E-DRUG: NEJM editorial on pharmaceutical industry
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[copied as fair use; thanks to AFRONETS for spotting this! WB]
The Pharmaceutical Industry -- To Whom Is It Accountable?
by Marcia Angell, M.D.
The New England Journal of Medicine, 22 June 2000
The pharmaceutical industry is under mounting scrutiny because of
rapidly increasing expenditures for drugs in the United States. Drug
expenditures are now the fastest-growing component of health care
costs, increasing at the rate of about 15 percent per year. (1,2)
They account for about 8 percent of health care spending, and at
their current rate of increase, they will soon surpass spending for
physicians' services and, for many health maintenance organizations
(HMOs), the costs of hospitalization. The increase is due both to a
greater use of drugs and to higher prices for individual drugs. Pa-
tients feel drug costs keenly, because they pay much of them out of
pocket. Many private insurers tightly limit drug coverage, and Medi-
care does not cover outpatient drugs at all.
The President and members of Congress on both sides of the aisle are
considering adding some sort of drug benefit to Medicare. Discussions
of this issue have drawn attention not only to the acceleration in
drug expenditures, but also to the apparent capriciousness of drug
pricing and other practices of the pharmaceutical industry. Americans
regularly pay up to twice as much as Europeans and Canadians for the
same drug. (3) Prices also vary widely within the United States,
where -- perversely -- they are highest for those in greatest need
and least able to pay. Medicare recipients with no supplementary in-
surance pay on average twice as much for the 10 most commonly pre-
scribed drugs as do favored customers, such as large HMOs and the
Veterans Affairs system. (4,5) For example, a month's supply of Zocor
(simvastatin) was reported last year to be priced at $103.87 for
Medicare recipients, as compared with $42.95 for favored customers.
(5) Chronically ill, older Americans may thus be hit with annual drug
costs of many thousands of dollars -- sums they simply cannot pay.
There are frequent stories of older Americans who play out their pre-
scriptions for as long as possible by taking reduced doses, or who
share drugs with their spouses, or who simply do without, choosing
food and heat over drugs.
The media have recently highlighted another inequity in drug access -
- the inability of people in the underdeveloped world to obtain the
drugs they desperately need. Some underdeveloped countries, over-
whelmed by the human immunodeficiency virus (HIV) epidemic and unable
to afford brand-name antiretroviral agents, have sought exceptions to
patent protections, so that they can manufacture or import generic
drugs. The pharmaceutical industry, with the support of the U.S. gov-
ernment, has fought these efforts. (6,7) The industry has also been
notably uninterested in developing drugs to treat tropical diseases
that afflict millions of people with low purchasing power. A recent
story in the New York Times described the reluctance of manufacturers
to maintain production of drugs to treat trypanosomiasis in Africa.
According to a spokesman for one of the drug companies, "The industry
has never been philanthropic. It has always produced products with an
aim to getting a return on investment." (8)
How do the drug companies respond to these criticisms? First, they
point out that the American pharmaceutical industry has, over the
past two decades, produced remarkably effective drugs -- drugs that
not only extend life and improve its quality, but also save money by
holding chronic diseases at bay and averting hospitalizations. High
prices, according to this view, simply reflect high value. As for the
fact that Americans pay more for the same drugs than people in other
countries, the industry maintains that it needs to make up for the
depressed prices in countries that impose price controls. Similarly,
it is argued that differential pricing within the United States is
justified by the need to offset the steep discounts demanded by high-
volume purchasers of drugs. Supporters say that someone needs to pay
prices high enough to attract the investment necessary to sustain the
industry's extraordinary research and development costs. They fre-
quently remind critics that for every drug brought to market, there
are innumerable false starts -- drugs that never make it. Prices re-
flect the development costs of not just a particular drug, but all
the potential drugs that enter the pipeline.
In sum, the industry contends that it leads the world in innovative
drug development because it functions in a free market where returns
can be commensurate with the very great risks. Yes, drug coverage
should be extended to everyone, but not at the cost of price controls
or other government interference that would stifle innovation. (That
is why the industry opposes a Medicare drug benefit unless it is ad-
ministered through the private sector.)
