Stripping Away Big Pharma's Figleaf

[Guest guest]

Stripping Away Big Pharma's Figleaf

Mokhiber and Weissman, AlterNet

June 17, 2002

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 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 prove 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?

Mokhiber is editor of the Washington, D.C.-based Corporate Crime

Reporter. Weissman is editor of the Washington, D.C.-based

Multinational Monitor. They are co-authors of Corporate Predators: The Hunt

for MegaProfits and the Attack on Democracy (Monroe, Maine: Common Courage

Press, 1999; http://

[Guest guest]

This is very interesting, a. I wish we could somehow bring about

meaningful reform. I do believe, as the authors suggest, that the figures

for development are grossly inflated, but I don't think the government would

be capable of taking on the entire responsibility of drug development. There

is just too much inefficiency in government endeavors.

[ ] Stripping Away Big Pharma's Figleaf

> Stripping Away Big Pharma's Figleaf

> Mokhiber and Weissman, AlterNet

> June 17, 2002

>

> 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 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 prove 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?

>

>

> Mokhiber is editor of the Washington, D.C.-based Corporate Crime

> Reporter. Weissman is editor of the Washington, D.C.-based

> Multinational Monitor. They are co-authors of Corporate Predators: The

Hunt

> for MegaProfits and the Attack on Democracy (Monroe, Maine: Common Courage

> Press, 1999; http://