They say there are two certainties in life: death and taxes. If we were to add a third certainty to that list, it might be that we generally have inflation as well. Inflation refers to a rise in the general level of prices. It doesn’t mean that the price of everything has gone up, just that prices in general are higher than they were previously. If a country experiences deflation, it means just the opposite: the general level of prices has fallen.
But if the price of most consumer goods are going up, is it fair for some to question why the price of a prescription drug, or even a generic, might be increasing as well? I ask that question because unless drugs are in some special, cost protected category, would we not expect their prices to be increasing during inflationary periods as well?
In this country inflation is measured by looking at a basket of goods a typical consumer might purchase, something we call the Consumer Price Index (CPI). This basket includes such staples as food and beverages, housing, apparel, and transportation. Not surprisingly, medical care (including medical supplies, physician services, and prescription drugs) are also included. By tracking the cost of these items over time, economists can determine if prices are rising or falling.
If you do any shopping at all, it should also come as no surprise to you that prices generally rise. In fact, for most of the 20th century, inflation has been the norm. Between 1950 and 2000, the dramatic and consistent rise in prices was unparalleled since the founding of the country. In fact, the most dramatic deflation this country has faced in the last 100 years occurred during the years 1930 to 1933, one of the most difficult economic times in the history of the U.S. During that time of prolonged deflation, prices dropped an average of 10 percent.
The U.S. economy experienced deflation in January 2015, as prices fell by 0.1 percent compared to the previous January. That was also the first time the U.S, had seen falling prices since 2009, and was primarily due to falling gas prices.
So why the inflationary rant? I had lunch yesterday with my colleague Rob Wright, chief editor of Life Science Leader, who had just returned from the BIO CEO & Investor Conference in New York City. During one session, a journalist in attendance questioned why the price of prescription drugs would be rising, if the benefits being provided by the drugs were not changing. It made me wonder whether some journalists truly understand the concept of inflation and why prices rise.
Even if the cost of producing the medicine was unchanged, is it realistic to expect that its price would not change? People generally get pay raises every year due to inflation. If GM employees received a new contract that increased their wages, would we not expect the price of a new car to rise? If teachers receive a pay increase, would we not expect the cost of education (i.e. our taxes) to go up? So why, if pharma employees get a raise or the company invests in capital improvements, should we not expect drug prices to rise as well?
But do we know that the cost of producing the drug has not changed? If the wages of the employees producing that drug have gone up, then the cost has increased. If prices are rising, is it possible that the APIs and other ingredients in the drug have increased in price as well? With the demand for outsourcing services increasing, is it possible that the cost of manufacturing services from a CMO has increased as well?
In addition to that, we know the cost of developing new drugs is, in fact, increasing. It now takes more than 10 years to bring a new drug to market, and at a cost of $2.5 billion or more, depending on whose numbers we believe. As new precision medicines are developed, I think we can expect costs to go higher. If GM had to invest a lot of money to build a new car, I would not be surprised if they raised the price of existing cars to help make up that expense. Is it wrong to think a pharma company might want to do the same?
And of course this discussion does not even begin to address quality issues. A couple of years ago the CEO of an API manufacturing company told me a story about glass shards being found in the generic version of a drug he was taking. I think we would all agree that it is best to not have glass, plastic, and other contaminants in the medicines we ingest. But quality also has a cost associated with it. If we move manufacturing from one CMO to one offering higher quality, should we not expect the price to rise? If we install better and more expensive equipment to ensure higher quality, will that not cause price to rise? Consumers seem to expect this in other industries, but not pharma.
I know some will want to question the profits of drug companies and what their employees are paid, and I’ll leave that discussion for another day. But for now I’ll bring this discussion to a close by mentioning one final thing. A couple years ago I had the opportunity to visit the Gallus BioPharmaceutical manufacturing facility in St. Louis, currently owned and operated by Patheon. We were shown one large piece of equipment the company had recently acquired, for over $30,000, which essentially created a clean room inside of a clean room. Gallus was doing business in Turkey, and the Turkish Ministry of Health (MOH) insisted they have the equipment, even though regulators in other countries, including the U.S., did not require those higher standards. As a result, Gallus made the decision to purchase it. This, along with all of the other protocols and safeguards that most pharma manufacturers have in place, will cause manufacturing costs to increase.
We all want quality medicines to inject and ingest, and that quality comes with a price. Prescription medicines are a necessity, and oftentimes not an inexpensive good for individuals to purchase. But if we want to continue to have the safest and best new medicines to rely upon, we may have to accept having to pay rising prices to acquire them. The same way we accept death and taxes.