costs,” Dr. Nagle says. “By cutting the incidence of sepsis, hospitals can keep down their expenses. “But in the case of an antiemetic drug for those under chemotherapy, the value is not to the hospital but to the patient,” he says. “From a financial perspective, the hospital doesn’t care if the patient goes home and throws up or has a wonderful afternoon. It is the patient who cares.” # PharmaVoice welcomes comments about this article. Email us at feedback@pharmalinx.com. 47 PharmaVOICE M a r c h 2 002 Group Inc.”In Europe,there is noDTCadver tising. (The U.S. and New Zealand are the only Westernized nations that permit DTC advertising.) The effect of that keeps the value of a new innovative product down because consumers are kept from finding out about it.” “We can eliminate advertising tomor row and patients still are going to get a considerable amount of information from newspapers, television programs, public television, books, nutrition shops, the Inter net; DTC is everyone’s scapegoat,”says Stu art Schweitzer, Ph.D., professor, health ser vices,and director,Ph.D.and M.S.programs, at the UCLA School of Public Health. He says DTC is important to drug devel opment.”Drugs come out every month that treat new diseases, eliminate side effects, or improve convenience, which patients tend to value,” Dr. Schweitzer says. “Pharma com panieswouldbe reluctant to innovate if they couldn’t market and convince people that their product is a better product.” David L. Webster, Ph.D., president and founder of The Webster Consulting Group Inc., says the industry needs to be credible when defending its promotional activities. “The industry touts the educational advan tage of DTC and the empowerment of indi vidual consumers, which is credible. But there are other reasons companies adver tise; companies have competitive motives for advertising to the consumer, they are trying to get market share.” JAMES N. CZABAN.Attorney,Heller EhrmanWhite &McAuliffe LLP,Washington, D.C.; Heller Ehrman is a law firm JOSEPHA.DIMASI,PH.D. Director of Economic Analysis,Tufts Center for the Study of Drug Development,Boston; the Tufts Center for the Study of Drug Development is an independent, academic,nonprofit, research group affiliated with Tufts University FAMILIES USA.Washington,D.C.;Families USA is a national nonprofit, nonpartisan organization dedicated to the achievement of highquality, affordable health and longterm care for all Americans EDWARDM.FEAVER,PHARM.D. President and CEO,Prescription Solutions, Costa Mesa,Calif.; Prescription Solutions, a wholly owned subsidiary of PacifiCare Health Systems Inc., is a pharmacy and medical management company that manages the prescription drug benefit of commercial,Medicare,and governmental health plans, as well as those of employers and unions representing 5 million members nationwide and $1.9 billion in pharmaceutical purchases HARRIS INTERACTIVE INC.Rochester, N.Y.; Harris Interactive is a worldwide market research and consulting firm KENNETH I KAITIN,PH.D.Director,Tufts Center for the Study of Drug Development,Boston,and assistant professor of pharmacology and experimental therapeutics at Tufts University School of Medicine; the Tufts Center for the Study of Drug Development is an independent,academic,nonprofit, research group affiliated with Tufts University THE HENRY J. KAISER FAMILY FOUNDA TION.Washington,D.C.; the Kaiser Family Foundation is an independent,national health philanthropy dedicated to providing information and analysis on health issues to policy makers, the media, and the general public Experts on this topic IRWIN LERNER.CEO,Reliant Pharmaceuticals LLC, Liberty Corner, N.J.; Reliant is a privately held pharmaceutical company DR.MERRILL MATTHEWS.Visiting Scholar, Institute for Policy Innovation, Lewisville, Texas; IPI is a nonprofit, nonpartisan public policy “think tank” founded in 1987 to research, develop,and promote innovative and nonpartisan solutions to today’s public policy problems THOMASNAGLE,PH.D. Chairman, Strategic Pricing Group Inc.,Waltham, Mass.; Strategic Pricing Group provides valuebased pricing and marketing strate gy development for businesstobusiness and businesstoconsumer markets PHARMACYBENEFIT MANAGEMENT INSTITUTE INC.Tempe,Ariz.; PBMI provides information and educational services focused on the pharmacy benefit management industry PUBLIC CITIZEN.Washington,D.C.;Public Citizen is a national, nonprofit consumer advocacy organization founded by Ralph Nader in 1971 to represent consumer interests in Congress, the executive branch, and the courts STUART SCHWEITZER,PH.D.Professor, Health Services,Director,Ph.D.and M.S. Programs,UCLA School of Public Health,Los Angeles,Calif.; the learning objectives of the Department of Health Services are to teach concepts to advance the health of popula tions by improving the effectiveness and effi ciency of personal and other health services in private and public health organizations JEFFTREWHITT. Pharmaceutical Research and Manufacturers of America,Washing ton, D.C.; PhRMA represents the country’s leading researchbased pharmaceutical and biotechnology companies DAVID L.WEBSTER,PH.D.President, Founder,The Webster Consulting Group Inc., Bethlehem,Pa.; the Webster Consulting Group provides management consulting services to the pharmaceutical, biotechnology,and medical industries

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