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Prescription Growth Drop Shows Sector Isn't Immune

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The Wall Street Journal

The Tampa Tribune

Published: July 17, 2008

In an ominous sign for drugmakers, the number of prescriptions dispensed by pharmacies in the United States is growing at its worst rate in at least a decade as consumers are squeezed by both a troubled economy and the growing burden of out-of-pocket health care costs.

By conventional wisdom, the pharmaceutical industry is resistant to economic downturns because people need medicine in good times and bad. But data from market researcher IMS Health and Wall Street analysts indicate that the rate of prescription growth has fallen steadily since early last year and has slipped in and out of negative territory in recent months.

Preliminary data suggest the number of prescriptions fell in the second quarter. The last time that happened, said Lehman Bros. drug-industry analyst C. Anthony Butler, may have been 1994, when the market was buffeted by the emergence of managed care and the threat of the Clinton administration's plan to overhaul the health care system.

Brands Vulnerable

The hit is coming at the expense of some of the industry's biggest brands. In May, branded medicines accounted for 30.6 percent of treatments dispensed, down from 45.9 percent in 2003, according to IMS. Pills for chronic conditions such as cardiovascular disease are vulnerable because patients tend to think they can do without treatments for so-called "silent" diseases more easily than for conditions such as cancer or HIV.

The slowdown is happening as economic pressures have snowballed in the first half of the year, from record-high gasoline prices to mortgage defaults. Skyrocketing out-of-pocket drug costs and an increasing number of uninsured Americans are making this downturn especially challenging for the health care sector, said Kevin Schulman, a specialist in health economics at Duke University.

"The last couple months have gotten worse, and that's going to continue," Schulman said. "The health care industry thinks it's immune from these macro forces, but at some point it can't be."

The development also comes as employers and insurers have shifted a larger share of health care costs to consumers in a bid to tame growth of the $2 trillion health care system. Pharmaceuticals may be an early look at how consumers react, especially when the broader economy turns sour.

"We don't have a real track record for understanding how the health care system will respond to this new economic model where people are exposed significantly to the cost of care," said Jeff Goldsmith, president of consultant Health Futures.

Skimping On Medicines

The burden on consumers has increased sharply. The average co-payment for a preferred drug on an insurance company's tiered system rose 67 percent to $25 in 2007 from $15 in 2000, according to the Kaiser Family Foundation. Out-of-pocket costs to cover family insurance premiums were $3,281 per employee last year, up nearly 84 percent from 2001.

Consumers appear to be skimping on medicines as a result. An April poll from the Kaiser foundation showed that 23 percent of patients who responded did not fill a prescription in the past year because of cost, up from 20 percent in 2005; 19 percent split pills or skipped doses, up from 16 percent in 2005. A report last month from the nonpartisan Center for Studying Health System Change in Washington said 20 percent of respondents in a 2007 survey of 18,000 people had put off or gone without medical treatment in the previous year, compared with 14 percent in 2003.

Data from IMS Health show that growth in prescription volume for the first five months of this year slowed to 1.5 percent, the lowest rate at least since 1996. From 2003 to 2007, annual volume growth averaged 3 percent. In December, total prescriptions dipped by 2.1 percent. The decline was 0.2 percent in April and 0.1 percent in May.

Patents Are Expiring

Flagging prescription growth comes at a period of particular vulnerability for the drug industry. Several blockbuster products have lost patent protection in the past two years, the main reason industry sales growth is at its lowest level since the 1960s, according to IMS Health. More patent expirations loom, including the one for the $13 billion-a-year seller Lipitor, which faces generic competition in 2011. There are few new drugs in late-stage development to take up the slack.

Safety worries, including scares surrounding contaminated Heparin and reports linking anti-smoking and epilepsy drugs to a risk of suicidal behavior, could be turning off demand.

Whatever the cause, the trend has the industry's attention. Lori Reilly, vice president of policy and research at PhRMA, the drug industry's Washington-based trade group, said she was surprised to learn recently that prescription growth had turned negative.

"That was the first time in recent memory that this has happened, and it's something we're monitoring closely," she said.

IMS Health's June data are due out this month, but based on calculations by Lehman Bros. of weekly June data, that month, and the entire quarter, are likely to be down as well. "I don't think you would have seen it this bad ever" for a quarter for prescription data, said Meredith Adler, drug retailing analyst at Lehman Bros.

In a June earnings call, Jeffrey Rein, chief executive of Walgreen Co., the drugstore chain, said the number of prescriptions his company filled in its fiscal third quarter that ended May 31 increased 1.1 percent over the previous year, while industrywide prescriptions at other stores fell 0.9 percent.

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