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Drug Company Accountability

June 24, 2000 | 18,329 views


Dr. Mercola's Comments:

It is not often that I post an entire article, but Dr. Angell is making some marvelous contributions to the medical literature prior to her departure from NEJM.

It is quite clear she is not beholden to the pharmaceutical industry. I continue to be amazed that the Massachusetts Medical Society would permit her to publish an editorial like this.

Don't get used to these outstanding articles in NEJM as the new editor is quite the contrast to Dr. Angell and will not likely ever write anything like this.

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. Patients feel drug costs keenly, because they pay much of them out of pocket. Many private insurers tightly limit drug coverage, and

Medicare 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 insurance pay on average twice as much for the 10 most commonly prescribed 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 prescriptions 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, overwhelmed 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. government, 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 frequently remind critics that for every drug brought to market, there are innumerable false starts -- drugs that never make it. Prices reflect 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 administered 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 hospitalizations 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 pharmaceutical 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 companies are reported to have profits averaging about 30 percent of revenues -- a stunning margin. (4,10) Over the past few years, the pharmaceutical 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 development 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 protections 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 development 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 industry was reportedly taxed at a rate of only 16.2 percent. (13) Most important, the drug companies enjoy 17-year government-granted monopolies 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 innovative? Only partly. Some recently launched drugs do indeed fill important, 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 profitable, 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 industry-sponsored clinical trials are designed more to find small advantages 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 supplementary 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 larger than the research and development costs -- although exact figures are difficult to come by, in part because marketing and administrative expenses are often folded together and in part because some of the research and development budget is for marketing research.

According to its annual report, Pfizer spent 39.2 percent of its revenues 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 contends 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 important 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 accounts for 37 percent, and Japan for 19 percent. (18) The U.S. fraction is certainly large, but not greatly disproportionate to the country's population. Innovative products come from the pharmaceutical 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 responsibilities that should not be totally overshadowed by its drive for profits. 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 compare 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 available 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 thoroughly 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 pharmaceutical 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 industry'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 Africa was a good but small start.

There have been other generous actions by drug companies, notably Merck's 1987 decision to donate millions 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 restrictions that currently prevent underdeveloped countries from manufacturing 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 benefits 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.
Marcia Angell, M.D.

The New England Journal of Medicine -- June 22, 2000 -- Vol. 342, No. 25


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2. Murray S, Lagnado L. Drug companies face assault on prices. Wall Street Journal. May 11, 2000:B1.

3. Dose of reality: idea of having Medicare pay for elderly's drugs is roiling the industry. Wall Street Journal. February 19, 1999:1.

4. Bernstein S. Drug makers face evolving marketplace. Los Angeles Times. January 31, 1999:A1.

5. Knox RA. Drug-coverage crisis hurting elderly. Boston Globe. March 6, 1999:B1.

6. Hoffmann V. Health groups say poor nations need access to generic drugs. Boston Globe. November 27, 1999.

7. McNeil DG Jr. Patent holders fight proposal on generic AIDS drugs for poor. New York Times. May 18, 2000:A5.

8. McNeil DG Jr. Drug makers and the Third World: a case study in neglect. New York Times. May 21, 2000:1.

9. Tanouye E. Drug dependency: U.S. has developed an expensive habit: now, how to pay for it? Wall Street Journal. November 16, 1998:1.

10. The pharmaceutical industry. The Economist. February 21, 1998.

11. How the industries stack up. Fortune. April 17, 2000.

12. Gerth J, Stolberg SG. Drug makers reap profits on tax-backed research. New York Times. April 23, 2000:1.

13. Anderson C. Drug firms said to pay less in taxes. Boston Globe. December 26, 1999.

14. Langreth R. Drug marketing drives many clinical trials. Wall Street Journal. November 16, 1998.

15. Harris G. Drug makers pair up to fight key patent losses. Wall Street Journal. May 24, 2000.

16. Annual report, 1999. New York: Pfizer, 1999.

17. Avorn J, Chen M, Hartley R. Scientific versus commercial sources of influence on the prescribing behavior of physicians. Am J Med 1982;73:4-8.

18. PhRMA facts and figures. Washington, D.C.: Pharmaceutical Research and Manufacturers of America, August 1997.

19. Ray WA, Griffin MR, Avorn J. Evaluating drugs after their approval for clinical use. N Engl J Med 1993;329:2029-32.

20. Waldholz M. Merck, in unusual gesture, will donate drug to fight leading cause of blindness. Wall Street Journal. October 22, 1987.

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