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Deconstructing Drug Pricing Strategy for Big Pharma

Copyright © DrugPatentWatch. Originally published at

Drug prices are mysterious and unpredictable for many consumers

With the average person’s out-of-pocket expense for a drug determined by several interdependent factors, planning for care is harder, and trying to predict how much a medication will cost sometimes feels impossible. More transparency with drug pricing is becoming a rallying cry among consumers and the healthcare providers that treat them.

Janssen, the pharmaceutical arm of Johnson & Johnson, recently released its 2016 U.S. Transparency Report, the first of its kind for clinical drug pricing. While it does not clear away all the opacity between consumers and drug prices, it does provide enough of a clear aperture into drug pricing to help consumers, politicians, healthcare advocates, and others figure out some next steps.

The Need for Drug Pricing Transparency

There is often a significant gap between the list price of a drug that is set by the manufacturer and the net price, which is how much the manufacturer actually receives, on average, for that drug. Between manufacturer and consumer are rebates and discounts, wholesaler fees, and other price concessions, and they vary according to manufacturer, pharmacy benefit manager (PBM), wholesaler, hospital, coupon programs, co-pay assistance, and the like.

Over the past several years, list prices have increased at a higher rate than net prices, which sounds good for consumers, and may be at first glance. What happens is, the larger the gap between list price and net price, the more insurers extract their profits from the insurers and taxpayers. Eventually, however, insurers start passing on those increased costs to policyholders in the form of higher out-of-pocket costs, and that is when public outcry (like that surrounding the price of Mylan’s EpiPen) results.

Smart Drug Pricing Strategies

Experts believe that the lack of transparency surrounding drug pricing and the increasing gap between list price and net price are unsustainable. What is the way forward? Nobody is precisely sure, but most believe that an increase in price transparency is a decent first step. The Janssen report has (hopefully) started the ball rolling, and Merck has created its own, more abbreviated form of a transparency report. However, if they are only doing it to deflect criticism directed at the entire pharmaceutical industry, it will not be enough.

Smart drug pricing will require more transparency as consumers and lawmakers demand clearer information from manufacturers

Better understanding of what happens between the drug manufacturer and the patient getting out his wallet at the pharmacy will be essential, and this means that consumers and pharmaceutical investors will have to learn more about how drug wholesalers, PBMs, and other middlemen make their profits. Currently, it is as if each drug list price is fed into its own “black box” function that performs some sort of proprietary mathematics on it and spits out the net price. If it is not known how those functions work, it is virtually impossible to root out inefficiencies.

Implications of the Janssen Report

The Janssen report (and Merck’s, to some extent) is a first step. The fact that Janssen is billing its report as a “first annual” report indicates that it will continue trying to communicate the differences between list prices and net prices and what accounts for them. In an ideal world, this type of report could lead to generic regulatory reform that would prevent generic manufacturers like Mylan and Turing from exploiting the opaque and complicated value chain around generics to their advantage to create artificial monopolies.

Coupled with new reforms countering “pay for delay” deals that pay generic manufacturers to keep a product off the market for a length of time, generic regulatory reform could finally give consumers, doctors, pharmacists, and politicians better insight into how list and net prices are determined. It is not the whole answer, but it is a start.

Drug Patent Information and Achieving Pricing Objectives

Drug patent information is already helpful to the pharmaceutical investor, and if transparency initiatives like Janssen’s continue and regulatory changes force more pharmaceutical price transparency, patent information will become even more important to investors. Understanding the many influences that cause the gap between list prices and net prices, and the ways brand manufacturers sometimes fend off generic competition, means that the informed investor can be more prepared to act based on patent timelines and information about potential generic competitors.

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Copyright © DrugPatentWatch. Originally published at
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