The Big Pharmas - Part 7 - The Dark Side

So far in this series we’ve looked at: the top pharmaceutical companies (“Big Pharmas”); the many phases in the process of bringing a new drug to market; competition between the Big Pharmas; generic drug manufacturers and other health product manufacturers; regulations and price controls; patents; and the value that the Big Pharmas and their competitors and partners bring to the table. Today we’ll look at what critics of the Big Pharmas are saying.

A prevailing attitude about the Big Pharmas is that they make excessive profits and rip off consumers. That’s not surprising, as the top fifteen companies made almost $400 billion in revenues in 2008 and they’ve been raising prescription drug prices by around 9% per year, far above inflation levels and increases in Gross Domestic Product. In the early days of the current health reform debate they stayed on the sidelines. However, as it became apparent that there might be more price controls, particularly for Medicare drugs, they have started a strong campaign to limit or defeat the health reform bill, a move that has big implications for seniors. In today’s article we’ll look at that issue and other criticism leveled at the Big Pharmas, together with our own conclusions on each topic. We’ve grouped the issues to align with the sequence in which we covered topics, starting with revenues.

Excessive profits
One of the main criticisms of the Big Pharmas is that they make excessive profits. The world’s largest corporation, petrochemical producer Exxon-Mobil, made its highest ever profit in 2007, almost $41 billion on revenue of $405 billion, so its profit was 10% of its revenues. Pfizer, the pharmaceutical company that generated most revenue in 2008, made a profit of just over $14 billion on revenue of just under $71 billion. Pfizer’s profit was almost exactly 20% of revenues, i.e., double Exxon-Mobil’s percentage profit!

The pattern holds true across all of the Big Pharmas, putting their average profit against revenue percentages higher than any other industry. There isn’t an exact definition of “excessive profits”, but if consumers are annoyed when the gas companies make record profits, they should be doubly troubled by the profits that the Big Pharmas are making.

Let’s look at some other facts:

• Since 2004, the global pharmaceuticals market has witnessed moderate growth across different geographies.
• The market growth is expected to decelerate through to 2013 due to increased number of patent expiries and intensifying competition from generic drug manufacturers.
• The global pharmaceuticals industry generated total revenues of $615.1 billion in 2008.
• Profits rose at a compound annual growth rate (CAGR) of 4.7% for the period spanning 2004-08.
• The industry’s total revenues are expected to touch $734 billion by the end of 2013, representing a CAGR of 3.6% for the 2008-13 period.
• The top 10 global pharmaceutical companies recorded revenues of $348.3 billion during 2008, an increase of 4% over 2007.
• The net profit of those companies was $65.1 billion in 2008, an increase of 12.1% over 2007.

The Big Pharmas are making huge profits and they are rising at a steady, but slowing rate. They are all worried about the effects of projected revenue drops when current patents expire, but, in absolute terms, they will still be taking a much larger percentage of revenues as profit than other large companies.

The profits are made even larger because the Big Pharmas charge their customers in the United States more than they charge customers overseas. The Congressional Budget Office estimates that the United States accounts for about one third of all branded prescription drug sales by volume (number of doses sold) but generates one half of the total revenue. A particular drug may sell for between 35% and 55% less in other countries than it does in the United States. We’re not talking about branded versus generic drug prices here. It’s the same drug. Many years ago the Big Pharmas claimed that the cost of regulation and litigation in the United States was much higher than elsewhere, so they needed to charge more here, but that argument no longer holds true across their major markets. As we’ll see in the next topic, US consumers and taxpayers are effectively subsidizing the Big Pharmas and getting nothing in return.

The Research and Development Myth
As we saw in Part 2 of this series, it can take 10 to 15 years to bring a drug to market and the Big Pharmas spend between 8 and 20 per cent of their revenue on Research and Development (R&D). The process of bringing a drug to market is long and arduous and patents only protect the resulting revenue stream against competitors for seven to twelve years, so there is an incentive to recover costs quickly.

