All opinions are my own.

Wednesday, July 21, 2010

Pharmaceutical Reverse Payments and Lower Drug Costs: An Interesting Dilemma!

US Federal Trade Commission and the lawmakers have scorned “reverse payment” also called “pay-for delay” in the pharmaceutical business. US House of Representative recently voted 239-182 to restrict such payments in the hopes that stopping such payments will reduce the cost of drugs to the consumer. Legislators would like to see the drug costs lowered for their constituents. Everyone had expected that the entry of generics would significantly reduce the drug prices. Generics have put some pressure on brand companies but their presence has not lowered the costs of drugs by significant percentage.

US Federal Trade Commission estimates that the “reverse payments” could save US customers about $ 3.5 billion dollars per year. These savings might be there but they are not worth the effort and squabble compared to the yearly US drug revenue of about $480 billion dollars. These payments are less than three day’s revenue. Since every company wants to maximize their profits for the patented drugs, use of “reverse payment” is part of doing business. These costs are passed on to the consumer. In US customers, who are covered by a health plan do not know the real prices of the prescription drugs they just pay the co-pay.

Legislation is not going to lower the drug costs. Fundamental reason for the companies to be in the business is “profits”. If any government limits the profit margins or sets the prices, they that will be in direct conflict with the charter of every company i.e. to have the highest profits. Government’s price control would discourage innovation.

We need to understand the factors of prices/costs, how they can be lowered and passed on to the consumers. Underlying fact is that all of us want to extend our life and we will pay anything for that. Drug prices are based on this sentiment. Prices are set at the highest level companies believe customers can afford. Every company in the supply chain has used this sentiment for pricing. This also covers inefficiencies of the companies.

Limiting profits is against the economic principles. Laws of economics teach us that in a fair game, only competition can lower prices. Brand companies have lowered prices when they want to promote and/or grab the market share as evidenced by recent price drops in the selected developing countries. In the recent years limited number of prescription drugs are available from well-known merchandisers [$4.00 for 30 day and $10.00 for 90 day supply]. This is a clear indication that the drug prices can be lowered and everyone in the supply chain can make their desired profit.

Regulatory and appropriate government bodies have to facilitate competition. Companies in the supply chain also have to participate in this endeavor. Lowering of drug costs to the consumer by 8-10 percent or higher will have value for consumers provided they are passed on. Less than one percent cost reduction is of no value. Addressing minor issues like “reverse payment” just placates the constituents without accomplishing anything and upsets the brand pharmaceutical companies.

Real issues that will lower the drug costs need to be addressed and no one is addressing them.



  1. Thanks to mr Girish MALHOTRA, PE for share with us.

  2. As you say:
    "Government’s price control would discourage innovation"
    However there is no need for the government to be a wide-eyed green horn rookie in a carnival.

    If you consider all US government agencies that procure drugs from pharma companies you can see clearly they are the largest or close to the largest purchaser of drugs.

    As is the case with any very large customer the government should have very powerful negotiating position to win massive discounts - but the system put in place does not allow all the government customers (VA Medicade etc) to negotiate as one customer - so they get screwed and the prices remain high.

    This is not the case in some of the countries where the government is the main procurer customer.
    We regularly see governments in Europe especially UK and Germany leverage their purchasing power to win massive discounts from pharma customers.

    Who pays for these massive discounts - the US consumer whose government really doesn't wish to act luck a customer with bargaining power but would rather be in the position of supporting the pharma companies (who donate so much) - the rest of the world is laughing at the US who have their lobbyists firmly in control of the legislative agenda.

    Do you know how to recognize when an idea is good for patients and not so good for pharma? - You'll start hearing the battle cry "Socialized Medicine"

    The US government is a sucker and big business knows it.

    The US should "Grow a pair" and negotiate like the massive customer that it is