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The Truth About the Drug Companies


By Marcia Angell
The New York Review of Books
July 15, 2004


1.

Every day Americans are subjected to a barrage of advertising by the
pharmaceutical industry. Mixed in with the pitches for a particular drug—usually
featuring beautiful people enjoying themselves in the great outdoors—is a more
general message. Boiled down to its essentials, it is this: "Yes, prescription
drugs are expensive, but that shows how valuable they are. Besides, our research
and development costs are enormous, and we need to cover them somehow. As
'research-based' companies, we turn out a steady stream of innovative medicines
that lengthen life, enhance its quality, and avert more expensive medical care.
You are the beneficiaries of this ongoing achievement of the American free
enterprise system, so be grateful, quit whining, and pay up." More prosaically,
what the industry is saying is that you get what you pay for.

Is any of this true? Well, the first part certainly is. Prescription drug costs
are indeed high—and rising fast. Americans now spend a staggering $200 billion a
year on prescription drugs, and that figure is growing at a rate of about 12
percent a year (down from a high of 18 percent in 1999).[1] Drugs are the
fastest-growing part of the health care bill—which itself is rising at an
alarming rate. The increase in drug spending reflects, in almost equal parts,
the facts that people are taking a lot more drugs than they used to, that those
drugs are more likely to be expensive new ones instead of older, cheaper ones,
and that the prices of the most heavily prescribed drugs are routinely jacked
up, sometimes several times a year.

Before its patent ran out, for example, the price of Schering-Plough's
top-selling allergy pill, Claritin, was raised thirteen times over five years,
for a cumulative increase of more than 50 percent—over four times the rate of
general inflation.[2] As a spokeswoman for one company explained, "Price
increases are not uncommon in the industry and this allows us to be able to
invest in R&D."[3] In 2002, the average price of the fifty drugs most used by
senior citizens was nearly $1,500 for a year's supply. (Pricing varies greatly,
but this refers to what the companies call the average wholesale price, which is
usually pretty close to what an individual without insurance pays at the pharmacy.)

Paying for prescription drugs is no longer a problem just for poor people. As
the economy continues to struggle, health insurance is shrinking. Employers are
requiring workers to pay more of the costs themselves, and many businesses are
dropping health benefits altogether. Since prescription drug costs are rising so
fast, payers are particularly eager to get out from under them by shifting costs
to individuals. The result is that more people have to pay a greater fraction of
their drug bills out of pocket. And that packs a wallop.

Many of them simply can't do it. They trade off drugs against home heating or
food. Some people try to string out their drugs by taking them less often than
prescribed, or sharing them with a spouse. Others, too embarrassed to admit that
they can't afford to pay for drugs, leave their doctors' offices with
prescriptions in hand but don't have them filled. Not only do these patients go
without needed treatment but their doctors sometimes wrongly conclude that the
drugs they prescribed haven't worked and prescribe yet others—thus compounding the problem.

The people hurting most are the elderly. When Medicare was enacted in 1965,
people took far fewer prescription drugs and they were cheap. For that reason,
no one thought it necessary to include an outpatient prescription drug benefit
in the program. In those days, senior citizens could generally afford to buy
whatever drugs they needed out of pocket. Approximately half to two thirds of
the elderly have supplementary insurance that partly covers prescription drugs,
but that percentage is dropping as employers and insurers decide it is a losing
proposition for them. At the end of 2003, Congress passed a Medicare reform bill
that included a prescription drug benefit scheduled to begin in 2006, but as we
shall see later, its benefits are inadequate to begin with and will quickly be
overtaken by rising prices and administrative costs.

For obvious reasons, the elderly tend to need more prescription drugs than
younger people—mainly for chronic conditions like arthritis, diabetes, high
blood pressure, and elevated cholesterol. In 2001, nearly one in four seniors
reported that they skipped doses or did not fill prescriptions because of the
cost. (That fraction is almost certainly higher now.) Sadly, the frailest are
the least likely to have supplementary insurance. At an average cost of $1,500 a
year for each drug, someone without supplementary insurance who takes six
different prescription drugs—and this is not rare—would have to spend $9,000 out
of pocket. Not many among the old and frail have such deep pockets.
Furthermore, in one of the more perverse of the pharmaceutical industry's
practices, prices are much higher for precisely the people who most need the
drugs and can least afford them. The industry charges Medicare recipients
without supplementary insurance much more than it does favored customers, such
as large HMOs or the Veterans Affairs (VA) system. Because the latter buy in
bulk, they can bargain for steep discounts or rebates. People without insurance
have no bargaining power; and so they pay the highest prices.

