While many measures suggest the biopharma industry has bounced back from an up-and-down 2016, that positive momentum disguises a still-shaky outlook which was noticeably rattled by critical comments from President Donald Trump in January.
His accusation that pharma companies were "getting away with murder" on drug pricing sunk investor confidence and spurred fears the industry could be facing major legislative changes.
Months later, however, very little has materialized as the administration’s time and energy has been sapped by other issues. Rather than a gathering push for major Congressional action, efforts at the federal level to address pricing are likely to be limited for now to smaller-bore executive actions paired with an empowered Food and Drug Administration, industry watchers say.
The picture is different in the halls of state legislatures, however, where a handful of states have taken up — and, in a few cases, passed — bills to rein in drugmakers’ pricing freedom. Other legislation aims to bring to light closely guarded details about drug costs, discounts and rebates.
State-level laws, however, have so far focused more narrowly on slices of the industry and are likely to face legal challenges.
Still, the magnitude of blowback on pricing over the past few years has already led the pharma industry to reevaluate its practices. A number of major drugmakers have taken steps to get ahead of criticism, indicating a growing recognition the broader business environment may have shifted — even without large-scale policy change.
In the opening months of the year, industry concern mounted as President Trump publicly called out drugmakers for "astronomical" prices.
In tweets and in early remarks, Trump appeared ready to support major policy shifts such as permitting the federal government to negotiate directly on the prices of drugs covered by Medicare.
Trump’s attacks on the industry ebbed as the year progressed, however. A draft executive order floated in June focused instead on reducing regulations and promoting ideas like value-based contracting, according to media reports. Several of the proposed steps in the order were recommendations pushed by pharma itself, suggesting a more industry-friendly stance on pricing from the administration.
On the Congressional front, rising costs remain an issue for many lawmakers. But a bruising fight to repeal and replace the Affordable Care Act, coupled with a busy slate of other priority items, has pushed back any consideration of pricing legislation.
"When you look at the legislative calendar for the remainder of the year, it is incredibly full," Daniel Esquibel, a Deloitte Advisory senior manager focused on life sciences, noted in a recent interview.
"I would say, while it is certainly not off the table entirely, it would be a very heavy lift to move legislation dealing with drug pricing [this year]," he explained, pointing to looming legislative deadlines for Congress in the fall.
Reauthorization of industry user fee agreements — seen as an opportunity to take up drug pricing issues — recently passed the Senate without any major amendments by a 94-1 vote. While the vote was hastened by a looming deadline, clean passage signals major pricing legislation is likely off the agenda for the near future.
States take up the slack
While action at the federal level has seemingly stalled, states across the country are moving quickly to pass legislation targeting drug manufacturers as well as service providers like pharmacy benefit managers.
"We had upwards of 90 bills introduced in state legislatures this year and a number of them have actually been enacted," said Jane Horvath, a senior policy fellow at the National Academy for State Health Policy (NASHP). "I expect next session that there will be more activity and a greater number of bills actually passing."
Under a 2016 law, Vermont will annually identify as many as 15 state-purchased prescription drugs that have had list price increases of 50% or more over the past five years, or by 15% over the past year. Drugmakers then need to provide justification for the increase in price.
The flurry of activity hasn’t gone unnoticed by industry, which spent more than one hundred million dollars to help defeat a high-profile ballot initiative in California last year. Known as Prop 61, the shot-down proposal would have prevented state agencies from purchasing drugs at prices higher than the discounted price paid by the U.S. Department of Veterans Affairs.
Pharma may have notched a win there — with the proposal voted down 53.2% to 46.8% — but the broader trend of states going after drug pricing has only grown stronger this year.
Looking to Maryland
In Maryland, for instance, a bill was recently enacted that empowers the state Attorney General to require generic drugmakers submit information on the cost of certain drugs when prices have risen beyond specified amounts. If the price increase is determined to be "excessive," the state can petition circuit courts to impose civil penalties or claw back revenues earned from the higher price.
Maryland Governor Larry Hogan didn't sign HB 631, but by choosing not to veto the legislation Maryland became the latest state to enact a law aimed at tackling rising drug prices. The act empowers the state Attorney General to take limited action against "price gouging."
The Association for Accessible Medicines (AAM), formerly known as GPhA, promptly sued to block the law from taking effect. The trade association challenged the law’s "unconstitutionally vague" language and for overstepping the state’s jurisdiction to regulate pricing.
AAM’s suit is representative of the kinds of legal challenges pricing laws will likely face. Any attempt by states to directly regulate the price of drugs could run afoul of prohibitions against regulating interstate commerce. And taking aim at "excessive" increases or "price gouging" invites counterclaims of overreach on loosely defined grounds.
NASHP’s Horvath argues, however, that Maryland’s law was smartly designed by limiting its scope to only markets with three or fewer generic manufacturers.
"A lot of states are looking at the Maryland generic price gouging bill," Horvath said. "By looking at generics, they avoided a patent law challenge because they are not regulating the price of patented products."
Shining a light on prices
A raft of other laws either passed or under consideration aim to make pharmaceutical pricing more transparent.
