The Real Drug Lords

Early December of last year provided evidence of why we need a genuine drug war -- one that targets not medical-marijuana users but America's pharmaceutical companies (a.k.a. "Big Pharma"), the nation's true drug lords.

The evidence concerned the Bristol-Myers Squibb Company, maker of the diabetes drug Glucophage, which was engaged in an ultimately unsuccessful PR campaign to have its patent on the popular medication extended so as to prevent comparable generics, which would sell for less, from entering the marketplace. Reports indicate that Bristol-Myers Squibb's effort, aimed at securing a favorable congressional vote for extension, cost the corporation $250,000 in political donations to the Republican party, but did convince Representative Dick Armey of Texas, the House majority leader, to champion its cause.

If the Bristol-Myers Squibb example is not sufficiently convincing, here's another, more recent indicator of undue drug-company influence peddling. In April of this year, according to the New York Times, the White House, acting at the behest of the pharmaceutical industry, dropped the expected nomination of Dr. Alastair Wood of Vanderbilt University to be head of the Federal Drug Administration (FDA). Dr. Wood's offense: He was a recognized expert on drug safety who threatened to be "too zealous" in regulating Big Pharma's products. The good doctor had intimated he would more aggressively monitor drugs already on the market, a suggestion that under his leadership, the FDA might actually do its job as a public watchdog; that was clearly unacceptable to the industry, and in matters pharmaceutical, the industry rules.

One more example of Big Pharma's hardball tactics: Last year, Maine and Vermont were taken to court by Pharmaceutical Research and Manufacturers of America (PhRMA), the drug industry's leading trade organization. The two states, it seems, had the temerity to legislate prescription-drug programs aimed at lowering prices for low- and middle-income people through negotiated bulk-purchase discounts. The Vermont law has been successfully overturned by PhRMA's lawyers; Maine's legislation remains, for now, in legal limbo.

What's behind this coordinated, industry-wide resistance to change is simple economics: a desire to maintain the lucrative status quo and protect profits. And no industry has more to protect than Big Pharma. In 2001, says Fortune magazine, America's pharmaceutical companies collectively ranked first in return on revenues (18.5%), first in return on assets (16.3%), and first in return on shareholders' equity (32.2%); median figures for the rest of the Fortune 500 were 3.3, 2.4, and 10.4%, respectively. The top 14 drug firms, Fortune reports, brought in a spectacular $215 billion last year and made a combined profit of $38 billion; their median return to investors was a tidy 14%.

This is nothing new. According to Public Citizen's Congress Watch, the drug industry has been the most remunerative in the US for the past decade, chalking up annual profits three times those of any other American industry. It's been so for most of the 20th century; in 1961, a congressional subcommittee chaired by Sen. Estes Kefauver, D-Tenn., found that pharmaceutical makers had a higher rate of return for the previous five years than any other industry, doubling the average for the nation's manufacturing sector as a whole. The only change that's taken place since then has been a growth in the disparity; Big Pharma, its coffers swollen from the start, has been getting richer year by year and decade by decade.

Consumers, naturally, are paying the price. They're paying it at the drug counter, where prescription costs have risen by 10% in each of the past two years (to $50 on average) and are expected to jump by over 12% in 2002; they're also paying in increased health-insurance premiums, which rose by an average 11% last year due largely (says the Kaiser Family Foundation) to the rising expense of prescription drugs, which now account for almost a fifth of all health-care costs nationwide. Some of this can be blamed on steady increases in what drug companies charge for existing drugs, and some of it on greater reliance on drugs by physicians, but the single biggest factor (40% of the rise, according to the Kaiser Foundation) is the recent introduction of new, more expensive drugs.

During the 1990s, overall wholesale drug prices rose at an average rate of 7% a year, with some new miracle cures carrying price tags in the thousands of dollars for an individual patient's annual supply. At the retail level, this has been particularly hard on senior citizens, who statistically purchase 18 prescriptions per year. Typical seniors now spend a third of their fixed yearly incomes on prescriptions, and according to an ABC News report increased numbers are involuntarily returning to work in order to meet their drug bills.

