Issues
Drug Money
Money talks. Guess who the loudest voices are?
Drug costs in the US have doubled and doubled again since 1993. Much of the increase is attributable to the fact that we are buying more pills, with new medications on the market, rather than actual price increases, but that hasn't stopped the hue and cry for regulation, especially if Medicare is to pick up part of the tab. The pharmaceutical industry, in the meantime, is crying foul, claiming that it costs $802 million to develop a new drug, and that price controls (or the federal government exercising its considerable buying power) would direct investment elsewhere and undermine the ability of companies to research and develop new medicines.
"It's a tidy story," writes Merrill Goozener in The American Prospect in an article from the early 2000s, "but it falls apart under scrutiny. Every independent study that's ever looked at the sources of medical innovation has concluded that research funded by the public sector - not the private sector - is chiefly responsible for a majority of the medically significant advances that have led to new treatments of disease."
The article cites a National Bureau of Economic Research study showing that public research was behind 15 of the 21 drugs regarded as having the highest therapeutic value between 1965 and 1992. Another study found that government labs and noncommercial institutions were involved in 60 percent of 32 innovative drugs. The National Cancer Institute, for instance, spent $32 million to develop the anticancer drug, Taxol, which generates $1.7 billion in sales for Bristol-Myers Squibb and which Bristol-Myers sells to patients for more than 20 times its manufacturing cost.
Merrill Goozener notes that about half of industry research is directed at "me-too" drugs or drugs to replace one whose patent is about to expire rather than real breakthroughs, that marketing and advertising rival research budgets, and that profit margins are the highest for any industry group.
These and other arguments echo an editorial that earlier appeared in the New England Journal of Medicine. There, the NEJM noted that drug companies make profits of about 30 percent and in 1999 realized an 18.6 percent return on revenues. Commercial banking, by contrast, was second with a 15.8 percent return. In addition, not only are the industry's research and development costs tax deductible, but so are its marketing expenses. This led the NEJM to conclude:
"The pharmaceutical industry is extraordinarily privileged. It benefits enormously from publicly funded research, government-granted patents, and large tax breaks, and it reaps lavish profits. For these reasons, and because it makes products of vital importance to the public health, it should be accountable not only to its shareholders, but also to society at large."
In a reply to that editorial, Alan Holmer, President of the Pharmaceutical Research and Manufacturers of America, asserts should that happen: "Investment will flow elsewhere, as it did the last time price controls were seriously considered, during the debate over health care reform in 1993 and 1994. Every year since 1980, pharmaceutical companies have increased research expenditures by double digits - except in 1994 and in 1995, when there was only single-digit growth."
By Alan Holmer's reasoning, pharmaceutical stocks should have stagnated or declined in 2000 owing to an election campaign that featured threatening noises from both parties. In actuality, industry stocks went up 32 percent. According to a report from Hoover's Online: "Despite the market's recent volatility, drug companies are relatively immune from the macroeconomic forces."
But even a doomsday scenario does not faze Merrill Goozener writing in The American Prospect: "Drug companies," he writes, "have a legitimate role in bringing new medicines to market, but it would be better public policy to lower drug prices, even at the cost of deterring some private investment, and to rely more heavily on publicly funded research."
Another View
It is probably fair to say that most of us have a dysfunctional relationship with our medications. Sure, we’re grateful for being restored to the land of the living, but who out there has ever sent a fan letter to a pharmaceutical company? Remember when Al Gore in his Presidential campaign promised to crack down on "big drug companies?" Most of us were probably cheering. Too bad our populatiaon doesn't vote.
All this tends to raise the hackles of the Adam Smiths of this world, and in a recent article in Reason science editor Ronald Bailey advances their point of view. In 1977, he reminds us, the year Tagamet and Zantac were introduced, surgeons performed about 97,000 operations for peptic ulcers. In 1993, that number was down to 19,000, saving patients and insurers a total of $224 million a year by one estimate.
That is only the beginning. A study done of 1,100 patients being treated with drugs for congestive heart failure found that hospital costs were reduced by 78 percent for an overall savings of $9.3 million, with a death rate reduction from 25 percent to 10 percent. Closer to home, schizophrenia drugs costing $4,500 annually save more than $70,000 per patient in yearly institutional treatment costs.
