Shortages, shifts in sterile injectable market lead some prices to soar

Last month, four U.S. senators asked the FTC to investigate "possible illegal collusion" by saline solution manufacturers to determine whether they had been unfairly cashing in on a two-year shortage. But saline is only one of hundreds of hospital generic injectable drugs whose prices have soared in the last 8 years, And given the current state of affairs in the business, it is a situation unlikely to change.

"It's a broken market," Stephen Schondelmeyer, a pharmacist and economist at the University of Minnesota who has studied drug prices, tells Bloomberg. "Drug companies know there is going to be an end to this blank check era and they are pushing for whatever they can get."

The price of surgery drug glycopyrrolate is one example. Bloomberg reports that when Hikma found itself the sole supplier in 2012, it raised its price more than 800%. Baxter International ($BAX) did the same thing with generic chemo drug cyclophosphamide, raising the price more than 1,200% over 6 years while reporting sales that soared to $463 million in 2014 from just $8 million in 2007. A survey for Bloomberg by DRX of the prices of 3,700 formulations of generic hospital drugs found that over 8 years, 10% of them have doubled in price and dozens have gone up at least 10-fold.

Hikma, Baxter, Hospira and others defend their pricing, often pointing to the cost of upgrades they have made to plants in recent years. For years, sales of generic sterile injectables was a low-margin business that drugmakers were loath to invest in. But that led to significant quality issues and drug recalls, which in turn prompted the FDA under former director Margaret Hamburg to order companies to make improvements or close plants. Some invested; others, like Germany's Boehringer Ingelheim, closed plants. In both cases, markets were disrupted, shortages arose and prices went up.

Hospira, now owned by Pfizer ($PFE), points to the $1 billion it invested in plant upgrades as one reason that prices have risen, like the 700% increase over 8 years for injectable papaverine, a blood vessel dilator.

But to shareholders, drugmakers often present a different spin on these matters. Before its buyout by Pfizer in September, Hospira said that its investment in a massive new plant in India would dramatically reduce its cost of doing business and improve its margins. The CEOs of Hikma and Baxter have pointed to their moves to take advantage of drug shortages as a sign of their company's business acumen.

In its H1 2015 earnings report, Hikma said that "continued success in capturing specific market opportunities" had kept injectables revenue in line with expectations. It also pointed out that the operating margin for the division rose to 42.4% in the first half of the year. It told shareholders that the unit could expect a "robust adjusted operating margin of around 35%" for the year.

Even with big investments, recalls have not always abated. Baxter and Hospira upped their production of saline in response to FDA requests in an effort to ease the shortage. But they also have had repeated recalls that have taken a lot of the product back off the market. They also deny that prices have risen as much as the senators suggested.

The letter to the FTC from Republican Senators Orrin Hatch and Mike Lee and Democrats Richard Blumenthal and Amy Klobuchar asks the agency to look at why, with all these efforts, the shortage would persist. "Price increases often help clear shortages, but in this case the shortage is still ongoing after nearly two years, raising questions about the incentives of the saline suppliers to solve this problem and about possible coordination among them."

It also asks the agency to pay particular attention to whether the three key saline producers, rather than trying solve the shortage, are even using it to sell other equipment by tying saline sales to other products such as "pumps, tubing, and catheters," a contention alleged by equipment competitors.

- read the Bloomberg story