Are U.S. drug companies really ripping you off?

[Guest guest]

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>

> Are U.S. drug companies really ripping you off?

> In a new book, author Marcia Angell slams the

> American pharmaceutical industry and says it needs

> to be saved ­ from itself

> Today show

> Sept. 2, 2004

>

> The high cost of prescription drugs have left many

> consumers searching for other options. For some,

> that means using the Internet or traveling to Canada

> to purchase medication in an attempt to save money.

> But in a new book called " The Truth About Drug

> Companies: How They Deceive Us and What To Do About

> It, " Dr. Marcia Angell, a Harvard lecturer and

> former New England Journal of Medicine

> editor-in-chief, argues that drug companies in this

> country should find a better way of doing business.

> She was invited on the " Today " show to talk about

> suggestions for consumers and reform for the

> industry. Here's an excerpt:

>

> The $200 Billion Colossus

> What does the 800-pound gorilla do? Anything it

> wants to.

>

> What's true of the 800-pound gorilla is true of the

> colossus that is the pharmaceutical industry. It is

> accustomed 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 47

> industries listed in the Fortune 500.) Of the many

> events that contributed to this sudden great

> 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 a

> much-needed 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.

>

> Let the Good Times Roll

> The election of Ronald Reagan in 1980 was perhaps

> the most 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 the poor, which had been

> narrowing since World War II, suddenly began to

> widen again, until today it is a yawning 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, Sen. Birch Bayh (D-Ind.) and Sen. Robert

> Dole (R-Kan.). Bayh-Dole enabled universities and

> small businesses to patent discoveries emanating

> from research sponsored by the National Institutes

> of Health (NIH), 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 start-up companies and the

> NIH for that. 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. While Bayh-Dole

> was clearly a bonanza for big pharma and the biotech

> industry, whether it is a net benefit to the public

> is arguable (I'll come back to that).

>

> 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 opportunities to parlay their discoveries

> into 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. There are two forms of monopoly

> rights ­patents granted by the U.S. Patent and

> Trademark Office (USPTO) and exclusivity granted by

> the Food and Drug Administration (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. 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.

>

> Riding High

> As their profits skyrocketed during the 1980s and

> 1990s, so did the political clout 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

> (33.2 percent). These are astonishing margins. For

> comparison, the median net return for all other

> industries in the Fortune 500 was only 3.3 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.

>

> 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).

> 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 the

> 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. 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 nonprofit

> group Families USA, the former 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. This is an industry

> that amply rewards its own.

>

> In recent years, the top ten companies have included

> five European giants ­ GlaxoSmithKline, AstraZeneca,

> Novartis, Roche, and Aventis. Their profit margins

> are similar to those of their American counterparts,

> and so are their expenditures for R & D and

> marketing and administration. Furthermore, they are

> members of the industry's trade association, the

> misleadingly named Pharmaceutical Research and

> Manufacturers of America (PhRMA). Recently I heard

> Daniel Vasella, the chairman and CEO of Novartis,

> speak at a conference. He was clearly pleased with

> the American commercial and research climate. " Free

> pricing and fast approval secure rapid access to

> innovation without rationing, " he said, sounding

> like the most red-blooded of Americans, despite his

> charming Swiss accent. His company is now moving its

> research operations to a site near the Massachusetts

> Institute of Technology (MIT), a hotbed of basic

> research surrounded by biotechnology companies. I

> suspect the move has nothing to do with " free

> pricing and fast approval " at all, and everything to

> do with the opportunity to profit from U.S.

> taxpayer-funded research under the terms of

> Bayh-Dole, and from the proximity of U.S. medical

> scientists who do the research.

>

> Excerpted from The Truth About the Drug Companies by

> Marcia Angell, M.D. Copyright© 2004 by Marcia

> Angell. Excerpted by permission of Random House, a

> division of Random House, Inc. All rights reserved.

> No part of this excerpt may be reproduced or

> reprinted without permission in writing from the

> publisher.

> © 2004 MSNBC Interactive

>