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Growth In Drug Spend Is Hitting A 13-Year High. Note To Pharma: Innovation Pays.

This article is more than 8 years old.

In 2014, the U.S. healthcare system spent $373.9 billion on drugs—13.1% more than it did the previous year and the highest rate of spending growth since 2001, according to a new report from IMS Health’s Institute for Healthcare Informatics. Digging into the numbers uncovers one prevailing theme: Innovation pays off for Big Pharma, even when insurers and politicians are on the attack over high drug prices.

As the IMS report points out, 42 novel drugs were introduced last year, up from 36 in 2013 and the most new medicines launched in a single year since 2001. Spending on new brands jumped by $20 billion—triple the previous annual increase. With each new entry came plenty of griping about sky-high price tags, but that didn’t seem to dampen sales one bit.

“Patients sought these treatments at rates that were higher than payers had expected and really anyone had expected, which is a reflection of an unmet need out there,” says Murray Aitken, executive director of the IMS Institute for Healthcare Informatics. “These are drugs that have relatively minor side effects and extremely high rates of efficacy.”

Take, for example, Sovaldi (sofosbuvir), the blockbuster hepatitis C treatment from Gilead Sciences . When the drug was introduced in the U.S. at a staggering price of $84,000 per course, there was such a huge outcry one might have thought the company wouldn’t be able to get the drug reimbursed by anyone. Express Scripts pitched a fit. U.S. senators demanded Gilead cough up documents proving they needed to charge so much.

Yet despite the brouhaha, Gilead pulled off what’s now considered the most successful drug launch in history. Sovaldi hauled in $8.5 billion in U.S. sales in 2014, its first full year on the market. Several other new hepatitis C drugs—including Gilead’s Harvoni (ledipasvir), Johnson & Johnson ’s Olysio (simeprevir), and Vertex Pharmaceuticals ’ Incivek (telaprevir) also did well.

And while there’s little doubt that discounting and other concessions were granted to payers in the end, the numbers prove that game-changing treatments ultimately end up in the hands of patients. “We had 161,000 hepatits C patients start treatment,” Aitken says. “That’s almost ten times as many as the year before.”

Innovation drove success in other therapeutic areas, as well, most notably oncology, diabetes and multiple sclerosis. Spending on specialty medicines in those categories and others increased by $54 billion over the five-year period ending in 2014, according to the IMS Institute, contributing nearly three-quarters of overall drug-spending growth. Among the recent winners: the MS drug Plegridy (peginterferon beta-1a) from Biogen Idec and Merck & Co .’s Keytruda (pembrolizumab)‎ for melanoma.

Some of the most recent trends in pharmaceutical innovation have been fueled by the FDA, which is providing significant incentives to companies, including the 2012 inception of the “breakthrough therapy” designation, which helps accelerate the approval process for drugs addressing significant unmet needs. Ten breakthrough therapies were launched last year. Five new antibiotics were also introduced in 2014—four of which had received the designation “qualified infectious disease product” (QIDP), which sped up their approvals. Some drugs with QIDP status, including Sivextro (tedizolid phosphate) from Cubist Pharmaceuticals , will be granted an additional five years of market exclusivity. “Those are all very big and positive aspects of what’s happening in terms of R&D,” Aitken says.

Obamacare is also paying off, at least in the short term. More than 15 million patients picked up health coverage last year under the Affordable Care Act, many of them through the expansion of Medicaid. These newly insured patients drove a 2.1% increase in prescriptions filled, according to the IMS Institute report.

Aitken cautions, however, that 2014’s huge drug spend won’t continue in perpetuity. First of all, the pace of patent expirations is expected to pick up again after what was an exceptionally slow year for generic competition. (For more on that, check out the IMS video below.) As for Obamacare, it has encouraged health providers to think more carefully about how they use drugs, while at the same time prompting several large employers to burden their workers with higher premiums and co-pays. The consequences of those changes have yet to be fully felt in drug spending, Aitken says.

“The bigger impact may come from the movement away from fee-for-service and to outcomes-based payments,” he says. “That may influence how providers look at the use of medicines—the impact of adherence, side effects, and the role of medicines in reducing hospital readmissions.” As for how employers are responding to Obamacare, “to the extent we see a reduction in the use of drugs, it raises the question of what long-term impact that may have.”

Nevertheless, the pharma industry is clearly getting the message that investing in products for specialty markets can be lucrative. According to the IMS Institute, 42 percent of drugs in the late stages of development are specialty medicines, as opposed to 33 percent a decade ago.