Dark Clouds On The Horizon For Big Pharma

Updated: Sep 6, 2021

Aug. 10, 2021 12:27 PM ET SPDR S&P Pharmaceuticals ETF (XPH) IHEPJP


Summary

  • According to the most recent healthcare report from the OECD, prescribed medicines here in the United States cost $1025.60 per capita, where the average per capita spending in the developed countries of the OECD is only $567.70.


  • According to the same source, we spend $10,966 per capita on healthcare here in the United States versus a comparable country average of $5697 per capita elsewhere.


  • 19 million adults importing medications from Canada or other countries. 8% of the population.


  • The US spends 514 billion per year on Pharmaceuticals. With over $174 billion of that coming from Medicare, Pharmaceutical Companies' margins would be crushed.


  • Pres. Biden stated in January that within 12 months, Medicare, and Medicaid through HSS would be negotiating pharmaceutical pricing.



For many years the pharmaceutical industry has spent nearly $300 million a year on lobbyists to protect their interest in Washington. They are finding their efforts may very well become problematic in the next year or so.


According to the most recent healthcare report from the OECD, prescribed medicines here in the United States cost $1025.60 per capita. The average per capita spending in the developed countries of the OECD is only $567.70. As you can see, the cost in the United States for pharmaceuticals are nearly double the world's developed countries.


Per capita prescribed medicines spending, US Dollars, 2018


United States


$1,025.6


Germany


$779.1


Canada


$736.9


Japan


$688.6


Switzerland


$645.6


Belgium


$641.8


France


$573


Comparable Country Average


$567.7


Austria


$512.2


Australia


$450.1


Sweden


$366.3


United Kingdom


$283.6


Note: Data for Australia and Japan are for 2017


Source: KFF analysis of OECD data Get the data PNG


According to the same source, we spend $10,966 per capita on healthcare in the United States versus a comparable country average of $5697 per capita elsewhere.


In an article written for drugwatch.com titled US drug prices versus the world, a case is noted where the cost of a 10 ml bottle of insulin in the US has a list price of $450. That same comparable bottle of insulin cost $21 in Canada.


Due to this enormous discrepancy, according to a 2015 Center for Disease Control and Prevention report states nearly 5 million Americans bought their prescription medications from other countries in 2013 to save money despite federal restrictions. The Kaiser Family Foundation found that number had grown to 19 million adults importing her medicines from Canada or other countries in three years. Though not currently being closely regulated, it is, in fact, against the law.


According to an IHS Markit report, other high-income countries pay 56% less than patients in the US for the same medicine. In France, it is one-third the cost. The report went on to say that Cardiovascular, Musculoskeletal, and Nervous System drugs were 80% lower than in the US.


In France, you would save 67%, Italy 53%, the UK 57%, Japan 43%, Germany 51%, Spain 55%, Canada 65%, and Australia 60%.


Pharmacychecker.com analysis found that "70% of the most popular brand name drugs sold in the US are manufactured outside then imported and sold to Americans at higher prices compared to patients in other countries."


Here are a few other examples Nexium, a drug manufactured by AstraZeneca in Sweden and sold to customers in the United States for $7.78 per pill compared to $3.37 in Canada and $2.21 in the UK, Australia, and New Zealand.


Abilify, an antipsychotic drug made in Japan, sells for $34.51 per pill and in the United States. The same tablet costs $4.65 in Canada--- 87% less than in the US.


Part of the reason for this discrepancy in pricing came about in 2003. Congress enacted the Medicare Modernization Act (MMA). This legislation incorporated Medicare part D prescription drugs. And due to the efforts of the pharmaceutical and insurance lobby, the Government agreed that Medicare could not negotiate prices with the pharmaceutical companies.


Another major contributor to the variation in cost is that most OECD nations actively have universal healthcare and negotiate their prices for prescribed meds.


The fact is that nothing that I have mentioned should come as any surprise to any of you. The most obvious point is that if pharmaceutical negotiations on drug pricing from Medicare and Medicaid were to be approved, it would significantly impact most big Pharma margins.


This issue is not new. In fact, in 2018, big Pharma was so concerned that they raised their prescription prices before the Trump administration imposed a freeze on prices in 2019.


Pres. Biden stated in January that within 12 months, Medicare and Medicaid through HSS would be negotiating pharmaceutical pricing.


In 2019 HR 275 was introduced in the House. This bill would have allowed not only the negotiation of prices but penalties for not participating.


Today HR3 has been introduced and is currently working its way through the House of Representatives. It would also allow pricing negotiation and adjustment in the future based on the CPI (Inflation).


Furthermore, a bipartisan bill has been introduced, HR 19, which deals primarily with the transparency of the pricing of pharmaceuticals.


It appears to me that some form of price negotiation has some bipartisan support. It was clear that the Trump administration supported such a measure. He endorsed a pricing structure based upon the average cost of the entire international community.


It's interesting to note that according to PPP and Harris Polling, 60 to 90% of the American people support this action. It has some momentum.


What will the impact be on Big Pharma? With 30% plus of all pharmaceutical sales made by Medicare (according to KFF), it could be significant, to say nothing about the bleed over into negotiations with the insurance and employer-based plans.


The US spends $514 billion per year on Pharmaceuticals, nearly half of the of the $1.25 Trillion spent worldwide. $174 billion of that coming from Medicare alone. A drop of 34% could crush the margins for pharmaceutical Company's. Here is what the CBO had to say. The CBO cited research that shows industry revenue could decline $1.2 trillion to $1.6 trillion from 2020 to 2029, meaning a drop in U.S. brand-drug revenue of 34% to 44% across the Medicare and commercial markets. Assuming the CBO is correct, the $524 billion in US revenues would fall $175 billion and worldwide revenues would drop 16%Now, of course, the industry has something to say about this too. The industry says significant cuts in R&D will reduce the number of new drugs coming to market by at least 10% if this legislation was passed. The entire 300 million dollars in lobbying money is spreading that message. I think the world as a whole should share in the R&D cost.


I would be negligent not to mention the revolution in technology and managing data regarding its impact on Big Pharma. Technology, to some extent, is replacing traditional biological research. How did we turn out a vaccine for COVID in 10 months? Ask Moderna (MRNA).


I believe this too will help R&D efficiencies, which can also reduce the cost of research in the future, hopefully lowering prices across the board.


When the Senate takes up this issue in August, and if approved by reconciliation or by the 60-vote option, things could get interesting for the industry.


It appears to me, with a few exceptions, that the Big Pharma stocks have gone nowhere relative to the markets gains over the last 12 months, especially once you consider the massive success of the COVID vaccine. Maybe the market is telling us something. Perhaps it's telling us there might be something to the dark clouds on the horizon for the industry ahead. At the same time, Generic Drug producers could ultimately be big winners.

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