Drugmakers Find Competition Doesn’t Keep a Lid on Prices
Makers of Viagra, Cialis show how rivals tend to raise prices in tandem, a reason for the surge in U.S. prescription-drug spending
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Pfizer Inc. raised the list price of Viagra by 13% in June. Less than a week later, Eli Lilly & Co. pushed up the price of its competing pill Cialis by the same percentage.
The two companies, though rivals, followed a common industry practice: raising prices almost in lockstep. For years, Pfizer and Lilly have taken increases on their erectile-dysfunction drugs within weeks of each other—sometimes even on the same day—keeping the list price of each pill within a few dollars.
The practice highlights what many see as a big problem in the drug industry: Even when there is competition, prices can continue to climb. That is because patients tend to stick with a drug that works for them, and health insurers and drug-benefit managers sometimes have contracts for drugs that prevent switching to cheaper options.
“You’re not rewarded for having a low price and for the most part, the market doesn’t punish a high price,” says Mick Kolassa, who has advised pharmaceutical makers and government health-care programs on pricing.
The freedom to raise, rather than slash, prices in the face of competition is a big reason why U.S. prescription-drug spending has surged by close to 10% on average annually in recent years to $310 billion in 2015, according to QuintilesIMS Institute for Healthcare Informatics.
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A common six-pill prescription of Viagra or Cialis lists for around $300 today—more than double the price five years ago, according to wholesale acquisition-cost data supplied by Connecture.
Pfizer and Lilly say the publicly disclosed list prices don’t indicate the true cost because the companies give insurers and employers confidential discounts. They also say they offer financial assistance to some patients who lack insurance or can’t afford their out-of-pocket costs.
Tandem drug-price increases for other ailments have prompted lawmakers to call for investigations into potential collusion. This month, Sen. Bernie Sanders (I., Vt) and Rep. Elijah Cummings (D., Md.) wrote the Justice Department and Federal Trade Commission requesting an investigation of whether insulin makers “have colluded or engaged in anticompetitive behavior” in setting prices.
“Not only have these pharmaceutical companies raised prices significantly—sometimes by double digits overnight—in many instances the prices have apparently increased in tandem,” the pair wrote. The FTC and Justice Department declined to comment.
Among the insulins singled out in the letter were Lantus from Sanofi SA and Levemir from Novo Nordisk A/S. Until Novo raised Levemir’s price last year, each of the drugs listed for $372.75 a month—about 2½ times their sticker price five years earlier—after a series of lockstep increases, according to Connecture. Lantus’s list price has held steady since November 2014; Levemir now retails for $403.50 a month.
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Sanofi says it follows all laws, and that Lantus costs insurance plans less than it did five years ago after “aggressive” discounts. Novo says it sets prices independently and “competitively negotiates” discounts with insurers and drug-benefit managers.
Tandem increases can be perfectly legal, so long as companies don’t confer with each other, says Herbert Hovenkamp, a University of Iowa law professor who wrote a reference book on antitrust law.
Pfizer and Lilly said they act independently when raising prices. “We do not consult other pharmaceutical companies or other competitors on the price of medicines,” a Lilly spokesman said. Both companies said they consider many factors when setting prices, including the price of competing products and the value of their medicines.
In compliance training, companies tell employees not to discuss pricing with rivals. But when it comes to drugs, list prices are public.
Companies just watch a competitor increase a price and then “take a similar one,” says Richard Evans, a former pricing official at Roche Holding AG’s U.S. pharmaceuticals business who is now an analyst for SSR Health LLC.
“Any profit-optimizing company is going to want to get as much price as they can get,” Mr. Evans says. According to an SSR analysis, Viagra and Cialis now net their makers about twice as much after discounts as the pills did five years ago.
Criticism of high drug prices appears to be curbing increases for expensive drugs treating certain diseases, including rheumatoid arthritis.
But the industry retains strong pricing power in many key areas.
When the blood-thinner Eliquis went on sale in 2013, Pfizer and partner Bristol-Myers Squibb Co. priced a day’s supply of the tablet one cent less than rival Xarelto. Since then, the drugs have risen in price five times, by a total 44% each. A month’s treatment of either costs $360.
Pfizer says drug prices reflect market dynamics and the need for research spending, and eventually decline when lower-priced generics go on sale. Bristol says list prices don’t reflect the discounts it negotiates. Johnson & Johnson, Xarelto’s seller in the U.S., declined to comment.
In the $3.3 billion U.S. male-impotence-drug market, several pills compete. But Viagra and Cialis account for most of the sales, according to prescription data from IMS Health.
On Jan. 1, 2013, Pfizer raised the list price for a maximum dose of Viagra by 9.4% to $24.37 a tablet, while Lilly on the same day raised the sticker price of the highest-dose Cialis pill by the same percentage to $26.52. Then on July 1, Pfizer raised prices by 9.4%, and Lilly by 9.5% the next day.
Since 2013, Pfizer and Lilly have been increasing list prices around twice yearly. This year, Pfizer has taken two 13% increases, lifting the highest dose of Viagra to $48.28 a tablet. After its June increase, Cialis’s maximum dose retails for $51.74 a tablet.
Write to Jonathan D. Rockoff at [email protected]