Some seniors in border states notice that drugs are cheaper in Canada, and they actually go and get them. What does that tell us about the two systems?
Well, the United States is the only advanced country that permits the pharmaceutical industry to charge exactly what the market will bear, whatever it wants. The other advanced countries in Europe and Canada have some form of price control, either mandatory volume discounts or some way of limiting price. So on average, Canada spends half of what we spend for the exact same drugs. Half.
So if you live on a border state and you can make a bus trip to Canada and have a prescription, you can -- particularly if you're a senior citizen who has to pay for drugs out of pocket, and have to take a lot of them -- you can do very well by taking that bus trip to Canada.
One argument [is that] he Canadians don't invent the drugs. They're parasitic on our R&D. It's unfair.
In fact, the pharmaceutical industry is what's parasitic on publicly funded research. The pharmaceutical industry likes to depict itself as a research-based industry, as the source of innovative drugs. Nothing could be further from the truth. This is their incredible PR and their nerve.
In fact, if you look at where the original research comes from on which new drugs are based, it tends to be from the NIH [National Institutes of Health], from the academic medical centers, and from foreign academic medical centers. Studies of this, looking at the seminal research on which drug patents are based, have found that about 15 percent of the basic research papers, reporting the basic research, came from industry. That's just 15 percent.
The other 85 percent came from NIH-supported work carried out in American academic medical centers. In one study, 30 percent came from foreign academic medical centers. So what we know about the numbers indicates that the foreign academic medical centers are responsible for more new drug discoveries than the industry itself.
[What is] the profitability of this industry, compared to other American industries?
Numero uno. The pharmaceutical industry is stunningly, staggeringly profitable. The 10 drug companies on the Fortune 500 list last year took in net profits of 18.5 percent on sales. That's 18.5 percent. That is stunning. The median for the other industries on the Fortune 500 list was a little over 3 percent, 3.3 percent of sales. This has been the case for the last 20 years; this is not just a fluke of last year. Year after year after year, the pharmaceutical industry has led all other industries in profits. ...
The drug companies make the case that their prices are so high, and that total expenditures are so high, because their R&D costs are very high, as though they were just eking out, just barely managing to survive. But what we can see is that their profits are very much higher than their R&D costs, and therefore they could spend more on R&D if they wanted, and still have plenty of profits left over.
They are numero uno in R&D as well, aren't they?
Their R&D costs are very high, in absolute terms. But in relative terms, they're quite small, that is, relative to their other expenditures and to their profits. The drug companies spend on average, by their own figures, last year, 15 percent to 17 percent on R&D. That's a lot of money. There's no question that that's a lot of money. But their profits are higher. Their profits are 18.5 percent. That's higher than their R&D.
What's really interesting is what they spend on marketing and administration, by their own figures, on average 35 percent. That's over twice as much as what they spend on R&D. So if they point to their R&D costs as some sort of justification for the high prices, what on earth can they say about their marketing costs, which are over twice that much?
Marketing and administration?
Marketing and administration, yes. One of the problems with talking about the R&D cost and the marketing cost and the profits, and the way the pharmaceutical industry does business, is that they're very secretive about the details. You can't get at exactly what the details are. But you can get close enough. You can infer from certain things.
The major drug companies, in general, combine marketing with administrative costs. So in their annual reports and in their SEC filings, they will give total expenditures for something they call "marketing administration." The indications are that the lion's share of that is for marketing. One company, one of the major companies, does break it down, does separate out marketing from administration. That company attributes 35 percent to marketing, 6 percent to administration.
If you then also look at how the employees are apportioned, by their own figures, over a third of their employees are in marketing -- not marketing administration, but marketing. So I think it's safe to conclude that somewhere on the order of 30 percent -- over twice the R&D costs -- are marketing.
Your contention is this slightly skewed picture is partly responsible for the lack of truly innovative drugs that we've seen lately, and the proliferation of "me too" drugs?
