The Truth About the Drug Companies By Marcia Angell, M.D.

By Marcia Angell, M.D.

10-Page Summary Exposes a Major Health Cover-up

For a two-page summary of the health cover-up, click here

“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) [in 2002]. 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.”

Summary below from New York Review of Books

Volume 51, Number 12 · July 15, 2004

http://www.nybooks.com/articles/17244

The Truth About the Drug Companies

Marcia Angell is a former editor in chief of the prestigious The New England Journal of Medicine. She is currently a senior lecturer in social medicine at Harvard Medical School. Her latest book is The Truth About the Drug Companies: How They Deceive Us and What to Do About It. Before the summary begins, here are excerpts from the book reviews of three leading US newspapers:

New York Times: “A scorching indictment of drug companies and their research and business practices…tough, persuasive and troubling.”

Boston Globe: “A sober, clear-eyed attack on the excesses of drug company power…a lucid, persuasive, and highly important book.”

Washington Post: “Always authoritative…[this book] delivers the message—that drug-company money and power is corrupting American medicine—in a convincing, no-nonsense manner.”

Part 1

Every day, the pharmaceutical industry bombards Americans with advertisements. A more general message is mixed in with the pitches for a specific medicine, which frequently feature gorgeous individuals having fun in the great outdoors. It boils down to this: “Yes, prescription pharmaceuticals are expensive, but it proves how valuable they are.” Furthermore, our R&D costs are considerable, and we must find a way to cover them. We produce a continual stream of innovative medications that lengthen life, improve its quality, and avoid more expensive medical care as’research-based’ enterprises. You are the beneficiary of the American free market system’s continuous success, so be grateful, stop whining, and pay up.” Simply put, the business is arguing that you get what you pay for.

Is any of this correct? The first half, at least, is. Prescription drug prices are indeed high—and rapidly rising. Americans now spend an astounding $200 billion per year on prescription drugs, and this figure is increasing at a rate of about 12% per year. [1] Drugs are the fastest-growing component of the health-care bill, which is also rapidly rising. The rise in drug spending reflects, almost equally, that people are taking a lot more drugs than they used to, that those drugs are more likely to be expensive new ones rather than older, cheaper ones, and that the prices of the most heavily prescribed drugs are routinely raised, sometimes several times a year.

For example, before its patent expired, the price of Schering-Plough’s top-selling allergy pill, Claritin, was raised thirteen times in five years, for a total increase of more than 50%—more than 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 cost of the fifty most commonly used medications by seniors was approximately $1,500 for a year’s supply. (Pricing varies widely, but this corresponds to what the firms term the average wholesale price, which is typically near to what an individual without insurance spends at the drugstore.)

Prescription drug costs are no longer solely a problem for the poor. As the economy continues to struggle, health insurance coverage is contracting. Employers are demanding employees to bear a greater share of the expenditures, and many businesses are discontinuing health insurance entirely. Because prescription drug prices are rapidly growing, payers are especially keen to get out from under them by shifting costs to individuals. As a result, more patients must pay a larger portion of their prescription expenditures out of pocket. And it packs a punch.

Many of them are simply incapable of doing so. They swap drugs for house heating or food. Some people try to stretch out their medication by taking it less frequently than suggested or sharing it with a partner. Others, too embarrassed to declare they can’t afford drugs, leave their physicians’ offices with prescriptions but don’t fill them. Not only do these individuals go without critical treatment, but their doctors sometimes incorrectly infer that the drugs they were provided haven’t worked and prescribe new ones, exacerbating the problem.

The elderly are the ones that suffer the most. When Medicare was first implemented in 1965, people used significantly fewer prescription pharmaceuticals, and they were much cheaper. As a result, no one saw the need to include an outpatient prescription medication benefit in the program. Senior citizens could generally afford to acquire whatever drugs they required out of pocket back then. Approximately half to two-thirds of the elderly have supplemental insurance that partially covers prescription pharmaceuticals, but that ratio is declining as employers and insurers see it as a losing venture. Congress enacted a Medicare reform measure at the end of 2003 that contained a prescription drug benefit set to begin in 2006, but as we will show later, its benefits are insufficient to begin with and will be swiftly surpassed by rising prices and administrative costs.

