Answer the following questions in 500 words using the article below.
1.Are the pricing decisions by drug companies defined by supply and demand or are they more like the actions of a monopoloist?
2.What gives these companies this power? Please also tell me the positive benefits that derive from this power.
PHOTO: JB REED/BLOOMBERG NEWS
By JONATHAN D. ROCKOFF and
Facing mounting criticism about prices, drug companies put some limits on their increases this year.
Prescription-drug makers traditionally raise list prices in January. This year, they didn’t raise prices for as many drugs as last year and imposed fewer boosts of 10% or greater, according to an analysis by the investment firm Raymond James & Associates.
About 5.5% of the increases reached the 10% level. A year ago, 15% did, and two years ago, 20% did.
Even so, the median drug-price increase was little changed from last year, at 8.9%, still far above the U.S. inflation rate of around 2%.
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In a meeting with American pharmaceutical executives on Tuesday, President Donald Trump pressed them to greatly reduce drug prices, promising to reduce regulation and lower taxes to help them compete. Photo: Getty Images
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Marathon Pharmaceuticals plans to sell a the drug deflazacort, used to treat a rare form of muscular dystrophy for $89,000 annually in the U.S., roughly 70 times the cost of the drug overseas. WSJ’s Joseph Walker and Tanya Rivero discuss the move. Photo: Zuma Press
Self-policing on prices hasn’t been universal. Marathon Pharmaceuticals LLC caused an outcry two weeks ago when it set an $89,000-a-year starting price for a decades-old muscular-dystrophy treatment that Americans could get from abroad for $1,600 a year or less until Marathon won U.S. approval to sell it. After criticism in Congress and elsewhere, Marathon said it would delay the launch.
Kaleo said it has a way to cut the cost to zero for most patients, though not for health plans. On the EpiPen, Mylan later offered a $300 generic version.
Even price increases below 10%, as most of this year’s are, can drive total drug spending up by hundreds of millions of dollars. Take Humira, an arthritis and psoriasis treatment that brought in $10.4 billion for AbbVie Inc. in U.S. sales last year. AbbVie raised Humira’s list price 8.4% in January, which could mean as much as $850 million in additional U.S. health-care spending this year if usage holds steady, according to Raymond James analyst Elliot Wilbur.
The January increase came on top of 18.5% in price boosts AbbVie took last year for Humira, which it advertises heavily to U.S. consumers on TV.
AbbVie said the figures don’t take into account discounts and rebates from the list price provided to middlemen such as pharmacy-benefit managers. The discounts mean that manufacturers must share the increased revenue with others, but they can still leave buyers such as insurers paying the higher price, or most of it. And regardless of discounts to middlemen, patients who have high-deductible health plans may have to pay close to full price for at least part of the year.
Allergan PLC Chief Executive Brent Saunders said his company will collect only 2 or 3 percentage points—in line with inflation—of the average 7.4% by which Allergan raised list prices of its prescription drugs in January.
One Allergan increase was 9% on its Estrace vaginal cream—narrower than last year’s 9.9% increase and far below the 38% by which Allergan raised the drug’s list price about two years ago.
Part of the reason pharmaceutical makers are keeping most price boosts below 10% is concern that bigger ones could spark public anger, industry analysts say. Drug companies are “sticking with what they perceive to be the rate the market will bear, high single digits,” said Mr. Wilbur.
Companies also hope to blunt calls for granting Medicare authority to negotiate drug prices directly with companies, which it now is legally barred from doing, according to industry analysts.
President Donald Trump has broached the idea of giving Medicare such power. He told pharmaceutical executives at a White House meeting last month that drug “pricing has been astronomical for our country” and vowed to take steps to “get the prices way down.”
He didn’t mention Medicare negotiating power, but White House press secretary Sean Spicer said early this month Mr. Trump still favors it. The possibility of such authority for Medicare, the biggest U.S. prescription-drug buyer, has been a weight on drug stocks.
In all, producers raised the U.S. list prices of 2,353 prescription drugs in January. That was about a quarter fewer than in January 2016, according to Raymond James, which based its analysis on prices known as the “wholesale-acquisition cost.”
In the drug industry, “price increases have become a substitute for innovation,” said the CEO of Regeneron Pharmaceuticals Inc.,Leonard Schleifer, in an interview. “If we continue to go crazy with price increases, the government will have to step in.” Regeneron hasn’t raised prices on its three drugs since their launch.
At Valeant Pharmaceuticals International, a habit of steeply raising prices, including a 525% increase on a newly acquired drug in 2015, led to a grilling by U.S. senators in April. Last month, Valeant raised the price of more than 50 products by an average of 8.4%.
It cut the price of one, the heart drug Nitropress, by 66%, according to Wells Fargo Securities, about two years after having tripled it.
Valeant’s CEO at the time of the Senate hearing admitted the company had been too aggressive in pricing. This month, a spokeswoman for Valeant said the company has decided its annual price increases will be under 10% and below the five-year weighted average of increases in the industry.
A few drug companies have promised more price information. Johnson & Johnson recently said it would report the average list-price increases for all of its drugs and their average cost, after discounts, to payers such as Medicare and insurers. AbbVie and Allergan have pledged to raise list prices only once a year and by no more than 9.9%.
Some companies, though, have raised prices for certain products more aggressively than in past years. Astellas Pharma Inc. upped the list price of organ-transplant drug Prograf by 9% last month, 2 percentage points more than its annualized rate of increases from mid-2014 to mid-2016, according to Raymond James. Astellas said it prices medicines based on the value they provide and uses the revenue to fund drug development.
The industry has moved to restrain price increases before. Early in the Clinton administration, worried about a risk of price controls, the main pharmaceutical-industry trade group pledged to limit increases to the consumer inflation rate.
Such self-policing “has never been long-lasting,” Goldman Sachs wrote in a note to clients this past September, adding: “Price increases have become an industrywide practice, especially since 2010, when reliance on higher price increases” for revenue growth intensified.