... The drug companies have found that the best way to make money at low cost is by turning out drugs that are imitations of other companies' blockbusters. A blockbuster is commonly accepted to be a drug that sells more than a billion dollars in a year. So they've found that the best way to make money is by imitating other companies' blockbusters, or by imitating their own blockbusters -- making a new version of their own blockbuster, when the first one is going off patent and they want to have one with a longer patent life. That's what they have been turning all of their efforts to now.
Innovation comes mainly from NIH-supported research in academic medical centers. The drug companies do almost no innovation now. It's just turning out one more drug that's similar to a blockbuster. These are called copycat drugs, or "me too" drugs. That's their major business now.
It's very hard to launch a "me too" or copycat drug, because you have to convince doctors and the public that they are somehow different and better from all of the other copycat drugs already on the market. So that's why their marketing costs have to be so high. ...
To get a "me too" past the FDA doesn't require that they prove it better than something on the market?
By law, a drug company cannot market drugs unless those drugs are approved by the FDA. The FDA approves the drugs if the manufacturers have shown, through clinical trials, that they're reasonably safe and effective. But here's the catch: To show that drugs are effective, the manufacturers only have to compare them, usually, with a placebo -- that is, with a sugar pill. So all they're required to do is show that this new drug is better than nothing. They are not required to show that it's better than other drugs already on the market for the same condition.
That's why there are so many "me too" drugs on the market. There's no comparison with older drugs. There's no comparison with generic drugs. The last thing the companies want to do is have a head-to-head comparison with similar drugs already on the market.
If theirs was better, they would want one, wouldn't they?
How will they know that it's better until they test it? Then they take the real risk that it will turn out to be worse. So what we have now is a blizzard of "me too" drugs, copycat drugs, that may be worse than the drugs already on the market, that may actually be worse than generics. There's no reason to think that they're better, and they could be worse. They could have more side effects. There is no way to know that, because the FDA does not require that a new copycat drug be compared with the older drug already on the market.
So they use this marketing budget to try and--
That's right. If the drug company produced a cure for AIDS or a cure for cancer, you wouldn't need a big marketing budget. The world would beat a path to its door. You have to have a huge marketing budget to convince the public that Nexium is better than Prilosec. That takes a great marketing budget. So that's where these marketing expenditures are going.
Now, the FDA itself categorizes the drugs that it reviews as either likely to be an improvement over drugs already on the market -- and they get what's called a priority review -- or as unlikely to be an improvement over whatever is already on the market -- that is, it's likely to be no better than what's already out there.
The number that are categorized as "likely to be an improvement" by the FDA has been going down and down and down. Last year, 2001, only 66 drugs were newly approved. Only 66 out of this whole gigantic industry, and that too has been going down. And of those 66, only 10 were classified as likely to be an improvement over whatever was already on the market. The other 56 were all "me too" drugs. That's pathetic, really, 10 out of 66 likely to be an improvement.
Until recently, marketing was done ... directly to physicians, which still is the largest part of the marketing budget. But in 1997, the FDA permitted direct-to-consumer advertising. Talk about the significance of that.
Direct-to-consumer advertising was always allowed, but only under certain conditions. Those conditions were that the company advertising the drug had to say what the side effects were; had to, in some detail, spell out what the risks of the drug were as well as the benefits.
In 1997, that was changed. Now drug companies don't have to spell out the risks. All they have to do is refer the viewer or the listener or the reader to where they might go if they want to [to find about] out about risks. "Go to your doctor. Tell your doctor you have kidney disease or liver disease," [which is] something you would hope that your doctor would already know. But that's what they say at the end of ads. Or "Here's an 800 number." So they don't have to, when they're advertising drugs, say, "And, oh, incidentally, this may cause bone marrow suppression, or a rash, or it may ruin your liver." They don't have to say that anymore.
So that created a huge opening for direct-to-consumer advertising, which coincides with the age of the consumer. The consumer, for various reasons, is now more of an active participant in his or her health care. So suddenly you had all of these ads that don't go through the side effects in any detail, or the risks in any detail -- that now account for about $3 billion of pharmaceutical expenditures.
But they still refer the patient to go see the doctor. So why should this distort [the market]?
Well, because it is the age of consumerism. It convinces consumers that they need drugs that they might not need, that they need some drugs at all. ...