The elderly, for obvious reasons, require more prescription drugs than younger individuals, primarily for chronic illnesses such as arthritis, diabetes, high blood pressure, and raised cholesterol. In 2001, roughly one in every four seniors reported skipping dosages or failing to complete medications due to expense. (This percentage is likely certainly greater currently.) Unfortunately, the elderly are the least likely to have additional insurance. At an average annual cost of $1,500 for each pill, a person without supplemental insurance who takes six different prescription drugs—which is not uncommon—would have to pay $9,000 out of cash. Not many elderly and weak people have such deep pockets.

Furthermore, in one of the more paradoxical tactics of the pharmaceutical industry, costs are substantially higher for the individuals who need the drugs the most but can least afford them. Medicare consumers without supplemental insurance are charged far more than favored customers, such as major HMOs or the Veterans Affairs (VA) system. Because they buy in volume, the latter can negotiate large discounts or rebates. People who do not have health insurance have no bargaining power and hence pay the highest prices.

For the first time in two years, we have seen the beginnings of public opposition to predatory pricing and other dubious pharmaceutical business tactics. Because of this opposition, drug firms are now bombarding us with public relations messaging. And the magic words, as if they were an incantation, are research, innovation, and American. American. Research. Innovation. It would make an excellent narrative.

However, while the rhetoric is exciting, it has little to do with reality. First, research and development (R&D) is a modest part of the huge pharma companies’ budgets, swamped by vast marketing and administration expenses, and even smaller than earnings. In fact, for more than two decades, this industry has been by far the most profitable in the United States. (For the first time, the industry fell out of first place in 2003, finishing third behind “mining, crude oil extraction,” and “commercial banking.”) The prices drug companies charge have little relationship to the expenses of creating the pharmaceuticals and might be drastically reduced without jeopardizing R&D.

Second, the pharmaceutical sector isn’t particularly creative. As difficult as it may seem, just a few truly essential pharmaceuticals have been brought to market in recent years, and they were primarily the result of taxpayer-funded research at academic institutions, tiny biotechnology firms, or the National Institutes of Health (NIH). The vast majority of “new” medications are simply variants of older drugs already on the market. These are known as “me-too” medications. The plan is to capture a piece of an established, lucrative industry by creating something that is strikingly similar to a top-selling medicine. For example, there are now six cholesterol-lowering statins on the market (Mevacor, Lipitor, Zocor, Pravachol, Lescol, and the newest, Crestor), all of which are versions of the first. According to Dr. Sharon Levine, associate executive director of Kaiser Permanente Medical Group:

“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 spend money on a much less certain venture, which is looking for brand-new drugs?” [4]

Third, the industry is far from a model of American capitalism. To be sure, it is free to choose which drugs to develop (me-too drugs rather than innovative ones, for example), and it is free to price them as high as the market will bear, but it is completely reliant on government-granted monopolies in the form of patents and FDA-approved exclusive marketing rights. If it is not extremely inventive in terms of medication discovery, it is highly innovative—and aggressive—in terms of devising new ways to extend its monopoly rights.

And there’s nothing particularly American about this business. It is the essence of a worldwide business. Europe is home to over half of the world’s largest pharmaceutical companies. (The exact number varies due to mergers.) Pfizer, Merck, Johnson & Johnson, Bristol-Myers Squibb, and Wyeth (originally American Home Products) ranked first in 2002, followed by GlaxoSmithKline and AstraZeneca from the United Kingdom, Novartis and Roche from Switzerland, and Aventis from France (which in 2004 merged with another French company, Sanafi Synthelabo, putting it in third place). [5] Their operations are very similar. All of their drugs are significantly more expensive in the United States than in other regions.

Because the United States is the key profit center, medicine companies passing themselves off as American, whether they are or not, is simply smart public relations. However, it is true that some European corporations are now basing their R&D operations in the United States. They contend that this is because we, unlike much of the rest of the world, do not regulate prices. More likely, they wish to capitalize on the exceptional research output of American colleges and the NIH. In other words, it is our publicly funded scientific business that pulls people here, not private enterprise.

