[corp-focus] Stripping Away Big Pharma's Figleaf

[Robert Weissman]

Stripping Away Big Pharma's Figleaf
By Russell Mokhiber and Robert Weissman

Drug prices in the United States are out of control, and rising.

The reason is that the United States permits pharmaceuticals to be
marketed by unregulated monopolies: Patent protection gives the drug
companies monopoly control over their products. These companies face
neither direct competition, nor price controls.

But what is the reason for the government grant of these patent
monopolies (which often extend long beyond the official 20 years, thanks
to a variety of Big Pharma "evergreening" tactics to block or delay the
introduction of generic competition)?

Leaving aside the raw political power of the pharmaceutical industry and
its allies, the policy rationale for patent monopolies is the cost of
drug development. According to the drug companies, the cost of
researching and developing a new drug is $800 million.

The myth of astronomical drug development costs is the figleaf behind
which Big Pharma and its paid associates (inside and outside of
government) hide to escape criticism for price gouging. If this myth
were peeled away, Big Pharma would stand exposed. And the prospect of a
more rational system of drug development and pricing would rise
dramatically.

This matter could be resolved, simply, if the drug companies were to
open their books and reveal their actual investments in R&D. Instead,
they implausibly claim that this information would give away trade
secrets and must remain proprietary.

The industry claim of $800 million costs per drug relies on a study from
an industry-funded research center at Tufts University in Boston. Tufts
researchers supposedly had access to industry data to come up with their
figure, but no one else is able to see the underlying data. So if you
choose to believe in this number, it is simply a matter of faith.

To get closer to the actual figures for the cost of drug development and
company per drug expenditures on R&D, you have to peel away the
assumptions and built-in biases of the Tufts-industry study.

Approximately half of the Tufts-industry estimates are attributed to
financing costs, known as opportunity cost of capital. Money invested in
drug R&D could have been invested in treasury bonds, say. While the
bonds would start returning revenues right away, R&D returns are not
realized for years, until a drug is discovered, developed, approved and
put on the market. So in the Tufts-industry study, a "cost" of
development is the forsworn income during the period of development.

This is all true, as far it goes, but it is not how people normally
think about "cost." As James Love of the Consumer Project on Technology
says, it is the equivalent of saying the cost of a car is not the
sticker price, but the sticker price plus interest payments on a car
loan.

Exacerbating the problem, the researchers may pick an unreasonably high
interest rate. They may also set the period for drug development as too
long -- in the Tufts-industry model, relatively small delays in getting
the drug to market lead to big increases in the overall cost.

The Tufts-industry estimate is for the cost of new chemical entities for
which the industry was wholly responsible -- that is, where there was no
substantial public contribution to R&D.

It turns out, however, that the vast majority of new drugs Big Pharma
brings to market do not involve new chemical compounds. A May 2002 study
by the National Institute for Health Care Management (NIHCM) Foundation
found that two-thirds of the prescription drugs approved by the FDA
between 1989 and 2000 were modified versions of existing medicines or
identical to drugs already on the market (and only about 15 percent were
both new and deemed by the FDA to provide significant improvement over
existing medicines). Pharma denies it, but there is every reason to
believe these less novel products are far cheaper to bring to market.

Then there's the not insignificant fact that the case of drugs brought
to market without government support is the exception, not the norm. The
federal government supports an enormous amount of research, and funds
the earliest and riskiest portions of the R&D process: basic research
and the earlier phases of clinical trials.

Finally, the Tufts-industry figures seem to wildly inflate the cost of
clinical testing. Looking at company filings with the IRS for tax
credits on research for "orphan drugs" (drugs which treat small
populations), however, the Consumer Project on Technology found that --
adjusted for risk -- drug companies report expenditures of only $7.9
million on clinical trials, less than 1 percent of the overall estimate.

Even if the costs for this category of drug are below average, as the
industry claims -- even if they were, implausibly, a tenth of the
average -- this would still suggest a much lower total development cost
than the Tufts-industry estimate.

Any honest examination of available evidence on the costs of drug
development suggests the United States -- and most of the rest of the
world, which thanks to the U.S./industry strong-arming tactics in
international trade negotiations, now maintains or soon will adopt
U.S.-style patent rules -- is massively overcompensating Big Pharma for
its work in bringing drugs to market.

With the U.S. healthcare system bursting at the seams, seniors draining
their bank accounts to buy drugs, and millions of people around the
world going without medicines, the time has come for fundamental reform.

Meaningful reform might include ending the industry's patent extension
tricks, licensing drugs developed with public monies on a nonexclusive
basis to permit price-reducing competition (or at least permitting
competition where prices are excessive), and considering rollbacks to
the 20-year patent term and the adoption of price controls.

But even these measures may inadequate. Why couldn't the government
simply take over the job of drug development, and then let private
companies manufacture and distribute medicines in a competitive
environment -- doing away with patent monopolies on drugs altogether?



Russell Mokhiber is editor of the Washington, D.C.-based Corporate Crime
Reporter. Robert Weissman is editor of the Washington, D.C.-based
Multinational Monitor, http://www.multinationalmonitor.org. They are
co-authors of Corporate Predators: The Hunt for MegaProfits and the
Attack on Democracy (Monroe, Maine: Common Courage Press, 1999;
http://www.corporatepredators.org).

(c) Russell Mokhiber and Robert Weissman

This article is posted at:
http://lists.essential.org/pipermail/corp-focus/2002/000118.html