Using Profit Margins to Attack Pharma Is Not the Clear Win that Pharma Skeptics Think It Is

Confession: after a week of what feels like daily bombshells, I fear my brain is full. There’s plenty to talk about today that has gone under-recognized or under-analyzed, but there’s lots more I still want to explore and undoubtedly items I’ve let slide. 

I’m hoping tomorrow is a big catch-up day, so if you’ve seen something I’ve missed, please shout.

The biggest problem with states implementing pharmaceutical price controls is that it creates swirl and uncertainty in the market that could come to create access issues for patients who -- right now -- don’t struggle with access. 

The second-biggest problem is that it turns out that setting prices is, operationally, really hard to do. Prescription drugs are not easy, given both the complex value calculus and the existing supply chain and pricing dynamics. Say what you will about the IRA, but Congress knew this was a mammoth task, which is why $3 billion was appropriated to get the whole apparatus set up. 

State governments are not spending $3 billion, and the results reflect that. 

The latest instance of a state moving ahead half-cocked comes from Oregon.** The state’s prescription drug affordability board this week voted to move ahead with a report promoting the idea that they should be able to set “upper payment limits.” The draft report is here. 

You could probably choose any one of a dozen ways to argue that the whole effort is rushed, but I’ll look at just one: how do patients feel about the process? 

As it turns out, Oregon commissioned a report on that very topic, which is included in the agenda for the group’s August meeting (control-F for “Myers” to skip to it). It’s a masterwork of all of the outstanding questions from patients. It’s a roadmap of all of the boxes that ought to have been checked before the PDAB moved ahead with anything too wild. 

Naturally, no meaningful effort was made to check those boxes. It’s not clear that the patient concerns were fully appreciated, let alone addressed. And now the endeavor rushes headlong toward its probably predetermined -- but not particularly thoughtful -- future. 

** If you’re thinking, “Why does the Oregon PDAB ring a bell?”, it may be because the executive director went off on one of the more unhinged anti-pharma rants in recent memory, which ended with a suggestion that the state should diverse pharmaceutical companies stocks.

The latest broadside against the pharmaceutical industry comes from a new report from the Campaign for Sustainable Rx Pricing, which is also known by its only-slight-less-unweildly abbreviation: CSRxP.

Payer-supported CSRxP has dusted off an old chestnut, arguing that drug prices could be lower because the profit margins enjoyed by drug companies are so high compared with other parts of the health care system. 

This is an argument worth exploring, head-on. 

First off, the CSRxP “analysis” -- which was apparently enough to convince Politico to write about it -- is objectively threadbare when it comes to intellectual rigor. The “full analysis” is here, and I have zero idea exactly how profit margins were calculated or what companies were included in the analysis. 

There’s a lot of skeptical research on pharma published every day that’s backed by clear methodology, and it’s constructive to think about those results and where there may be truth and where there may be methodological flaws. CSRxP’s work is too thin to subject to that kind of scrutiny. 

That said, the overarching point is true: pharma profit margins are higher than other industries in health care. The question is why. CSRxP says it’s because drugs are too expensive.

The truth is more boring. 

Profit margins have to be higher in pharma because drug companies take a lot of risk, and the profits are the reward for taking that kind of risk. You all know the stats: hardly any medicines make it from Phase 1 testing all the way to approval, and the number of meds that end up as commercial failures even after surviving that gauntlet is a lot higher than appreciated.

Go ask the folks at Bluebird -- scientific pioneers with three gene therapies on the market -- what their profit margin looks like. Risk abounds. The possibility of profits offsets that risk. 

And once you’re on the market, companies have to make hay while the sun shines. Loss of exclusivity forever looms over even the most successful biopharma. Health insurers don’t operate under the same, constant threat.  

If you compare pharma to a lot of other innovation-driven businesses, you’ll find similarly high profit margins. CSRxP makes much of its conclusion that pharma has a profit margin of almost 23% between 2017 and 2023, but fails to note that the figure is below the margin enjoyed by, say, Apple or Facebook. 

When was the last time you saw a public pressure campaign around Airpod prices? 

And there’s data to suggest that profit margins are trending down. CSRxP’s own data shows that the industry’s margin was only 19% last year. That is, with the exception of the COVID year, the lowest figure recorded over the seven years that CSRxP examined. Other research has noted that the period between 2014 and 2018 showed falling margins as compared with the first decade of so of the millennium. 

That’s not to say that pharma companies are operating on razor-thin margins, only that they’re working in a hugely fraught environment. That -- and not drug prices -- is why margins are high.

• This is a really good STAT look at why and how tariffs are likely to miss the pharmaceutical industry. 

• Here’s a somewhat novel take on Robert Kennedy, from George Mason economics prof Tyler Cowen: Kennedy has a lot of disdain for interventions that are clearly, economically high-value (think vaccines), which suggest that he may not make very good decisions about reimbursement issues. 

• I feel like I’ll need to go at this harder because the top-line findings align with some of my firmly held worldviews: the Commonwealth Fund has a detailed look at the state of insurance coverage for working-age adults, finding that a huge number of Americans -- 23% -- have insurance coverage that doesn’t do what insurance is support to do: provide affordable access to health care.

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