There's a rationale for all this, of course. The drug companies claim that the astronomical prices they charge are absolutely necessary for "research and development" -- for inventing and perfecting new medicines and bringing them to market. Interference with this process by such means as tighter drug regulations, government price controls, patent reform, or group price negotiations will, they argue, bring catastrophe in the form of an end to pharmaceutical breakthroughs beneficial to the public, killing, in effect, the golden goose.

To hedge its bets, Big Pharma has reinforced its research rationale with direct political action. During the 1999-2000 election cycle, reports Public Citizen, the drug industry employed 625 lobbyists (the most for any special interest) at a cost of $177 million and spent an additional $85 million on campaign contributions and issue ads to guarantee itself a friendly hearing in the nation's capital. Nevertheless, it is the superficially plausible and oft-repeated R&D rationale, accepted by many, that forms Big Pharma's real bulwark against reform and preserves its morally questionable rates of profit. For that reason, the R&D argument begs further analysis.

The drug industry's chief intellectual defense for its pricing policies quickly dissolves under careful scrutiny. The notion, first of all, that pharmaceutical firms are plowing their vast profits back into public-spirited research is simply a myth; annual returns to their shareholders alone are sufficient to puncture that balloon. Furthermore, as a variety of news sources have reported in recent months, between a third and half of all US drug research is actually carried out with tax dollars through the National Institutes of Health (NIH), a federal agency under the Department of Health and Human Services based in Bethesda, Maryland. The rights to NIH research results are then routinely transferred to a private company for a drug's final development and marketing. At some point, the FDA gives its stamp of approval.

Drugs initially created at government expense later earn private distributors profits that climb into the billions. One such example, cited by drug-industry critic Merrill Goozner of New York University, is the cancer drug Taxol, a product of the NIH-affiliated National Cancer Institute; it is now a staple of the Bristol-Myers Squibb line. In effect, the public paid twice, once in taxes to fund the drug's research and again in inflated prescription costs to aggrandize the company.


The pharmaceutical industry's well-oiled propaganda machine, programmed to justify high prices, has long denied the crucial role played in drug creation by the public sector, a role that extends back at least half a century. World War II saw government labs take the lead in the practical development of antibacterial sulfa drugs and penicillin, used to prevent infection from combat wounds, and synthetics, such as Atabrine, a substitute for quinine in the treatment of malaria. Private industry played a complementary but decidedly subordinate role.

Drugmaker Pfizer, for instance, didn't invent the antibiotic penicillin that eventually made it rich beyond its dreams, but it did find a way to mass-produce the drug in usable form. That, in a nutshell, is the contribution to pharmacology made by America's private-sector drug lords; they rarely do the pure, painstaking scientific research that leads to discoveries, concentrating instead on processing, packaging, mass-producing, and marketing the discoveries of others. This qualitative difference is nowhere to be seen in their corporate advertising, however. There, private, for-profit labs are portrayed as responsible for the critical breakthroughs that improve the quality of life.

The truth is mostly the reverse. Data submitted to the Joint Economic Committee of Congress by the National Bureau of Economic Research reveals that public research, not private, led to 15 of the 21 most therapeutically valuable drugs introduced between 1965 and 1992, and other studies done in the 1990s suggest that only a minority of important drug discoveries in recent years -- estimates range from 17% to 40% -- were the result of commercial research. Those new cures were instead the product of the federal National Institutes of Health (NIH), either the "intramural" (or in-house) research performed by NIH scientists, which accounts for 10% of the agency's $20 billion annual budget, or the "extramural" research contracted out through NIH grants to universities, medical and pharmacy schools, nonprofit foundations, and private laboratories, which accounts for most of the rest.

