March 2015 has been a big month for cancer drugs and the pharmaceutical industry. The US Food and Drug Administration (FDA) granted Bristol-Myers Squibb approval to use the PD-1 inhibitor, Opdivo, in the treatment of advanced squamous non-small cell lung cancer.1 The drug was approved on the basis of results from a clinical trial suggesting patients who received Opdivo lived an average of 3.2 months longer than those who received standard care.
Abbvie announced its intention to buy Pharmcyclics for approximately $21 billion – a move largely motivated by the prospect of bringing Imbruvica, a drug used to treat chronic lymphocytic leukaemia, into the company’s portfolio.2
Total US prescription drug spending rose 13% in 2014, the biggest increase in a decade.3 Driving this trend is spending on branded specialty drugs – spending on drugs to treat inflammatory diseases, hepatitis C, multiple sclerosis, and cancer rose an unprecedented 31%.
And in the most newsworthy development, the FDA approved Sandoz’s Zarxio as the first ‘biosimilar’ drug in the US market. The drug is similar to Amgen’s Neupogen, used to prevent infection in cancer patients. Biosimilar drugs are like the inexpensive generic versions of typical prescription drugs. However, unlike most generics, biosimilars are not facsimilies of the original because of the difficulty of manufacturing biologic drugs. Payers’ savings from biosimilar entry for many cancer drugs could be enormous. According to one study, biosimilar entry could save the health care system $44 billion over a ten-year period.4
The costs of progress
Like many new cancer drugs, Opdivo and Imbruvica cost over $10,000 per patient per month. A decade ago drugs with prices in this range prompted headlines like “Cancer Weapons, Out of Reach”5 and “Price of Cancer Drugs Called ‘Mind-Boggling’”6, but manufacturers have found that the shock wears off quickly.
Branded cancer and other specialty drugs are huge revenue generators for their pharmaceutical companies. For Amgen, Neupogen racked up $1.2 billion in worldwide sales in 2014;7 for Bristol-Myers Squibb, Opdivo is expected to bring in up to $7.5 billion in peak worldwide sales.
Prices continue to rise
We studied the relationship between inflation-adjusted launch prices and survival benefits and approval year for 58 anticancer drugs approved in the US between 1995 and 2013 (Howard et al. 2015). Launch prices are the prices drug companies charge for newly approved drugs. We found that launch prices are going up by $8,500 per year, approximately 12% year over year.
Put another way, our regression model predicts that patients and their insurers could expect to pay $27,000 in 1995 for a new drug that extended survival time by six months. If the same drug providing the same benefit to patients were approved in 2013, we predict it would launch at a cost over $100,000.
A peculiar market
What accounts for this extraordinary increase in drug launch prices? And what is to stop companies from charging a million dollars or more for a drug?
Commonly, insurers steer patients towards cheaper drugs by making patients pay more if they use a drug for which there is a less costly substitute. This approach has encouraged patients to use low-cost generics and significantly restrained spending on drugs used to treat chronic conditions.8
This approach hasn’t worked well for cancer drugs. Most cancer drugs have no competitors, due in part to the fact that new drugs offer benefits, however small, over existing drugs, and the slow pace of biosimilar approval. Generic entry does occur for non-biologic cancer drugs, with price drops on the order of 60–80% off the branded price within a year (Conti and Berndt 2014). But these old generic drugs are used as a backbone upon which newer drugs are added to a cancer patient’s treatment. Insurers can’t tell doctors or patients to use the cheaper alternative, because there isn’t one.
Patients are insulated from the cost of the drugs they use. Most Medicare beneficiaries have supplemental plans that cover the costs that Medicare does not, and pharmaceutical companies have proved adept at undermining private insurers’ cost-sharing requirements through the use of ‘patient assistance programs’ (Howard 2014). Under these programs, pharmaceutical companies refund any money patients pay for cancer drugs. These programs reduce patients’ financial liabilities, but make it easier for manufacturers to charge insurers high prices.
Many cancer drugs are administered to patients in physicians’ offices. Physician practices acquire these drugs at wholesale costs, administer them to patients, and bill insurers. Because insurers’ payments for the drugs typically exceed physicians’ acquisition cost, physicians often profit when they administer drugs. In the mid 2000s, the Medicare program cut drug payments to reduce incentives for overuse, but, even so, physicians have no direct financial incentive to avoid high-cost drugs.
Although physicians face no direct incentives to avoid high-cost cancer drugs, there have been some recent examples of physicians balking at prescribing drugs with prices they perceive as exploitative.9 The difference between a reasonable and an exploitative price is subjective, however, and companies can set the prices of new drugs slightly above the prices of existing drugs without provoking a backlash. As ever-costlier drugs come to market, physicians become habituated to higher prices, giving manufacturers leeway to set even higher prices in the future.
Another factor that has been pushing prices upwards is the expansion of the 340B program, which allows some hospitals, affiliated specialty clinics and contract pharmacies to obtain brand drugs at steep discounts (Conti and Bach 2013). As the number of prescriptions eligible for the discounts grows, due to changes in program eligibility requirements and mergers between hospitals and physician practices, manufacturers face an incentive to set higher list prices (Duggan and Scott-Morton 2006).
Where do we go from here?
On the news of Opdivo’s lung cancer approval, shares of BMS gained 7% and are currently trading at more than 38 times expected 2015 earnings. This is twice as much as the S&P 500 pharmaceuticals industry index. Premium prices and the promise of billion-dollar annual revenues are spurring investors to pour money into US biotech companies.10
Meanwhile, in the UK, the National Health Service recently decided to stop paying for 25 costly cancer drugs.11 The US is unlikely to pursue this approach.
Barring a fundamental change in how US payers cover and reimburse drugs, there are limited prospects for cancer drug prices and spending to stabilise or decline in the near future. The FDA’s first biosimilar approval is a bright spot in US policymakers’ quest to lower spending on specialty drugs.
Conti, R M, P B Bach (2013), “Cost consequences of the 340B drug discount program”, Journal of the American Medical Association, online first, 22 April.
Conti, R M and E R Berndt (2014), “Specialty drug prices and utilization after loss of U.S. patent exclusivity, 2001–2007”, NBER Working Paper 20016.
Duggan, M and F Scott-Morton (2006), “The distortionary effects of government procurement: evidence from Medicaid prescription drug purchasing”, Quarterly Journal of Economics, 121(1): 1–30.
Howard, D H (2014), “Drug companies’ patient-assistance programs – helping patients or profits?”, New England Journal of Medicine, 371(2): 97–99.
Howard, D H, P B Bach, E R Berndt, and R M Conti (2015), “Pricing in the market for anticancer drugs”, Journal of Economic Perspectives 29(1): 139–162.
 “Biosimilar Medications Could Create Billions in Health Care Savings”, RAND Corporation press release, 3 November 2014.
 Anna Edney, “Novartis Biosimilar of Amgen’s Neupogen Wins U.S. Panel Backing”, Bloomberg, 7 January 2014.
 Chris Fleming, “Slow Growth In Health Spending And Utilization Continues”, Health Affairs Blog, 9 January 2012.
 Rena M Conti and Ernst R Berndt, “Winners And Losers From The Zaltrap Price Discount: Unintended Consequences?”, Health Affairs Blog, 20 February 2013.