19th Annual
J.P Morgan H&Q Healthcare Conference

On the road for Info.Resource, publisher of Oregon-Bioscience.com

Drug Costs: a Function of Perspective

By Lorraine Ruff and David Gabrilska, Partners
Milestones, the critical thinking company
Seattle, WA

Perspective. If you're one of the 10 million Americans over the age of 65 who has no prescription drug coverage, a Medicare drug benefit matters a lot.

Perspective. Al Gore and most Democrats consider Medicare reform, including a drug benefit, well nigh a right. Republicans are focused on tax reform, budget and defense.

Perspective. Americans love their doctors, hate their health care plans and insurers and have very high expectations for the pharmaceutical industry. They want magic bullets available to treat the ills that ail them in front of their need for them, but they aren’t necessarily willing to pay for the "insurance." In fact, Americans fund the full cost for drug research and development for the world. A good example of this resides in the differential pricing for drugs. Example: the prescription allergy medicine Claritin™- one pill per day - costs Americans approximately USD $70/month; Canadians pay USD $24/month for the same drug.

The history of drug price increases has been uneven and opportunistic since the 1970s. Depending upon when the respective interests weigh in colors perspective. In fact, in recent years drug prices have increased two-to-four percent. The political diatribe we've heard throughout the 2000 presidential election stems from drug price increase excesses of the 1980s when there was very little price sensitivity compared to flat line drug price increases pre-1970s.

The "high price" perspective the American public has of pharmaceuticals has taken on a life of its own and it’s gotten up close and personal. The boomers have impacted every institution they’ve touched as issues become relevant to their interests…watch out. We believe that the drug industry will need to make fundamental changes in the manner in which it relates to the American public, elected officials, and boomers in particular, if they are to avoid knee-jerk universal healthcare reform and a liberal backlash in 2002. Moreover, now’s the time for the pharmaceutical industry to demonstrate leadership in the public affairs arena, an industry that needs to go beyond the self-serving "benefit" assertions of industry association-sponsored TV advertisements. Without it, the pharmaceutical industry could lose control of its own destiny at a time when there are truly significant therapeutic opportunities in development.

The good news:

• Even though the cost of drugs as a percentage of healthcare spending is expected to increase to nine-to-10 percent by 2003, in large part due to baby boomers reaching senior citizen status, today the cost of drugs represents approximately eight percent of all healthcare spending.

• Drug companies and physicians believe that drugs are the most cost effective form of healthcare. For instance, the use of Genentech’s clot-busting tPA during heart attack represents a $1,700 expenditure that could prevent $6,100 in post-heart attack patient rehabilitation and nursing home care costs.

• The pharmaceutical industry has demonstrated itself to be a sophisticated sector. While the industry has enjoyed high margins and profitability in good times and bad, it has also demonstrated for more than 100 years its willingness to invest in longer term results. During the past 20 years, that willingness has been characterized by the formation of strategic alliances and partnerships with the biotechnology industry and government. It’s not all altruistic of course: a biologics-based drug pipeline is about true innovation, sustained proprietary position in drug development and ROI for investors.

• President-elect George W. Bush is a master negotiator. "He will find solutions where the more doctrinaire will not," said panelist Leonard Shaeffer, CEO for Wellpoint, Inc. Bush desires tax reform. The Democrats want Medicare reform, including drug benefits. This political dichotomy represents an amazing win-win for all parties if they will only seize it as such. If the Republicans refuse to address Medicare drug benefits, Medicare reform will become apocryphal for the Democrats and could win the Congress in 2002. Bush is likely to send up trial balloon alternatives to reform, including block grants.

• You can still fit representatives from government and the drug industry in one room with room left over for representative patient advocates.

• Annual revenues for brand-name prescription sales among US-based drug companies represent approximately $56 billion. If Congress passes a Medicare drug benefit that results in a 25 percent price decrease in drug prices for those drugs essential to seniors, it will amount to a 2.5 percent decrease in overall drug company revenues, according to J.P. Morgan H&Q pharmaceutical analysts. This hardly represents disaster for drug company investors who will enjoy the financial upside of a broader number of seniors for whom drugs will be prescribed.

Listening to the predictions of the J.P. Morgan H&Q panelists about what Congress is likely to do was akin to visiting the sausage factory out of the misguided notion that you’ll enjoy the sausage more if you see how it’s made. Not so with Medicare drug benefit legislation or what motivates it.

It’s time for the pharmaceutical industry to recognize a Medicare drug benefit as the larger-than-life issue that it has become. Without leadership, the industry may find management of its own business model taken up by newly elected officials on critical legislative committees such as Senate Finance (Senators Boxer and Clinton) and House Ways and Means (Thomas and Johnson) many of whom are woefully unprepared to deal with drug industry business realties and political hubris.

As Star Trek Enterprise captain Jean Luc Picard would say: "Make it so."

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* Source: Pharmaceutical Research and Manufacturers of America.

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