There is this kind of marketing that is designed to convince people that they need pills. It's designed to convince them that they need particular pills that happen to be more expensive, or just going on patent rather than coming off. Then, armed with this feeling, the consumer goes to the physician, who often just prescribes the pills. It's a buyer's market here. Doctors don't want to lose patients. They don't want to say no to patients. They're, in some sense, too busy to say no to patients. They are forced to see more and more patients more and more rapidly. It's faster to write out a prescription than it is to try to talk with patient and convince the patient that he or she may have been manipulated by these ads.
In addition, the doctors themselves are manipulated by the same ads, and also by what amounts to bribery from the drug companies. The drug companies turn up. They have $8 billion worth of free samples that they give to doctors. The doctors hand out the free samples to patients. It makes the doctor look good. The patient has free samples. But both the doctor and the patient, from that point on, are hooked on that particular drug. And believe me, it's not going to be a generic, and it's not going to be a drug that's just going off patent. It is going to be a new, newly patented, high-price drug. So in a sense, both the doctors and the consumers are sucked into a sort of "bait and switch," because sooner or later they will have to pay for[that drug.]
Doctors are supposed to be the informed actors in this picture. Isn't it a flaw that they're so easy to manipulate?
It certainly is. If I sound easy on the doctors, I don't mean to be easy on the doctors, because in the last analysis, it's the doctor who writes the prescription. That's why the drug companies spend so much time and so much of their marketing expenditures on the doctors. That's where the action is. Yes, [the companies] spend a lot of money on consumer ads. They spend an awful lot of money on Congress, on lobbying, on political campaigns. But the lion's share of their attempts to manipulate the situation goes to the doctors, because they are the ones who write the prescriptions.
They do this in part by perpetrating a gigantic fiction, and that fiction is that somehow they are not only in the business of selling drugs, but they are also in the medical education business and the medical research business. Now, that's nonsense. Their investors expect them to make as high profits as they possibly can. They are investor-owned businesses and their fiduciary responsibility is to their investors, which means selling drugs.
But they have managed to make a lot of people believe that they are also somehow educating them about drugs. That can't be. It's as though you look to beer companies to educate you about alcoholism. There is a conflict of interest there. Drug companies might educate you about drugs as long as they're talking about the benefits, but are they doing to talk about the down side? Are they going to say to a bunch of doctors, or patients, "Our drug isn't really very good; the other company makes a better drug?" No. It simply doesn't happen. It can't happen. But doctors pretend to believe that they're in the education business, because they both benefit from this. ...
Why doesn't the medical leadership do something about this? Why doesn't the AMA have their own objective data on drugs? Why are doctors so easy to corrupt?
Well, I wouldn't say they're any easier [than] anybody else. But they're no less easy, either. ...
The other thing I want to say is, the academic medical centers are abdicating their responsibility to teach pharmacology. There is very little teaching that goes on in medical schools now about drugs, about their down sides as well as their benefits, about classes of drugs, about cost-effective prescribing of drugs. To a large extent, the academic medical centers, the medical schools, have abdicated this and left that to the drug companies to do. They permit drug company representatives, salespeople, pretty much unfettered access to medical students, to interns and residents in hospitals. The salespeople are wandering the halls of almost every major hospital in this country, handing out freebies to the young doctors, telling them all about their new drugs, which, the evidence shows, the young doctors pretty quickly respond to and prescribe. And the medical centers stand back and let that happen.
Counter arguments. Drug companies argue that a big reason more money is spent on drugs than in the past is increased utilization.
There's no question that the increasing use of drugs is one reason for the increase in expenditures. There's no question about that. Pricing is only part of it. It's also the increased use, and some of these drugs are indeed great advances that probably do keep people out of the hospital or spare them surgery. But most of those were the result of NIH-funded research.
The "me too" drugs, I'm not at all convinced that they are a success story. There is no question that they are heavily promoted by the drug industry. The drug industry does not say, "You probably don't need these drugs." The drug industry says, "Yes, go out and ask your doctor about this drug." So I find that an odd sort of argument for them to make, that they're really trying to discourage the use of drugs.
