The drug crisis
By Marcel Côté
In 2004, Canadians spent about $22 billion on medication. According to research firm IMS Health, the cost of prescription drugs sold in Canada rose by 14% a year from 1997 to 2003. If the trend continues, in six years’ time prescription drugs will account for 20% of Canada’s healthcare spending — compared with 16% today.
This hike is primarily due to growing drug consumption and, to a lesser extent, the use of more expensive drugs. The price of prescription drugs has remained stable, but Canadians are taking more, consuming newer, pricier products.
Pharmacopoeia has come a long way since 1928 and the discovery of penicillin, the first of the great modern drugs. Today, all well-known diseases are systematically targeted by biopharmaceutical research. Drugs have fundamentally changed society and significantly reduced hospital time. They relieve symptoms of illness and allow the body to heal more rapidly. Increasingly, drugs attack causes of disease and decrease risk of serious illness.
Several factors contribute to increased usage of prescription drugs. Thanks to scientific breakthroughs, therapeutic horizons are opening up. The flurry of new drugs for cancer and cardiovascular problems illustrates this trend. The aging of the population is also a factor. In fact, most prescription drugs are consumed by the elderly, who rely on medication to counteract age-related physiological imbalances.
Lastly, the marketing efforts of pharmaceutical companies are a factor, although their real impact is probably exaggerated. Chronic disorders are the main reason for most drug expenditures and for the rising drug consumption. Three out of the five top sellers worldwide, Lipidor, Zocor and Novasc, are heart disease treatments the public seldom hears of.
What’s more, over-consumption of drugs is not as widespread as people think; in fact, under-consumption is probably more common as many patients don’t take their medication. Promoting the correct use of medication may not have any significant impact on overall consumption.
Half the prescription drugs sold are expensive, with gross margins in the 60% to 80% range. The other half are ge-neric and sold at lower margins. Their formulas are in the public domain and can be fabricated by any standard-compliant manufacturers. Patented drugs are another story. Their patents last only 20 years, and thus they are new drugs. Their price has nothing to do with their manufacturing costs. The revenue they generate funds all research carried out by phar-maceutical firms. Their price reflects their perceived value in the marketplace: the higher a drug’s value, the higher the price is likely to be set. In all countries, major buyers (such as governments and large insurers) work together to put downward pressure on prices, which accounts for considerable price differences from one country to the next. Prices are much lower in Canada than in the US because provincial and federal governments have been able to collaborate effectively and have significant monopolistic power as payers.
But someone has to foot the bill for pharmaceutical research. Drug development is a highly selective process. Only one molecule out of a thousand that enters the R&D pipe-line comes out as an approved drug. Any drug that reaches the marketplace has to cover the research costs for those that don’t, which significantly inflates the bill. What’s more, launching a new drug is expensive. Pharmaceutical firms usually only have 12 patent years to make a drug pay. That’s why it’s in their interest to get it on the market quickly and promote it intensely, two factors that add to its cost.
As a consultant for governments and pharmaceutical firms, I have been asked what’s the solution. What sur-prises me is how hard it is to get stakeholders to pay their fair share of a drug’s develop-ment. Currently, the US pays most of the R&D costs. This cannot last. Other industrialized countries will have to achieve price convergence regarding new drugs. This does not auger well for Canadians, who are not paying their share.
However, the issue remains the growth in drug consumption, at rates significantly higher than the GDP. For governments, which defray about a quarter of medication costs in Canada, this creates serious budget problems as they have to reallocate funds to deal with it.
But what can be expected? More resources are devoted to new technologies everywhere in the economy. Information systems expenditures are increasing much faster than the GDP and no one is making an issue of it. Why shouldn’t it be the same for drugs?
Marcel Côté is a partner at SECOR Inc. in Montreal |