In the past two years, we have started to see, for the first time, the
beginnings of public resistance to rapacious pricing and other dubious practices
of the pharmaceutical industry. It is mainly because of this resistance that
drug companies are now blanketing us with public relations messages. And the
magic words, repeated over and over like an incantation, are research,
innovation, and American. Research. Innovation. American. It makes a great story.

But while the rhetoric is stirring, it has very little to do with reality.
First, research and development (R&D) is a relatively small part of the budgets
of the big drug companies—dwarfed by their vast expenditures on marketing and
administration, and smaller even than profits. In fact, year after year, for
over two decades, this industry has been far and away the most profitable in the
United States. (In 2003, for the first time, the industry lost its first-place
position, coming in third, behind "mining, crude oil production," and
"commercial banks.") The prices drug companies charge have little relationship
to the costs of making the drugs and could be cut dramatically without coming
anywhere close to threatening R&D.

Second, the pharmaceutical industry is not especially innovative. As hard as it
is to believe, only a handful of truly important drugs have been brought to
market in recent years, and they were mostly based on taxpayer-funded research
at academic institutions, small biotechnology companies, or the National
Institutes of Health (NIH). The great majority of "new" drugs are not new at all
but merely variations of older drugs already on the market. These are called
"me-too" drugs. The idea is to grab a share of an established, lucrative market
by producing something very similar to a top-selling drug. For instance, we now
have six statins (Mevacor, Lipitor, Zocor, Pravachol, Lescol, and the newest,
Crestor) on the market to lower cholesterol, all variants of the first. As Dr.
Sharon Levine, associate executive director of the Kaiser Permanente Medical Group, put it,

If I'm a manufacturer and I can change one molecule and get another twenty
years of patent rights, and convince physicians to prescribe and consumers to
demand the next form of Prilosec, or weekly Prozac instead of daily Prozac,
just as my patent expires, then why would I be spending money on a lot less
certain endeavor, which is looking for brand-new drugs?[4]

Third, the industry is hardly a model of American free enterprise. To be sure,
it is free to decide which drugs to develop (me-too drugs instead of innovative
ones, for instance), and it is free to price them as high as the traffic will
bear, but it is utterly dependent on government-granted monopolies—in the form
of patents and Food and Drug Administration (FDA)–approved exclusive marketing
rights. If it is not particularly innovative in discovering new drugs, it is
highly innovative—and aggressive—in dreaming up ways to extend its monopoly rights.

And there is nothing peculiarly American about this industry. It is the very
essence of a global enterprise. Roughly half of the largest drug companies are
based in Europe. (The exact count shifts because of mergers.) In 2002, the top
ten were the American companies Pfizer, Merck, Johnson & Johnson, Bristol-Myers
Squibb, and Wyeth (formerly American Home Products); the British companies
GlaxoSmithKline and AstraZeneca; the Swiss companies Novartis and Roche; and the
French company Aventis (which in 2004 merged with another French company, Sanafi
Synthelabo, putting it in third place).[5] All are much alike in their
operations. All price their drugs much higher here than in other markets.

Since the United States is the major profit center, it is simply good public
relations for drug companies to pass themselves off as American, whether they
are or not. It is true, however, that some of the European companies are now
locating their R&D operations in the United States. They claim the reason for
this is that we don't regulate prices, as does much of the rest of the world.
But more likely it is that they want to feed on the unparalleled research output
of American universities and the NIH. In other words, it's not private
enterprise that draws them here but the very opposite—our publicly sponsored
research enterprise.

Over the past two decades the pharmaceutical industry has moved very far from
its original high purpose of discovering and producing useful new drugs. Now
primarily a marketing machine to sell drugs of dubious benefit, this industry
uses its wealth and power to co-opt every institution that might stand in its
way, including the US Congress, the FDA, academic medical centers, and the
medical profession itself. (Most of its marketing efforts are focused on
influencing doctors, since they must write the prescriptions.)

