Why isn’t downward competitive pressure on drug prices more effective?

Using current methods of inventing drugs, Borisy believes it will be possible to create new medicines that mimic the effects of existing big sellers, and bring them to market in a matter of years. Then EQRx will sell them to insurers and large hospital systems at a discount, displacing the innovators. Because its medicines will be cheaper to develop, EQRx will be able to make a handy profit despite these lower prices. The key question is whether health insurers and giant hospital systems have gotten desperate enough to want to shake up the system.

Quite simply, Borisy is going to invent and develop new drugs, and sell them for less money than the competition. He calls this “a radical proposition.” In any other sector, it would just be called “business.”

But the branded drug business is different, in part for structural reasons but also because people and doctors tend to be reticent to switch to a new medicine just because it’s cheaper. That has helped lead to dramatically higher prices.

Why, Borisy asks, have prices of, for instance, cancer drugs gone up eightfold over 20 years if the technology to make new medicines is steadily improving, and if we are, in fact, as he says, in “a golden age of biotech and pharmaceutical innovation”?

EQRx is his antidote. On Monday morning, the company is also announcing that it has raised $200 million from a bevy of top tech and biotech investors.

Over the next 10 years, Borisy said, he’d like for EQRx to start developing somewhere in the ballpark of 50 different experimental medicines. He wants the company to come out with its first medicine in five years, and to have 10 drugs within a decade.

Will this succeed?  Even if so, why did it take so long for this to happen?  The article offers this explanation:

There are multiple reasons creating a company like EQRx will be difficult. The idea of creating a “fast-follower” — a new drug that is much like an existing one — is anything but new. In fact, it has yielded some of the pharmaceutical industry’s biggest sellers. Lipitor followed several other cholesterol medicines to market, but became the best-selling drug in the world in the 2000s. Rheumatoid arthritis treatment Humira, the industry’s current best-seller, was introduced after two similar medicines, Remicade and Enbrel, were already on the market.

But fast-followers do not compete on price, because lowering price has not historically resulted in selling more units of a drug. Instead, the least successful medicine in a category will sometimes raise its price to make up for lost market share, and the best-sellers will often follow, raising their own prices.

Here is the full Matthew Herper piece, via Sarah Constantin.  Model this!


This is pretty much another America only business idea - the NHS does not care about branding in purchasing, nor do its patients have any real influence on prescribing.

This is pretty true in all other major EU countries.

The main reason patients have no influence on prescribing is that direct to consumer advertising of prescription drugs is banned there and pretty much everywhere us. Only the U.S. and New Zealand allow it.

Germany bans pharma companies advertising to doctors also.

Advertising is irrelevant to the topic at hand, though, since all of the drugs are advertised in the market at issue.

Of course advertising is relevant - how else do you think brand names are established in a mass market? Brand names which are then asked for by patients, who are only aware of the brand name through advertising.

Yes, and?

Why exactly could a second or third "me too" also brand itself and get asked for by name. After all Pepsi, Coca Cola, and even RC manage to have a market presence.

If anything, the second drug should have an easier time of advertising as the market leader will have done all the fun little PSA's drumming up fear ... err awareness of the pathology to be treated.

Similarly, if you ban drug advertising for drugs then again I don't see how a second mover is in any way more handicapped than the original.

What market leader? Generally, people are not interested in a brand name in much of the world (they generally don't know the brand name), they are interested in getting healthy.

Generally without caring about brands, as the perceived difference in brands is non-existent.

This begs the question. If new companies can skim the cream from the drug industry how will new research and testing be funded?

Patients in the US don't have any real influence on the drugs their prescribed, either.

Look at the research on patient preferences for drugs. Advertising influences that, obviously, which in turn influences prescribing. Again, obviously, or the drug companies wouldn't pay billions to do it.

Advertising might push the needle a bit. But you’re missing the forest for the trees here.

The difference is that most OECD countries have a nationwide formulary.

Either the drug is on form or not. If it’s not, it’s not covered. The formulary drives the major difference in usage.

Even in the US formularies make it much harder to get me toos on the market. Even if you price below the market entrant, you may find that the negotiations on one drug impact another when it comes to formulary. A cheaper price still has to navigate the idiotically complex web of deals that favor some drugs over others.

In counterpoint, once a drug gets established, it is has to take it off. When you browbeat people until they use one drug whenever applicable, it is harder to get them to stop later. Likewise, the process to change formularly can easily take over a year. If you anticipate losing market share, it makes sense to cash in now before the formulary eventually gets around to kicking you off.

Low pricing up front transitioning to high price once you have some degree of customer lock-in is not exactly uncommon in capitalism.