The case for the pharmaceutical industry sounds reasonable, but is it
valid? Some of it undoubtedly is. There is no question that the past
20 years have seen the introduction of many new drugs that have
changed the face of medicine and improved the lives of millions.
(Whether they have resulted in net savings from averted hospitaliza-
tions is far less clear.) But much of the case for the pharmaceutical
industry is exaggerated or misleading, and some of it is simply
false. Let's look at the argument more closely.
How risky is the pharmaceutical business? For a small company pinning
everything on a few products, it may be immensely risky. But that is
not the case for the large drug companies that dominate the market.
True, their research and development costs are high, as compared with
those of other industries. The top 10 drug companies are reported to
spend on average about 20 percent of their revenues on research and
development. (9) (Many critics charge that marketing and promotional
costs are misleadingly included in this figure.) But the pharmaceuti-
cal giants have so many drugs in the pipeline at any given time that
they can count on being able to bring a certain number of drugs to
market regularly.
It is instructive to compare the research and development costs of
the large drug companies with their profits. The top 10 drug compa-
nies are reported to have profits averaging about 30 percent of reve-
nues -- a stunning margin. (4,10) Over the past few years, the phar-
maceutical industry as a whole has been by far the most profitable
industry in the United States. (9,11) According to a recent issue of
Fortune, in 1999 the pharmaceutical industry realized on average an
18.6 percent return on revenues. Commercial banking was second, at
15.8 percent, and other industries ranged from 0.5 to 12.1 percent.
(11) An industry whose profits outstrip not only those of every other
industry in the United States, but often its own research and devel-
opment costs, simply cannot be considered very risky.
What about the picture of the drug industry as an exemplar of the
free market? That image is very far from the truth. On the contrary,
the pharmaceutical industry enjoys extraordinary government protec-
tions and subsidies. Much of the early basic research that may lead
to drug development is funded by the National Institutes of Health.
(12) It is usually only later, when the research shows practical
promise, that the drug companies become involved. The industry also
enjoys great tax advantages. Not only are its research and develop-
ment costs deductible, but so are its massive marketing expenses. The
average tax rate of major U.S. industries from 1993 to 1996 was 27.3
percent of revenues. During the same period the pharmaceutical indus-
try was reportedly taxed at a rate of only 16.2 percent. (13) Most
important, the drug companies enjoy 17-year government-granted mo-
nopolies on their new drugs -- that is, patent protection. Once a
drug is patented, no one else may sell it, and the drug company is
free to charge whatever the traffic will bear.
Is it correct that the U.S. pharmaceutical industry is highly innova-
tive? Only partly. Some recently launched drugs do indeed fill impor-
tant, previously unmet medical needs. But it is hard to escape the
conclusion that many other new drugs add little to the therapeutic
armamentarium except expense and confusion. Consider the welter of
very similar drugs to lower cholesterol levels. Developing genuinely
innovative drugs is difficult and chancy. It is easier to make "me-
too" drugs or minor variants of established products. To be profit-
able, the variation need only be sufficient to secure a new patent,
and the rest is marketing. Critics believe drug companies are doing
far too much of that sort of thing. They also charge that many indus-
try-sponsored clinical trials are designed more to find small advan-
tages that can be highlighted in promotional campaigns than to find
clinically meaningful effects. (14)
The industry has certainly been ingenious in finding ways to extend
patents on its bestselling drugs. For example, a recent Wall Street
Journal article describes a complicated business deal between Merck
and Schering-Plough for the marketing of two new drug combinations,
one to lower serum lipid levels and the other to relieve allergies.
Each combination will pair one company's "blockbuster" drug, whose
patent as a single product will soon expire, with a drug with supple-
mentary action owned by the other company. The combination drugs will
have new patents, and their profits will be shared by both companies.
(15) This may be good business, but the medical soundness of fixed
drug combinations as opposed to flexible combinations of separate
drugs is debatable.
The marketing budgets of the drug industry are enormous -- much lar-
ger than the research and development costs -- although exact figures
are difficult to come by, in part because marketing and administra-
tive expenses are often folded together and in part because some of
the research and development budget is for marketing research. Ac-
cording to its annual report, Pfizer spent 39.2 percent of its reve-
nues on marketing and administration in 1999 (16); Pharmacia & Upjohn
is reported to have spent about the same. (12) The industry depicts
these huge expenditures as serving an educational function. It con-
tends that doctors and the public learn about new and useful drugs in
this way. Unfortunately, many doctors do indeed rely on drug-company
representatives and promotional materials to learn about new drugs,
and much of the public learns from direct-to-consumer advertising.