If prescription drugs were like ordinary consumer goods, all this might not
matter very much. But drugs are different. People depend on them for their
health and even their lives. In the words of Senator Debbie Stabenow (D-Mich.),
"It's not like buying a car or tennis shoes or peanut butter." People need to
know that there are some checks and balances on this industry, so that its quest
for profits doesn't push every other consideration aside. But there aren't such
checks and balances.

2.

What does the eight-hundred-pound gorilla do? Anything it wants to.
What's true of the eight-hundred-pound gorilla is true of the colossus that is
the pharmaceutical industry. It is used to doing pretty much what it wants to
do. The watershed year was 1980. Before then, it was a good business, but
afterward, it was a stupendous one. From 1960 to 1980, prescription drug sales
were fairly static as a percent of US gross domestic product, but from 1980 to
2000, they tripled. They now stand at more than $200 billion a year.[6] Of the
many events that contributed to the industry's great and good fortune, none had
to do with the quality of the drugs the companies were selling.

The claim that drugs are a $200 billion industry is an understatement. According
to government sources, that is roughly how much Americans spent on prescription
drugs in 2002. That figure refers to direct consumer purchases at drugstores and
mail-order pharmacies (whether paid for out of pocket or not), and it includes
the nearly 25 percent markup for wholesalers, pharmacists, and other middlemen
and retailers. But it does not include the large amounts spent for drugs
administered in hospitals, nursing homes, or doctors' offices (as is the case
for many cancer drugs). In most analyses, they are allocated to costs for those facilities.

Drug company revenues (or sales) are a little different, at least as they are
reported in summaries of corporate annual reports. They usually refer to a
company's worldwide sales, including those to health facilities. But they do not
include the revenues of middlemen and retailers.

Perhaps the most quoted source of statistics on the pharmaceutical industry, IMS
Health, estimated total worldwide sales for prescription drugs to be about $400
billion in 2002. About half were in the United States. So the $200 billion
colossus is really a $400 billion megacolossus.

The election of Ronald Reagan in 1980 was perhaps the fundamental element in the
rapid rise of big pharma—the collective name for the largest drug companies.
With the Reagan administration came a strong pro-business shift not only in
government policies but in society at large. And with the shift, the public
attitude toward great wealth changed. Before then, there was something faintly
disreputable about really big fortunes. You could choose to do well or you could
choose to do good, but most people who had any choice in the matter thought it
difficult to do both. That belief was particularly strong among scientists and
other intellectuals. They could choose to live a comfortable but not luxurious
life in academia, hoping to do exciting cutting-edge research, or they could
"sell out" to industry and do less important but more remunerative work.
Starting in the Reagan years and continuing through the 1990s, Americans changed
their tune. It became not only reputable to be wealthy, but something close to
virtuous. There were "winners" and there were "losers," and the winners were
rich and deserved to be. The gap between the rich and poor, which had been
narrowing since World War II, suddenly began to widen again, until today it is a chasm.

The pharmaceutical industry and its CEOs quickly joined the ranks of the winners
as a result of a number of business-friendly government actions. I won't
enumerate all of them, but two are especially important. Beginning in 1980,
Congress enacted a series of laws designed to speed the translation of
tax-supported basic research into useful new products—a process sometimes
referred to as "technology transfer." The goal was also to improve the position
of American-owned high-tech businesses in world markets.

The most important of these laws is known as the Bayh-Dole Act, after its chief
sponsors, Senator Birch Bayh (D-Ind.) and Senator Robert Dole (R-Kans.).
Bayh-Dole enabled universities and small businesses to patent discoveries
emanating from research sponsored by the National Institutes of Health, the
major distributor of tax dollars for medical research, and then to grant
exclusive licenses to drug companies. Until then, taxpayer-financed discoveries
were in the public domain, available to any company that wanted to use them. But
now universities, where most NIH-sponsored work is carried out, can patent and
license their discoveries, and charge royalties. Similar legislation permitted
the NIH itself to enter into deals with drug companies that would directly
transfer NIH discoveries to industry.