Over the last two decades, the pharmaceutical industry has strayed far from its original lofty goal of developing and manufacturing helpful new pharmaceuticals. This industry, which is now essentially a marketing machine for medications of doubtful benefit, utilizes its riches and power to co-opt any institution that stands in its way, including the US Congress, the FDA, academic medical facilities, and the medical profession itself. (Because doctors must write the prescriptions, the majority of its marketing efforts are aimed at influencing them.)

If prescription pharmaceuticals were ordinary consumer goods, none of this would be so significant. However, medications are not the same. People rely on them for their health and sometimes even their lives. “It’s not like buying a car, tennis shoes, or peanut butter,” Senator Debbie Stabenow (D-Mich.) said. People need to know that there are certain checks and balances in place to ensure that the industry’s thirst for profits does not override all other considerations. However, such checks and balances do not exist.

Part 2

What exactly does the 800-pound gorilla do? It can do whatever it wants.

What is true of the 800-pound gorilla is also true of the pharmaceutical industry’s colossus. It is accustomed to doing pretty much anything it wants. 1980 was the watershed year. It was a fine business before then, but it was a fantastic one after that. Prescription medicine sales were relatively stable as a percentage of US GDP from 1960 to 1980, but roughly tripled between 1980 and 2000. They are currently worth more than $200 billion per year. [6] ONone of the various factors that contributed to the industry’s success had anything to do with the quality of the pharmaceuticals the businesses were selling.

It is an understatement to say that medicines are a $200 billion industry. That is roughly how much Americans spent on prescription medications in 2002, according to government statistics. This figure includes the almost 25% markup for wholesalers, pharmacists, and other middlemen and retailers, as well as direct consumer purchases at drugstores and mail-order pharmacies (whether paid for out of pocket or not). However, it excludes the vast sums spent on pharmaceuticals provided in hospitals, nursing homes, and doctors’ offices (as is the case for many cancer drugs). Most assessments allocate them to the costs of those amenities.

Drug company revenues (or sales) are a little different, at least as presented in corporate annual report summaries. They usually refer to a company’s global sales, which include sales to health care facilities. However, they do not include the earnings of middlemen and retailers.

IMS Health, perhaps the most cited source of pharmaceutical industry statistics, estimated total worldwide prescription medicine sales in 2002 to be around $400 billion. Approximately half were in the United States. So the $200 billion behemoth is actually a $400 billion megabehemoth.

The victory of Ronald Reagan in 1980 was possibly the most important factor in the rapid emergence of big pharma—the collective term for the major pharmaceutical companies. With the Reagan administration came a strong pro-business change in government policies as well as in society as a whole. And, as a result, the public’s perception of tremendous wealth shifted. Prior to then, extremely large wealth seemed a little unsavory. You may choose to achieve well or do good, but most individuals who had an option thought it would be difficult to do both. This conviction was especially strong among scientists and other intellectuals. They could live a comfortable but not opulent life in academia, hoping to perform fascinating cutting-edge research, or they might “sell out” to industry, doing less important but more lucrative work. Americans began to change their tune during the Reagan years and continued through the 1990s. Being wealthy became not just reputable, but almost virtuous. There were “winners” and “losers,” and the winners were wealthy and deserved to be so. The rich-poor divide, which had been shrinking since World War II, has abruptly widened again, becoming a chasm.

As a result of a variety of business-friendly government moves, the pharmaceutical industry and its CEOs swiftly joined the ranks of the winners. I won’t list them all, but two are particularly significant. Beginning in 1980, Congress enacted a series of rules intended to accelerate the translation of tax-funded fundamental research into viable new products—a process known as “technology transfer.” The purpose was also to strengthen the standing of American-owned high-tech companies in global markets.

