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3 Key Lessons From Trump’s Drug Price Feud With Pfizer

July 11, 2018, 5:50 PM UTC

This week, President Donald Trump renewed his long-standing feud with the pharmaceutical industry and its drug price hiking tactics. But the fight took on a different sheen this time around — Trump specifically called out an offender, and a powerful one at that: New York-based drug giant Pfizer, the maker of multibillion dollar medicines like Viagra, Lipitor, and Lyrica.

Trump has called out the pharmaceutical industry multiple times over the course of his administration. At one point, biotech stock indices would rise and fall in reaction to the president’s words; recently, in the absence of tangible policy changes, investors have begun to shrug off Trump’s tough talk.

But the Pfizer feud resulted in some intriguing moves. Specifically, Pfizer actually agreed to temporarily roll back its newest slate of drug price hikes after CEO Ian Read had a conversation with Trump and mounting pressure from administration officials.

“Following an extensive discussion with President Trump today, Pfizer’s Chairman and CEO Ian Read announced that it will defer the company’s price increases that were effective on July 1 to give the president an opportunity to work on his blueprint to strengthen the healthcare system and provide more access for patients,” the company said in a statement.

Those rollbacks aren’t permanent. In fact, Pfizer openly said that they would take effect either at the end of the year or following the enactment of the administration’s recent drug pricing proposal (a proposal that actually sent biopharma stocks shooting upward). But the entire episode is instructive of the convoluted nature of American health care policy. Here are some key takeaways.

1. Drug prices are arbitrary, and companies hold the power

There is no law or regulation in the U.S. requiring drug companies to set their prices at a certain level. It is completely within companies’ power to dictate the prices of an approved drug. The Food and Drug Administration (FDA) is barred from taking affordability into account when deliberating on whether or not to clear a medicine for the market — safety and efficacy are the sole elements under the agency’s purview.

As such, drug companies have carte blanche to raise prices on their key products year after year, even though the medicines aren’t actually achieving anything new. In fact, plenty of other firms, such as biotech giant Celgene, have been hiking prices on legacy products far beyond the rate of inflation this year.

Public and political outrage over such price hikes, which are par for the course in the industry, may on occasion nudge firms to retrench for fear of a PR headache. But as Pfizer’s own statement highlights, companies are very much in the driver’s seat when it comes to setting (or increasing) their list prices.

2. List prices aren’t the same as what patients pay

That brings us to another critical and oft-overlooked point about how drug prices work in the U.S: The list prices announced by companies are almost never what consumers pay. That’s not to say that list prices aren’t important — they are, as they have downstream effects for the rest of the industry and, ultimately, the consumer. But it does mean that squabbling over list prices doesn’t equate to a direct benefit or loss for the patients who need these medications.

Following the setting of a list price, drug companies engage in a complicated dance with pharmacy benefits managers (PBMs) and insurance companies. These overwhelmingly opaque negotiations are what eventually determine what a patient pays for his or her medicine at the point of sale. And, often times, as recent reporting has shown, the various middlemen up and down the pharmaceutical supply chain pocket the rebates they negotiate with drug makers without necessarily passing the savings onto consumers.

This is part of the reason pharma companies set high list prices in the first place — they know that they’ll have to engage in a war of attrition with PBMs and insurers to get their products covered at all in the first place. But Americans who are uninsured may easily be left out to dry and face the full brunt of a list price.

3. Big pharma companies are raising prices because their ROI stinks

Beyond the obvious profit motive in a relatively laissez-faire industry, why are big drug makers like Pfizer so keen on hiking prices despite the risk of major public blowback? Simply put, many drug makers are failing miserably at recouping their R&D costs.

Consider: The 12 largest large cap drug companies got just a 3.2% return on R&D in 2017, according to Deloitte. That’s a huge plunge from the 10.1% rate of return just eight years ago. And, when it comes to companies like Pfizer and Celgene, legacy products are rapidly losing patent protection and bleeding market share to far cheaper generics. That reality, in conjunction with lax regulations on the prices companies can set, incentivizes price hikes to make up for falling sales and the failure to create new blockbuster treatments.

At the end of the day, presidential call-outs may lead some companies, like Pfizer, to pause their price-hike strategies. But other than public shaming, they have few economic or regulatory incentives to change their behavior at large.

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