Bayh-Dole gave a tremendous boost to the nascent biotechnology industry, as well
as to big pharma. Small biotech companies, many of them founded by university
researchers to exploit their discoveries, proliferated rapidly. They now ring
the major academic research institutions and often carry out the initial phases
of drug development, hoping for lucrative deals with big drug companies that can
market the new drugs. Usually both academic researchers and their institutions
own equity in the biotechnology companies they are involved with. Thus, when a
patent held by a university or a small biotech company is eventually licensed to
a big drug company, all parties cash in on the public investment in research.

These laws mean that drug companies no longer have to rely on their own research
for new drugs, and few of the large ones do. Increasingly, they rely on
academia, small biotech startup companies, and the NIH for that.[7] At least a
third of drugs marketed by the major drug companies are now licensed from
universities or small biotech companies, and these tend to be the most
innovative ones.[8] While Bayh-Dole was clearly a bonanza for big pharma and the
biotech industry, whether its enactment was a net benefit to the public is arguable.

The Reagan years and Bayh-Dole also transformed the ethos of medical schools and
teaching hospitals. These nonprofit institutions started to see themselves as
"partners" of industry, and they became just as enthusiastic as any entrepreneur
about the opportunities to parlay their discoveries into financial gain. Faculty
researchers were encouraged to obtain patents on their work (which were assigned
to their universities), and they shared in the royalties. Many medical schools
and teaching hospitals set up "technology transfer" offices to help in this
activity and capitalize on faculty discoveries. As the entrepreneurial spirit
grew during the 1990s, medical school faculty entered into other lucrative
financial arrangements with drug companies, as did their parent institutions.
One of the results has been a growing pro-industry bias in medical
research—exactly where such bias doesn't belong. Faculty members who had earlier
contented themselves with what was once referred to as a "threadbare but
genteel" lifestyle began to ask themselves, in the words of my grandmother, "If
you're so smart, why aren't you rich?" Medical schools and teaching hospitals,
for their part, put more resources into searching for commercial opportunities.
Starting in 1984, with legislation known as the Hatch-Waxman Act, Congress
passed another series of laws that were just as big a bonanza for the
pharmaceutical industry. These laws extended monopoly rights for brand-name
drugs. Exclusivity is the lifeblood of the industry because it means that no
other company may sell the same drug for a set period. After exclusive marketing
rights expire, copies (called generic drugs) enter the market, and the price
usually falls to as little as 20 percent of what it was.[9] There are two forms
of monopoly rights—patents granted by the US Patent and Trade Office (USPTO) and
exclusivity granted by the FDA. While related, they operate somewhat
independently, almost as backups for each other. Hatch-Waxman, named for Senator
Orrin Hatch (R-Utah) and Representative Henry Waxman (D-Calif.), was meant
mainly to stimulate the foundering generic industry by short-circuiting some of
the FDA requirements for bringing generic drugs to market. While successful in
doing that, Hatch-Waxman also lengthened the patent life for brand-name drugs.
Since then, industry lawyers have manipulated some of its provisions to extend
patents far longer than the lawmakers intended.

In the 1990s, Congress enacted other laws that further increased the patent life
of brand-name drugs. Drug companies now employ small armies of lawyers to milk
these laws for all they're worth—and they're worth a lot. The result is that the
effective patent life of brand-name drugs increased from about eight years in
1980 to about fourteen years in 2000.[10] For a blockbuster—usually defined as a
drug with sales of over a billion dollars a year (like Lipitor or Celebrex or
Zoloft)—those six years of additional exclusivity are golden. They can add
billions of dollars to sales—enough to buy a lot of lawyers and have plenty of
change left over. No wonder big pharma will do almost anything to protect
exclusive marketing rights, despite the fact that doing so flies in the face of
all its rhetoric about the free market.

As their profits skyrocketed during the 1980s and 1990s, so did the political
power of drug companies. By 1990, the industry had assumed its present contours
as a business with unprecedented control over its own fortunes. For example, if
it didn't like something about the FDA, the federal agency that is supposed to
regulate the industry, it could change it through direct pressure or through its
friends in Congress. The top ten drug companies (which included European
companies) had profits of nearly 25 percent of sales in 1990, and except for a
dip at the time of President Bill Clinton's health care reform proposal, profits
as a percentage of sales remained about the same for the next decade. (Of
course, in absolute terms, as sales mounted, so did profits.) In 2001, the ten
American drug companies in the Fortune 500 list (not quite the same as the top
ten worldwide, but their profit margins are much the same) ranked far above all
other American industries in average net return, whether as a percentage of
sales (18.5 percent), of assets (16.3 percent), or of shareholders' equity (33.2
percent). These are astonishing margins. For comparison, the median net return
for all other industries in the Fortune 500 was only 3.3 percent of sales.

