Bignascarfan
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.)
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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.
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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.
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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.
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.
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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.
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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 oppor-tunities to parlay their
discoveries in-to 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.
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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
(19.2 percent). These are astonishing margins. For
comparison, the median net return for all other
industries in the Fortune 500 was only
20.3 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]
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]
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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, engag-
ing 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
Phar- maceuticals, 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 for-bids 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.
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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
[21] 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/
,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.
[22] 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 <http://www.familiesusa> (http://www.familiesusa/)
.org/site/PageServer?pagename=Publications_Reports).
[23] Sarah Lueck, "Drug Prices Far Outpace Inflation," The
Wall Street Journal, July 10, 2003, p. D2.
[24] On ABC Special with Peter Jennings, "Bitter Medicine:
Pills, Profit, and the Public Health," May 29, 2002.
[25] For the top ten companies and their recent mergers as
of 2003, see www .oligopolywatch.com/2003/05/25.html.
[26] 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.
[27] 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).
[28] 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.
[29] Families USA, "Out-of-Bounds: Rising Prescription Drug
Prices for Seniors."
[30] Public Citizen Congress Watch, "Rx R&D Myths."
[31] "The Fortune 500," Fortune, April 15, 2002, p. F26.
[32] 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.
[33] Henry J. Kaiser Family Foundation, "Prescription Drug
Trends," November 2001 (www.kff.org).
[34] FamiliesUSA, "Profiting from Pain: Where Prescription
Drug Dollars Go," July 2002 (www.familiesusa. org
/site/DocServer/PReport.pdf?docID=
35).
[36] Patricia Barry, "More Americans Go North for Drugs,"
AARP Bulletin, April 2003, p. 3.
[37] Chandrani Ghosh and Andrew Tanzer, "Patent Play,"
Forbes, September 17, 2001, p. 141.
[38] Gardiner Harris, "Schering-Plough Is Hurt by Plummeting
Pill Costs," The New York Times, July 8, 2003, p. C1.
[39] 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.
[40] Alice Dembner, "Drug Firm to Pay $875M Fine for Fraud,"
The Boston Globe, October 4, 2001, p. A13.
http://www.nybooks.com/articles/17244
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.
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-----------
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.
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 oppor-tunities to parlay their
discoveries in-to 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.
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-----------
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
(19.2 percent). These are astonishing margins. For
comparison, the median net return for all other
industries in the Fortune 500 was only
20.3 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]
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]
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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, engag-
ing 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
Phar- maceuticals, 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 for-bids 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.
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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
[21] 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/
,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.
[22] 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 <http://www.familiesusa> (http://www.familiesusa/)
.org/site/PageServer?pagename=Publications_Reports).
[23] Sarah Lueck, "Drug Prices Far Outpace Inflation," The
Wall Street Journal, July 10, 2003, p. D2.
[24] On ABC Special with Peter Jennings, "Bitter Medicine:
Pills, Profit, and the Public Health," May 29, 2002.
[25] For the top ten companies and their recent mergers as
of 2003, see www .oligopolywatch.com/2003/05/25.html.
[26] 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.
[27] 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).
[28] 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.
[29] Families USA, "Out-of-Bounds: Rising Prescription Drug
Prices for Seniors."
[30] Public Citizen Congress Watch, "Rx R&D Myths."
[31] "The Fortune 500," Fortune, April 15, 2002, p. F26.
[32] 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.
[33] Henry J. Kaiser Family Foundation, "Prescription Drug
Trends," November 2001 (www.kff.org).
[34] FamiliesUSA, "Profiting from Pain: Where Prescription
Drug Dollars Go," July 2002 (www.familiesusa. org
/site/DocServer/PReport.pdf?docID=
35).
[36] Patricia Barry, "More Americans Go North for Drugs,"
AARP Bulletin, April 2003, p. 3.
[37] Chandrani Ghosh and Andrew Tanzer, "Patent Play,"
Forbes, September 17, 2001, p. 141.
[38] Gardiner Harris, "Schering-Plough Is Hurt by Plummeting
Pill Costs," The New York Times, July 8, 2003, p. C1.
[39] 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.
[40] Alice Dembner, "Drug Firm to Pay $875M Fine for Fraud,"
The Boston Globe, October 4, 2001, p. A13.
http://www.nybooks.com/articles/17244