If drug-company money is not going into pure drug research, then, where (other than to stockholders) is it going? The pharmaceutical lobby PhRMA claims its member firms sank $26 billion into R&D in 2000, slightly more than the NIH, but industry analyst Merrill Goozner maintains that probably half of the total went to develop "me-too" drugs, copycat versions of cures competing manufacturers were successfully marketing, or slightly altered versions of drugs already in a company's repertoire that could qualify for new (in effect, extended) patent monopolies. Goozner's charge is supported by a study emanating from the National Institute for Health Care Management, which shows that only 15% of new drugs approved by the FDA from 1989 to 2000 could be called "highly innovative"; the rest were simply modifications of older drugs with expiring patents.

Even bogus research on me-too drugs (a term coined by Sen. Kefauver during his pioneering industry hearings of 1959-61) accounts for only a small portion of total drug-company expense budgets. Kefauver discovered that just 6% of pharmaceutical revenues were going toward research during his time, a figure that had inched up to 13% by 1996, but only because the pressures of patent protection instigated an acceleration in chemical retooling. If only a fraction of Big Pharma's total expenditures are funding drug research of any kind, pure or derivative, what's left after production costs and salaries is drug promotion, and it should come as no surprise that promotion -- selling and advertising -- is where the money is spent.

Forty years ago, Sen. Kefauver found that advertising actually outstripped research by four to one in dollars allocated by private drugmakers; it was, he revealed, the single largest item of overhead for the major pharmaceutical firms next to actual production, swallowing 25% of their operational outlays. Little has changed since the Kefauver days to alter established trends; between 1996 and 2000, reports the health-care information firm IMS Health, the US drug industry expended $54.5 billion on product promotion, or nearly $14 billion a year -- substantially more than for serious research. In addition to the traditional marketing ploys used for decades -- visits to doctors by the industry's approximately 55,000 drug representatives, mailings of brochures and samples, advertisements in medical journals, and exhibits and proselytizing "educational programs" at medical conventions -- recent years have seen vast sums spent on television ads aimed directly at health-care consumers.

These marketing techniques, most especially the increased dollars spent on TV commercials, are the real cause of high drug prices; the industry's much-vaunted research spending pales by comparison. And the reason Big Pharma has that advertising money available to spend is the monopoly position it finds itself in by virtue of exclusive patents. The United States is the only major country that allows the private inventor of a drug or medicine to patent the discovery, even if it was made with the help of a public grant, and to retain exclusive rights to its production and sale, thereby avoiding competition. This is the primary reason why American drug prices are double (or more) those of Canada, Japan, and Europe at the retail level, and also why newly patented drugs for ailments like arthritis are 10 times more costly in the domestic market than older, off-patent medications.

Until relatively recently, US drug patents applied for 17 years, allowing a total market monopoly for that period. In the early 1960s, Sen. Kefauver proposed reducing this to a three-year monopoly followed by a 14-year licensing period during which competitors could gain production rights in exchange for royalty payments. He was denied his reform, and, incredibly, Congress in 1994 extended the long-standing 17-year patents to 20 years, giving an added lease on life to drug monopolists. The battle isn't over, however. Within the past year, organizations like Seniors USA have begun calling for a 10-year maximum patent life for drug discoveries made with private funds and the entire elimination of patents for drugs developed with public monies, in order to force down prices.

A multiplicity of other solutions to the existing American drug-price dilemma, aimed mostly at seniors, have been offered: government vouchers, drug discount cards, a prescription benefit under Medicare. All are inadequate and would only shift the burden of payment without reducing basic prices. The real answer lies in two alternative directions: (1) serious patent reform to limit the monopoly status conferred on new drugs and their manufacturers, and (2) direct drug-price regulation of the sort routinely employed in most civilized countries.

Despite the refrain that price controls never work, they have been successfully imposed on pharmaceuticals by the Canadian government since 1987. Empowering direct price negotiations by the Medicare program is one form of regulation that could be easily implemented. The drug industry's fond belief that its high administered prices are deserved simply because of the importance of its products to the public is a defunct idea that should have long since been interred. Estes Kefauver said it best over a generation ago: "The justification of high price in terms of value to the public is the ideology of monopoly."


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