Commercial banking, itself no slouch as an aggressive industry with many friends
in high places, was a distant second, at 13.5 percent of sales.[11]
In 2002, as the economic downturn continued, big pharma showed only a slight
drop in profits—from 18.5 to 17.0 percent of sales. The most startling fact
about 2002 is that the combined profits for the ten drug companies in the
Fortune 500 ($35.9 billion) were more than the profits for all the other 490
businesses put together ($33.7 billion).[12] In 2003 profits of the Fortune 500
drug companies dropped to 14.3 percent of sales, still well above the median for
all industries of 4.6 percent for that year. When I say this is a profitable
industry, I mean really profitable. It is difficult to conceive of how awash in
money big pharma is.

Drug industry expenditures for research and development, while large, were
consistently far less than profits. For the top ten companies, they amounted to
only 11 percent of sales in 1990, rising slightly to 14 percent in 2000. The
biggest single item in the budget is neither R&D nor even profits but something
usually called "marketing and administration"—a name that varies slightly from
company to company. In 1990, a staggering 36 percent of sales revenues went into
this category, and that proportion remained about the same for over a
decade.[13] Note that this is two and a half times the expenditures for R&D.
These figures are drawn from the industry's own annual reports to the Securities
and Exchange Commission (SEC) and to stockholders, but what actually goes into
these categories is not at all clear, because drug companies hold that
information very close to their chests. It is likely, for instance, that R&D
includes many activities most people would consider marketing, but no one can
know for sure. For its part, "marketing and administration" is a gigantic black
box that probably includes what the industry calls "education," as well as
advertising and promotion, legal costs, and executive salaries—which are
whopping. According to a report by the non-profit group Families USA, the
for-mer chairman and CEO of Bristol-Myers Squibb, Charles A. Heimbold Jr., made
$74,890,918 in 2001, not counting his $76,095,611 worth of unexercised stock
options. The chairman of Wyeth made $40,521,011, exclusive of his $40,629,459 in
stock options. And so on.[14]

3.

If 1980 was a watershed year for the pharmaceutical industry, 2000 may very well
turn out to have been another one—the year things began to go wrong. As the
booming economy of the late 1990s turned sour, many successful businesses found
themselves in trouble. And as tax revenues dropped, state governments also found
themselves in trouble. In one respect, the pharmaceutical industry is well
protected against the downturn, since it has so much wealth and power. But in
another respect, it is peculiarly vulnerable, since it depends on
employer-sponsored insurance and state-run Medicaid programs for much of its
revenues. When employers and states are in trouble, so is big pharma.
And sure enough, in just the past couple of years, employers and the private
health insurers with whom they contract have started to push back against drug
costs. Most big managed care plans now bargain for steep price discounts. Most
have also instituted three-tiered coverage for prescription drugs—full coverage
for generic drugs, partial coverage for useful brand-name drugs, and no coverage
for expensive drugs that offer no added benefit over cheaper ones. These lists
of preferred drugs are called formularies, and they are an increasingly
important method for containing drug costs. Big pharma is feeling the effects of
these measures, although not surprisingly, it has become adept at manipulating
the system—mainly by inducing doctors or health plans to put expensive,
brand-name drugs on formularies.

State governments, too, are looking for ways to cut their drug costs. Some state
legislatures are drafting measures that would permit them to regulate
prescription drug prices for state employees, Medicaid recipients, and the
uninsured. Like managed care plans, they are creating formularies of preferred
drugs. The industry is fighting these efforts—mainly with its legions of
lobbyists and lawyers. It fought the state of Maine all the way to the US
Supreme Court, which in 2003 upheld Maine's right to bargain with drug companies
for lower prices, while leaving open the details. But that war has just begun,
and it promises to go on for years and get very ugly.