The most important of these bills is known as the Bayh-Dole Act, named for its principal proponents, Senators Birch Bayh (D-Ind.) and Robert Dole (R-Ky). (R-Kans.). Bayh-Dole allowed universities and small businesses to patent discoveries resulting from research sponsored by the National Institutes of Health, the primary source of tax dollars for medical research, and then grant exclusive licenses to pharmaceutical companies. Until then, taxpayer-funded discoveries were in the public domain and could be used by any firm. However, universities, which conduct the majority of NIH-sponsored research, can now patent, license, and charge royalties for their discoveries. Similar legislation allowed the NIH to enter into agreements with pharmaceutical companies that would directly transfer NIH discoveries to industry.

Bayh-Dole provided a major boost to both the fledgling biotechnology industry and big pharma. Small biotech firms, many of which were founded by university researchers to commercialize their discoveries, proliferated rapidly. They now contact major academic research institutions and frequently carry out the early stages of drug development in the hopes of striking lucrative deals with large pharmaceutical companies that can market the new drugs. Typically, both academic researchers and their institutions own stock in the biotechnology companies in which they are involved. As a result, when a university or a small biotech company’s patent is eventually licensed to a large pharmaceutical company, all parties benefit from the public investment in research.

Because of these laws, drug companies no longer have to rely on their own research for new drugs, which few large companies do. They are increasingly reliant on academia, small biotech startup companies, and the NIH for this. [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 undoubtedly a boon to big pharma and the biotech industry, whether its passage resulted in a net benefit to the public is debatable.

The Reagan era and the Bayh-Dole Act also altered the culture of medical schools and teaching hospitals. These non-profit organizations began to consider themselves as “industry partners,” and they grew as excited about the prospects to profit from their findings as any entrepreneur. Faculty academics were encouraged to secure patents for their work (which were assigned to their universities), and royalties were shared. To assist in this effort and capitalize on faculty discoveries, many medical schools and teaching hospitals set up “technology transfer” offices. As the entrepreneurial spirit flourished in the 1990s, medical school teachers and their parent institutions stepped into other lucrative payment relationships with pharma corporations.

One of the consequences has been an increase in pro-industry bias in medical research—exactly where such prejudice should not exist. Faculty members who had previously been comfortable with a “threadbare but elegant” lifestyle began to wonder, in the words of my grandmother, “If you’re so smart, why aren’t you rich?” Medical schools and teaching hospitals, on the other hand, devote more resources to the pursuit of commercial prospects.

Beginning in 1984 with the Hatch-Waxman Act, Congress passed a succession of policies that were equally beneficial to the pharmaceutical business. These legislation extended brand-name medicine monopolies. Exclusivity is the industry’s lifeblood because it means that no other business may offer the identical drug for a fixed length of time. When exclusive marketing rights expire, copies (known as generic medications) enter the market, and the price drops to as little as 20% of what it was. [9] Monopoly rights are classified into two types: patents awarded by the US Patent and Trade Office (USPTO) and exclusivity given by the FDA. While they are related, they function relatively independently, almost as backups for one another. Hatch-Waxman, named after Senator Orrin Hatch (R-Utah) and Representative Henry Waxman (D-Calif.), was intended primarily to promote the faltering generic business by bypassing several FDA restrictions for bringing generic medications to market. While accomplishing this, Hatch-Waxman also extended the patent life of brand-name medications. Since then, industry lawyers have exploited some of its clauses to allow patents to last far longer than the legislators intended.

Other regulations passed by Congress in the 1990s extended the patent life of brand-name pharmaceuticals even further. Drug firms now hire legions of lawyers to milk these rules for all they’re worth—which is a lot. As a result, the effective patent life of brand-name pharmaceuticals grew from around eight years in 1980 to approximately fourteen years in 2000. [10] Those six years of extended exclusivity are gold for a blockbuster—typically defined as a medicine with annual sales of more than a billion dollars (such as Lipitor, Celebrex, or Zoloft). They can increase revenues by billions of dollars, enough to purchase a lot of lawyers and still have enough of cash left over. No wonder big pharma will go to practically any length to retain exclusive marketing rights, even if doing so contradicts all of its rhetoric about the free market.

