New Blockbuster Drugs Come to Market/Drug Prices Soar/Generics Offer Some Relief

Drug spending in the U.S. was forecast to reach $463.6 billion in 2024, according to the Centers for Medicare & Medicaid Services (CMS). Globally, the total prescription drug market was expected to reach $1.8 trillion as early as 2024 according to Plunkett Research estimates.

Consumers’ voracious need for drugs will continue to soar, thanks in part to the rapidly aging populations of such nations as the U.S., most of Europe and much of Asia, including Japan and China, and also due to the continuing introduction of new drugs. In coming years, taming pharmaceutical costs will be one of the biggest challenges facing the health care system. Prescription drug costs already account for about 10% of all health care expenditures in the U.S. Managed care must be able to determine which promising new drugs can deliver meaningful clinical benefits proportionate to their costs.

Following a brief period in recent years when a number of extremely lucrative “blockbuster” drugs such as the cholesterol therapy Lipitor went off patent and thus opened the door for exploding sales of generic equivalents, several highly effective and extremely expensive new drugs began to hit the market.

Part of the reason that many new drugs command astronomical prices is the total expense and level of risk that drug companies incur in order to develop medicines, including the investment in drugs that fail to be effective or win regulatory approval, and therefore never make it to market, despite massive investments in research and testing.

Massive Investment Required to Get a New Drug Approved by the FDA

In the spring of 2020, three researchers (Olivier Wouters, Martin McKee and Jergen Luyten) published a study that shows the range of investment required to research, develop, test and get a new drug through the approval process and ready to market. Their data was based on 63 new drugs approved by the U.S. FDA, primarily between 2014 and 2018. They estimated a median research and development cost of slightly less than $1 billion per approved drug. The study estimated that it typically took five years on the market after approval and launch for such drugs to generate enough revenues to recover their investments. However, it should be noted that their data were limited mostly to investments by smaller firms. A similar study of cancer drugs (published in 2019 by Kiu Tay-Teo, Andre Ilbawi and Suzanne Hill) found investments per drug to range from $219 million to $2.8 billion, with a median cost of about $800 million.

The Tufts Center for the Study of Drug Development published, in 2019, an estimated average out-of-pocket cost of $1.4 billion per approved new drug. In addition, Tufts estimated additional costs incurred of $1.2 billion per drug when considering the expected investment returns that a company forgoes while a drug is in the non-revenue development phase. Then there is another $312 million in estimated costs of continuing research and development after a new drug is first approved. Tufts estimated that the chances of a new drug candidate moving beyond the clinical development phase to final marketing approval is only 12%.

Extraordinarily high new drug prices are causing backlash, and attempts are being made to limit pharmaceutical costs. With regard to cancer drugs, for example, the American Society of Clinical Oncology suggested a “value framework” in 2015. Points are awarded to drugs based on their effectiveness, possible side effects and costs, not only from the patient’s point of view, but also the overall cost of the drug to the health system. Roche’s Avastin, for example, received a low 16 out of 130 possible points as a lung cancer treatment, largely because its monthly cost was $11,907.87, compared to $182.09 for using chemotherapy as an alternative.

A growing trend has created a new category for blockbuster drugs based on vanity, convenience or personal choices. Historically, pharmaceutical research was focused primarily on curing life-threatening or severely debilitating illnesses. But a segment of drugs, commonly referred to as “lifestyle” drugs, is transforming the pharmaceutical industry. Lifestyle drugs target a variety of human conditions, ranging from the painful to the inconvenient, including obesity, impotence, memory loss, urinary urgency and depression. Drug companies also continue to develop lifestyle treatments for hair loss and skin wrinkles in an effort to capture their share of the huge anti-aging market aimed at older generations. The use of lifestyle drugs dramatically increases the total annual consumer intake of pharmaceuticals and creates a great deal of controversy over which drugs should be covered by managed care and which should be paid for by the consumer alone.

Factors leading to high expenditures in the American health care system:

= Millions of members of the Baby Boomers generation (born from 1946 through 1964) are entering their senior years. The lifespan of Americans is increasing, and chronic illnesses are increasing as the population ages.

= Obesity-related illnesses, for patients young and old, are estimated by Plunkett Research to cost $200+ billion yearly. (The recently launched obesity drugs, such as Ozempic and Mounjaro, while relatively expensive themselves—about $1,000 monthly—could eventually lead to a dramatic reduction in obesity-related chronic diseases, and thus an overall reduction in the costs of treatment and care.)

= Fraud, abuse and billing errors in the Medicare and Medicaid system cost an estimated $100 billion yearly. Fraud and billing abuse throughout the rest of the health care system could easily cost another $150 billion+ yearly.

= Malpractice insurance, lawsuits and “defensive” treatment practices intended to limit exposure to lawsuits add billions of dollars to overall health care costs each year.

= Drug prices and total drug expenditures are soaring. Breakthroughs in research and development are creating significant new drug therapies, allowing a wide range of popular, but sometimes extraordinarily expensive, treatments that were not previously available.

= The hospital and clinic industry has merged and consolidated to the extent that major metro markets across the U.S. are often served by only two or three very large health care companies. This limits competition and gives these few companies the ability to command high prices.

= A rapid expansion of government-funded health care, particularly through the Affordable Care Act (ACA), has driven demand and expenses while doing very little to lower costs or prices.

= “Lifestyle” drug use is high, as shown by the popularity of such drugs as Viagra (for the treatment of sexual dysfunction), Propecia (for the treatment of male baldness) and Botox (for the treatment of facial wrinkles). Such drugs are often quite expensive.

Source: Plunkett Research, Ltd.

It is clear that the largest pharma companies, such as Pfizer, invest vast sums in their efforts to develop new drugs, and the number of drugs they finally commercialize as a result is very small. Smaller drug firms that are more focused on a particular type of disease or therapy are likely to spend less, as are firms based in lower-cost nations. Exorbitantly high prices paid in the U.S. foot the bill for much of global drug development, marketing and profits, to the benefit of billions of patients worldwide.

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