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The Truth About the Drug Companies


If 1980 was a watershed year for the pharmaceutical industry, 2000 may very well turn out to have been another one—the year things began to go wrong. As the booming economy of the late 1990s turned sour, many successful businesses found themselves in trouble. And as tax revenues dropped, state governments also found themselves in trouble. In one respect, the pharmaceutical industry is well protected against the downturn, since it has so much wealth and power. But in another respect, it is peculiarly vulnerable, since it depends on employer-sponsored insurance and state-run Medicaid programs for much of its revenues. When employers and states are in trouble, so is big pharma.

And sure enough, in just the past couple of years, employers and the private health insurers with whom they contract have started to push back against drug costs. Most big managed care plans now bargain for steep price discounts. Most have also instituted three-tiered coverage for prescription drugs—full coverage for generic drugs, partial coverage for useful brand-name drugs, and no coverage for expensive drugs that offer no added benefit over cheaper ones. These lists of preferred drugs are called formularies, and they are an increasingly important method for containing drug costs. Big pharma is feeling the effects of these measures, although not surprisingly, it has become adept at manipulating the system—mainly by inducing doctors or health plans to put expensive, brand-name drugs on formularies.

State governments, too, are looking for ways to cut their drug costs. Some state legislatures are drafting measures that would permit them to regulate prescription drug prices for state employees, Medicaid recipients, and the uninsured. Like managed care plans, they are creating formularies of preferred drugs. The industry is fighting these efforts—mainly with its legions of lobbyists and lawyers. It fought the state of Maine all the way to the US Supreme Court, which in 2003 upheld Maine’s right to bargain with drug companies for lower prices, while leaving open the details. But that war has just begun, and it promises to go on for years and get very ugly.

Recently the public has shown signs of being fed up. The fact that Americans pay much more for prescription drugs than Europeans and Canadians is now widely known. An estimated one to two million Americans buy their medicines from Canadian drugstores over the Internet, despite the fact that in 1987, in response to heavy industry lobbying, a compliant Congress had made it illegal for anyone other than manufacturers to import prescription drugs from other countries.15 In addition, there is a brisk traffic in bus trips for people in border states, particularly the elderly, to travel to Canada or Mexico to buy prescription drugs. Their resentment is palpable, and they constitute a powerful voter block—a fact not lost on Congress or state legislatures.

The industry faces other, less familiar problems. It happens that, by chance, some of the top-selling drugs—with combined sales of around $35 billion a year—are scheduled to go off patent within a few years of one another.16 This drop over the cliff began in 2001, with the expiration of Eli Lilly’s patent on its blockbuster antidepressant Prozac. In the same year, AstraZeneca lost its patent on Prilosec, the original “purple pill” for heartburn, which at its peak brought in a stunning $6 billion a year. Bristol-Myers Squibb lost its best-selling diabetes drug, Glucophage. The unusual cluster of expirations will continue for another couple of years. While it represents a huge loss to the industry as a whole, for some companies it’s a disaster. Schering-Plough’s blockbuster allergy drug, Claritin, brought in fully a third of that company’s revenues before its patent expired in 2002.17 Claritin is now sold over the counter for much less than its prescription price. So far, the company has been unable to make up for the loss by trying to switch Claritin users to Clarinex—a drug that is virtually identical but has the advantage of still being on patent.

Even worse is the fact that there are very few drugs in the pipeline ready to take the place of blockbusters going off patent. In fact, that is the biggest problem facing the industry today, and its darkest secret. All the public relations about innovation is meant to obscure precisely this fact. The stream of new drugs has slowed to a trickle, and few of them are innovative in any sense of that word. Instead, the great majority are variations of oldies but goodies—“me-too” drugs.

Of the seventy-eight drugs approved by the FDA in 2002, only seventeen contained new active ingredients, and only seven of these were classified by the FDA as improvements over older drugs. The other seventy-one drugs approved that year were variations of old drugs or deemed no better than drugs already on the market. In other words, they were me-too drugs. Seven of seventy-eight is not much of a yield. Furthermore, of those seven, not one came from a major US drug company.18

For the first time, in just a few short years, the gigantic pharmaceutical industry is finding itself in serious difficulty. It is facing, as one industry spokesman put it, “a perfect storm.” To be sure, profits are still beyond anything most other industries could hope for, but they have recently fallen, and for some companies they fell a lot. And that is what matters to investors. Wall Street doesn’t care how high profits are today, only how high they will be tomorrow. For some companies, stock prices have plummeted. Nevertheless, the industry keeps promising a bright new day. It bases its reassurances on the notion that the mapping of the human genome and the accompanying burst in genetic research will yield a cornucopia of important new drugs. Left unsaid is the fact that big pharma is depending on government, universities, and small biotech companies for that innovation. While there is no doubt that genetic discoveries will lead to treatments, the fact remains that it will probably be years before the basic research pays off with new drugs. In the meantime, the once-solid foundations of the big pharma colossus are shaking.