They say R&D is enormously lengthy and expensive because the attrition rate is incredibly high.
Yes, it is. It is true that only a handful of the drugs that start out in testing make it through to FDA approval. That's one reason that the drug companies are turning their efforts to "me too" drugs, where you just have to twiddle a molecule a little bit to make essentially the same drug, or make the same drug for a slightly different use. ...
Isn't it unfair to single out the pharmaceutical companies? Surely there's a lot of waste and inefficiency in the rest of medicine.
There certainly is. The pharmaceutical industry isn't the only place where there's waste and inefficiency and profiteering. That happens in much of the rest of the health care industry. I think that drugs are perhaps on the front burner when we think about the exorbitant costs of our health care system, because it's here that the costs are rising faster than ever. It's here that there's so much distortion about what's actually going on. It's here that people are feeling it more, because Medicare recipients don't have any benefits for outpatient drug costs.
Companies argue it's important to keep this a largely private market to protect innovation, and that's why drug companies in other countries are less innovative. Over half of all drugs are produced here.
This is like Holy Roman Empire: It's not holy, it's not Roman, it's not an empire. This question has many of the same problems. Almost every element of what you just said is wrong. Let's look at the big drug companies first. Of the 10 top drug companies, five are European and five are American. Their innovation is much the same. Their turnout of new drugs is much the same. Their marketing budgets are much the same. Their profits are much the same. This, in fact, is a global industry.
All of them have the lion's share of their sales here, because prices are so much higher in the United States than they are in Europe and Canada. So it's sort of good public relations to portray themselves as quintessentially American businesses. They're not. Even in countries where there are price controls, these companies are doing extremely well. So that's the first thing that's wrong with your question.
The second is the implication that these are innovative businesses. They are not innovative businesses. They are giant marketing and PR machines that turn out predominantly "me too" drugs, and whose truly innovative drugs are based mainly on taxpayer-funded work. So they are not innovative. ...
What is going on here, when the pharmaceutical industry insists that they should be essentially left alone, is a threat. It's a threat to the American public. They are saying, "Don't mess with us. Do nothing about our obscene profits. Do nothing about these unsustainable increases in prices, or else we will not give you your miracle cures." Well, guess what? They're not getting them the miracle cures in the first place. But that is their very successful PR pitch. "We are the source of all miracles. Don't mess with us." ...
One thing that is insufficiently appreciated, because it's disguised by the drug industry's public relations, is the degree to which they are dependent on the government. They like to portray themselves as a sort of model of American free enterprise and ingenuity. Nothing could be further from the truth. They are an exemplar of free enterprise, only in the sense that they are free to charge whatever the market will bear in this country, and that they are free to decide what drugs they want to turn out. They would rather turn out another baldness drug than a drug that affects the Third World, or even a vaccine for Americans. So they are free, in that sense. They are free to charge what they want. They're free to decide what they're going to turn out.
But they are not an exemplar of free enterprise, when you look at the fact that they are utterly dependent on congressional favors and government-granted monopolies in the form of patents and FDA exclusive marketing rights. Patents are usually given for 20 years from the time you file that patent. During that time, it's illegal for any other company to sell the same drug. The FDA also has another form of exclusive marketing rights, and may approve a new use. They will give the drug a certain length of time that it can be sold without fear of any competition.
It used to be, about 20 years ago, that the time that a drug company had a monopoly was limited to the time of the patent minus the time it took for clinical testing, because that's usually done after the patent is issued and the time it took for the FDA to approve the drug. So in practice, the time that a company had to market a brand name drug free of any competition amounted to about eight years. Seventeen years in those days was the length of the patent, minus the time it took for clinical trials and FDA approval. That time is now about doubled. The patent life is now about 20 years. The time for clinical testing and for FDA approval is shorter. There are a number of maneuvers, thanks to an industry-friendly Congress, that allow them to stretch the patent life longer.