(17) But to rely on the drug companies for unbiased evaluations of
their products makes about as much sense as relying on beer companies
to teach us about alcoholism. The conflict of interest is obvious.
The fact is that marketing is meant to sell drugs, and the less im-
portant the drug, the more marketing it takes to sell it. Important
new drugs do not need much promotion. Me-too drugs do.
How about the claim that the American pharmaceutical industry is the
world's engine for drug innovation? The United States accounts for 36
percent of global pharmaceutical research and development. Europe ac-
counts for 37 percent, and Japan for 19 percent. (18) The U.S. frac-
tion is certainly large, but not greatly disproportionate to the
country's population. Innovative products come from the pharmaceuti-
cal industries of many countries, including those that regulate drug
prices, and most large companies have global markets.
The pharmaceutical industry deserves recognition for the many truly
extraordinary drugs it has developed. Furthermore, it is hard to
imagine any other system for developing new drugs and bringing them
to market. This is clearly a job for the private sector. But, in my
view, an industry so important to the public health and so heavily
subsidized and protected by the government has social responsibili-
ties that should not be totally overshadowed by its drive for prof-
its. There needs to be a better balance between the interests of the
shareholders and those of the public.
This is not the place to propose detailed reforms that might right
the balance. My purpose here is primarily to describe the problems.
But I would like to suggest a few steps that could be taken.
Congress should modify its enabling legislation to permit the Food
and Drug Administration to require some pre-marketing trials to com-
pare new drugs with the best available drugs, not with placebos, and
to make its approval contingent on the results of those trials. In
some cases, the new drug should be compared with both the best avail-
able treatment and a placebo. Requiring manufacturers to demonstrate
that a new drug is substantially better than anything available would
help to stem the rising tide of me-too drugs. Third-party payers
might also link coverage to the quality and outcome of trials, as
suggested by Ray et al. (19)
To consider other reforms, I believe we need an independent national
advisory panel to study the pharmaceutical industry's practices thor-
oughly and then make recommendations. There have been such panels in
the past, but the magnitude of the problems is greater now and a
prominent panel would accordingly have more influence. The panel
should consist of distinguished experts with no stake in the pharma-
ceutical industry. Although its recommendations would not be binding,
they would stimulate and inform a public debate that would lead to
reforms.
Among the most important questions belonging on the panel's agenda
should be whether some form of price controls is desirable, and if
so, how it might be implemented. This is an exceedingly difficult
question that will require careful study and analysis, but in my
opinion, some method of constraining prices will probably be needed.
Just as public utilities are not permitted to charge whatever the
traffic will bear, neither should drug companies. It is hard to take
seriously the inevitable industry argument that price controls would
stifle innovation and frighten investors when profit margins are so
great and so much revenue is spent on marketing.
The panel might also consider whether some small fraction of the in-
dustry's revenues should be set aside for social purposes. I believe
it should. Such funds might be used to subsidize HIV treatment in
sub-Saharan Africa or the purchase of drugs by the needy. The recent
decision by five drug companies to cut the price of HIV drugs in Af-
rica was a good but small start. There have been other generous ac-
tions by drug companies, notably Merck's 1987 decision to donate mil-
lions of doses of ivermectin to treat onchocerciasis and lymphatic
filariasis in underdeveloped countries. (20) These are examples that
the rest of the industry might do well to emulate in an organized
way. Drug companies should also allow exceptions to patent restric-
tions that currently prevent underdeveloped countries from manufac-
turing generic drugs for humanitarian purposes or importing drugs
from the countries where they can be obtained most cheaply.
The pharmaceutical industry is extraordinarily privileged. It bene-
fits enormously from publicly funded research, government-granted
patents, and large tax breaks, and it reaps lavish profits. For these
reasons, and because it makes products of vital importance to the
public health, it should be accountable not only to its shareholders,
but also to society at large.
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