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Sean Hinton

Prescription drug prices are often brought up in debates about the U.S. health care system as a whole. Many claim that pharmaceutical companies overcharge for their prescription drugs, making quality healthcare too expensive for some to afford. Drug companies cite the high costs of drug development as the reason for high end-user prices. They also often decry the length of patent protection, saying that they have to recoup all the money spent on development within a relatively limited period of time, forcing them to charge higher prices. Nonetheless, there is growing political pressure to lower prescription drug prices and relax the restrictions on generic drug production, despite pharmaceutical companies' warnings that this could slow or hinder the development of life-saving drugs.

An example of this political pressure is the recent bill passed by the House of Representatives aimed at lowering prescription drug costs for Medicare recipients. The bill repealed a previous provision that prevented the Secretary of Health and Human Services from negotiating with drug companies on behalf of Medicare recipients. Instead, the new bill requires that the Secretary conduct such price negotiations. This is aimed at lowering costs for Americans enrolled in Medicare prescription drug plans, though it would save the government money as well.

US Federal Reserve chairman Ben Bernanke warned of rising health costs and the effect it may have on the government budget. Lower income households would be the hardest hit because they depend the most on government help.^[1]

Companies that benefit from increased regulation of pharmaceuticals

Health insurance companies

• Aetna (AET), UnitedHealth Group (UNH), WellPoint Health Networks (WLP), and AFLAC (AFL) are all large providers of health insurance. Insurance companies often have to cover part of their clients' prescription costs. Political pressure to reduce prescription drug prices would benefit insurance companies since they'd have to pay less for their customers' drugs.

Companies hurt by increased regulation of pharmaceuticals

Pharmaceutical companies

The drug development process is costly and time-consuming, taking an average of $800 million and several years to develop just one commercially viable drug. Pharmaceutical companies cite these as reasons why they're forced to charge seemingly exorbitant prices for their products. If political pressure were to lead to increased regulation of drug prices or a relaxing of rules governing generics, large pharmaceutical companies would be negatively impacted.

• Pfizer (PFE), GlaxoSmithKline (GSK), Sanofi-Aventis SA (SNY), Novartis AG (NVS), AstraZeneca (AZN), and Merck (MRK) are some of the largest pharmaceutical companies by revenue. The U.S. is a large market for pharmaceuticals and represents a substantial percentage of all these companies' revenues. As such, any moves in the U.S. to reduce prescription drug prices could impact these companies significantly.

Among the biggest issues facing the industry is the meaningful decline in the pace of new drug introductions combined with the pending patent expiration of some of the highest revenue producing drugs in the industry. Merck is likely to lose 25% of its revenue to patent expiration over the next 3 years, drugs like Vasotec, Prinivil, Pepsid, and Prilosec. Pfizer faces the patent expiration of Lipitor, it's $13 billion blockbuster, in 2011. Patented drugs are coming off patent faster than new drugs are being patented. This is steadily eroding the profitability of the industry as price per pill declines dramatically upon the introduction of generic competition, and operating margins move into the single digits. Firms are reacting with cuts in R&D and Sales Expenses, and are finding growth through acquisition and the economies of scale of size. The largest firms are moving toward a model that recognizes their core strength as distribution while innovation is purchased on the outside.