Pharma Companies: A Conglomerate Of Monopolies

Virtual monopolies exist in almost every healthcare sector: from hospitals and health systems to medical groups and single specialties backed by private equity. With so much consolidation of power and influence, U.S. healthcare has become a conglomerate of monopolies; the subject of this continuing series.

When it comes to claiming market control, pharmaceutical companies stand apart from healthcare’s other monopolies.

Whereas hospitals and health systems rely primarily on mergers and acquisitions, drug companies employ a slew of powerful tactics: from legislative protections and legal loopholes to stonewalling would-be competitors and more.

But there is one thing that unites all healthcare monopolies: As their powers expand, they become complacent. And when that happens, innovation dies and Americans pay the price, both with their wallets and their health.

Exorbitant vs. unfair pricing

The rising price of prescription drugs has sparked outrage for more than a decade. That’s largely because medications aren’t like other expensive products.

Take a $250,00 sports car or a $20,000 handbag. Both are exorbitantly priced. Meaning, these retail prices far exceed the cost of production. At the same time, if people are willing to pay—despite a near-endless array of less-expensive options—then these prices are market driven and, therefore, fair.

By contrast, monopolistic pricing in healthcare is both excessive and unfair, leaving millions of patients with only one choice: pay up or suffer. Drug companies know that’s not really a choice, and they take full advantage.

Last year, Americans paid $460 billion for prescription drugs, accounting for 16.7% of all healthcare expenditures.

But don’t assume that the large (and ever-rising) price tag for U.S. medications reflects massive improvements in drug efficacy.

When the Institute for Clinical and Economic Review (ICER) studied price increases for some of the most expensive drugs, it found 70% of those increases (accounting for $805 million) were unsupported by clinical evidence.

To explain why drug prices are rising rapidly while drug innovation lags, it’s helpful to look at how biopharmaceutical research and development (R&D) has changed.

The golden era of drug R&D

In the 20th century, pharmaceutical manufacturers made massive R&D investments in a collective quest to discover the next generation of lifesaving medications.

Among those innovations were birth control pills, which received FDA approval in 1960 and have reduced maternal mortality worldwide by nearly a third. Similarly, statins, which were patented in 1985, have cut the risk of heart attack and death from heart disease by a quarter. The HIV/AIDS treatment zidovudine (better known as AZT), introduced in 1989, has saved millions of life years.

These and other 20th-century advances were accomplished through a grueling, expensive and risky R&D process—an approach that remained the industry standard for decades. Back then, drug company CEOs understood that R&D costs were high and the risk of failure higher still.

But they also knew that success would save millions of lives—and prove profitable, too.

The downfall of drug innovation

Yesterday’s model of drug development is a rarity nowadays.

In the 21st century, most drug companies have replaced moonshots with chip shots: strategies aimed at minimizing risk. Rather than chasing the elusive game-changing drug, today’s biopharma giants focus on monetizing easy wins.

In fact, a recent report found 9 in 10 major drug companies spend less on R&D than on marketing and sales.

Even Covid-19 vaccines—the most celebrated innovation of the 21st century—were brought to market with minimal risk to drug makers. The federal government underwrote most of the development costs through decades of NIH-funded research and it unburdened participating companies by fronting $18 billion as part of “Operation Warp Speed.”

Drug innovations of the 20th century contributed mightily to longevity gains, adding nearly 30 years to the average American’s life between 1900 and 2000. In this century, however, drug companies have gotten comfortable. And as complacency set in, drug innovation eroded. Unsurprisingly, U.S. life expectancy has remained relatively unchanged for the past two decades.

But even as the impact of new drugs stalled, spending accelerated. In 2022, the median price for a new FDA-approved medication surpassed $220,000 with the average list price for more than 1,200 prescription drugs rising nearly 32% from July 2021 to July 2022.

The pharmaceutical industry understands there are two keys to ensuring profits: minimizing risk while driving prices skyward. To accomplish that, they’ve mastered a series of useful tactics. Here are four:

1. Purchase new rights to old drugs

Many long-established medications are now sold as generics. Most of those are manufactured by a single, small company for modest profits.