So now drug companies probably have on the order of 13-14 years to sell their brand-name drugs without fear of competition. After the exclusive marketing rights expire, then what's called generic drugs can enter the market. These are simply copies made by other companies. They have to be identical in terms of their effectiveness. The FDA does see they're identical. But they don't have to go through all the research costs. So after the patent has expired or the other exclusive marketing rights have expired, then generics can get into the market. As soon as generics get into the market, the prices drop steeply, on average to about 20 percent, one-fifth of what they were before.
So you can see that for a drug company that has a blockbuster -- that is, a drug that makes a billion a year -- everything depends on extending their right to market that exclusively, without generic competition. ... There are many, many ways to do that now. This is where, in my opinion, the industry's true innovative genius, lies -- in the multiple ways in which their legions of lawyers can extend the period of exclusive marketing and keep generics off the market.
If they've been successful with the federal government, they now face the states. If a state brought in price control -- this is now in the Supreme Court -- would the sky fall for drug innovation?
No, because they don't do much now. Drug innovation would come from the same place it comes from now. You know, this is a drug company choice, to concentrate on "me too" drugs and to rely on getting its innovative drugs from the academic medical centers. This is the choice that they make.
Might you be less willing to look at a more risky prospect if you had smaller profits, if we had Canadian-style prices?
I would hope, if there's some price control, and that price control includes some limitation on the use of "me too" drugs -- that is, a formulary -- that this would redirect the R&D efforts of the drug companies toward trying to discover and develop important new drugs, and not "me too" drugs. I think that that could be one result. It's not going to hurt the drug companies in terms of their profitability. Because the profits are so large, there's a lot of room there. If they stopped with the "me too" drugs, their marketing costs could be much less, and that's an even bigger source of savings.
The problem -- and this is an interesting thing -- the problem is not how profitable is the industry, in a sense. It's how much are the profits are increasing, because that's what investors want. The investment market is an odd thing. It doesn't look at what the profits are making. It looks at, "Are they more than they were yesterday? Can I sell my stock for more than I just bought it for?" So in a sense, investors say to the drug companies, "What have you done for me today? Never mind that you pulled in last year 18.5 percent of your sales in net profits. Never mind that. What's it going to be this year?"
Of course, no industry can keep climbing like that. They can't, and they haven't, in the last couple of years. They can't keep going up in these astonishing, stunning profits. It can't be done. But it shows how responding to their investors can, in a sense, put them between a rock and a hard place, and distort what they call innovation, so that it's the very opposite. It's less risky to make an empty "me too" drug than it is an innovative drug.
The states, [such as] Oregon, are talking about a functional marketplace. When we buy cars, we can go to Consumer Reports. Why can't we rely on drug companies for objective information? Why is it left to state and federal governments to fill in this gap?
You have a lot of stuff mixed up in that question. You have the research, and you have the states versus the federals. I'm going to have to break these down.
The state governments, as you say, are faced with a swelling Medicaid budget, and they have to balance their budget. Much of the swelling Medicaid cost represents the increase in drug expenditures. So they're well nigh desperate to get some handle on drug costs, and they're going at it in two different ways.
One, they're looking at the pricing. They're essentially pulling together the Medicaid patients and the uninsured, and in some cases, I believe, the Medicare population, who have no supplementary drug insurance, because ultimately the states are going to have to pay for this. So they're pulling them together in one population, and making the argument that they should be able to bargain with the drug companies for volume discounts, in much the same way that the Veterans' Affairs system does, or that the large HMOs do. They bargain for discounts. So the states are saying, "We ought to be able to do that, too." So that's one thing. They're looking at prices.
But they're also looking at "me too" drugs. They're saying, "Why should we pay for newly patented, brand name, 'me too' drugs, when there's no evidence that they're any better than generic drugs or older brand name drugs that are going to go off patent soon? Why should we do that?" So they're looking at what's called formularies, lists of drugs for various conditions, that are the most cost-effective drugs. They're saying, "We'll pay for these drugs. But we won't pay for the more expensive drugs, brand-name drugs, for which there's no evidence of increased effectiveness." They are the two ways in which the states are moving. ...