That is an oversimplification, but generally, yes, US gov payers refuse to not cover most drugs, no matter the cost. In some cases, by law, they must cover every brand drug in a class. I agree it is the larger issue. It is political cowardice.

"But fast-followers do not compete on price, because lowering price has not historically resulted in selling more units of a drug. Instead, the least successful medicine in a category will sometimes raise its price to make up for lost market share, and the best-sellers will often follow, raising their own prices."

This makes absolutely no sense: I wait to raise price until I get a competitor?

They raise prices because the buyer is a third party who spends other people's money and is rewarded for paying those higher prices in the form of higher premiums. The wonders of indirect buying through middlemen. A somewhat similar dynamic takes place in advertising markets like tech companies where the first party is screwed by the second and third parties. Whatever happened to just directly paying for stuff you like? Incentives would be much better aligned.

Can you explain what you mean a bit more about third party payers in tech companies?

Do a search for shadow pricing and drugs. It's especially incredible how in lock step the price increases for MS drugs and insulins have been over the last 10 years. However, it is a bit more complicated, as the prices are "list prices" which are the starting point from which they compete to give discounts to middlemen, like the Pharmacy Benefits Managers Ron Swanson points to. Those discounts are secret so it is hard to know how much the drug company vs middleman is receiving for any particular medication, but we do know that anyone paying out of pocket for the drug or who is in the deductible phase of their health plan does not get access to those discounts. It is the insurers get the savings, theoretically to lower premiums.

"It is the insurers get the savings, theoretically to lower premiums."

Except that most insurance in the USA that's not provided by government is provided as an employment benefit.

Yet the premiums employers pay for insurance are typically set according to claims history. Which is to say, this "insurance" is essentially a cost-plus arrangement with the insurance component limited to administration and claims handling, plus a small risk that current claims will for some reason be significantly more costly than predicted.

At a minimum, arrangements like this dilute any pressure on insurers to reduce costs. Unless the "insurer" is an HMO and receiving capitation payments, of course.

Upon reflection, there is one way, and only one way, that entry can lead to a price rise: Collusion. After entry each of the two firms has a smaller output than the single one before. This raises the average cost of each firm, because they have to "move up the average cost curve". Thus, both raise price. This sticks if they collude.

Collusion is illegal, of course. :-)

Ehh not so much. You can also have a discrimination effect.

For instance I might prescribe drug A with side effect X (e.g. increased stroke risk). Drug B comes out and treats the same primary indication as A, but with side effect Y (e.g. nephrotoxicity). In most patients X is much worse than Y, so we swap 80% of our scripts over to B and are willing to pay a premium to do so (treating the complications of Y << X so we up the price we pay for Y).

However for a certain percentage of the population Y is much worse than X (say 10%) and a certain percentage of docs & patients are unwilling or unable to migrate (e.g. their formulary is set for the next 11 months). Knowing that the only customers they have left are in some fashion locked-in, the makers of A can increase their price.

B is more expensive because it provides more QALY's, this is what we want. A is more expensive because the demand curve has become much more inelastic. Prior to the arrival of B, the makers of A could not easily discriminate between their marginal customers (e.g. people flying to a vacation) and their locked-in customers (e.g. frequent business travelers with high mileage status). Once B arrives, they can.

Oddly enough, the more you you constrain physicians with formularies and other tactics, the more valuable the price hike becomes. After all, changing these things requires time. Papers must be published, committees must meet, and the patient has to transition over. Adopting a cheaper alternative in low physician-discretion environment is much slower.

This means that an immediate and heavy price hike, before the gears of bureaucracy can grind through, is actually pretty effective. Yeah you will lose the formularies next year, but that is a sunk cost if your drug is inferior or the price is undercut.

Even if B is universally better, that is not going to be readily apparent for some time after widespread switching. A's maker can (and will) search for select patients that might be better off on A. If enough of these groups can plausibly be contested, you may well be able to gin up enough locked-in patients to eke some more value out before the patent expires.

I have little doubt that something tantamount to collusion occurs, but these are not truly interchange goods. If you strip away the marginal patients who could use either, those using the more expensive drug typically cannot swap and are likely going to have a much more inelastic demand curve.

But the original monopolist could have price discriminated in the first place, for example through cheap trickery. Upon entry: No collusion, no price hike possible.

Say there are 10,000 patients up for treatment every year. 2,000 of them cannot tolerate side effect X but get a lot of utility from treatment. 2,000 cannot tolerate side effect Y but get a lot of utility from treatment. 4,000 gain some, but not a lot, of utility from any treatment at all. The other 2,000 gain a lot of utility for treatment.