During the 1980s and 1990s, drug firms’ political power grew in lockstep with their revenues. By 1990, the sector had taken shape as a company with extraordinary control over its own destiny. For example, if it didn’t like something about the FDA, the federal agency in charge of industry regulation, it might modify it through direct persuasion or through its congressional allies. Profits at the top ten drug corporations (which included European firms) were about 25% of sales in 1990, and except for a drop during President Bill Clinton’s health care reform program, profits as a proportion of sales stayed roughly the same for the next decade. (Of course, in absolute terms, profits increased as sales increased.) In 2001, the ten American pharma businesses on the Fortune 500 list had the highest average net return of any American industry, whether measured as a proportion of sales (18.5 percent), assets (16.3 percent), or shareholders’ equity (33.2 percent). These are incredible margins. In comparison, the median net return for all other Fortune 500 industries was only 3.3 percent of sales. Commercial banking, which is no slouch as an aggressive industry with many friends in high places, came in a distant second, accounting for 13.5 percent of sales.[11]

As the economic downturn continued in 2002, big pharma profits fell only slightly, from 18.5 to 17.0 percent of sales. The most startling fact about 2002 is that the combined profits of the Fortune 500’s ten pharmaceutical companies ($35.9 billion) exceeded the profits of the remaining 490 businesses ($33.7 billion). [12] Profits at Fortune 500 drug companies fell to 14.3 percent of sales in 2003, still well above the 4.6 percent median for all industries that year. When I say this is a profitable industry, I really mean it. It’s difficult to imagine how wealthy big pharma is.

Despite being huge, drug industry R&D spending were consistently significantly less than profits. They accounted for only 11 percent of sales for the top ten companies in 1990, rising slightly to 14 percent in 2000. The largest single item in the budget is not R&D or even profits, but something commonly referred to as “marketing and administration”—a term that varies slightly from company to company. This category accounted for a staggering 36 percent of sales revenues in 1990, and that proportion has remained roughly constant for more than a decade. [13] Note that this is two and a half times the expenditures for R&D.

These figures are derived from the industry’s own annual reports to the Securities and Exchange Commission (SEC) and stockholders, but what exactly falls into these categories is unclear, as drug companies keep that information close to their chests. R&D, for example, is likely to include many activities that most people would consider marketing, but no one can be certain. For its part, “marketing and administration” is a massive black box that most likely includes what the industry refers to as “education,” as well as advertising and promotion, legal costs, and exorbitant executive salaries. According to a report by the non-profit group Families USA, Charles A. Heimbold Jr., the former chairman and CEO of Bristol-Myers Squibb, earned $74,890,918 in 2001, not including his $76,095,611 in unexercised stock options. Wyeth’s chairman earned $40,521,011, excluding stock options worth $40,629,459. And so forth. [14]

Part 3

If 1980 was a milestone year for the pharmaceutical business, 2000 might be another—the year things started to go awry. As the late 1990s’ burgeoning economy soured, many profitable enterprises found themselves in jeopardy. State governments also found themselves in problems as tax revenues fell. In one sense, the pharmaceutical business is well shielded from a downturn because of its money and power. In another way, it is particularly susceptible because it relies heavily on employer-sponsored insurance and state-run Medicaid programs for a large portion of its revenue. Big pharma suffers when employers and states suffer.

And, indeed, in the last few years, businesses and the private health insurers with whom they contract have begun to push back against rising prescription costs. Most large managed care plans now bargain for significant price reductions. Most have also implemented three-tiered prescription medication coverage: full coverage for generic drugs, partial coverage for beneficial brand-name drugs, and no coverage for expensive drugs that provide no additional benefit above cheaper alternatives. These preferred drug lists are known as formularies, and they are becoming an increasingly essential technique of controlling drug expenditures. Big pharma is feeling the consequences of these efforts, and not unexpectedly, it has gotten expert at manipulating the system—most notably, by persuading doctors or health plans to include expensive, brand-name pharmaceuticals on formularies.

State governments are also looking for methods to reduce drug expenses. Some state legislatures are working on legislation to allow them to control prescription drug pricing for state employees, Medicaid beneficiaries, and the uninsured. They are developing preferred drug formularies, similar to managed care schemes. The business is fighting back, primarily through its legions of lobbyists and attorneys. It fought the state of Maine all the way to the United States Supreme Court, which upheld Maine’s right to bargain with drug companies for lower prices in 2003, but left the details open. But the conflict has only just begun, and it promises to last years and get extremely ugly.