But in terms of the formularies to limit drugs to those that have been found safe and effective compared to things already on the market, it seems to me that the fundamental place to do that is in the FDA. The FDA should change its policy -- and this would probably take some enabling legislation from Congress. Instead of allowing drugs to be approved on the basis that they are better than sugar pills, they should be required to make the companies show how they compare with drugs already on the market. And until that happens, I don't think we'll truly get a handle on "me too" drugs.
So even before they're released there should be a higher standard of efficacy?
Absolutely. There's no standard now. It just has to be better than nothing. It has to be shown to be safer or more effective or substantially more convenient, or in some way an improvement over similar drugs already on the market, or generic drugs already on the market.
Who's going to do this job? Why isn't the medical leadership more involved in this? Why should it be left to state legislatures?
The problem is this: In the academic medical centers, the medical schools, the teaching hospitals, almost all of the NIH-funded research is basic research, the fundamental mechanisms of disease, early stage research. The research that looks at drugs, that evaluates drugs, clinical trials in human subjects, is funded mostly by the pharmaceutical industry, and they attach strings to that funding.
One string -- it isn't explicitly stated as such, but it is in fact a string -- is "Don't look at our new drug compared with other older drugs in the same family. Look at it either compared with placebos, or sugar pills, or look at it compared with a drug for maybe the same condition but of a different class, a completely different class. Or we're not going to give you the money for these studies."
That in fact is what happens. You see study after study that is really set up, designed by the company, to show what they want to find. The studies that do compare drugs head to head, a new drug with older drugs of the same class, are often funded by the NIH. The NIH does fund some clinical trials.
It's essential that it comes from an independently funded source, to be credible?
Well, it doesn't have to be from an independently funded source. It has to be designed; the data have to be collected; it has to be interpreted; the publication has to be independent. The funding can come from the company. I think it should. It always did -- but without the strings attached.
Now the companies design the studies in such a way that it's tilted toward their new product. They often keep the data, assert ownership of the data. They often write the papers. Maybe the author then signs off on the paper. They interpret the data. They analyze the data. So there are a lot of strings attached now, such that the drug company is intimately involved with the evaluation of its own products. There's an astonishing conflict of interest there, but it goes on. The medical centers, they want the funding, and so they sit still for this.
If we did have effective head-to-head studies for drugs, could we save a lot of money?
We could save an awful lot of money. The FDA itself indicates that 56 of the 66 newly approved drugs last year were "me too" drugs. If each of these drugs had to be compared with the best of its class already on the market, I would imagine that most of them would never reach the market. Nor would you see this constant marketing of drugs that are just like other drugs. ...
Do we as consumers have to play a role in evaluating treatments? We've so far been protected, with insurance, from the costs of procedures.
Well, I have mixed feelings about that. I'm very wary of any kind of scheme in the health care system that requires individuals to feel the pain of paying for the illness as well as the pain of enduring the illness. That seems to be a double burden. It seems to me that any decent society takes care of sick people, and that we should do the same thing. So I would hate to see consumers be forced to calculate, particularly sick and poor people, whether they can afford a drug they need. The issue is: Do they need it?
I think there, if you had formularies -- and these were done independently, and drugs were not added to that formulary unless there was clear scientific evidence that they were better than something already on the formulary -- if that were done, then I would not object to consumers having to pay extra for those drugs that didn't make it to the formulary. I think that would be fine. But they shouldn't have to pay for anything on the formulary.
Why shouldn't the drug companies be able to charge whatever the market will bear? Every other industry does. Why a different standard?
Well, there are a couple of reasons. One, drugs can be vital to people's health and even to their lives. If people are forced to forego those drugs, or, as many Medicare recipients do, play those drugs out by taking them in half doses, or sharing them with their spouse, or taking the drugs instead of paying for food or heat, then that is simply not right -- for people to be denied a vital thing so that drug companies can make higher profits.
Second, other companies are not living off of government-granted monopolies. General Motors does not have a government-granted monopoly on its cars. Toothpaste, there's not a government-granted monopoly. So the pharmaceutical industry enjoys great public support, not only in terms of patents and exclusive marketing rights, but also in terms of huge tax breaks -- this industry pays less than other industries in taxes -- and also in the R&D subsidization through NIH-funded research. So, in two ways, it's not like other industries.