Pharmaceutical costs are pulled in different directions by a panoply of social and economic pressures. Below are some of them:
While 80,000 sales reps in the U.S. stoke doctors' interest in drugs, Big Pharma drives demand by ads directed at consumers. Spending on such ads nearly tripled between 1997 and 2000, hitting $2.3 billion. Payers say the strategy pays off--witness the Viagra boom.
Patent-holders use lawsuits to tie up generic-drug makers for years. For some, this wins time to persuade patients to switch to a newer, patented product. AstraZeneca (AZN) is trying to move users from its $5.8 billion stomach drug Prilosec to the newer Nexium.
Drugmakers have upped research spending in recent years--Pfizer spends $4.9 billion annually; Merck (MRK), about $2.6 billion--but with no big payoff in productivity. Hefty up-front investments in genomics, in particular, have so far failed to yield a big crop of new compounds. Big Pharma is licensing more drugs from biotech companies, but such deals don't come cheap.
Breakthrough drugs with hefty price tags are coming to market, including rheumatoid arthritis drugs, which can cost nearly $12,000 a year, and Novartis' (NVS) cancer agent Gleevec, which can cost $28,000. Other cancer drugs could turn the disease into a chronic condition--prolonging lives but at a tremendous cost.
When Bayer, under pressure from the U.S. government, slashed the price of Cipro, it was following a well-trodden path. Merck, Bristol-Myers (BMY), and others have already cut prices on AIDS medications sold in Africa. Other drug companies will come under similar pressures, in the U.S. and abroad, if their products fit the bill in times of emergency.
In the next five years, drugs with U.S. sales of $35 billion will lose patents or other forms of market exclusivity. In August, when a generic version of the antidepressant Prozac was launched, pharmacy benefits manager Merck-Medco switched 80% of the patients in its massive mail-order operation to the generic in just one week.
Insurers, government agencies, and other payers are trying to figure out which drugs offer the most bang for the buck. Now the military is requiring that all new allergy patients be started on Allegra, which is less than half the price of competing Claritin, saving millions per year. Another example: substituting cheap ibuprofen for expensive Vioxx.
In addition to pushing doctors to prescribe generics, payers are giving consumers more incentive to pick cheaper alternative drugs by requiring that they pay more out of pocket for the more expensive choices. Already, 50% of people in HMOs have such "tiered co-pays," up from 5% three years ago.