When Drug A hits the market it sells 8,000 doses (everyone but those intolerant of X). If it raises the price, it loses 4,000 sales as insurance companies won't approve it (at least without a lot of hassle for the patients and physicians). Say a 25% price hike would zero out the 4,000 marginal patients. Say your drug has a marginal cost of $700 and a price of $1000. Bumping up to $1250 gives you $2,200,000 ($550 * 4,000) compared to cool $2,400,000 ($300 * 8,000) if you set the price for the marginal buyers.

Now drug B comes on the market. Side effect Y is less intrusive and cheaper to treat so drug companies are willing to pay 5% more. Drug A still has a corner on 2,000 patients, but its ability to compete for the marginal patient and the patients who can tolerate either side effect.

Now if A's price is raised by 25% it raises the profit from $600,000 to $1,100,000.

At not point did the makers of A collude with B. It just works out that when A can compete for marginal patient's the profit maximizing price is lower than when A strictly cannot compete with B (because B is simply a better drug) for most patients so now its profit maximizing price is higher because A's remaining patients all have a more inelastic demand curve.

Why have a price $1250 higher in the first place? Firm A was not maximizing profits.

Check your math. If you have 4,000 marginal patients, then price maximization occurs by selling the largest number of doses that includes them. Pricing at $1000 gives a $300 profit per patient with 8,000 patients; that is higher than pricing at $1250 and only selling to 4,000 patients. Dropping the price is useless (no more patients to buy) and raising it cuts into the marginal patients.

Once firm A cannot compete for the marginal patients (or the ones with high demand but agnostic about the drug of choice), it still has 2,000 patients locked in. If those 2,000 will pay some higher price, then firm A can charge more.

In real life, the marginal patient calculation is more complex but the basic dynamic is the same. As a drug company you price initially to optimize earnings over all potential patients. Some of them are marginal patients who could use some other, lesser effective class of medication or who could simply tolerate their disease. Somewhere there is a price which maximizes profit by selling to more patients at lower price than the most desperate patients can afford.

A better drug entering the market will typically sweep up all the marginal patients. Now you are left with only a fraction of patients who often cannot use the new drug for some reason. With this new, smaller pool of patients the demand curse is less elastic and the profit maximizing price rises.

This is not your typical response to competition because two different drugs are not perfect substitutes. The most obvious example is allergy. A patient allergic to the new drug cannot take it. Rather than competing for all the customers, the two drugs partition the population and maximize their profits.

This also bears out for other things. After all, initially the drug company does not know just how desperate patients are for the drug or how much insurers will actually value their product. Over time, they get better information and at least half the time that points to higher price for profit maximization.

Goods that cannot substitute freely with incomplete information can lead to odd price behavior completely absent collusion.

Which is not to say that drug companies don't collude. Just that the situation is more complex.

-The new drug is a substitute for the old drug.
-To calculate profit, one needs to know average cost, and that declines with increasing output, or rises with decreasing output on account of the R&D outlay. [Say marginal cost is constant.]

Firm A was not maximizing profit if it can increase profit by raising price after new entry, except for collusion: Firm A was [and is] a monopolist, demand for its product falls upon new entry. It cannot raise price to maximize profits, except under collusion.

To put your case formally, upon entry the new demand curve for the old product falls and gets steeper. Output must rise. Hence, price must fall.

You continue to treat the new drug as a perfect substitute. This is a profound error when it comes to drugs.

Suppose I have two drugs that equally inhibit the same g-coupled protein receptor. Suppose their side effect profiles are the same. Drug K is renally excreted. Drug L has hepatic excretion. Drug L will be the drug of choice for patients with renal failure. Drug K will be the drug of choice for liver failure patients. This will be true irrespective of their prices.

Suppose the marginal cost, average cost, and every other cost is higher for drug L. Can all patients just substitute K for L? No, the 700,000 renal failure patients (who disproportionately get sick and need medications) cannot take K no matter the cost differential. For those 700,000 patients, L is still a monopolist.

So L faces a choice, its maker can try to compete for all patients and mostly lose to K. Or it can monopoly price for a smaller segment of the market for which K cannot substitute.

For many drugs we see production rates decrease with rising prices. Once you have clearly lost the marginal patients, those who can freely substitute between L & K, many drugs have more profit potential monopoly pricing for a segment of the market.

The magic lies in the fact that L cannot extort monopoly pricing from more, but also more price sensitive, consumers when it is the only option in town. Once K shows up, L is not going to be as profitable in gross terms. However it may well have more future profits from ceding the competitive market and going for a very high monopolist price in its new restricted market.

I have seen this timeline multiple times. New drug treats everyone and does so objectively better. Me-too steals the bulk of the market. Old drug is left treating a small, but largely price insensitive segment of the market. Prices rise because the consumers left desperately need the old drug and all the price sensitive consumers migrated to the new drug.

