Lilly CEO: Drugmakers getting bum rap

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John Lechleiter thinks the press and presidential candidates have the story wrong about prescription drug pricing.

The Eli Lilly and Co. CEO said Thursday that, while there have been “individual huge drug price increases,” the cost of drugs is rising very slowly and remains a small part of overall U.S. health care spending.

“If you go back through successive presidential campaigns, with some bit of variability, drug pricing sort of tends to rear its head, because I think it's something that politicians have found resonates with voters,” Lechleiter said. “Having said that, I think the facts tell a different story.”

Lechleiter’s comments came in response to a leading question by Dr. Mark Schoenebaum, a pharmaceutical analyst at ISI Evercore (and an Indiana University graduate).

“When is the industry going to begin to spend the money to try to change the image and teach Americans that it's probably worth it?” Schoenebaum asked Lechleiter during an Oct. 22 conference call.

He referenced a Sept. 21 tweet by Democrat Hillary Clinton saying, “Price gouging like this in the specialty drug market is outrageous. Tomorrow I'll lay out a plan to take it on.” He also mentioned comments from Republican candidate Marco Rubio, who said last week, “It’s because their argument is we can—we can raise prices on this, the market will bear it, people like this drug, they rely on it, their physician will write it. And so because we can, we do. And it’s just pure profiteering.”

Lilly’s stock had risen 28.3 percent this year until Clinton’s remarks, but then lost 10 percent of its value over the following week.

Technically, the numbers are on Lechleiter’s side in this argument. According to the U.S. Department of Health and Human Services, Americans spend $2.9 trillion per year on health care, with 32 percent going to hospitals, 20 percent going to doctors, and 9.3 percent going toward pharmaceuticals.

For the average American, that punches out to be $861 per year, or $72 per month, for prescription drugs. That’s without factoring in any payments from insurance plans.

U.S. prices for prescription drugs have been rising rapidly in the past year—4.7 percent, according to the latest monthly data from the Altarum Institute. But as recently two years ago, a raft of patent expirations held prices to just 0.2 percent. When a drug’s patent expires, other drug manufacturers are allowed to make copycat versions of the brand name drugs, usually selling them at reduced prices.

Lilly’s third-quarter results showed both trends in action. The company hiked its U.S. prices by 9 percent for products still under patent. But price decreases on Lilly’s drugs Cymbalta and Evista, which have recently seen their patents expire, reduced Lilly’s overall price increases to 3 percent.

“Price increases across the industry in the US have been [less than 1 percent in the second quarter of 2015], which captures both price increases on brands, and price decreases that happen when brands go off-patent, yet this is not what the press highlights—it tends to focus only on the big price increase,” wrote Dr. Tim Anderson, a pharmaceutical analyst at Bernstein Research, in an Oct. 23 note to investors.

Lilly beat Wall Street’s expectations with its third-quarter profit, prompting the drugmaker to raise its full-year forecast by as much as 20 cents per share.  The company earned $800 million in the three months ended Sept. 30—up 60 percent from the same quarter a year ago.

Lilly was able to boost profit by reducing its research, marketing and administrative spending.

The financial success of drug companies has been a target of patient and voter anger for decades, but it is surging again, according to various surveys. This summer, a Kaiser Family Foundation survey found that three-quarters of Americans think prescription drug prices are unreasonably high.

That’s due in part to news stories about new drugs for cancer and hepatitis C costing from $80,000 to $150,000 for a standard course of treatment. It’s also due to the tactic by some investors and generic drugmakers to acquire old drugs with no competitors among a small group of patients and then jack up the price.

The recent poster child for that latter strategy was Turing Pharmaceuticals AG’s purchase of the old antibiotic daraprim, and then hiking its price more than 50-fold to $750 per pill.

But consumers are also feeling the cost of drugs more than they do the cost of the most expensive health care services. The percentage of employers offering single-person health coverage with a deductible of at least $1,000 has shot up from 10 percent in 2006 to 46 percent this year, according to another Kaiser Family Foundation survey.

Lechleiter, however, thinks Americans are still getting remarkably good deal from prescription drugs.

“We've got to keep telling the story, reminding people that the medicines as a percentage of total health care spend have remained remarkably constant for a long period of time,” Lechleiter said, “which suggests that our medicines are helping to hold the line or even reduce other costs in the system that none of us want to incur: hospital stays, being off of work, disability, et cetera.”

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