the other drug war [home]

will controlling the prices of prescription drugs hinder innovation?
The pharmaceutical industry agrees that something needs to be done to help seniors and the uninsured obtain access to affordable prescription drugs. But the industry vehemently opposes any kind of government price regulation that is common in the rest of the world.

Commenting on this issue are: Sidney Taurel, chairman, president and CEO of Eli Lilly; Uwe Reinhardt, an economist who specializes in health issues; Marcia Angell, former editor in chief, The New England Journal of Medicine; Richard T. Evans, pharmaceutical analyst, Sanford C. Bernstein & Co.; and John Kitzhaber, former governor of Oregon.

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Sidney Taurel
Chairman, president and CEO, Eli Lilly

Many countries outside the United States have a form of price controls, and those price controls have affected tremendously innovation. ... All modern economists know that the one predictable outcome of price controls is to reduce the availability of whatever is being supplied. In the case of pharmaceutical products, what is being curtailed is the production of new innovative medicines.

We've seen that, again, not only in France, but in Japan, in Italy, in Spain, in Canada. Really, most of the pharmaceutical innovation is now concentrated in the United States. More than 60 percent of new drugs are invented and developed in the United States. Why? Because we have a free pricing system, which allows rewards for innovation to be determined by the marketplace.

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Richard Evans
Senior research analyst, global pharmaceuticals, Sanford C. Bernstein & Co.

So, price controls would change the picture, right? Is that statement true? By making expensive drugs affordable through price controls, that would increase access to people, which would be good for seniors. But there would be a downside. ...

I would really break the statement in two. One is price controls are bad for the industry because you limit the return on R&D, and as you limit that return, I, as a shareholder, don't want you to do as much R&D. I would rather you give me the money as a dividend so I could do something else with it. That means you're going to do less R&D. That means you are going to get fewer drugs. So price controls are going to limit the amount of research and development that is done.

The other premise in the question is that price controls are going to increase access. I don't think that is necessarily true. If we look at what is the case for most Americans, most Americans have coverage. And if you change the list price of a drug, most Americans are still going to be paying the same amount at the pharmacy. It is not going to increase access. ...

If you lower drug prices by 20 or 30 percent, do you really eliminate the problem for somebody who doesn't have drug coverage? I don't think you do. You still go to the pharmacy. And let's say you cut price by 30 percent. Instead of $60 dollars it is now $43 dollars. If I don't have any income and I've got dependents, $42 dollars for drugs is still a huge number. I need coverage. I think coverage is the answer to access. Price controls are not. ...

Let's take a Roche drug, Fuzeon, which was just priced in Europe at $22,000 dollars a year. It's the only drug for AIDS patients who have become resistant to other therapies. It is an exceeding expensive drug to manufacture. Back in the days when you were just planning that drug, if you felt you wouldn't have the ability to set that price, in other words, that price would be set for you, you never would have developed that drug.

So there does seem to be a trade-off ...

There are really three things in motion here: price controls, access, and future products. If we control prices today, then management is going to spend less on R&D and we're going to get fewer products tomorrow. So if we want price controls today, we've just got to realize that we're a capitalist society and we finance these companies and control these companies and measure these companies through the capital markets. They are going to restrain R&D, which means you are going to get fewer products. It is an inevitable trade.

More importantly, or as importantly, I think you've got to distinguish between price controls and access. Price controls aid access, I think, on the margin but it does not solve the access problem. So, as an economist, someone who has been in the industry as a consumer, as an executive, who sort of sits and is paid to judge it objectively, I think price controls are a mistake.

I think we desperately need to solve the access problem. Price controls won't do it. But price controls will wreck future product flow.

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marcia angell
Former editor in chief, The New England Journal of Medicine

[The pharmaceutical companies'] R&D costs are very high, in absolute terms. But they're quite small relative to their other expenditures and profits. The drug companies spend on average, by their own figures, last year, 15 to 17 percent on R&D. And that's a lot of money. But their profits are higher. Their profits are 18.5 percent. And what's really interesting is what they spend on marketing and administration, by their own figures, is 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? ...

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.

... 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. And 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.

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Uwe reinhardt
Professor of economics and public affairs, Princeton University.

... If I take a dollar away from the drug industry, by how many cents will research shrink? Well, on average, R&D, by their own income statements, is about 13 cents of every revenue dollar the pharmaceutical industry gets. It's about 28 cents for manufacturing, packaging, quality control. It's about 37 cents for administration and marketing. It's about 13, maximally 15, for R&D, and then 18 is profit. So that's the big argument. The pharmaceutical industry often sort of pretends as if you take a dollar away from them, research will fall by a dollar. I don't see why that should be so. ... Maybe it'll be 15 cents. Even so, it will lead to a reduction in research, which may or may not be the right thing to do.

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john kitzhaber
Former governor of Oregon. He led the state's effort to develop a Consumer Reports-style preferred drug list for its citizens.

Eli Lilly says they need these blockbuster drugs with high prices to pay for years of research that allows them to come up with new drugs. It allows them to pay for all the failures, is the argument as well.

First of all, a lot of the money that supports pharmaceutical research is public money. It's federal money. You pay it and I pay it, and we don't get much of a profit from it.

Drug companies say that any effort to mess with business as usual will affect their ability to innovate. Try and connect evidence-based research to innovation. Is it good for it, bad for it?

I would think that evidence-based research would help it. And let me make a distinction here between public dollars and private dollars. What people do with their after-tax dollars in this country ought to be their business. They can buy whatever brand name designer drug, new innovative drug they want. That's fine. What we're talking about is how you spend limited public dollars, and how you assure that there's accountability for how those dollars are being spent.

I would argue that if the public is going to be subsidizing in any way, even through what we pay for health care for a person who's financed by the federal government or by the state government, that's the public subsidizing something ... [and] it ought to be something we need, and it ought to be something that contributes to the objective of health. ...


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posted june 19, 2003

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