In the future, prescription drug prices will be lower than you might think

This is something I’ve been thinking about for a while.  The cost of health care is rising everywhere, but it seems to be a particularly critical issue in the US.  While the cost of drugs is a approximately 10% of total health care spending in the US, it is increasing, albeit more slowly than total health care spending.

This is related to a previous post, where I commented on how it seems like every pharmaceutical and biotech company is jumping on the oncology bandwagon.  One of the big reasons for this trend is that the pricing pressure on oncology drugs is relatively low.  Insurance companies consider oncology relatively “untouchable”, that is, telling a mother of three that you won’t pay for her cancer drugs will cost you far more in terms of public relations than it will ever cost in terms of dollars.  This is why we now have drugs like Yervoy ($120K/treatment) and Provenge ($93K/treatment).  And these high prices aren’t limited to cancer.  There are drugs that cost over $10,000/year in areas such as asthma, multiple sclerosis and lupus, to name just a few.  Is this strategy really sustainable?  The answer is no, it’s not.  But what will stop this trend of ever increasing drug prices?

The answer is you.  You’ll simply stop paying for these drugs.

You’re probably thinking “Come on!  I never pay full price for my drugs!  The worst case scenario is that I pay a $25 or $50 co-pay, not my problem!”  That’s probably true right now, but might not be true in the future if the trend towards high deductible health plans (HDHP) continues.  The number of Americans covered by HDHPs has more than doubled since 2008 and continues to rise (see chart below).   Why?  The premiums on HDHPs are often a fraction of what HMO or PPO coverage is.  It not only reduces costs for your employer, but it also reduces the premiums that are deducted off your paycheck every month.

What are HDHPs?  Well, under typical HMO or PPO coverage, you only pay a co-pay on your prescription drugs.  Depending on if it’s a generic or a branded drug, your co-pay might be $5, $10 or even $50, but that’s all you’ll pay whether or not the drug’s actual cost is $5 or $5000.  Under a HDHP, you pay the full amount of your drug costs, up to the annual deductible limit (the limit includes all health care expenses).  These plans are almost always paired with a health care saving account (HSA), where you (or your employer) make tax-free contributions that you can use to pay for your out of pocket expenses.

So let’s say you visit your physician and he says “Mr. Smith, it looks like you’ve got a bacterial infection, might be serious, let’s put you on Zithromax.”  Under the HMO or PPO plan, you might say, “Sounds good doc!  Thanks!” and then run to your pharmacy and complain about the $25 co-pay.  Under the HDHP plan, you’ll likely repsond “Really?  How much is Zithromax? $200?!?!?  Is there anything else I could take that isn’t so expensive?  Amoxicillan?  $4 at Walmart?  Thanks Doc!!”.  Of course, this isn’t a likely scenario if you have cancer, but for non-life threatening diseases, it’s a conversation I could see happening.

As medical costs in general, and prescription drug costs in particular, continue to be shifted towards the patient, there will be an increased awareness on the part of patients of the costs of drugs and choices will have to be made, hopefully through consultation with physicians.

So what does this mean for drug companies?  The strategy of shifting from $200/month drugs for large patient populations, to $10,000/month drugs for smaller patient populations, won’t work forever.  Eventually patients will start to say “This is coming out of my pocket, is there anything cheaper?” and drug companies will be facing real pricing pressure, across the board.

It’s a challenging situation to be in for drug companies since producing safe, effective drugs is an expensive process.  However, eventually another strategy (lower priced drugs) will have to replace the current one.  That’s going to require more than just a shift in strategy by the drug companies, it will require a complete reappraisal of how patients, physicans, insurance companies, the FDA and drug companies view value and risk.

I’ll be honest and say I have no idea what the drug industry will look like in 10 or 20 years.  However, I do know that the drug companies that will be on top are the ones planning for this future right now.

More news on the obesity front!

Amazing!  No less than 10 days after I blogged about Vivus resurrecting their NDA for Qnexa, Orexigen sent out a press release detailing their plan to resubmit their NDA for their obesity drug Contrave.

To give you a little bit of background, the FDA rejected Orexigen’s NDA, despite a majority vote to approve (13 to 7), due to concerns about cardiovascular safety.  The FDA ended up “recommending” (I put it in quotes since nothing the FDA recommends is actually optional) that another clinical trial be run to eliminate concerns over over an increase in blood pressure seen during the phase III clinical trials that Orexigen submitted as a part of thier original NDA.

Originally, this caused Orexigen’s leadership to announce they were abandoning Contrave.  Details are scarce, but apparently the FDA requested a clinical trial design that was so out of touch with what a company like Orexigen could muster that the company decided it wasn’t even worth discussing.

However, after a period of negotiations with the FDA, Orexigen apparently reached a deal where they could resubmit their NDA if they conduct a cardiovascular safety trial comprised of approximately 10,000 patients.  If Orexigen considers that a win, I can’t even imagine what the FDA’s original demand looked like.

So now, Orexigen is estimating that they can complete the trial and resubmit their NDA in 2014.  Rather than critique the company’s announcement, I’ll just point you to Adam Feuerstein’s article where he points out the utter ridiculousness of Orexigen’s optimism.

If you don’t feel like reading the article, I’ll give you the cliff notes: Orexigen has $70M in the bank and a conservative estimate for the cost of a 10,000 patient trial is $100M.  However, Contrave is being co-developed with Takeda who has much deeper pockets than Orexigen.  A more insurmountable obstacle is the time line of NDA resubmittal in 2014.  A trial that size will take one to two years, just to enroll all 10,000 patients, never mind administer the drug, collect data, resubmit the NDA and get FDA approval.

If Orexigen/Takeda pulls this off, it will be a victory indeed.  I just worry it might be a pyrrhic victory.