Nor is this unique to medicine. Some new software comes out. Its better than the old stuff. Almost everyone migrates to the new software. Some niche applications are locked-in. The old software vendors begin charging ever more for support and service precisely because the only people left buying their product have no other option. People pay a premium for Cobol and DB2 even though new entrants have handily displaced them from most systems.

Nothing depends on perfect substitutes, but the old and new drugs must be substitutes to some degree to make the assertion that entry raises price interesting.

Putting it generally, the more substitutes there are, the lower is monopoly power. That's why the price of the old drug cannot rise.

For a segment of the market there are still no other substitutes.

Prices can rise when pricing as a monopolist for only that segment is more profitable than pricing competitively for the whole market.

Imagine there are 20 drugs. The original one still has a set of patients who can only tolerate it. The maker can either play the commodity game, or they can price for the niche where there is little or no competition.

Prices of the new drug should be less than the old, ceteris paribus. But even that only occurs if the new drug is not better in some way that justifies a higher price (e.g. fewer side effects, less costly administration, easier compliance).

Alas, you are messing with what substitute means.

Interesting thinking, respect, but over and out.


If the vast majority of the costs of bringing a new drug to market are in the regulatory approval process, not in the actual discovery and invention itself, a way to optimize the latter is not going to make much of a difference.

Discovering and bringing to market are two different things, though drug companies love to complain about their costs. Tellingly, they generally remain silent on how they save costs.

This explains the game fairly succintly - "That’s why the cuts were especially unwelcome in the executive suites of drug and biotech companies. Their business models depend on Washington subsidizing expensive, high-risk basic research, mostly through the vast laboratory network funded by the NIH.

Just how important is our publicly funded research to Big Pharma and Biotech? According to a new study by a small, partly industry-funded think tank called the Center for Integration of Science and Industry (CISI), it is existentially important. No NIH funds, no new drugs, no patents, no profits, no industry.

The CISI study, underwritten by the National Biomedical Research Foundation, mapped the relationship between NIH-funded research and every new drug approved by the FDA between 2010 and 2016. The authors found that each of the 210 medicines approved for market came out of research supported by the NIH. Of the $100 billion it spent nationally during this period, more than half of it — $64 billion — ended up helping the development of 84 first-in-class drugs." - from an article entitled Taxpayers — not Big Pharma — have funded the research behind every new drug since 2010 (the link seems invalid here - anyone know why?)

Socialism for companies is always acceptable.

The CISI study, underwritten by the National Biomedical Research Foundation, mapped the relationship between NIH-funded research and every new drug approved by the FDA between 2010 and 2016. The authors found that each of the 210 medicines approved for market came out of research supported by the NIH. Of the $100 billion it spent nationally during this period, more than half of it — $64 billion — ended up helping the development of 84 first-in-class drugs." - from an article entitled Taxpayers — not Big Pharma — have funded the research behind every new drug since 2010 (the link seems invalid here - anyone know why?)

Does that mean the NIH provided 100% of the funding or just most?

So for 210 drugs, the NIH spent $100 billion in disease research.

The companies took the disease research and developed drugs, costing about $525 billion.

Well there is no evidence whatsoever to support that statement, so it is an irrelevant comment.

No, he’s completely correct.

The overwhelming percentage of costs to bring drugs to market is shepherding drugs through phase 1 to phase 4 clinical trials.

Pfizer does R&D still but the value chain of the industry has shifted.

Basic research (low add, public) —> drug development (high add, usually start up, requires biomed talent) —> Start up acquired & PH1-PH4 trials (high add + high risk, Pfizer/Takeda type)

Remember the failure rate of Ph1-Ph4 is relatively high. And the cost per drug is billions.

Seems as if you are not skeptical enough when it comes to pharma propaganda. The cost of discovering the drugs worth bringing to market in the first place is mainly borne by tax payers (and at a second remove for taxpayers, tax free foundations).

Pfizer may do enough basic research to justify its own R&D tax breaks, but it is not wasting money in the same fashion that the NIH wastes money on the myriad failures that accompany true breakthroughs. Pfizer has shareholders who expect a profit, not the occasional life saving breakthrough with the expense of all the accompanying failures being a burden on quarterly earnings.

Basically, drug companies bear the cost of acquiring a government granted monopoly by following the rules laid down by government. Your heart may bleed for those poor, poor companies, likely because of a lack of true skepticism concerning profit making ventures whose highest goal is earning more money.

However, possibly you are actually in favoring of removing patent protection for pharma companies, and sponsoring research and testing through public funding. In which case, Dean Baker will smile broadly.

Agreed. Pharmaceutical companies are the equivalent of war profiteers.