Recently the public has shown signs of being fed up. The fact that Americans pay
much more for prescription drugs than Europeans and Canadians is now widely
known. An estimated one to two million Americans buy their medicines from
Canadian drugstores over the Internet, despite the fact that in 1987, in
response to heavy industry lobbying, a compliant Congress had made it illegal
for anyone other than manufacturers to import prescription drugs from other
countries.[15] In addition, there is a brisk traffic in bus trips for people in
border states, particularly the elderly, to travel to Canada or Mexico to buy
prescription drugs. Their resentment is palpable, and they constitute a powerful
voter block—a fact not lost on Congress or state legislatures.

The industry faces other, less familiar problems. It happens that, by chance,
some of the top-selling drugs—with combined sales of around $35 billion a
year—are scheduled to go off patent within a few years of one another.[16] This
drop over the cliff began in 2001, with the expiration of Eli Lilly's patent on
its blockbuster antidepressant Prozac. In the same year, AstraZeneca lost its
patent on Prilosec, the original "purple pill" for heartburn, which at its peak
brought in a stunning $6 billion a year. Bristol-Myers Squibb lost its
best-selling diabetes drug, Glucophage. The unusual cluster of expirations will
continue for another couple of years. While it represents a huge loss to the
industry as a whole, for some companies it's a disaster. Schering-Plough's
blockbuster allergy drug, Claritin, brought in fully a third of that company's
revenues before its patent expired in 2002.[17] Claritin is now sold over the
counter for much less than its prescription price. So far, the company has been
unable to make up for the loss by trying to switch Claritin users to Clarinex—a
drug that is virtually identical but has the advantage of still being on patent.
Even worse is the fact that there are very few drugs in the pipeline ready to
take the place of blockbusters going off patent. In fact, that is the biggest
problem facing the industry today, and its darkest secret. All the public
relations about innovation is meant to obscure precisely this fact. The stream
of new drugs has slowed to a trickle, and few of them are innovative in any
sense of that word. Instead, the great majority are variations of oldies but
goodies—"me-too" drugs.

Of the seventy-eight drugs approved by the FDA in 2002, only seventeen contained
new active ingredients, and only seven of these were classified by the FDA as
improvements over older drugs. The other seventy-one drugs approved that year
were variations of old drugs or deemed no better than drugs already on the
market. In other words, they were me-too drugs. Seven of seventy-eight is not
much of a yield. Furthermore, of those seven, not one came from a major US drug
company.[18]

For the first time, in just a few short years, the gigantic pharmaceutical
industry is finding itself in serious difficulty. It is facing, as one industry
spokesman put it, "a perfect storm." To be sure, profits are still beyond
anything most other industries could hope for, but they have recently fallen,
and for some companies they fell a lot. And that is what matters to investors.
Wall Street doesn't care how high profits are today, only how high they will be
tomorrow. For some companies, stock prices have plummeted. Nevertheless, the
industry keeps promising a bright new day. It bases its reassurances on the
notion that the mapping of the human genome and the accompanying burst in
genetic research will yield a cornucopia of important new drugs. Left unsaid is
the fact that big pharma is depending on government, universities, and small
biotech companies for that innovation. While there is no doubt that genetic
discoveries will lead to treatments, the fact remains that it will probably be
years before the basic research pays off with new drugs. In the meantime, the
once-solid foundations of the big pharma colossus are shaking.

The hints of trouble and the public's growing resentment over high prices are
producing the first cracks in the industry's formerly firm support in
Washington. In 2000, Congress passed legislation that would have closed some of
the loopholes in Hatch-Waxman and also permitted American pharmacies, as well as
individuals, to import drugs from certain countries where prices are lower. In
particular, they could buy back FDA-approved drugs from Canada that had been
exported there. It sounds silly to "reimport" drugs that are marketed in the
United States, but even with the added transaction costs, doing so is cheaper
than buying them here. But the bill required the secretary of health and human
services to certify that the practice would not pose any "added risk" to the
public, and secretaries in both the Clinton and Bush administrations, under
pressure from the industry, refused to do that.

The industry is also being hit with a tidal wave of government investigations
and civil and criminal lawsuits. The litany of charges includes illegally
overcharging Medicaid and Medicare, paying kickbacks to doctors, engaging in
anticompetitive practices, colluding with generic companies to keep generic
drugs off the market, illegally promoting drugs for unapproved uses, engaging in
misleading direct-to-consumer advertising, and, of course, covering up evidence.
Some of the settlements have been huge. TAP Pharmaceuticals, for instance, paid
$875 million to settle civil and criminal charges of Medicaid and Medicare fraud
in the marketing of its prostate cancer drug, Lupron.[19] All of these efforts
could be summed up as increasingly desperate marketing and patent games,
activities that always skirted the edge of legality but now are sometimes well on the other side.

