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GlaxoSmithKline plc Message Board

  • tek727 tek727 Apr 10, 2003 4:30 PM Flag

    Industry Outlook

    The major drug companies and the FDA have built a great system to preserve jobs and line the pockets of the companies. Unfortunately, America can no longer afford to support this bloated model.

    In the last 20 years I lived through the commoditization of personal computers. From IBM PCs being sold only through �authorized dealers� with �medallions� and grey marketers being chased....through distribution by mass merchandisers�through telemarketing and the internet�and finally Costco and WalMart. The bottom line is economic reality and free market pressure pushed the cost of products down and widely increased the availability.

    The drug industry is going to go through this cycle now. It should be generally accepted by now that Americans pay about twice as much for medication as citizens of other countries. This is supported by a Princeton study of Britain, France, Germany, Canada and Japan without even looking at the areas of the great unwashed.

    So it begs the question �who�s making all the money?� Well, for those of you who don�t know, here are a few facts. It�s not the retailers in the US. Information gathered from the 10-Ks filed with the SEC by five major retailers yield the following after tax net profit %: Walgreen 3.6%, CVS 3.0%, RiteAid -5%, Longs 1.1%, and -20%. It�s not the distributors; McKesson and AmerisourceBergen both registered after tax net profit % of .8%

    Well, it truly is the major drug manufacturers. Following is the after tax net profit % for the seven largest: Pfizer 15.2%, JNJ 15.0%, Merck 16.6%, GSK 19.3%, Novartis 18.2%, Lilly 26.4% and AstraZeneca 12.9% The average is 17.7%

    Now if you back out taxes and recognize that a far higher gross margin is made in the US, it is probably reasonable to postulate that the drug companies achieve a 40% operating margin in the US.

    In a period of mushrooming Federal and state deficits, a war tax, a -5% current account balance, rising unemployment and other negative economic indicators, this price gouging will not be tolerated. Whether it�s opening the gates at the borders (reimportation), relaxing the approval processes, changing patent laws, reclassifying many drugs to non-prescription (am I gonna overdose on Nexium, screw myself to death on Viagra?) or other fundamental changes, the wall of frustration over health care costs is rising behind the dam built by the drug companies and the FDA. Maybe it will seep through the cracks (such as reimportation) or it will break through and sweep away everything in its path.

    In any event the major drug business is at its apex now, expect nothing but a downhill slide from here.

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    • <And how juvenile of those hundreds of thousands of people who are buying prescriptions from Canada because they think they're getting the same damn thing for about 40% less.>

      First they may "think" they are getting the same thing but in many cases they are not.

      More important, these studies don't say that there are no drugs that are cheaper in Canada it says that "on average" the drugs are not cheaper. That means some are more expensive, some are less.

      Most important, the studies say that the price differentials aren't explained by the fact the Canadian government controls prices. Factors that have a signficant impact include differences in standard of living, liability laws, distribution networks, and perscription practices, among others.

    • juvenile of me.

      And how juvenile of those hundreds of thousands of people who are buying prescriptions from Canada because they think they're getting the same damn thing for about 40% less.

      If we would just listen to you, pdci and the Wharton economists (the best that money can buy), we would understand the folly of our ways and ask the FDA to redouble their efforts to protect us from ourselves.

      You say an industry where the top seven companies having a combined market value of $860 Billion came up with a study says you shouldn't buy from shit!

    • <Adds to the cost of many products and services. >

      So that being the case. If the law says drugs sold to Canada can't come back to the US, wouldn't the company then put a lower 'liability" premium on the product sold to Canada? Wouldn't it also be justified to bark if that Canadian product (for which they weren't getting a liability premium) came back into the US where there is a higher liability?

      Auto insurance is cheaper in Montana than New York city but you can't buy your insurance at Montana rates and do all your driving in NYC.

    • < think the USFSS is significantly higher than the formulary prices. I have a spreadsheet >

      As all these studies have pointed out, such naive comparisons cannot be made because of differences in formulation, doses etc. Why do you think your 15 minute analysis is better than a Wharton economist, doctors and independent researcy organizations that have put hundreds of hours into preparing their studies?

    • tek and tech,

      At least you two are going at it sanely and coherently. It's nice not to even see crosales name for a few days.

    • Tort reform in this country is certainly a valid issue. Adds to the cost of many products and services.

    • I think the USFSS is significantly higher than the formulary prices. I have a spreadsheet of the USFSS pricing and a link to the Saskatchewan formulary. My quick anlysis of two drugs showed USFSS pricing about 25% higher than the formulary pricing.

      Not conclusive certainly but I think pricing in this country, even to the US government, is significantly higher than Canada formulary.

    • By the way, you or Tune still haven't answered my question regarding liability. Canada limits pain and suffering awards to a maximum of $260,000. In the US some of these awards have run into the billions.

      Might this liability differential justify increase the price in the US relative to Canada? Might it also be the reason why companies are willing to sell some drugs in Canada at lower prices? Isn't is also a possible reason why the companies want the US to inforce anti-reimportation laws?

    • <that's what the consumer pays in Canada>

      Thats right. End prices are never as low as the formulary price. The formulary price is the loswest possible wholesale price. Similarly the US Government price represents a price equal to what other high volume wholesalers (the source of the vast majority of the drugs) in the US pay.

      In otherwords these metrics are quite comparable (and consistent with the other studies I cited).

    • I know the canadian distribution system allows a markup on the drug plus a dispensing fee to be added to the formulary price...that's what the consumer pays in Canada.

      The US Government, buying at the FSS prices, then incurs its own costs for personnel to distribute and prescribe the medication.

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