You read a lot into that comment that wasn’t there. Anyways, I was going to write out a long comment outlining how the pharma industry works and the value chain, but what’s the point? Most of your comment is just mood affiliation.

Fundamentally, public spending dominates discovery research and private spending dominates drug development, clinical trials, and commercialization.

In the most basic terms, pharmas value add is in terms of taking the research and developing it and trialing it with about a 90% commercialization failure rate. Total costs run about 2-3 billion per successful drug.

There’s certainly a case for IP reform, particularly in “new indication” extensions that are mostly an abuse of the current system. But hand waving away the realities of taking research through commercialization is not going to change the reality of the capital costs.

So what is the capital cost of weeding through the thousands of failures and the significantly smaller number of promising leads resulting from taxpayer funded basic research for a drug company? They simply choose what seems promising and then pay the costs to ensure they profit from a government granted monopoly.

Any way to reliably sort the "promising leads" from the "thousands of failures" is worth literally billions. Pharma cannot tell the two apart (nor oddly enough can academic researchers).

Discovery is cheap. You can use tissue models and batch chemistry with cost ineffective reagents.

Production is expensive. You use animal models and then human subject. The chemistry is typically continuous flow with only cost effective reagents.

Basically finding something new requires that you buy yeast while production requires paying thousands of subjects. Of course the latter is far more expensive.

That's not the "regulatory approval process," lol. That is the testing process. No large drug company would want to sell something they haven't put through clinical trials, as they would have no idea whether it is safe or effective (some smaller firms would of course).

On the other hand, tech companies are good at making worker pay go to zero. Doordash, to cite a recent example, pays roughly $1.45 per hour. The "sharing economy" means workers don't get their share.


If this is true, then why don't Doordash workers get a huge raise by applying for a minimum wage job? They're hiring in every store and restaurant in the country.

Is the same in the Defence Industry. Users want the best product available, not the "good enough" product.

Obviously you've never been in the military.

There are positive externalities for doctors to use the market leader drug as there will be more information available and a larger "ecosystem" (case studies, drug combinations, side-effect management,...).

Btw they are underestimating the difficulty to predict which drug will be profitable to "fast-follow". If they were good at it, they could just do arbitrage on the stock market for much cheaper and without the headaches.

I haven't been prescribed "the market leader drug" in 40 years, but initially the best cost-benefit drug, with generic substitute always checked, an then simply the same drug decade after decade because it works.

These are something like 80% of all doses prescribed, sold, used.

Until the 90s, manufacturing and distribution labor costs drove/set prices.

Then profit driven scarcity began driving up profits.

Eg, big pharma closed/sold manufacturing plants until scarcity lured them into buying exclusive distribution rights. With only 1-2 factories for a completely off patent generic, a big pharma can lock up hundreds of high volume generics in distribution deals, and jack up profits and profits.

Walmart triggered a "war" with $3/$7 prescriptions in the 90s. It bought directly from factories in high volumes, a strategy duplicated by others, like Target. I switched from CVS to Target because insurer copays at CVS were higher than the no insurance price at Target.

Target eventually ended up finding it so hard to get supply, it seemed to be buying on a spot market with the factory supplier changing several times a year.

Target sold out to CVS because it was so hard to source, while CVS was getting squeezed its adding both doctors and insurance.

Big hospital provider systems are adding drug manufacturing, mostly the most generic of all, sterile solutions, eg bags of salt water, which have seen severe shortages engineered by big pharma creating scarcity to drive profits.

The accounting is simple: does the product yield x% profit? No, then jack the price. If that cuts unit sales, then sell or close the factory.

A hedge fund buys the factory, cuts staff, to get profit, but that results in bad product, an FDA shutdown, and an emergency shortage of bagged sterile salt water, etc.

Big hospital systems can follow and buy stockpiles at critical points like end of quarter sale quotas to close factory sell off the hedge funds, or big order, to hungry factory buyers, which can be resold/traded for other scarce supplies with other hospitals.

Note, an efficient economy has no economic profit, but Friedman argued businesses managers had a duty to make the economy inefficient by generating economic profit for shareholders by creating scarcity. Thus is the opposite of Keynes who argued for "euthanizing" monopoly profits and rents.

This is unsurprisingly 100% wrong.

Generic drugs are not scarce, they’re dirt cheap to the patient. Prices have been falling YoY for decades. The reason plants have closed isn’t evil hedge funds, it’s that the companies sold at a loss and went out of business.

The profit margins are razor thin for generics companies. Industry is seeing consolidation as a pushback.

also no, Target was not “buying on the spot market.” They had a formulary and contracted rates like everyone else.

