DRUG HABIT: WSJ On U.S. Pharmaceutical Usage
Two articles in today's Wall Street Journal take a look at the spiraling demand for pharmaceuticals as new and ever- more expensive remedies flood the U.S. market. While countries like France, Japan and Great Britain indirectly discourage pharmaceutical R&D through "a complex system of price controls" or outright price cuts, U.S. firms "lead the world" in drug development, producing nearly half of all new drugs introduced worldwide between 1975 and 1994. (Great Britain was second, with 14%, according to PhRMA.) U.S. drugmakers introduced 120 new products between 1995 and 1997, and expect to have launched 30 more by the end of December. All the activity has its costs: government studies show drug prices in the U.S. are one-third higher than in Canada and 60% higher than in Great Britain.
Good For Us?
The Journal reports that by the end of this year, pharmacies will "rack up an estimated $102.5 billion in sales of prescription drugs ... up 85% in just half a decade. Drug sales in the U.S. are rising 16.6% this year, more than four times the increase in health care spending overall." The impact upon insurers, employers and government agencies is tremendous: Chrysler's employee prescription drug expenditures have soared "86% in five years to more than $220 million." Blue Cross Blue Shield of Michigan spends 28% of all medical outlays on prescription drugs, more than it spends on physician visits. And MediCal, California's Medicaid program, expects this year to exceed its $1.4 billion pharmaceutical budget by 10%.
The Envy Of Industry
While the overall growth forecast for the nation's top 500 companies across the next four years is an annual 4%-7%, U.S. drugmaker profits are expected to grow 16%-18% a year, the Journal reports. Prescription pharmaceuticals boast gross profits margins (before research, sales and other corporate expenses) of 90%. Raw materials cost just cents in pills that retail at $15 apiece. Pfizer refused to comment on one estimate that pegged Viagra gross profit margins at 98%. Net profit margins are lower but still enviable, about 18% industry-wide. The pharmaceutical industry is quick to note rising development and marketing costs -- pushing a single drug "through years of human trials can run up bills of $150 million or more, and only a tiny fraction ever make it to market." In addition, the industry will invest $11 billion this year in marketing. In the past two years, pharmas "have hired 40% more sales representatives, called detail people, to pitch prescriptions to doctors, pharmacies and other providers." And according to IMS Health, pharmas will spend an estimated $1.3 billion on direct-to-consumer advertising this year, seven times what they spent in 1993.
Ain't Seen Nothing Yet
The "pharmaceutical frenzy" will only worsen "in coming years, as drug giants crank out more new medications to salve an aging population." The over-65 group will double to 70 million by 2030, up from 13% of the population today to 20%. On average, the Journal reports, people over age 65 fill between nine and twelve prescriptions a year, versus two or three for the 25-44 age group. But the article asks, "how does society calculate the value of drugs that let a 70-year-old woman stave off osteoporosis and spend five more years gardening, when she otherwise would have withered away in a wheelchair?" The pharmaceutical industry is quick to note the drugs' importance to patients and to cite the threat of cost shifting. One oft-mentioned 1991 study conducted in New Hampshire showed that when the state restricted Medicare prescription reimbursement, "drug use in the program declined by 35%, but admissions to nursing homes rose by 80%; admissions later returned to normal when the restrictions were lifted." The article closes with a mention of the Clinton health reform debate of 1992, when national attention to drug costs "impelled" pharmas to "hold back price increases until the furor died down." If the industry gets too complacent, the Journal cautions, it might just get "whipsawed" again by consumer and political backlash (Tanouye, 11/16).