This $50 billion industry is cannibalizing the economy

Rob Kim/Getty Images For alice + olivia by Stacey Bendet

In the sluggish US economy, the goods-producing sector has been in decline since late 2014, but sales in its biggest sub-sector are booming: medicines.

Drugs are a physically small part of the goods-producing economy. But in terms of dollars, they’re the elephant in the room: According to the wholesales report by the Commerce Department, total drug sales by manufacturers to pharmacies, hospitals, and others in the distribution chain jumped 11.3% from a year ago (not seasonally adjusted) to $54.3 billion.

That was the largest of the wholesale categories in the report: larger than “Groceries” ($51.5 billion), “Electrical” ($45.0 billion),”Petroleum” ($43.4 billion), and Automotive ($36 billion). Drug sales accounted for 12.2% of total wholesales. For the last 12 months, it was 12.0%.

In May a year ago, manufacturers sold $48.8 billion in drugs, or 11.3% of total wholesales. In May 2014, drugs accounted for 9.4% of total wholesales. In May 2013, it was 9.1%. In May 2012, it was 8.8%.

You get the idea. Drug sales at the wholesale level account for an ever larger portion of total wholesales.

Total wholesales rose 0.3% in May year over year. Without the $5.5 billion increase in sales of drugs, total wholesales would have fallen 0.9% year-over-year.

Are Americans really consuming that much more in pharmaceutical products? Hardly: According to the Producer Price Index, prices charged by manufacturers of pharmaceutical products jumped 9.8% in May from a year ago.

So the Wall Street Journal reviewed corporate filings and conference-call transcripts of the 20 largest members of Big Pharma in the US and found that over two-thirds had attributed their sales increases in the first quarter at least in part to jacking up prices. Among them:

Pfizer disclosed that price increases (and in some cases, higher volume of prescriptions) pushed up revenues for nine drugs that together reached $2 billion in the US.

Biogen disclosed that its 15% year-over-year sales increase of multiple-sclerosis drug Tecfidera “was primarily due to price increases,” and sales of its other big drugs, Avonex and Tysabri, were also propped up by price increases.

Rob Kim/Getty Images For alice + olivia by Stacey Bendet

Amgen reported that global sales of anti-inflammatory drug Enbrel had soared 24% year-over-year to $1.39 billion, powered largely by a higher “net selling price.” According to Leerink Partners, cited by the WSJ, the company had jacked up its US list price of Enbrel by 28% in 2015. In July, it slapped on an additional 9.9% so that sales in 2016 would look better.

AbbVie managed to increase the net price of its anti-inflammatory drug Humira, including all rebates and discounts, by 18% in the US in 2015, which helped sales soar by 32% in the first quarter to $2.2 billion. Higher prescription volume (at these higher prices) accounted for the remainder.

Drug pricing is purposefully opaque and complex to the point where actual prices charged after all rebates and discounts remain difficult to track. There are ways to get some info, however. The WSJ:

But companies often describe in regulatory filings the factors behind product sales growth or declines, including the impact of net pricing, after all the rebates and discounts they give insurers and pharmacy-benefit managers are taken into account.

Drugmakers often tout these discounts off their list prices as evidence of a competitive marketplace where powerful health insurers check their pricing power. But drug companies’ financial disclosures show that net prices in many cases continue to rise, and boost revenue, despite these discounts.

“Companies are very fond of saying, ‘No, no, don’t pay any attention to list price increases,’” Geoffrey Porges, a Leerink analyst, told the WSJ. “The industry sort of hiding behind that is really a diversionary tactic.”

How do drugmakers get the power to raise prices like this, in a sluggish economy where competition is supposed to restrain price increases, and where many consumers, struggling to make ends meet and unable to pay for these higher prices, would normally kill demand when companies try to jack up prices?

The US health-care system, backed by patent laws, has consistently stifled competition. It encourages the formation of monopolistic structures via Big-Pharma takeovers funded by cheap credit and booming financial markets, in an environment where the consumer of those drugs often doesn’t pay for them directly, but where third parties, like insurance companies and state and federal agencies, pay for them.

Insurance companies have trouble saying no to consumers who need the drugs. In turn, they’re not in a strong negotiating position with the drugmakers. So they haggle over price the best they can, and then turn around and increase their premiums.

Drugmakers have figured this out. They’re in nirvana. They know they can get away with this in the US, though perhaps not in other countries.

Congress has steadfastly refused to take on this issue and crack down on the abuses, despite some rumblings here and there – thanks to the irresistible lobbying power of the pharmaceutical industry. And imbued with this kind of pricing power, drugmakers will continue to jack up prices until the last dime has been squeezed out of consumers and the economy.

But on paper, these soaring sales, based on soaring prices, look good for GDP that the government wants to tout. The price increases look good in the inflation figures that the Fed wants to tout. And investors are soaking up the money, unless a drug company crumbles under the weight of its own schemes, like Valeant. And so this remains one of the few booming sectors of the US economy though it comes at a great expense for the rest of the economy and consumers.

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