If my understanding of what these guys want to do is correct, this is nothing new. In the industry these products are called “me-toos”.

Discovery of new classes of medicine are exceedingly rare. Lipitor is atorvastatine, a class that include 5-6 molecules, like rosuvastatine of AstraMedica, for example. Prozac of Lilly, which is fluoxetine, the first SSRI, was quickly followed by paroxetine of GSK, Venflaxacine of Whyatt, Sertraline of Pfizer, and so on.

They are essentially the same molecule with the same effects, only one or a few atoms are different. But being not exactly the same, they can be patented. Developing mee-toos is much cheaper than developing the first of a new class, but it still costs a few hundreds of million dollars, for the regulatory barriers (mostly useless red-tape) of the FDA and the equivalents around the world. They are produced by other Big Pharma companies, not by generic producers. Real generics start to appear only 20 years after the original, so they begin with the very first molecule, and in a few year there are generics of the entire class.

It is true that me-toos are priced very close to the original molecule. I suspect that it is a tacit agreement among the few Big Pharma companies. They are relatively few (maybe ten worldwide), so they might have reached a unspoken agreement “not to shit in the main plate”, so to speak, and instead dividing the pie, where the original usually keeps the largest share (it wasn’t the case with fluoxetine because for some reasons had more problems with the libido of the subjects than other molecules of the same class). The price goes down only when the real generics come in. Apparently, this start-up wants to do me-toos and price them like generics.

Another, even more questionable phenomenon is the “me-agains”. These are the same old molecules that become unprotected and the producer do some tweaking, like an extended-release formulation, or changes the salt, and therefore it receives another 20 years protection. For example Pfizer, that acquired Whyatt, came up with desvenfkaxacine to defend venflaxacine from generics. I would say that this last practice is totally due to the capture of regulatory bodies by Big Pharma.

Why all these practices work? Because at the end the doctors have still an incredible latitude in what prescribing, and they get swayed by the the three Fs of the detailing force: Food, Friendship and Flattery (in poor countries there is also the fourth, but in the US or Europe it has not been the case in the last couple of decades at least). In the cost structure of Big Pharma, sales and marketing are usually 3-4 times the expenses of R&D (and much R&D, like studies IV, is really marketing).

What I find a bit puzzling is that apparently these guys want to do the same also with long molecules, and not through bio-similars, but real new molecules. It is extremely expensive even to create even a bio-similar (the generic of those drugs), because the molecules, created by bugs and not a chemical reaction, are very difficult to compare. But good luck to them.

Exactly! This is the crux of the issue.

(And I have learned a new phrase--"not shit in the main plate”--which I will use in a meeting today.)

"the doctors have still an incredible latitude in what prescribing, and they get swayed"

Little evidence for most prescribing. Eg treating diabetes high blood pressure, diabetes, etc.

Instead it's a matter of shutting down manufacture of branded generic X to produce the same quantity of minor tweak patent substitute and either making it a "generic" substitute, or advising pharmacists to get a prescription change from the doctor, both stanblooddard/common practices from the era beta blockers, calcium channel, etc drug for greatly expanded treatment of high blood pressure. Those drugs from the 80s were largely FDA approved imports from Europe and Japan which were priced at labor cost plus ROIC, ie, zero (economic) profit. Note, when US Treasuries were 6-8% the ROIC of 10% was not profit, but with t-bills at 2%, 10% ROIC is 5%+ economic profit, requiring monopoly driven scarcity.

The monopoly results from closing old factories not generating 10% ROIC when money is cheap.

One of my favorite parts of the Mulp character is that he/she is essentially standing on the sidewalk yelling at strangers about how they won’t pick up the $20 bills he/she sees everywhere.

mulp just hasn't been able to get his or her antipsychotic treatment since the generic being used went under.

As a general matter, if your ideological assumptions depend on their being a tacit conspiracy operating against the parties' economic interests, your ideological assumptions are probably wrong. Empirically speaking, too, pharmaceutical pricing has been the subject of intense government investigation over the last 20 years.

I would agree with you, in general. I do not believe in cartels that are not enforced by the State. However, owning a pretty large chain of pharmacies and wholesale distributors in developing countries, I have been exposed to these guys for 20 years now. I also spent 10 years in management consulting before, so I got to know fairly deeply maybe 30 different industries.

People working in Big Pharma really seem different animals compared to the average manager of any other industry. They have ingrained a strange concept of “unfair competition”. For example, even when they have a generics arm, like Sándoz for Novartis, or Sanofi (different brands) they never produce generics of the other Big Pharma companies. They produce as generics only their own molecules or very old molecules (metformina or amoxicillin, for example).