How is the pharmaceutical industry responding to its difficulties? One could
hope drug companies would decide to make some changes—trim their prices, or at
least make them more equitable, and put more of their money into trying to
discover genuinely innovative drugs, instead of just talking about it. But that
is not what is happening. Instead, drug companies are doing more of what got
them into this situation. They are marketing their me-too drugs even more
relentlessly. They are pushing even harder to extend their monopolies on
top-selling drugs. And they are pouring more money into lobbying and political
campaigns. As for innovation, they are still waiting for Godot.

The news is not all bad for the industry. The Medicare prescription drug benefit
enacted in 2003, and scheduled to go into effect in 2006, promises a windfall
for big pharma since it forbids the government from negotiating prices. The
immediate jump in pharmaceutical stock prices after the bill passed indicated
that the industry and investors were well aware of the windfall. But at best,
this legislation will be only a temporary boost for the industry. As costs rise,
Congress will have to reconsider its industry-friendly decision to allow drug
companies to set their own prices, no questions asked.

This is an industry that in some ways is like the Wizard of Oz—still full of
bluster but now being exposed as something far different from its image. Instead
of being an engine of innovation, it is a vast marketing machine. Instead of
being a free market success story, it lives off government-funded research and
monopoly rights. Yet this industry occupies an essential role in the American
health care system, and it performs a valuable function, if not in discovering
important new drugs at least in developing them and bringing them to market. But
big pharma is extravagantly rewarded for its relatively modest functions. We get
nowhere near our money's worth. The United States can no longer afford it in its
present form.

Clearly, the pharmaceutical industry is due for fundamental reform. Reform will
have to extend beyond the industry to the agencies and institutions it has
co-opted, including the FDA and the medical profession and its teaching centers.
In my forthcoming book, The Truth About the Drug Companies, I discuss the major
reforms that will be necessary.

For example, we need to get the industry to focus on discovering truly
innovative drugs instead of turning out me-too drugs (and spending billions of
dollars to promote them as though they were miracles). The me-too business is
made possible by the fact that the FDA usually approves a drug only if it is
better than a placebo. It needn't be better than an older drug already on the
market to treat the same condition; in fact, it may be worse. There is no way of
knowing, since companies generally do not test their new drugs against older
ones for the same conditions at equivalent doses. (For obvious reasons, they
would rather not find the answer.) They should be required to do so.
The me-too market would collapse virtually overnight if the FDA made approval of
new drugs contingent on their being better in some important way than older
drugs already on the market. Probably very few new drugs could meet that test.
By default, then, drug companies would have to concentrate on finding truly
innovative drugs, and we would finally find out whether this much-vaunted
industry is turning out better drugs. A welcome by-product of this reform is
that it would also reduce the incessant and enormously expensive marketing
necessary to jockey for position in the me-too market. Genuinely important new
drugs do not need much promotion (imagine having to advertise a cure for cancer).

A second important reform would be to require drug companies to open their
books. Drug companies reveal very little about the most crucial aspects of their
business. We know next to nothing about how much they spend to bring each drug
to market or what they spend it on. (We know that it is not $802 million, as
some industry apologists have recently claimed.) Nor do we know what their
gigantic "marketing and administration" budgets cover. We don't even know the
prices they charge their various customers. Perhaps most important, we do not
know the results of the clinical trials they sponsor—only those they choose to
make public, which tend to be the most favorable findings. (The FDA is not
allowed to reveal the results it has.) The industry claims all of this is
"proprietary" information. Yet, unlike other businesses, drug companies are
dependent on the public for a host of special favors—including the rights to
NIH-funded research, long periods of market monopoly, and multiple tax breaks
that almost guarantee a profit. Because of these special favors and the
importance of its products to public health, as well as the fact that the
government is a major purchaser of its products, the pharmaceutical industry
should be regarded much as a public utility.

