[Pharm-policy] PhRMA's backgrounder on draft TACD R&D statement

[James Love]

  This is the PhRMA January 26, 2000 back grounder
on the draft TACD statement.  As noted in the
earlier missive, the PhRMA statement is riddled
with errors, for example on the fundemental
question of how qualifying expenditures were
determined (the IRS itself collects this
right from the company returns, and it was not
necessary to make the types of assumptions
PhRMA alleged were made), on the matching
of US version US R&D expenditure (no one
compared US to worldwide), and on other
items.  Apparently PhRMA thought this was something
prepared for a Wed press conference organized
by Public Citizen, and it was a bit rushed.  

I told PhRMA I would give them a look at the
next version of the TACD statement, and I also
gave them a heads up on the fact that CPT would
probably issue some type of report on R&D
that covered some of these same topics, in the 
next couple of weeks.   Maybe in the next round
we can have a debate with less misinformation and
confusion.   
  
    Jamie

  ---------------------------
  
  January 26, 2000
  THE PHARMACEUTICAL INDUSTRY'S R&D INVESTMENT
  
  Background
  
     In the attack du jour on the pharmaceutical industry,
  critics have charged that the annual estimates of R&D
  expenditures compiled by the Pharmaceutical Research and
  Manufacturers of America (PhRMA) are inflated.  The charge
  appears to be based on the erroneous assumption that amounts
  claimed under the R&D tax credit represent total R&D
  expenditures.
  
  The R&D Tax Credit 
  
     In fact, the R&D tax credit is based on incremental, or
  added, spending on a limited category of expenses.  Its
  purpose is to spur companies to increase investment in R&D;
  it was never meant to include all R&D spending.  Moreover,
  the IRS rules defining expenses eligible for this credit are
  extremely restrictive.  Many expenditures that qualify as
  research and development expenses under generally accepted
  accounting principles are excluded.  Ineligible expenses
  include:
  
    all R&D equipment costs (including the cost of
          equipping state-of-the-art laboratories with such
          expensive tools as screening robotics, high-speed
          computers, laser capture microscopes and others);
          
    fringe benefits paid to employees engaged in R&D;
          
    salaries and benefits of many employees supporting
          and supervising R&D activities;
          
    a percentage of the expenses of research conducted
          on a contract basis, and
          
    expenses for R&D paid by a U.S. company for R&D
          conducted outside the U.S.
          
     IRS data show that, as a result of the above
  restrictions, only about 55 percent of total R&D expenses
  are qualified expenses for the purposes of the R&D tax
  credit.
  
  
    
  The TACD Analysis
  
     The Transatlantic Consumer Dialogue (TACD), an
  organization affiliated with Ralph Nader's Public Citizen,
  attempted to estimate total pharmaceutical industry R&D
  expenditures based on the R&D tax credit used by taxpayers
  to reduce tax liability.  While the TACD analysis attempts
  to take into account the fact that the credit is only for
  incremental, or added, R&D expenditures, it arbitrarily
  assumes a base of 50 percent.  In other words, it assumes
  that current year R&D is double the average of the previous
  four years' R&D expenditures.  This is unrealistic.  Only
  start-up companies and other very rapidly growing companies
  have such a low base.  For more mature companies, a base of
  80 to 90 percent is more realistic.  This means that mature
  companies increase R&D by 5 to 15 percent each year.  In
  fact, the PhRMA Survey for calendar year 2000 estimates an
  increase in industry R&D spending of 10.1% over 1999.  By
  assuming a universally low base, the TACD analysis seriously
  underestimates R&D expenditures.  
                               
     Finally, the TACD analysis assumed all taxpayers
  received a 20 percent credit for incremental qualified
  expenditures.  In fact, a number of taxpayers choose an
  alternative 13 percent credit to avoid an R&D deduction
  disallowance that is required if the 20 percent credit is
  claimed.
  
