Why Plunging Generics Prices Won’t Halt Rise in Drug Spending

One of the more spirited exercises in the pharmaceutical world is tracking prescription drug spending. And the latest data indicates that, for the first time in more than 20 years, there was a decrease in annual spending last year in the US on traditional medicines, mostly due to the use of low-cost generics for treating common ailments as high blood pressure and high cholesterol.

Specifically, total spending by those with private health insurance fell 1.5 percent in 2012, according to Express Scripts (ESRX), the pharmacy benefits manager, which regularly releases spending reports. Not surprisingly, the decline reflects the impact of the patent cliff, which refers to big-selling drugs that lost patent protection and the subsequent arrival of cheaper generics. A prime example, of course, was Lipitor, the Pfizer (PFE) cholesterol pill.

Meanwhile, prices on a market basket of the most widely used brand-name medications rose 12.5 percent last year, significantly higher than the Consumer Price Index 1.7 percent inflation rate. During the same time frame, generic prices fell 24 percent. This amounted to the biggest gap between these two categories of medications since the pharmacy benefits manager began calculating a price index five years ago.

Before anyone gets too excited over a price decline, there is an important caveat worth noting. To wit, there was an 18.4 percent increase in spending on specialty medications that are used to treat more complex diseases, such as cancer, rheumatoid arthritis, hepatitis C and assorted rare diseases. Overall, the combined spending last year for all prescription drugs rose 2.7 percent, which was consistent with the growth rate in 2011.

Just the same, Express Scripts cautions that spending on specialty medicines is expected to continue rising. Although conditions that require treatment with a specialty medicine affect less than 2 percent of the population, these drugs accounted for 24.5 percent of the total spending within the pharmacy benefit, which was the highest percentage on record (here is the complete report).

Price hikes are just one tool pharmaceutical companies are using to try to make up for a failure to develop enough new drugs and expiring patents on existing drugs. Even with higher prices, major drug makers are having a hard time generating revenue growth.

PFE Revenue TTM data by YCharts

In fact, Express Scripts points out that four of the 15 costliest diseases, in terms of spending on drugs, are treated with specialty medications — multiple sclerosis, various forms of cancer, HIV and inflammatory conditions. Meanwhile, the FDA last year approved 22 new specialty drugs, many of which cost more than $10,000 per month of treatment.

For instance, spending on rheumatoid arthritis meds rose 23 percent, thanks to a 9 percent increase in utilization and a 14 percent rise in unit cost. Similarly, utilization and costs for cancer medications increased by 3.4 percent and 22.3 percent, respectively. The PBM attributed the higher costs new drugs that were developed to treat unique genetic profiles.

And take hepatitis C, which experienced a 33.7 percent increase in drug spending, which was the biggest jump among all therapy classes. The increase is due almost entirely to two new drugs introduced in May 2011 – Merck’s Victrelis (MRK) and Vertex Pharmaceutical’s Incivek (VRTX). Studies have estimated the wholesale acquisition costs of 12 weeks of Incivek therapy at $49,200 and a 32-week course of Victrelis therapy at $35,200.

To read the remainder of this article, go to Pharmalot.

Ed Silverman, a contributing editor of YCharts, is the founder and editor of Pharmalot. He previously reported on the pharmaceutical industry and other business topics for the Star-Ledger of New Jersey, New York Newsday and Investor’s Business Daily. He can be reached at editor@ycharts.com.

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