That’s the united front that the Big Pharmas present to consumers and governments. They claim that they need the money to fund R&D. Almost every time that you see one of their paid disciples being interviewed, they’ll trot out that line as soon as prices or profits are mentioned. The reality is somewhat different. First, it turns out that R&D is a relatively small part of the budgets of the Big Pharmas. It’s smaller than the profits they make and is dwarfed by their vast expenditures on marketing and administration. Around 36 percent of their sales revenue goes into paying for these activities. This is roughly two and a half times the average percentage expenditures for R&D. Critics claim, with a lot of justification, that the prices drug companies charge bear little relationship to the actual costs of developing and making them and could be cut dramatically without coming anywhere close to threatening R&D.

Second, the pharmaceutical industry is not especially innovative. Only a handful of truly important drugs have been brought to market in recent years, and most were based on taxpayer-funded research at academic institutions, small biotechnology companies, or the National Institutes of Health (NIH). Most of them are simply variations of older drugs already on the market, targeted at grabbing a share of an established, lucrative market. For instance, we now have six statins (Crestor, Lescol, Lipitor, Mevacor, Pravachol and Zocor) on the market to lower cholesterol, all variants of the first.

So, who does the research and why have things changed so dramatically over the past two decades? All of the fingers point at President Reagan and the Bayh-Dole Act, named 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 that result from research sponsored by the National Institutes of Health (NIH) and then to grant exclusive licenses to drug companies. The NIH is the major distributor of tax dollars for medical research. Before Bayh-Dole, taxpayer-financed discoveries were in the public domain, available for free to any company that wanted to use them. Now, the universities, where most NIH-sponsored work is carried out, can patent and license their discoveries and charge royalties for them. Similar legislation permitted the NIH to cut similar deals directly with the drug companies.

Bayh-Dole was a tremendous boost for the emerging biotechnology industry and the Big Pharmas. Small biotech companies, many of them founded by university researchers to exploit their discoveries, proliferated rapidly. They often carry out the initial phases of drug development, hoping to cut lucrative deals with big drug companies that can manufacture and market the new drugs. When a patent held by a university or a small biotech company is licensed to a big drug company, all parties cash in on the public investment in research, but the taxpayer gets nothing in return. 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.

The Reagan years and Bayh-Dole also transformed the ethos of medical schools and teaching hospitals from nonprofit academic institutions to “partners with industry”, akin to profit centers for the startups and Big Pharmas. One very unfortunate side effect has been a growing and unhealthy pro-industry bias in medical research. Medical schools and teaching hospitals are putting more resources into searching for commercial opportunities and wild-haired professors are asking themselves why they aren’t as rich and famous as rock stars.

Imaginary Unfair Competition
The Big Pharmas are increasingly worried by the generic drug companies, but they are fighting back hard by: fighting to extend patent lives and decrease government regulation; trimming staff and relying on external research; making more from “look-alike” products, rather than new discoveries; moving manufacturing overseas; increasing marketing, both to physicians and consumers; and raising prices.

We’ve looked at R&D. The Big Pharmas claim that they are being unfairly hit by overseas manufacturers who pay their workers less and are legally able to offer fewer benefits. However, consider these facts:

• Fact #1: Most U.S. prescription drugs aren’t actually made in the United States. Manufacturing has been steadily moved offshore, where labor and benefit costs are lower and labor regulations are much less strict.
• Fact #2: Many U.S. prescription drugs are made in China, a country widely known to have the lowest quality control standards in the world.
• Fact #3: Most U.S. drug companies don’t even run quality control checks on the drugs they import from China!

The Big Pharmas contract with cheap, low-end Chinese chemical factories to manufacture their drugs at something like two cents a pill. They then they import these Chinese-made pills and don’t even test them before selling them to U.S. consumers at markups that can be as high as $20 a pill! Lipitor tablets, that typically sell here for around $130 for a month’s supply, probably cost under $1 to produce and deliver to the pharmacist. Admittedly, some of the difference goes to marketing, but the rest is pure profit, mainly to the pharmaceutical company.

The FDA and the Big Pharmas repeatedly warn about the dangers of herbal supplements and other natural treatments produced overseas and sold by competitors, but they don’t seem as worried about manufacturing and delivering products that may use the same natural or synthetic ingredients and are produced in dubious manufacturing facilities from ingredients bought from equally dubious sources.

