The $200 Billion Colossus

The following is taken from Chapter 1 of The Truth About Drug Companies by Marcia Angell, published by Random House.

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 U.S. gross domestic product, but from 1980 to 2000, they tripled. They now stand at more than $200 billion a year. Furthermore, since the early 1980s, this industry has consistently ranked as the most profitable in the United States˜by a long shot. (Only in 2003 did it fall from that position to rank third among the forty-seven industries listed in the Fortune 500.) Of the many events that contributed to their sudden great and good fortune, none had to do with the quality of the drugs the companies were selling.

In this chapter I'll give you an overview of the pharmaceutical industry – its meteoric rise and the recent, early signs of either a coming fall or an overhaul. I will not go into much detail here; I'll leave that to later chapters. What I want to do now is provide a quick look at what's under this rock when it's lifted. It's not a pretty sight.

Before I begin, a few words about the facts and figures I will use throughout the book. In most cases, I use data from the year 2001, because it is the most recent year for which information is reasonably complete for all the aspects of the industry I will consider. If I stick with one year, it will make it easier to see the whole picture. But for some important facts, I will use figures from 2002 and, whenever possible, 2003. In all cases, I will make it clear what year I am talking about.

I also need to explain what I mean when I say this is a $200 billion industry. 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, but my focus in this book will be mainly on how the drug companies operate in the United States.

You should understand, however, that it is virtually impossible to be precise about most of these figures. Before drugs reach consumers, they pass through many hands and are paid for in exceedingly complicated, often hidden, ways. It is easy to compare apples and oranges without knowing it. You need to ask, for example, whether a number refers just to prescription drugs or includes over-the-counter drugs and other consumer products made by drug companies; whether it includes revenues for middlemen and retailers or not; whether it refers just to outpatient consumer purchases or also to health facility purchases; and whether it includes mail order purchases.