The general public has recently expressed dissatisfaction. It is now well accepted that Americans spend far more for prescription medications than Europeans and Canadians. Despite the fact that, in response to heavy industry lobbying, a compliant Congress made it illegal for anyone other than manufacturers to import prescription drugs from other countries in 1987, an estimated one to two million Americans buy their medicines from Canadian drugstores via the Internet. [15] Furthermore, there is a high volume of bus journeys for persons from border states, particularly the elderly, to travel to Canada or Mexico to purchase prescription medications. Their displeasure is evident, and they form a sizable voting bloc, which Congress and state legislatures are well aware of.

Other, less well-known issues confront the industry. It just so happens that three of the top-selling pharmaceuticals, with combined annual sales of roughly $35 billion, are set to go off patent within a few years of one another. [16] The fall off the cliff began in 2001, when Eli Lilly’s patent on its blockbuster antidepressant Prozac expired. In the same year, AstraZeneca lost its patent on Prilosec, the original “purple pill” for heartburn that brought in a staggering $6 billion per year at its peak. Glucophage, Bristol-Myers Squibb’s best-selling diabetes drug, was discontinued. The unusual cluster of expirations will last for a few more years. While it is a huge loss for the industry as a whole, it is a disaster for some businesses. Claritin, Schering-Plough’s blockbuster allergy drug, accounted for nearly a third of the company’s revenue before its patent expired in 2002. [17] Claritin is now available without a prescription for a substantially lower price. So far, the company has been unable to compensate for the loss by attempting to transfer Claritin consumers to Clarinex—a medicine that is nearly identical but has the advantage of still being under patent.

Worse, there are relatively few medications in the pipeline that are ready to take the place of blockbusters that are about to go off patent. In reality, that is the industry’s largest challenge today, as well as its deepest secret. All of the public relations surrounding innovation is designed to disguise this fact. The flow of new drugs has slowed to a trickle, and few of them are creative in any way. Instead, the vast majority are “me-too” medications that are variations on oldies but favorites.

Only 17 of the 78 medications approved by the FDA in 2002 contained novel active components, and only seven of them were considered as enhancements over earlier drugs by the FDA. The remaining 71 medications approved that year were either modifications of existing drugs or were rated no superior than drugs already on the market. In other words, they were clones. Seven out of 78 isn’t much of a return. Furthermore, none of the seven originated from a big US pharmaceutical business. [18]

For the first time in a few years, the massive pharmaceutical business is in significant financial trouble. It is facing “a perfect storm,” as one industry spokesman put it. Profits are still well above what most other businesses might dream for, but they have recently declined, and for some corporations, significantly. That is what investors care about. Wall Street is only concerned with how high profits are today, not how high they will be tomorrow. Stock values for several corporations have plunged. Nonetheless, the sector continues to promise a bright new day. It grounds its assurances on the belief that the mapping of the human genome and the subsequent surge in genetic research will result in a plethora of vital new medications. Unspoken is the fact that big pharma relies on government, universities, and tiny biotech firms for innovation. While there is no doubt that genetic discoveries will lead to medicines, the fact remains that basic research will most likely take years before it yields new pharmaceuticals. Meanwhile, the once-firm underpinnings of the behemoth of big pharma are trembling.

The signals of problems, along with the public’s rising disdain of exorbitant costs, are causing the first fractures in the industry’s formerly staunch support in Washington. In 2000, Congress introduced legislation that would have eliminated some of the loopholes in Hatch-Waxman while simultaneously allowing American pharmacies and individuals to import pharmaceuticals from nations with lower prices. They might, in particular, repurchase FDA-approved medications exported from Canada. It may appear absurd to “reimport” pharmaceuticals that are marketed in the United States, but even with the additional transaction fees, doing so is less expensive than purchasing them here. However, the measure required the secretary of health and human services to certify that the treatment would not pose any “additional risk” to the public, and secretaries in both the Clinton and Bush administrations refused to do so, citing industry pressure.