The generic drug manufacturers are clearly a threat to the Big Pharmas as long as they can get access to new drugs to manufacture. The Big Pharmas have fought back on the manufacturing side, but they still have significant R&D costs, albeit with taxpayer, academic and startup help. The smarter generic manufacturers are now starting to encourage similar R&D efforts by their own governments, so that they don’t have to rely on the Big Pharma’s “castoffs”. It remains to be seen whether this will lower prices to the consumer or result in increased greed on the part of the new generic/branded drug manufacturers.

Bribery and Corruption
One of the unfortunate results of competition, government regulations and price controls, and shorter patent life protection, is that unscrupulous people within an organization will often look for ways to bend the rules and increase the chances of turning a profit.

Some of the strategies employed by the Big Pharmas to increase their market share and profits are legal. They have dramatically increased their level of advertising to consumers over the past decade, though many organizations have limited their direct access to their real customers – the corporate purchase agents and physicians and who decide which products to buy or prescribe. The problem of free “educational” lunches/dinners and off-site events at luxurious locations became so bad at my previous employer that all such activities were banned, with decisions on approved medications having been moved to an independent panel of experts who used clinical results and comparative pricing, rather than pressure sales exposure, as their main criteria.

The rapidly increasing amount of advertisements and free “educational” material directed at consumers is doubly dangerous. It makes it difficult for physicians to treat their patients with drugs that their experience selects, rather than yielding to the demands of a vociferous and partially knowledgeable, or deliberately misinformed, patient. It also creates the impression that every condition should be automatically treated with a prescription drug, which is very often not the case. In many cases, for instance, a life style change can be much more effective, long lasting, less expensive and safer.

The Big Pharmas have a proven and unfortunate track record of resorting to questionable marketing practices and straight bribery, albeit some of it legal. We wrote recently about the record fines, such as the $2.3 billion one against Pfizer, for off-label marketing. In this scam, the drug company touts its products to consumers and physicians for purposes that they weren’t approved for, often with marginal or negative effects. The fines imposed on the Big Pharmas, unfortunately, are often more like a raindrop falling on the hide of an elephant, rather than an effective deterrent.

There is a huge incentive to delay the expiration of drug patents, so the Big Pharmas have found all kinds of legal loopholes to prevent the generic manufacturers from muscling in on their act. The Hatch-Waxman Act provides for an automatic 30-month delay while a court sorts out the “new” patent issues. In one famous case, AstraZeneca extended its monopoly on the blockbuster anti-heartburn medication Prilosec by filing a new patent claim describing how the drug could be sprinkled on applesauce for use by patients who have trouble swallowing pills. Federal Drug Administration (FDA) rules mandated that generic competitors would have to prove that their versions would behave the same way when sprinkled on applesauce, requiring more testing, causing more delays and preventing patients who could swallow pills from getting cheaper drugs. Until President Bush put a restriction on its use, the Big Pharmas could simply keep launching a series of claims, each resulting in an automatic 30 month extension of their patent.

Unfortunately, the FDA has been repeatedly linked to bribery. Not surprisingly, it was a generic pharmaceutical company, Mylan, that first publicly exposed the pharmaceutical industry’s influence on the drug approval process. Mylan suspected corruption in the fast approval of some pharmaceuticals and not others, so they hired private detectives who caught FDA agents red-handed. They were taking bribes in exchange for expediting drug approval. This resulted in the conviction of four FDA employees. There have also been cases where the FDA has allowed patent life extension for dubious reasons, reaping vast benefits for the Big Pharma involved. A person with suspicions would smell the scent of bribery in the air.

There have also been many cases where the Big Pharmas have been proven to have bribed generic manufacturers or alternative therapy suppliers to keep competitive products off of the market. In 2002, the Federal Trade Commission (FTC) filed a complaint against pharmaceutical giant Hoechst Marion Roussel, Inc. (now a part of Aventis) and the Florida-based Andrx Corp, alleging the firms stifled market competition by agreeing to delay the release of a cheap generic heart drug. The FTC alleged that Hoechst paid Andrx millions of dollars not to market a competing version of a Hoechst heart drug known as Cardizem CD. Andrx had developed a cheaper version of Cardizem CD but, according to the FTC, agreed to keep it off the market in exchange for payments of $40 million per year from Hoechst. At the same time, the FTC also announced a proposed settlement with Abbott Laboratories and Geneva Pharmaceuticals. The FTC had found that Abbot had paid Geneva $4.5 million a month to keep a generic version of Abbott’s drug Hytrin off of the market.