These are just two of many reforms I advocate in my book. Some of the others
have to do with breaking the dependence of the medical profession on the
industry and with the inappropriate control drug companies have over the
evaluation of their own products. The sort of thoroughgoing changes required
will take government action, which in turn will require strong public pressure.
It will be tough. Drug companies have the largest lobby in Washington, and they
give copiously to political campaigns. Legislators are now so beholden to the
pharmaceutical industry that it will be exceedingly difficult to break its lock on them.

But the one thing legislators need more than campaign contributions is votes.
That is why citizens should know what is really going on. Contrary to the
industry's public relations, they don't get what they pay for. The fact is that
this industry is taking us for a ride, and there will be no real reform without
an aroused and determined public to make it happen.

Notes

[1] There are several sources of statistics on the size and growth of the
industry. One is IMS Health (www.imshealth .com), a private company that
collects and sells information on the global pharmaceutical industry. See www
.imshealth.com/ims/portal/front/articleC/0,2777,6599_3665_41336931,00. html for
the $200 billion figure. For further sources on this and other matters, see my
book The Truth About the Drug Companies: How They Deceive Us and What to Do
About It (to be published in August by Random House), from which this article is
drawn.
[2] For a full picture of the special burden of rising drug prices on senior
citizens, see Families USA, "Out-of-Bounds: Rising Prescription Drug Prices for
Seniors" (www.familiesusa .org/site/PageServer?pagename=Publications_Reports).
[3] Sarah Lueck, "Drug Prices Far Outpace Inflation," The Wall Street Journal,
July 10, 2003, p. D2.
[4] On ABC Special with Peter Jennings, "Bitter Medicine: Pills, Profit, and the
Public Health," May 29, 2002.
[5] For the top ten companies and their recent mergers as of 2003, see www
.oligopolywatch.com/2003/05/25.html.
[6] These figures come from the US Centers for Medicare & Medicaid Services,
Office of the Actuary, National Health Statistics Group, Baltimore, Maryland.
They were summarized in Cynthia Smith, "Retail Prescription Drug Spending in the
National Health Accounts," Health Affairs, January– February 2004, p. 160.
[7] For excellent summaries of public contributions to drug company research,
see Public Citizen Congress Watch, "Rx R&D Myths: The Case Against the Drug
Industry's R&D 'Scare Card,'" July 2001 (www.citizen.org); and NIHCM, "Changing
Patterns of Pharmaceutical Innovation," May 2002 (www.nihcm.org).
[8] This is probably an underestimate. One source that indicates it is at least
this is CenterWatch, www.centerwatch .com, a private company owned by Thomson
Medical Economics, which provides information to the clinical trial industry.
See An Industry in Evolution, third edition, edited by Mary Jo Lamberti
(CenterWatch, 2001), p. 22.
[9] Families USA, "Out-of-Bounds: Rising Prescription Drug Prices for Seniors."
[10] Public Citizen Congress Watch, "Rx R&D Myths."
[11] "The Fortune 500," Fortune, April 15, 2002, p. F26.
[12] Public Citizen Congress Watch, "Drug Industry Profits: Hefty Pharmaceutical
Company Margins Dwarf Other Industries," June 2003 (www.citizen
.org/documents/Pharma_Report.pdf). The data are drawn mainly from the Fortune
500 list in Fortune, April 7, 2003, and drug company annual reports.
[13] Henry J. Kaiser Family Foundation, "Prescription Drug Trends," November
2001 (www.kff.org).
[14] FamiliesUSA, "Profiting from Pain: Where Prescription Drug Dollars Go,"
July 2002 (www.familiesusa. org /site/DocServer/PReport.pdf?docID= 249).
[15] Patricia Barry, "More Americans Go North for Drugs," AARP Bulletin, April
2003, p. 3.
[16] Chandrani Ghosh and Andrew Tanzer, "Patent Play," Forbes, September 17,
2001, p. 141.
[17] Gardiner Harris, "Schering-Plough Is Hurt by Plummeting Pill Costs," The
New York Times, July 8, 2003, p. C1.
[18] For key information about the numbers and kinds of drugs approved each
year, see the Web site of the US Food and Drug Administration (FDA), www
.fda.gov/cder/rdmt/pstable.htm.
[19] Alice Dembner, "Drug Firm to Pay $875M Fine for Fraud," The Boston Globe,
October 4, 2001, p. A13.

 

 

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