The Wall Street Journal's "Drug Prices Surge Despite Criticisms On Campaign Trail" disclosed overall price increases for the 50 top selling drugs of 7.82%, 6.73% and 6.22% in 2007, 6 and 5. The statistics were provided by Delta Marketing Dynamics, Inc. The inflation rate over the last 12 months was 4.1%.
Over the last three years, GlaxoSmithKline (NYSE:GSK) raised prices for antidepressant Wellbutrin XL 44.5%, Sanofi-Aventis (NYSE:SNY) raised Ambien 70.1%, and even Pfizer (NYSE:PFE) raised Lipitor 16%. These are not new drugs, so the R&D has been recovered long ago. Gross margins are extremely high on drugs, so increased manufacture costs are of little relevance. Even sales forces have shrunk, reducing marketing costs.
Pharmaceutical companies initially base pricing on a drug's comparative efficacy and cost savings relative to alternative treatments. Are the pharmaceutical companies telling us that a drug's efficacy and relative value increases over time – like a fine wine? The pharmaceuticals listed above are commodity drugs with many branded and genetic alternatives. In a free market with many alternatives, how are GSK, SNY and PFE able to raise prices? Shouldn't prices for old drugs fall just like Intel's (NASDAQ:INTC) old chips?
Obviously there is no free market for drugs. Doctors will not give you a prescription with multiple choices, letting you shop for the cheapest. Most pharmacies don't quote prices over the phone. In fact, CVS (NYSE:CVS) won't even tell you the cost (under your insurance) until after they fill the prescription. All this makes it impossible for the customers to shop. Add to this that everyone subsidizes Medicaid because the government insists that they get the lowest prices.
The HMO days appear to be coming to an end (outside of Medicare). Both employee group health plans and individual health insurance policies include ever higher deductibles. High deductibles are intended to get consumers to shop for medical products and services. With little transparency in the system, shopping is near impossible. Call your doctor and ask for the price of an office visit. He'll likely to tell you: "I don't know, it depends on what code I put in the computer. You will find out after I'm done."
The only bright spot seems to be the area of medical testing, imaging and diagnostics. Competition must be brewing because they are starting to quote prices. Of course, doctors that don't accept any insurance readily quote prices.
Disclosure: Author has a long put on PFE.