Although it’s not illegal, influence peddling in Washington is an ongoing problem, particularly when it comes to Wall Street, the health industry in general and the Big Pharmas. We’ve written extensively about the huge amounts of money that the health sector throws to politicians to influence their decisions. Some have received millions over the past year alone, as the health reform debate warmed up. The Big Pharmas are spending millions of Dollars a day to alter or defeat the proposed health reform bill, while threatening to raise prices by at least 9% in 2010, no doubt, in part, to pay for the advertisements and political “bribes”. The Big Pharmas are determined not to allow changes to Medicare to allow negotiation of prescription drug prices, a change that could save the government (i.e. taxpayers) tens of millions of Dollars a year and cut prescription costs for seniors.

The race to the bottom
This article could easily be ten times longer. Here are a few more issues to ponder:

• In 2000, in the New England Journal of Medicine, Marcia Angell, MD, former editor of the publication, wrote about the conflicts of interest that abound between the author/physicians who conduct pharmaceutical studies and the companies themselves. Four years later, Dr. Angell wrote the controversial book, “The Truth About Drug Companies: How They Deceive Us and What to Do About It.”
• In 2004, a disturbing Washington Post editorial asked the questions: ” Should pharmaceutical companies have to reveal the results of clinical trials they conduct on their drugs, even when the results show the drugs to be ineffective? That’s the issue behind a discussion that has begun among the editors of the nation’s medical journals. Concerned that drug companies may be sending them only partial results from their clinical trials, they now want to set up a national registry of clinical trials.”
• In 2004, the Associated Press exposed the fact that several of the “famous doctors [who] advised the government recently on new cholesterol guidelines for the public” didn’t reveal their financial ties to pharmaceutical companies: “Eight of the nine were making money from the very companies whose cholesterol-lowering drugs they were urging upon millions more Americans. Two own stock in them.” The Big Pharmas use Prescriber Reports, which are weekly lists of every prescription written by each of the 600,000 doctors in the United States to target physicians who aren’t touting their products.
• In 2005, a New York Times article points out that “when the drug industry came under fire last summer for failing to disclose poor results from studies of antidepressants, many major drug makers promised to provide more information about their research on new medicines. But nearly a year later, crucial facts about many clinical trials remain hidden, scientists independent of the company say.”
• In 2006, an MSNBC article exposed one of the Cancer Industry’s “dirty little secrets”: Cancer doctors are allowed to profit from the sale of chemotherapy drugs. One oncologist is quoted here as saying, “So the pressure is frankly on to make money by selling medications.”
• In 2007, Sheffield (England) University medical/pharmaceutical research scientist, Dr. Aubrey Blumsohn, was commissioned by Procter and Gamble to test their osteoporosis drug, Actonel. However, he says he was denied access to key data, and that P & G then proceeded to ghostwrite “his” analysis of it. When he complained, the company tried to silence him. He wouldn’t be silenced, so he lost his job.

Observations
The Big Pharmas affect everyone, but the people hurting most are the elderly. When Medicare was enacted in 1965, people took far fewer prescription drugs and they were much cheaper. Senior citizens could generally afford to buy whatever drugs they needed out of pocket. Seniors tend to need more prescription drugs than younger people, but an increasing proportion are reporting that they have skipped doses or have not filled prescriptions because of the cost. 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, that can bargain for steep discounts or rebates. People without insurance have no bargaining power; and so they, or taxpayers, pay the highest prices. It would be nice to think that those prices were fair, but they’re clearly not.

Like all big organizations, the Big Pharmas have exemplary tales to tell and many, many dirty little secrets to hide, or crimes to gloss over. We’re probably looking at the tip of the iceberg, so we can assume that there will be more evidence of the Big Pharma’s questionable practices, scams and crimes. The big question is – can we do anything about it?

Tomorrow: In the final article in this series we’ll look at some potential remedies, mostly generic or homeopathic, rather than branded.

Related articles: Part 1 – Introduction | Part 2 – R&D On Steroids | Part 3 – Competition | Part 4 – Regulations and Price Controls | Part 5 – Patents | Part 6 – Medical Triumphs | Part 8 – Time To Take a Pill