I do not know why. Possibly, it is because the economics are so strange. The individual who consumes, the patient, is not the individual who decides (the doctor) nor that which pays (insurances or the government in Europe). This creates an enormous quantity of free-riding and weird incentives, and a lot of opportunity for connivance with regulators and other people in the value chain.

Good comment. But, there is something else to consider as well. To the extent that doctors are part of integrated practices--HMOs, hospital doctor practices--the decision on what is on the formulary as to what they can prescribe or choose from is not made in the FFF space, but rather by a pharmaceutical team. These docs don't see the drug reps anymore. And, the hospital and HMO negotiate the price and are well aware of drug equivalency since, if they are part of the HMO, have every incentive to get the lowest price.

The market in drugs isn't the only market in which firms do not compete in price, but it's the one that gets the most attention. It's said that the "kinked" demand curve suggests that firms concentrate on non-price competition (product differentiation in pharmaceuticals, loyalty cars in airlines, subsidized delivery in internet commerce (e.g., Amazon), brand loyalty through advertising (e.g., sodas)). Airlines generate more revenues from selling points to credit card companies than from selling tickets to passengers. Something dear to Cowen's heart (stomach) is non-price competition by restaurants: they compete on quality (or more accurately the perception of quality). Why so little objection to non-price competition in these other industries while non-price competition among drug makers causes outrage? Is it the effect on health? But I don't know many who object to Amazon's practice of subsidizing delivery even though it's congesting our roads, choking our air, and contributing to global warming.

Whoops, I omitted an important term from my comment: oligopoly. Also, loyalty cards, not cars.

Seems like a classic “other people’s money” issue. Doctors have no reason to prescribe cheaper drugs since the patient can’t just buy a cheaper drug on their own and the insurer is paying, and patients have no reason to buy cheaper drugs since the insurer is paying. It would function more like a normal market if patients were allowed to buy the drugs they wanted and paid out of pocket for them.

Doctors have no problem prescribing cheaper drugs. All you have to do is say to your doctor, "Can I try this cheaper drug? It will save me a lot of money." And then the doctor writes you a new prescription.

I ask my doctors to prescribe different drugs for me all the time. I tell them I want to try something else, and they say, "Okay, let's try it and see how it goes." They write me a new prescription and away I go.

Sometimes doctors have legitimate reasons to object, meaning that they are aware of some research suggesting that the product you're asking about is not as good as the physician's preferred product. In that case, listen to your doctor. If you still want to try the other product, you can usually get your doctor to prescribe it for you if you tell him or her that you are aware of the risks and want to try anyway. Otherwise, you can always get a new doctor.

I’ve done that too. I ran across one case where there was a quite significant price difference between the same drug packaged as a tablet and a capsule. The doc was happy to write for the cheaper option.

"But fast-followers do not compete on price, because lowering price has not historically resulted in selling more units of a drug. Instead, the least successful medicine in a category will sometimes raise its price to make up for lost market share, and the best-sellers will often follow, raising their own prices."

just seems to point back to market structure type issues rather than pricing aspect. Clearly the demand for consuming drugs (out side recreational demand for a limited segment of the drug market) is more fixed demand. But the demand does not make the choice about the drug or the price paid.

Isn't that largely known already? Basically inelastic demand, various elements of cartel and monopoly structure, bribery/payola structures....

The problem is not in the production stage, it is with the distribution model.

Borisy's proposal ignores what routinely goes in in the pharma industry every single day. Companies are constantly tweaking molecules trying to come up with better drugs; Massimo smartly pointed to a couple of excellent examples. Pharma companies know what is being done within the industry and are not surprised by new advances. The major problem has always been to find the right structure (and it doesn't matter if it's a biologic or small molecule) that has an optimal benefit/risk profile. Yes, Borisy's company can do a lot of tweaking but it still has to look at the clinical benefit and safety profile. this is where the high cost of development comes in.

When I took a course in drug development chemistry we had a saying, "...methyl, ethyl, propyl, butyl, futile..." It's not at all clear to me that Borisy, other than some venture capital experience, knows much at all about drug development. As with 90% (maybe more) of biotech investments, this one is likely to lose investor's money quite rapidly.

Drug prices haven't been going up. List prices have been going up. When list prices go up cost shares go up, and the extra money collected from the member/government can be split between plan sponsors, insurers, etc.

The big problem with drugs is they aren't an insurable event, so drug insurance inevitably means predictable subsidy. There is a strong incentive to reverse that subsidy.

Also, list price increases sometimes actually hurt pharma, since in certain government programs pharma has to pay discounts based on list that can exceed 100%.

The Borisy proposal is just a VC promising to make piles of money with one weird trick. That's what they always say. Why is this particular guy worth any attention?

