J.P Morgan H&Q Healthcare Conference
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Info.Resource, publisher of Oregon-Bioscience.com
Drug Costs: a Function of Perspective
By Lorraine Ruff and David Gabrilska,
Milestones, the critical thinking company
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
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 arent 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
The "high price" perspective the American public has of pharmaceuticals has
taken on a life of its own and its gotten up close and personal. The boomers have
impacted every institution theyve touched as issues become relevant to their
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, nows 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
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
- Drug companies and physicians believe that drugs are the most cost effective form of
healthcare. For instance, the use of Genentechs 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.
Its 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
youll enjoy the sausage more if you see how its made. Not so with Medicare
drug benefit legislation or what motivates it.
Its 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."
* Source: Pharmaceutical Research
and Manufacturers of America
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