  PhRMA's Annual Surveys
  
     Every year, PhRMA surveys its member companies -the
  country's leading pharmaceutical and biotechnology companies
  -on their individual R&D expenditures.  These expenditures
  are defined as the total costs incurred for all
  pharmaceutical research and development activity, including
  salaries of employees who conduct, support or supervise R&D;
  supplies and equipment used in R&D; a fair share of
  overhead; contract research expenditures; the costs of
  synthesis and extraction of compounds; the costs of
  laboratory testing (pre-clinical); expenditures involved in
  formulating the dosage and testing the stability of
  compounds; the expenditures incurred in three-stage,
  FDA-supervised clinical trials; the costs of post-marketing
  studies, and bioavailability studies.  
  
     The most recent survey found projected R&D expenditures
  for 2000 of $26.4 billion.  This figure represents a 10.1
  percent increase over 1999 R&D expenditures of $24 billion.
  
  Other Government Data Sources
  
     The National Science Foundation collects and publishes
  annual R&D expenditures by industries.  That data, when
  adjusted to take into account the different categories
  between PhRMA surveys and the NSF survey, is consistent with
  the R&D expenditure figures published by PhRMA.
  
  
         For 1996, NSF data show $9.8 billion for domestic
  research performed by pharmaceutical companies, plus an
  additional $2.1 billion of pharmaceutical industry domestic
  contract research.  The PhRMA survey includes all biomedical
  research, including biotech, which is included in a larger
  NSF category for "Research, Development and Testing."  The
  amount in that NSF category is $5.9 billion, a substantial
  portion of which relates to biomedical research.
  
  The Fruits of R&D
  
     Anyone who questions the fact that pharmaceutical
  companies are investing heavily in R&D should look at the
  results of that investment -"the proof of the pudding." 
  Last year alone, pharmaceutical companies added 40 new
  treatments to the nation's medicine chest.  The new
  medicines target 36 diseases with a total patient population
  of 545 million and a total annual cost of $600 billion.  In
  the last decade of the 20th century, companies made a total
  of 370 new medicines available -up from 239 in the previous
  decade.  
  
     The medicines of the 1990s included breakthrough
  medicines for AIDS, cancer, stroke, depression,
  schizophrenia, arthritis and many other diseases.
  
  The Rising Cost of R&D
  
     According to the Boston Consulting Group, the average
  cost of development a new drug is about $500 million,
  including the cost of research failures as well as interest
  costs over the period of investment.  Drug development costs
  are increasing due to a number or reasons, including more
  clinical trials, usually involving more patients and more
  procedures, and the fact that companies are attacking more
  and more difficult diseases.
  
  Prices vs. Expenditures
  
     Critics of the pharmaceutical industry tend to confuse
  "drug prices" with total "drug expenditures."  Total
  expenditures for pharmaceuticals increased by 15.7 percent
  in 1998.  But, according to IMS Health, the average cost of
  a prescription Medicine increased by a modest 3.2 percent. 
  In other words, because more patients got more and better
  medicines, even if there were no price increases, total
  expenditures would have increased by 12.5 percent.
  
     Rising drug expenditures represent a sea change that is
  occurring in health care.  Prescription drugs are an
  increasingly important treatment option, which can often
  keep people out of hospitals, nursing homes and surgical
  suites.  They are the most cost-effective, least invasive
  form of health care.  The share of total health care
  expenditures represented by outpatient prescription drugs is
  only in the single digits, currently 7.9 percent.  That
  figure is inching up every year because patients, physicians
  and insurers are increasingly turning to prescription drugs. 
  Still, it should be noted that since outpatient drugs
  account for only 7.9 percent of health care expenditures,
  even a 15.7 percent increase in total drug expenditures is a
  good investment in effective and cost-effective treatment of
  patients.
  
  Coverage is Key
  
     The fact that prescription drugs are the most
  cost-effective and least invasive health care treatments
  means that prescription drug coverage is increasingly
  important.  This is especially true for seniors, who use
  more prescription medicines than younger Americans. 
  Medicare's lack of coverage of prescription drugs is truly
  an anachronism.  That's why PhRMA supports enhancing drug
  coverage for seniors.  We want to do this in a way that
  provides quality health care for seniors while preserving
  the incentives to invest in pharmaceutical R&D.



James Love, Consumer Project on Technology
P.O. Box 19367        | http://www.cptech.org
Washington, DC 20036  | mailto:love@cptech.org
Voice 1.202.387.8030  | fax 1.202.387.8030