New York Times
POSTED: 1:30 a.m. HST, Aug 10, 2012
They are the staples of most dermatology practices: generic creams and ointments that treat everything from skin rashes to athlete’s foot to scabies. Many doctors prescribe the drugs without a second thought. But increasingly, some dermatologists say, patients are complaining about a recent, mysterious and rapid rise in price.
Take betamethasone dipropionate, a cream used to relieve itchy skin. In 2008, a tube cost $18.17. The medicine now costs $71.28, according to Red Book, which tracks wholesale drug prices. Permethrin cream, which kills scabies mites, cost $29.25 in 2008 but has jumped to $71.08 today.
The hefty price increases have stumped doctors and their patients. “It seems to me that something is going on, but I don’t have quantitative details,” said Dr. Steven R. Feldman, a professor of dermatology at Wake Forest Baptist Medical Center in Winston-Salem, N.C. “I wouldn’t have thought that these old-timey, generic drugs would be very costly.”
The added revenue from the higher prices has improved the bottom lines of the handful of companies that make such drugs, and has even figured into a contested buyout of one of the companies by an India-based drug maker, Sun Pharmaceuticals.
The phenomenon offers a window into the murky and often illogical world of drug pricing, where prices are not always driven by the usual rules of supply and demand. “In most markets, basic economics would say the lower the price, the higher the volume,” said Les Funtleyder, the health care fund manager for Poliwogg, a private equity and hedge fund. “But health care isn’t one of those standard markets.”
Other than pharmacy benefit managers, which manage prescription drug plans, few other players in the health care market make decisions based on cost, said Funtleyder. When doctors write a prescription, they often fail to consider the price of the drug. And since many patients have prescription drug coverage, they also often ignore the cost. The situation can create a lucrative opening for some companies, especially in a low-profile corner of the industry like dermatology, where price increases might not attract broader notice.
“You might have a lot of itchy people, but people can go around and manage OK,” Funtleyder said. “A rash is not a public health emergency.”
Even so, some doctors said the prices were unacceptable. “Patients complain about it at every office visit,” said Dr. Mark G. Lebwohl, chairman of the National Psoriasis Foundation’s medical board and of dermatology at Mount Sinai Medical Center in Manhattan. “I think it’s outrageous that the cost of a generic cream — or any cream — exceeds the cost of a doctor’s office visit.”
Most generic creams and ointments in the United States are made by three companies: Perrigo, Taro and Fougera, which was recently acquired by Sandoz, the generics division of Novartis. It is a specialized business, requiring both the right equipment and expertise. Before getting clearance to make a drug, the companies must demonstrate to the Food and Drug Administration that their creams are absorbed through the skin in the same quantities as the brand-name drugs, a more difficult task than proving that a generic pill is equivalent.
“It’s much more time-consuming and expensive to get these drugs approved,” said Brian Sheehy, managing partner of IsZo Capital, a minority shareholder in Taro, who said that increased scrutiny of manufacturing practices by the FDA had raised costs and forced some companies to stop making certain drugs. So even if prices increase, “it’s still not worth anyone’s time to supply the market.”
In all, the prices of more than a dozen generic dermatology drugs have increased significantly since 2010, according to the distributor Cardinal Health, which tracks price fluctuations in generic drugs. Express Scripts, the pharmacy benefit manager, found that total spending on dermatology drugs increased 18.2 percent in the first five months of 2012 over last year, driven mainly by the rising cost of individual prescriptions.
Jim Grossman, a public relations executive in New York, said he was surprised when Target recently asked him to pay about $24 for the nystatin and triamcinolone antifungal cream, made by Taro, that he has used on and off for years. The drug had been on Target’s list of generics that the store sells for $4.
“I can understand why the price might go up, but not go up six times all at once,” said Grossman. He added that Target allowed him to pay the $4 price when he complained.
James Kedrowski, the interim chief executive of Taro, said the company did its best to offer fair prices to customers. But, he said, pricing structures for many of its products had gotten so low that other drug makers “were dropping out because they couldn’t make any money at it.”
That’s not to say the companies aren’t reaping the benefits of the price increases. In a May earnings call, Perrigo’s chairman and chief executive, Joseph C. Papa, told investors that a “favorable pricing environment” in the company’s prescription drug business was a major reason prescription net sales increased last quarter by 84 percent. On Monday, Taro reported that net income for the previous quarter had increased to $62.9 million from $35.7 million last year, a 76 percent increase.
Perrigo and Sandoz declined to comment on pricing strategies. In a statement, however, Sandoz said “we believe that complex, difficult-to-make dermatology generics continue to offer great value to U.S. patients and payers.”
Whether the price increases will last is a matter of debate. Kedrowski said that in some cases prices were starting to drop again as competitors who had stopped making certain drugs saw opportunity and returned to the market. Until recently, Taro was the only producer of nystatin, he said, but now the company has four competitors. The price of the cream used by Grossman, a combination of nystatin and triamcinolone, remains elevated.
“We basically believe the market will resolve itself,” Kedrowski said. One analyst echoed his sentiments, saying there were signs some drug prices had already begun to drop, even if it wasn’t reflected in available drug pricing data, which is notoriously vague.
But not everyone agrees. The question of whether prices will stay high has become a flash point in a dispute between Sun Pharmaceuticals, which owns two-thirds of Taro, and minority shareholders who have argued that the shares are worth more than Sun is offering. In July, a special committee of the board rejected a buyout bid by Sun, describing the offer as inadequate.
Sheehy of IsZo Capital has opposed the buyout, arguing that the higher prices are here to stay. “It’s a strange situation because all of these products individually are tiny, but collectively, they’re significant,” he said.