But many mid- to large-sized drug manufacturers have begun to purchase the rights to these generics, using their market powers to hike the price and keep the added revenue as profit.

That’s exactly what Nostrum Laboratories did with nitrofurantoin, first created in 1953 to treat bladder infections. Nirmal Mulye, CEO of Nostrum Laboratories, bought the rights and raised the medication’s price 400% without any additional R&D investments.

When asked about the price increase, Mulye told the Financial Times: “I think it’s a moral requirement to make money when you can … to sell the product for the highest price.”

That self-serving mindset has become standard in the pharmaceutical industry today.

2. Buy a guaranteed future winner

Rather than pursuing a generic drug, large drug manufacturers frequently purchase rights to new drugs from small startups.

These drugs are almost ready for clinical use. All that’s missing is funding to complete the FDA-mandated clinical trials—a pricey process most startups can’t afford. Drug giants are happy to step in because they know that market success is all but guaranteed, and they can price the medication exorbitantly high once the FDA approves it.

Sofosbuvir, a drug used to treat Hepatitis C, is a telltale example. It’s owner, Gilead Sciences, reportedly paid $11 billion to acquire the rights from a small company named Pharmasset. But rather than pricing a course of treatment at $33,000, as Pharmasset had planned, Gilead charged $100,000 per patient.

Monopolistic pricing allowed the company to recoup its investment in less than 18 months with $200 billion in projected revenue over the drug’s lifespan—nearly a 2,000% return on investment.

3. Exploit patent and drug-approval laws

U.S. patents are designed to reward entrepreneurs and industries willing to invest huge sums of time and money toward creating something new and valuable. Those same laws have been contorted in recent decades by the drug industry, which uses them to manufacture marketing opportunities for medications that add minimal clinical value.

Consider the cost-benefit of chemotherapy agents. In the 21st century, the FDA has approved more than 90 new oncology drugs. Last year, 6 of 8 newly launched cancer drugs had prices over $200,000 per year. Compare that cost with the average gain in life expectancy for patients with cancer: a mere 73 days. Much of that time is spent in pain, dealing with debilitating side effects while being isolated from loved ones.

Many of today’s high-priced drugs are fast-tracked through the FDA’s accelerated approval program, which doesn’t require measurable clinical improvement in outcomes—only the possibility that they might add value. Half the time, the drugs approved through this process prove useless for the patient (but highly profitable for the companies selling them).

And regardless of how companies obtain approval or how ineffective the drug is, when patents are set to expire, manufactures extend monopolistic control and high pricing through legal suits, minor molecular modifications, and various “pay for delay” schemes with potential competitors.

All of these paths are legal. All of them protect monopolistic pricing.

4. Lobby to preserve favorable U.S. laws

Drugs sold in Europe—even ones invented and manufactured in the United States—cost a third to half of what Americans pay for the same medications.

That’s because a 2003 “non-interference” law called the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) prohibits the federal government from negotiating drug prices. Congressional leaders during that time were influenced significantly by

campaign contributions and lobbying efforts. Health-sector spending on lobbying rose 70% from 2000 to 2020, accounting for more than $5 billion, driven mostly by pharmaceutical manufacturers.

In most European nations, prices are negotiated by the government based on a drug’s efficacy. A recent study by the National Academy of Medicine concluded that a similar “value-based drug pricing” program in the United States would reduce spending 11% to 37%.

Solving a uniquely American problem

Last August, Congress took a baby step toward limiting monopolistic drug pricing with the Inflation Reduction Act. Beginning in 2026, the Medicare program will be able to negotiate prices for about 20 common medications.

However, the new policy won’t make much of a dent in the price of pharmaceuticals. Drug companies, aware that restraints are coming, have already raised the prices for more than 350 highly profitable prescription medications. They argue that high prices for drugs are necessary to fund research and development for the next generation of breakthrough medications.

Yet independent analysis shows that adopting the European model would eliminate only 1% of all future drug development in the U.S. Moreover, tying prices to medical outcomes would incentivize U.S. companies to focus on researching and developing drugs with the greatest clinical value, potentially improving U.S. life-expectancy once again.

Whether in the hospital or pharmaceutical industries, monopolies harm patients. The next article in the series will examine what happened when doctors joined the party.