The Prescription Drug Ripoff

In our recent series on the Big Pharmas we noted that – ” 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.”

The top fifteen drug 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. Their response to the threat that the health reform bill would allow Medicare to negotiate prices was to threaten to raise them by even more in 2010.

Remember that 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 that year. Pfizer’s profit was almost exactly 20% of revenues, i.e., double petrochemical giant Exxon-Mobil’s percentage profit!

Where does the profit come from?
Let’s consider a hypothetical drug that costs $100 for 100 pills in the United States, i.e. $1 per pill. Europeans pay 35% to 55% less than us for the same drug, so let’s assume that our drug costs 45% less there. The Europeans will pay $65 for their 100 pills, or 65¢ per pill. If they were to buy $100 worth of the pills they’d receive 154 pills.

We know that the drug company will make a 20% profit on their revenue. They sold 254 pills for $200, charging about 79¢ each. Let’s call it 80¢ to make the math easier. So, they made about 16¢ profit on each pill. Remember that our pills cost $1 each, but the Europeans bought their’s for 65¢ each. We paid 35¢ more than them, handsomely covering the drug companies 16¢ profit! The Big Pharma’s much-touted Research and Development (R&D) costs are less than their profits, so we also covered their complete R&D costs! The Europeans contributed 2¢ more than the cost of the pill, which can be put towards other manufacturing costs.

Let’s run that by again. For an average drug, that produces the 20% profit that the Big Pharmas enjoy, you can more or less assume that the extra amount that Americans pay for their prescription drugs directly covers those companies’ R&D costs and also provides them with twice the percentage profits that other large American corporations enjoy.

We should also be factoring in the tax Dollars that go to the research facilities that do the basic compound discovery that the Big Pharmas rely on to provide them with new drugs to sell. They’re rewarding us for our efforts by ripping us off and threatening to get even better at it. They have our legislators running scared.

What if we forced them to reduce their profits by lowering prices?
Although this will never happen, it’s worth considering. Let’s say that the Big Pharmas were forced to drop prices to American consumers by 10%, effectively, reducing overall profits by the same amount. They’d probably respond by raising prices overseas. However, as they spend huge amounts on Administration and Marketing expenses for promoting “me-too” drugs, they could reduce their advertising expenditure to restore their profit levels. If we passed laws that only allowed new drugs onto the market if they have substantial benefits over existing ones, the marketing costs would drop anyway, as new drugs are much easier to sell. So, forcing them to reduce prices here, or reduce profits overall, could actually have beneficial effects. It would temporarily lower their overall revenue, but their percentage profitability might be maintainable if it wasn’t regulated.

How can this happen?
It’s simple. The Big Pharmas have bought our elected representatives, coercing them into passing legislation that boosts their profits and protects them against consumer and voter action groups. If you don’t believe that, look at what has happened during the health reform debate. Everything that might have lowered prescription drug prices has been systematically stripped from the bill. Provisions calling for fuller disclosure of clinical trial readiness results were quashed before they even got debated. We can directly blame the drug price ripoff on the people we voted into cosy positions in Washington.

What we should do
We’re simply going to repeat what we said in the concluding article of our series on the Big Pharmas. Contrary to the drug companies’ public relations messages, consumers and taxpayers don’t get value for their money. People who need to take drugs to improve or maintain their health can’t simply stop buying a product and often have no alternatives to turn to. We are all being taken for a ride, and there will be no real reforms in the pharmaceutical industry unless an informed, aroused and determined public forces legislators to make them happen. We need more innovation, responsible profit making, more facts and far fewer half-truths from the Big Pharmas.

So, where are those Teabagger (Tantrum Party) people when you need them? Why aren’t they out there in the streets, invading the Senate and House of Congress, disrupting the Big Pharmas’ share holders meetings and disrupting drug company conventions? Maybe they’re foolish enough to believe the Big Pharmas’ adverts as well as the ones from the health insurance companies.