Presidential candidate and Democratic party front-runner Hillary Clinton’s comments on the prohibitive costs of certain medications have recently drawn much attention. Most of these exorbitant prices have been attributed to new launches or sudden price hikes. However, a new study by the Wall Street Journal shows that higher revenue generated by pharma companies is primarily attributable to a series of price increases.
In fact, companies exert pricing power to such a degree that even falling demand can be countered. Several other factors are responsible for such price increases besides patent protection. This is why pharma companies are likely to gain from this phenomenon even in the future and it may be a good idea to add such stocks to your portfolio.
Higher Prices Negate Falling Demand
The study covered 30 of the top selling prescription drugs using financial statements and prescription data from IMS Health Holdings, Inc. (IMS – Snapshot Report) and wholesale prices from Truven Health Analytics. The period covered stretched from the beginning of 2010 to the end of last year.
The key finding was that growth in revenues had clearly beaten demand levels during this five year period. Average revenue growth came in at 61%, nearly three times higher than the growth in prescriptions. This was primarily achieved by a series of price increases.
Overall, wholesale prices have increased 76% over the five year period covered by the study. This is eight times higher than inflation levels. Of the 30 drugs covered, 18 have experienced increases in both prescriptions and revenue. But in each case, revenue has increased at a significantly faster pace than prescriptions. In fact, 10 drugs have generated revenue increases even though demand has fallen.
For instance, the price of Novartis AG’s (NVS – Analyst Report) Gleevec experienced a 2% increase in prescriptions over the period. However, the wholesale price increased by more than 100%. Consequently, revenues from Gleevec increased 69% in the 2010-14 period.