The hints of trouble and the public’s growing resentment over high prices are producing the first cracks in the industry’s formerly firm support in Washington. In 2000, Congress passed legislation that would have closed some of the loopholes in Hatch-Waxman and also permitted American pharmacies, as well as individuals, to import drugs from certain countries where prices are lower. In particular, they could buy back FDA-approved drugs from Canada that had been exported there. It sounds silly to “reimport” drugs that are marketed in the United States, but even with the added transaction costs, doing so is cheaper than buying them here. But the bill required the secretary of health and human services to certify that the practice would not pose any “added risk” to the public, and secretaries in both the Clinton and Bush administrations, under pressure from the industry, refused to do that.

The industry is also being hit with a tidal wave of government investigations and civil and criminal lawsuits. The litany of charges includes illegally overcharging Medicaid and Medicare, paying kickbacks to doctors, engaging in anticompetitive practices, colluding 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, covering up evidence. Some of the settlements have been huge. TAP Pharmaceuticals, for instance, paid $875 million to settle civil and criminal charges of Medicaid and Medicare fraud in the marketing of its prostate cancer drug, 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 industry responding to its difficulties? One could hope drug companies would decide to make some changes—trim their prices, or at least make them more equitable, and put more of their money into trying to discover genuinely innovative drugs, instead of just talking about it. But that is not what is happening. Instead, drug companies are doing more of what got them into this situation. They are marketing their me-too drugs even more relentlessly. They are pushing even harder to extend their monopolies on top-selling drugs. And they are pouring more money into lobbying and political campaigns. As for innovation, they are still waiting for Godot.

The news is not all bad for the industry. The Medicare prescription drug benefit enacted in 2003, and scheduled to go into effect in 2006, promises a windfall for big pharma since it forbids the government from negotiating prices. The immediate jump in pharmaceutical stock prices after the bill passed indicated that the industry and investors were well aware of the windfall. But at best, this legislation will be only a temporary boost for the industry. As costs rise, Congress will have to reconsider its industry-friendly decision to allow drug companies to set their own prices, no questions asked.

This is an industry that in some ways is like the Wizard of Oz—still full of bluster but now being exposed as something far different from its image. Instead of being an engine of innovation, it is a vast marketing machine. Instead of being a free market success story, it lives off government-funded research and monopoly rights. Yet this industry occupies an essential role in the American health care system, and it performs a valuable function, if not in discovering important new drugs at least in developing them and bringing them to market. But big pharma is extravagantly rewarded for its relatively modest functions. We get nowhere near our money’s worth. The United States can no longer afford it in its present form.

Clearly, the pharmaceutical industry is due for fundamental reform. Reform will have to extend beyond the industry to the agencies and institutions it has co-opted, including the FDA and the medical profession and its teaching centers. In my forthcoming book, The Truth About the Drug Companies, I discuss the major reforms that will be necessary.

For example, we need to get the industry to focus on discovering truly innovative drugs instead of turning out 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 fact that the FDA usually approves a drug only if it is better than a placebo. It needn’t be better than an older drug already on the market to treat the same condition; in fact, it may be worse. There is no way of knowing, since companies generally do not test their new drugs against older ones for the same conditions at equivalent doses. (For obvious reasons, they would rather not find the answer.) They should be required to do so.

The me-too market would collapse virtually overnight if the FDA made approval of new drugs contingent on their being better in some important way than older drugs already on the market. Probably very few new drugs could meet that test. By default, then, drug companies would have to concentrate on finding truly innovative drugs, and we would finally find out whether this much-vaunted industry is turning out better drugs. A welcome by-product of this reform is that it would also reduce the incessant and enormously expensive marketing necessary to jockey for position in the me-too market. Genuinely important new drugs do not need much promotion (imagine having to advertise a cure for cancer).

A second important reform would be to require drug companies to open their books. Drug companies reveal very little about the most crucial aspects of their business. We know next to nothing about how much they spend to bring each drug to market or what they spend it on. (We know that it is not $802 million, as some industry apologists have recently claimed.) Nor do we know what their gigantic “marketing and administration” budgets cover. We don’t even know the prices they charge their various customers. Perhaps most important, we do not know the results of the clinical trials they sponsor—only those they choose to make public, which tend to be the most favorable findings. (The FDA is not allowed to reveal the results it has.) The industry claims all of this is “proprietary” information. Yet, unlike other businesses, drug companies are dependent on the public for a host of special favors—including the rights to NIH-funded research, long periods of market monopoly, and multiple tax breaks that almost guarantee a profit. Because of these special favors and the importance of its products to public health, as well as the fact that the government is a major purchaser of its products, the pharmaceutical industry should be regarded much as a public utility.

These are just two of many reforms I advocate in my book. Some of the others have to do with breaking the dependence of the medical profession on the industry and with the inappropriate control drug companies have over the evaluation of their own products. The sort of thoroughgoing changes required will take government action, which in turn will require strong public pressure. It will be tough. Drug companies have the largest lobby in Washington, and they give copiously to political campaigns. Legislators are now so beholden to the pharmaceutical industry that it will be exceedingly difficult to break its lock on them.

But the one thing legislators need more than campaign contributions is votes. That is why citizens should know what is really going on. Contrary to the industry’s public relations, they don’t get what they pay for. The fact is that this industry is taking us for a ride, and there will be no real reform without an aroused and determined public to make it happen.

  1. 15

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

  2. 16

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

  3. 17

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

  4. 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.

  5. 19

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

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