Drug makers, understandably, don’t like to talk about raising prices. When they must, companies often cite the hefty investment required to develop new treatments, as some do in today’s WSJ article on the pricing issue . But there’s another force that helps explain why 2010′s price increases were the biggest in recent years. Companies are facing a huge revenue shortfall as their blockbuster products lose patent protection. Like squirrels gathering nuts for winter, drug makers must collect as much revenue as they can before major sources dry up, say industry experts. “Industry is under a lot of cost pressure,” Ed Schoonveld, a pricing consultant at ZS Associates and author of a new book on the subject, “The Price of Global Health,” tells the Health Blog. “Like everybody else, companies are trying to make ends meet,” he says. Credit Suisse’s Catherine Arnold tells the Health Blog that the price increases have helped companies keep sales growth chugging along, albeit at lower rates than before. An analysis by Richard Evans and Scott Hinds at Sector & Sovereign Research concludes that companies’ “reliance on real pricing growth is perhaps greater than it’s ever been.” The calculus of drug pricing is complicated. Beyond R&D expenses and looming patent expirations, the value a drug provides is a factor. So is the cost of rival treatments. Indeed, Evans, who

used to work on pricing at Roche, says companies also pay a lot of attention to what the competition is doing. “It’s a lot like speeding:  I’m going to go as fast as I can go,” he says. Whatever is driving prices higher, companies point out that no one pays the list prices that are the basis of studies like the one from Barclays Capital that is featured in the WSJ. Companies are “gaining revenue where they can, but when you see price increases, a big part of that is going out in the form of rebates” to payers, says Mason Tenaglia, managing director at the Amundsen Group, which advises drug makers on pricing strategy. He says health plans can now seek rebates as much as 70% off list price in exchange for granting preferred status on the formularies that drugs must be on to drive sales. Such steep rebates can explain why pharma companies are significantly increasing prices for certain drugs. But the overall upward trend suggests larger cost pressures at work as well. And with drugs representing $110 billion in sales about to face generic competition over the next few years, it’s likely pharma companies will continue to push prices higher. Image: iStockphoto

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Drug Price Increases Come As Companies Peer Over Patent Cliff