The industry has long argued that looking solely at the list price, or wholesale acquisition cost, of any given drug is misleading, because it doesn’t take into account any rebates or discounts negotiated with payers. Pharmacy benefit managers, negotiating on behalf of insurers, keep that information under lock and key.
This makes assessing the true net cost of drugs difficult. It has also raised questions around how much of those discounts and rebates PBMs and insurers are actually passing on to reduce patient costs.
The resulting opaqueness has hindered efforts to find a straightforward solution for rising prices and sparked an expensive game of finger-pointing between the pharma industry and PBMs.
According to NASHP data, there are 23 bills, many aimed at providing greater transparency, under consideration across 15 states that would regulate PBMs. Even more — a total of 62 bills across 26 states — aim to do the same for the drug manufacturers themselves.
Take Nevada. After some back-and-forth, Governor Brian Sandoval signed into law legislation that requires the state health department to list diabetes medications deemed essential, making note of any with a percentage price increase exceeding the rate of medical care inflation over the past year (or twice the rate over the past two years).
In June, Nevada enacted SB 539, a bill designed to boost transparency around the pricing of prescription drugs for diabetes. Under the act, drugmakers and PBMs are required to report information about certain medications and the sales representatives who sell those drugs.
Manufacturers with drugs on the list then have to report a considerable amount of information, such as the costs of producing the drug, marketing expenditures related to the drug, profit margins and the aggregate amount of all rebates provided to PBMs for sales of the drug within the state.
PBMs face further scrutiny, too. Under the law, the middlemen are required to disclose to the government the total amount of rebates negotiated during the prior year for drugs included on the list and the total amount of all rebates for those drugs that were retained by the PBM.
Transparency laws have little in the way of monetary teeth. The Nevada law, for example, only provides for administrative penalties in the event of a company not submitting information. But such legislation can lay the ground work for later regulation.
"There is a slippery slope from transparency to price reduction."
Principal, Pharmaceuticals and Life Sciences group, PwC
"The transparency piece isn't price reduction but it is the precursor to price reduction," explained Karla Anderson, a principal covering pharma and life sciences at PwC. "There is a slippery slope from transparency to price reduction."
2017 has already been an active year for state legislation on drug pricing. Yet, there is likely more to come. State officials in Ohio recently approved the inclusion of an initiative with strong similarities to California’s Prop 61 in November’s ballot. Known as the Ohio Drug Price Relief Act, the measure poses a similar challenge to the pharma industry and speaks to the continued exposure drugmakers have at the state level.
Can pharma police itself?
For all that momentum, state-level laws so far are a piecemeal response that the industry can adapt to, particularly in the absence of major changes at the federal level. Without a strong push from Congress and the White House, pharma may see reputational concerns and growing payer power as larger threats on the pricing front than regulation.
Yet, the context around pricing has shifted, and there were signs across the past few years that criticism has begun to affect company strategy.
"The conceptual change and the political pressure, whether or not enacted through law, is already starting to impact standard practice," Susan Garfield, a principal at EY, said in an interview. "I think it has raised awareness at the highest levels of industry that pricing practices of the past are probably not sustainable."
Allergan has led the charge in this regard, and CEO Brent Saunders has been outspoken about the need for the industry to police itself.
"The election may give the industry time to demonstrate that it can self-govern."
CEO, Allergan plc
"The election may give the industry time to demonstrate that it can self-govern," Saunders wrote in a blog post after President Trump’s electoral victory. "Our industry must not pretend that everything is fine because the cost of medicines may not be priority number one for the Trump Administration," he continued.
Several months before that December post, Saunders had committed Allergan to limiting price increases on its products to single-digit percentages only once a year, disavowing price gouging.
Since then, Sanofi SA, Novo Nordisk A/S and AbbVie Inc. have also pledged to curb price hikes to varying degrees of strictness. And, in a move to back up claims that list price increases aren’t representative, Merck & Co., Johnson & Johnson and Eli Lilly & Co. have all rolled out new transparency measures.
Lilly, for example, said in March the total average discounts to list prices across its entire U.S. product portfolio had climbed to reach 50% in 2016, up from 28% in 2012.
By disclosing information on net prices and discounts, drugmakers are doubling down on highlighting the role of payers and PBMs in pricing — dispersing criticism across the entirety of the system. And restricting price increases to single-digits fuels the argument that price gouging is a story of Martin Shkreli, not of Pfizer, Inc.
Such actions, coupled with aggressive marketing efforts by the trade lobbies PhRMA and BIO to highlight drugmaker innovation, appears to have had some effect in muting federal pushback.
The risk the industry still runs, however, is that smaller changes build up over time, slowly changing the legal contours of the larger system.
Momentum in the states can bubble up to higher levels of lawmaking, where Congress won’t always be in the throes of a fiercely contested fight over healthcare.
And responsible pricing for big pharma may not be seen as such by the public, who are more exposed to out-of-pocket costs than in the past. Polls indicate most Americans, across party affiliation, support lowering the cost of prescription drugs.
"Change probably is going to happen and the degree to which [drugmakers] are part of crafting and finding that solution — that is the question of the day," says EY’s Garfield.