To answer the question headlining the posting: because a thousand laws, regulations, and rules have been created by the government under the influence of the industry to ensure that free market price mechanisms will not have any power.

My guess is that for some (?) most (?) readers/commenters here prescription drug prices are an abstract, theoretical issue.

A few of us here, however, due to health issues - or age, need to take medications. Properly phrased, I suppose, would be ‘my chance of suffering a life-threatening or life-changing event would be significantly greater if I DID NOT take those medications’.

I personally am lucky enough that only a single med I take is a non-generic. With Medicare pricing the cost for that tiny little pill is about $1.50 per day.

The generics I take are mostly ‘free’ - covered by the part D plan for which I pay a monthly premium. The others are just pennies a day.

Now my health issues are pretty common for old geezers. There are a lot of us and medications that work have been around for decades.

However, not all generics are chemically the same.
It turns out a few atoms here or there in a molecule do matter.

While different generics to treat the same symptoms can all be inexpensive, their side effects can vary greatly from person-to-person.

That is why NEW medications should require extensive and expensive testing on actual members of H. sapiens sapiens before being released.

Just my purely anecdotal yet personal experience.

"However, not all generics are chemically the same.
It turns out a few atoms here or there in a molecule do matter."

You are wrong. In order to be classified as a 'generic' and be able to reference the innovator's data for approval, the chemical structure has to be identical.

But 'inert' elements also play a role - lithium is the active ingredient, but the difference between lithium carbonate or lithium citrate and lithium chloride are not exactly trivial.

" the difference between lithium carbonate or lithium citrate and lithium chloride are not exactly trivial"

While you are correct, you missed the main point in that the chemical structures are not identical. I'm not sure which one is approved by the FDA but the three are not interchangeable and do not fall under the definition of 'generic.'

Lithium carbonate and lithium citrate are both approved by the FDA. Lithium chloride had a short lived career as a salt substitute, but was toxic. Which led to a decades long delay in recognizing lithium as a treatment for manic depression in the U.S.

Though lithium may not precisely be the best example in such discussions.

Alan, while you say I'm wrong my body begs to differ.

Two different generics of the same original medication. The first one caused an allergic reaction causing itching on my arms and torso. A
different firm's generic of the same medication produces no such reaction what-so-ever.

Funny I suppose. But I haven't been itching at all since I switched.

And no, we didn't switch detergents and my diet hasn't changed and we don't have pets. The Doctor agrees with you that it simply shouldn't have happened. Her only explanation was the INERT ingredients are different.

I would rather invest in Google Pharmacy or Amazon Pharmacy as they would have a better database of equivalent drugs and would be able to data mine a larger population to identify risks.

There are plenty of resources out there than deal with drug equivalency.

I just saw an Amazon Pharmacy add and it was pretty nifty. For those who take multiple drugs, Amazon will sort things into packs so you take the right drugs at the right time. Really convenient for seniors who may tire of putting their pills into the little containers.

In case you are interested, there is some behavioral econ research on the problems with interface design and computer prescription services.

Interesting article: https://medium.com/backchannel/beware-of-the-robot-pharmacist-4015ebf13f6f

The start up should get good insurance and do field testing. (The article is assigned reading in BE and comp sci).

Why don't actual drug dealers bundle pharmaceuticals? Free insulin with every cocaine purchase. Or vice versa perhaps, at current prices.

“Why swallow a rock?”
“It’s slightly recherché but there are waves of empathy.”
“Didn’t scientists just find the brain receptors for pot?”
“Drug use such a hell raising act,” he said. “There’s no explaining why people do drugs, why God supplied drugs. Why they work.”
“I suppose someone would say you’re a student of the art of warfare.”
“And then when he was writing the prescription, I said to myself, ‘My god.’”
“Could you imagine the only pill, like there is a tulip on fire, it’s in this room you’re never going find, like that elevator doesn’t exist anymore, and outside there’s a cow chewing gum. I got scared because I thought there was a wall that was impassable.”

The market for drugs differs from most. Pharma companies don't just patent their products. They attempt to get patents on everything that might be similar.

I get a strong feeling from a lot of Tyler's writing about drug pricing and competition that he has never delved too deeply into the dynamics of drug manufacturer rebates and list prices vs net prices. But maybe I'm wrong and just being cranky.

The publicly visible drug "prices" that journalists gawk at because they show up in out-of-pocket bills are only tangentially related to the actual financial relationships between manufacturers, insurers and pharmacies that underpin our drug markets.

One industry observer expresses extreme skepticism about EQRx to actually produce large number of drugs in a "fast follower" fashion as if they were creating knock offs of designer clothing. Even closely similar chemicals have to go through the clinical trials etc.

Comments for this post are closed