A flood of government probes and civil and criminal cases is also hitting the business. The charges include illegally overcharging Medicaid and Medicare, paying kickbacks to doctors, engaging in anticompetitive practices, collaborating 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, concealing evidence. Some of the towns were massive. TAP Pharmaceuticals, for example, spent $875 million to settle civil and criminal Medicaid and Medicare fraud accusations related to the promotion of their prostate cancer medicine, 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 sector dealing with its problems? One would expect that drug corporations will decide to make some adjustments, such as lowering their pricing or making them more equal, and investing more of their money in trying to create truly revolutionary drugs, rather than just talking about it. However, this is not the case. Instead, drug corporations are doing more of what got them into this mess in the first place. They are aggressively marketing their knock-off medications. They are putting even more pressure on the FDA to extend their monopolies on top-selling medications. They are also increasing their spending on lobbying and political activities. They’re still waiting for Godot in terms of creativity.

The news for the industry isn’t all awful. Because it prohibits the government from negotiating pricing, the Medicare prescription medication program, approved in 2003 and set to go into force in 2006, offers a windfall for big pharma. The instant increase in pharmaceutical stock prices following the passage of the measure revealed that the industry and investors were well aware of the windfall. However, this regulation will only provide a brief boost to the business. As prices climb, Congress will be forced to revisit its pro-industry choice to let drug corporations to establish their own rates with no questions asked.

This is an industry that, in some respects, resembles the Wizard of Oz in that it is still full of bluster but is now being revealed to be considerably different from its image. It is a massive marketing machine rather than an engine of innovation. Instead of being a success story of the free market, it relies on government-funded research and monopoly rights. Nonetheless, this business is critical to the American health-care system, and it serves a significant purpose, if not in discovering major new pharmaceuticals, then in developing and bringing them to market. However, big pharma is lavishly compensated for its comparatively minor duties. We don’t get our money’s worth. In its current shape, the United States cannot afford it.

Clearly, major reform in the pharmaceutical business is overdue. Reform must extend beyond the industry to the agencies and organizations that it has enslaved, such as the FDA and the medical profession and its teaching hospitals. The major adjustments that will be required are discussed in my book, The Truth About Drug Companies.

For example, we need to encourage the pharmaceutical industry to focus on developing truly novel drugs rather than producing 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 FDA’s requirement that a medicine be better than a placebo. It doesn’t have to be better than an older drug on the market to treat the same condition; in fact, it could be worse. There is no way to know because businesses rarely test new medications versus older ones for the same ailments at equal doses. (For obvious reasons, they would like not to discover the solution.) They should be compelled to do so.

The me-too business would collapse very immediately if the FDA made new medicine approval contingent on them being significantly better than older drugs currently on the market. Very few new medications are likely to pass the test. By default, drug corporations would have to focus on developing truly novel treatments, and we would finally see whether this much-touted business is producing better drugs. This reform would also minimize the constant and exorbitant marketing required to compete for position in the me-too market, which would be a good byproduct. Genuinely significant new medications do not require extensive marketing (imagine having to advertise a cure for cancer).

A second significant reform would be to oblige pharmaceutical corporations to open their books. Pharmaceutical businesses reveal very little about the most important components of their business. We don’t know how much they spend to get each drug to market, or what they spend it on. (We know it’s not $802 million, as some industry defenders recently stated.) We also don’t know what their massive “marketing and administration” expenses cover. We have no idea what prices they charge their various customers. Perhaps most importantly, we don’t know the outcomes of the clinical experiments they fund—only the ones they choose to make public, which are usually the most positive. (The FDA is not permitted to reveal the results.) The industry says that all of this information is “proprietary.” Nonetheless, unlike other firms, drug corporations rely on the public for a slew of special benefits, including access to NIH-funded research, long periods of market monopoly, and a slew of tax exemptions that nearly guarantee a profit. Because of these specific benefits, the importance of its products to public health, and the fact that the government is a significant purchaser of its products, the pharmaceutical sector should be viewed as a public utility.

