Pharma CEOs Grapple With Huge R&D Costs

It’s not easy being a pharma CEO. The industry is currently taking a PR beating for raising the prices of its drugs, and not just for new medicines, but also ones that have been in the market for decades. But pharma CEOs counter that it’s increasingly tough to cover R&D expenses, though they are finding other ways to mitigate costs, including slashing other types of expenses and buying competitors.

The topic busted out in the open when Turing Pharmaceuticals CEO Martin Shkreli last month hiked the price of 62-year-old Daraprim—a drug commonly used to treat patients with AIDS, cancer, and malaria—by about 5,445%.

In the face of mounting criticism, including from presidential candidates on both sides of the aisle, Turing eventually pushed the price down from $750 per pill to an undisclosed amount. (Business Insider)

“Many investors think drug R&D is a worse financial investment than an index fund.”

Branded drug prices have risen 15.7% over the past year, and specialty drugs have increased 9.43%, said Stephany Verstraete, general manager at Truveris, a New York-based drug pricing and benefits analytics company.

Prices on a good amount of generic drugs are also rising again, according to a May report by the AARP Public Policy Institute. While 73% of generic medications declined in price in 2013, 27% percent of them rose. The costs skyrocketed among some commonly used drugs such as doxycycline hyclate, an antibiotic, which rose steeply from $20 for 500 100-milligram capsules in October, 2013 to $1,849 in April 2014. A cholesterol medication, Pravastatin sodium, climbed sharply from $27 to $196 for a one-year supply of 10-milligram tablets. (Daily Finance)

Pharma CEOs like Pfizer’s Ian Read contend the industry doesn’t make as huge a profit from drug sales as many outsiders may think—largely because the costs it takes to develop drugs and bring them to market is so huge. From 1997 to 2011, the New York City company spent $7.7 billion on R&D for every new drug that reached the market, Read told .

“Many investors think drug R&D is a worse financial investment than an index fund,” Forbes wrote.

Pfizer has been finding many ways to offset the costs, including raising prices on its existing drugs. Over the past three years, the company has increased the net price of Viagra by 57%, of Lyrica (for chronic pain) by 51% and of hormone replacement therapy Premarin by 41%, according to SSR. Pfizer is not alone, either. AbbVie got 112% of its revenue growth from price increases and Bristol-Myers Squibb, 47%.

But Read has also spearheaded a number of other initiatives since replacing Jeffrey Kindler as CEO in 2010. The company cut head count from 130,000 to a low of 80,000 at the beginning of this year, raised $32 billion by selling off extraneous divisions and got seven drugs approved after fixing the company’s R&D operation (it had spent $40 billion over five years to produce just four drugs, which today have combined annual sales of about $2 billion).

This is on top of trying to expand revenues through earlier acquisitions of competitors, including Pfizer’s $110 billion purchase of Warner-Lambert in 2000, its $60 billion purchase of Pharmacia in 2003, and its $68 billion purchase of Wyeth in 2009.

Last year Read tried to make his own megabid, offering $100 billion for London’s AstraZeneca in a hostile deal. But lawmakers and other critics balked at the attempted inversion to avoid paying more taxes, and Read walked.

Now, Read and the board are deciding whether to split Pfizer in two, separating new drugs from older ones (like Lipitor) that have lost patent protection but still generate billions of dollars in sales. Investors could choose risky, fast growth or safer, steady sales. A decision is expected by the end of 2016.



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