In 2017, expect pharma to be even more predatory

by Daniel R. Hoffman

Published Dec. 27, 2016, 5:40 p.m. ET

Will the bad publicity that pharma's price gouging has generated for itself lead to more restrained price hikes in 2017 and beyond?

Not likely. Two weeks ago the consultancy Deloitte crunched the numbers and concluded that for the world's 12 largest biopharma companies, return on investment from R&D, the industry's lifeblood, has declined to an all-time low.

The problem, according to Deloitte, is not the usual industry fabrication about rising development costs for new drugs. Those costs have actually plateaued. It's the fact that the revenue margins generated by new products, while still enormous, have fallen below the exorbitant levels that pharma takes as its entitlement.

So instead of moderating price increases, this prospect of declining profitability makes it more likely that pharma companies will instead engage in collusion and other restraint-of-trade practices to enhance their price gouging.

Some of that is already taking place. Generic drugs now account for 80 percent of prescriptions in the U.S., with sales of $74.5 billion in 2015. Consumers count on the availability of affordable generic medications. Yet this month attorneys general in 20 states filed complaints against several generic companies for fixing prices.

The companies accused of price fixing include Aurobindo Pharma USA, Citron Pharma, Heritage Pharmaceuticals, Mayne Pharma, Teva Pharmaceuticals USA (located in North Wales and Malvern), and Mylan Pharmaceuticals. The Justice Department also charged two former executives at Heritage with price fixing.

The companies claim that a variety of "benign" circumstances produced the apparent lack of price competition. The truth, according to one of the legal complaint filings, is "much more straightforward and sinister—collusion among generic drug competitors."

To support their complaint, the attorneys general produced evidence that executives at generic pharma companies met clandestinely at cocktail lounges in New Jersey and other locations where they "discussed how to divvy up market share to avoid competing with each other for business." The agreements involved companies either declining to bid for certain customers or offering " 'cover bids' that they knew would be rejected."

In addition to raising prices as demand falls, pharma is using another strategy for spiking its profits. This one follows the national epidemic of dependence and death that has resulted from the industry's unethical promotion of opioid pain medications. Now that various cities and other jurisdictions are suing pharma companies for falsely promoting opioids by understating their addiction potential, a Los Angeles Times exposé this month has shown that some of the major players in that category are shifting their marketing emphasis overseas, where some of the latest U.S. promotional limitations have not yet appeared.

Even as pharma remains unscathed by censures such as the one from last week's Senate report, the government continues to bestow windfalls on the industry and protections from the market. One enormous example is the 21st Century Cures Act, signed into law by President Obama on December 13. One experienced observer referred to the law as "the 21st Century Giveaway Act." While the legislation continues funding for the National Institutes of Health and various exotic programs such as the cancer "moon shot," it also reduces support for less glamorous public health programs such as immunizations and tobacco prevention.

At its core, this last piece of Obama genuflection to pharma, according to columnist Michael Hiltzik, "is a huge deregulatory giveaway to the pharmaceutical and medical device industry, papered over by new funding."

The key gift to pharma involves relaxing the standard that the FDA currently uses for approving new drugs. Instead of using prospectively designed, placebo-controlled, double-blind studies as the gold standard, the new law will expand the use of so-called "real world evidence."

The phrase "real world evidence" is one of those semantic sleights of hand typically used by Republican marketing researcher Frank Luntz to make egregious giveaways to corporations and the wealthy sound like motherhood and milk. In this case it involves using observational studies that lack the rigor of current standards. According to health care reporter Julia Belluz, "Drugmakers could conceivably find any correlation they want in the data and present them as proof their products work."

Equally appalling, the new law will allow the FDA to rely upon "qualified data summaries" to support new indications for a drug, thereby allowing pharma companies to submit their own reviews as the basis for securing such approvals.

Regardless of what Donald Trump and his cabinet of billionaires do in health care, pharma has already rigged the game for itself and it seems likely that in 2017 the industry will continue to gouge consumers and taxpayers.