These are only two of the several improvements I argue for in The Truth About Drug Companies. Others have to do with breaking the medical profession’s reliance on the industry and the inappropriate power pharma firms have over the appraisal of their own goods. The type of long-term improvements required will necessitate government action, which will necessitate considerable public pressure. It will be difficult. Drug firms are the most powerful lobby in Washington, and they lavishly fund political campaigns. Legislators are now so enslaved to the pharmaceutical industry that it will be extremely difficult to free them.

However, politicians require votes more than campaign funds. That is why citizens should be aware of what is going on. Contrary to business propaganda, they do not get what they pay for. The truth is that this industry is taking us for a ride, and there will be no true reform unless the public becomes enraged and determined to see it through.

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Notes

[1] There are several sources of statistics on the size and growth of the industry. One is IMS Health, a company that collects and sells information on the global pharmaceutical industry. See www.imshealth.com/ims/portal/front/articleC/0,2777,6599_3665_41336931,00.html for the $200 billion figure. For further sources on this and other matters, see my book The Truth About the Drug Companies: How They Deceive Us and What to Do About It, from which this article is drawn.

[2] For a full picture of the special burden of rising drug prices on senior citizens, see Families USA, “Out-of-Bounds: Rising Prescription Drug Prices for Seniors”

www.familiesusa.org/assets/pdfs/Out_of_Boundsab79.pdf

[3] Sarah Lueck, “Drug Prices Far Outpace Inflation,” Wall Street Journal, July 10, 2003, p. D2.

[4] On ABC Special with Peter Jennings, “Bitter Medicine: Pills, Profit, and the Public Health,” May 29, 2002.

[5] For the top ten companies and their recent mergers as of 2003, see www.oligopolywatch.com/2003/05/25.html.

[6] These figures come from the US Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group, Baltimore, Maryland. They were summarized in Cynthia Smith, “Retail Prescription Drug Spending in the National Health Accounts,” Health Affairs, January/February 2004, p. 160.

[7] For excellent summaries of public contributions to drug company research, see Public Citizen Congress Watch, “Rx R&D Myths: The Case Against the Drug Industry’s R&D ‘Scare Card,’” July 2001 (www.citizen.org); and NIHCM, “Changing Patterns of Pharmaceutical Innovation,” May 2002 (www.nihcm.org).

[8] This is probably an underestimate. One source that indicates it is at least this is CenterWatch, www.centerwatch.com, a private company owned by Thomson Medical Economics, which provides information to the clinical trial industry. See An Industry in Evolution, third edition, edited by Mary Jo Lamberti (CenterWatch, 2001), p. 22.

[9] Families USA, “Out-of-Bounds: Rising Prescription Drug Prices for Seniors.”

[10] Public Citizen Congress Watch, “Rx R&D Myths.”

[11] “The Fortune 500,” Fortune, April 15, 2002, p. F26.

[12] Public Citizen Congress Watch, “Drug Industry Profits: Hefty Pharmaceutical Company Margins Dwarf Other Industries,” June 2003, www.citizen.org/documents/Pharma_Report.pdf. The data are drawn mainly from the Fortune 500 list in Fortune, April 7, 2003, and drug company annual reports.

[13] Henry J. Kaiser Family Foundation, “Prescription Drug Trends,” November 2001, www.kff.org

[14] FamiliesUSA, “Profiting from Pain: Where Prescription Drug Dollars Go,” July 2002:

www.familiesusa.org/resources/tools-for-advocates/tips/profiting-from-pain-talking-points.html

[15] Patricia Barry, “More Americans Go North for Drugs,” AARP Bulletin, April 2003, p. 3.

[16] Chandrani Ghosh and Andrew Tanzer, “Patent Play,” Forbes, September 17, 2001, p. 141.

[17] Gardiner Harris, “Schering-Plough Is Hurt by Plummeting Pill Costs,” New York Times, July 8, 2003, p. C1.

[18] For key information about the numbers and kinds of drugs approved each year, see the Web site of the US Food and Drug Administration (FDA), www.fda.gov/cder/rdmt/pstable.htm.

[19] Alice Dembner, “Drug Firm to Pay $875M Fine for Fraud,” Boston Globe, October 4, 2001, p. A13.

Marcia Angell – The Truth About the Drug Companies