Marshall Brain's Blog

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Drug Prices

An article in the Washington Post called U.S. Prescription Drug System Under Attack contains this interesting fact about the prescription drug system in the United States:

"Between 1994 and 2001, the number of prescriptions swelled to 3.1 billion -- a nearly 50 percent increase. In nearly the same period, sales soared from $61 billion to $155 billion."

There are about 100 million households in America. That means that each household uses, on average, 31 prescriptions per year and spends approximately $1,550 to buy them. The average cost of a prescription, therefore, is $50.

It is interesting that the number of prescriptions is up 50% in just 7 years, while revenue is up by 150% during the same period of time.

According to the article:

"Three Fortune 500 companies -- Cardinal Health Inc. of Dublin, Ohio; McKesson Corp. of San Francisco; and AmerisourceBergen of Chesterbrook, Pa. -- dominate the drug wholesaling industry, with combined annual revenue of $146 billion. They are known in the business as the Big Three."

About 94% of all pharmaceutical revenue flows through these three companies -- they have a virtual lock on the marketplace. One of the problems discussed in the article is the fact that the Big Three are purchasing diverted drugs (which have been stored and transported improperly) or counterfeit drugs from suppliers other than the pharmaceutical companies.

You would like to believe that if a) we could get the Big Three to stop buying from diverters and counterfeiters and buy only from manufacturers, and if b) we could get pharmacies to buy only from the Big Three (which already happens 94% of the time), then the entire problem with counterfeit and diverted drugs would evaporate.

Once counterfeiting and diversion are solved, then the next hurdle is pricing. Anyone who has been watching the Canadian drug importing stories knows that there is a gigantic difference in price for American drugs purchased in Canada. This article states that, "Canada's system of price controls sets drug costs as much as 50 percent below American retail prices." Now that Americans are importing half-price drugs from Canada in large numbers, people are starting to notice.

According to this article, Merck, "the maker of Zocor, Vioxx and Singulair already pays shareholders 2.4% annually, or $1.44 per share. Merck has raised its dividend 16 years in a row, and is likely to keep doing so, given its strong financials." Of course Merck has strong financials -- pharmaceutical revenue is up 150% in 7 years while prescritions are up only 50%. Merck is paying $3.2 billion per year in dividends right now. In other words, about $32 flows out of every American household every year to pay dividends to Merck's shareholders. The five largest drug companies in America pay over $10 billion in dividends, or $100 per household.

• Merck paid over $3 billion in dividends in 2002
  
• Pfizer paid over $3 billion in dividends in 2002
  
• Bristol-Myers Squibb paid over $2 billion in dividends in 2002
  
• Abbott Laboratories paid almost $1.5 billion in dividends in 2002
  
• Schering-Plough paid over $1 billion in dividends in 2002 [ref]

For comparison, Wal-Mart is the largest company in America -- about 5 times bigger than Merck and much bigger than the top five drug companies combined -- and pays only $1.3 billion in dividends.