And to set the record straight: Despite the high cost of drugs, the average consumer spends but one percent of his or her annual income on pharmaceuticals while the elderly spend three percent.
Not one to leave any stone unturned, Bailey has a way of shrinking the obscenely high 30 percent margins the pharmaceutical industry enjoys to a more modest nine percent. It has something to do with the fine points of depreciating R and D expenses according to conventional accounting calculations, but mercifully he stops short of a detailed analysis.
Easier to follow is his rebuttal to the claim that taxpayers are subsidizing much of drug company research and getting nothing in return. In 1982, for instance, a $4 million NIH grant led to the glaucoma drug, Xalatan, which accounted for seven percent of sales for Pharamacia and Upjohn in 1999. Out of the profits from this drug, however, the manufacturer paid taxes of about $24 million, which, Bailey notes, amounts to a nice return on the taxpayer’s investment, and that’s only for one year.
As for the "me-too" drug argument: "When new antidepressant medications were introduced in the mid-1990s, they cost only 53 percent as much as Prozac did when it first hit shelves in 1988 and had the field more or less to itself."
Concludes Bailey: "If we want the pharmaceutical and biotech companies to find and market new life-saving, life-enhancing drugs to cure and treat heart disease ... and other illnesses, then Congress and President Bush would be wise to let the sort of relatively unfettered market competition that has worked well in the past continue into the future."
Don’t you just hate it when these guys have a point?
But Only to a Point
An article published in New Republic in 2003 by two former New England Journal of Medicine editors, Arnold Relman and Marcia Angell, challenge the $802 million figure that the pharmaceutical industry claims it takes to bring a new drug to market. The figure is based on confidential information supplied by the industry to analysts at the Tufts Center of Drug Development, the University of Rochester Graduate School of Business Administration, and the Department of Economics at Duke. But Relman and Angell note that the Tufts et al analysis only concerns the costs of "new molecular entities" (NMEs), which comprise but a small minority of drugs that are newly approved (most are "me-too" drugs, which would include all SSRIs but the first one). An increasing number of drugs, moreover, are licensed from academia and biotech firms.
Additionally, the figure relies on an accounting fiction called opportunity cost (what a drug company would have earned had they invested their R and D money in the equities markets). Subtracting opportunity costs reveals a truer estimated out-of-pocket expense of $403 million per drug. Since R and D expenditure is fully tax deductible, the actual cost would be closer to $266 million per NME. Factoring in the me-too's and licensed drugs results in "less than $100 million for each drug that was approved between 1994 and 2000."
Meanwhile, a two-part article in the March 4 issue of Money magazine pulls no punches in its scathing commentary on mismanagement in the pharmaceutical sector. With historic 30 percent profit margins and 15 percent earnings growth, drug stocks have traditionally been regarded as a license to print money, even during recessions. In 2002, however, with a host of chickens coming to roost at once, drug stocks fell 22 percent. In the words of Money: "All of the companies, to one degree or another, have become overly reliant on a way of doing business that simply cannot last."
According to Money, the pharma boom of the nineties was built on a wave of research that resulted in blockbuster drugs, including the SSRIs. In the wake of these successes, industry strategy focused on milking profits from their own blockbusters and developing "me-too" drugs to capitalize on the blockbusters of their competitors at the expense of working on a wider range of drugs covering a more diverse portfolio. Unfortunately for the industry, 42 of 52 blockbusters representing $82 billion in sales will go off-patent by 2007, while the drugs in the development pipelines are a long way from coming onstream. The dry pipelines are attributable to short-sighted cost cuts.
The good news is that genomic research will likely provide a steady feedstock for new drugs, and that new scientific knowledge will sharply reduce the trial and error element in testing meds, with corresponding reductions in development costs. The future good health of the pharmaceutical industry will hopefully result in our good health, as well. But for this to happen, we need competent managers who can adapt quickly to changing times, not ones nurtured in an era of easy money. The last thing we need is business as usual.
Updated Feb 12, 2008
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