Pharmaceutical Industry: Rx for Profit

December 22, 2001

By any measure, the pharmaceutical business is big business. Last year, retail pharmacies filled 2.9 billion prescriptions, an increase of 7.5 percent over 1999. Sales from the 50 best-selling prescription drugs rose from $730.6 billion in 1999 to $886.6 billion in 2000.

Its not over yet: the federal government expects prices to increase at a 12 percent annual rate for the coming decade. At that rate, drug costs will soon exceed payments to doctors as the largest item on the health bill, after hospital costs.

Marcia Angell, former editor of The New England Journal of Medicine, calls the prescription drug cabal a prescription for profit. And well she should.

Last year the 11 companies that make up the Fortune 500 drug industry category enjoyed an 18.6 percent return on revenues. By comparison, the median return for all Fortune 500 industries was 4.9 percent.

Leading the way was Merck, maker of Zocor and Vioxx, with sales from the year 2000 of $40.4 billion and profits of $6.8 billion, more than the profits of all the Fortune 500 companies in the airline, entertainment, food production, metals and hotel/casino/resorts industries combined.

Mercks profitability (17 percent of revenues) was the envy of companies such as Nike (6 percent), Boeing (4 percent), Walt Disney (4 percent) and Wal-Mart (3 percent).

Although its total profit did not equal that of Merck, GlaxoSmithKline, with a 28 percent return on sales, was by far the most profitable company in the United States. GlaxoSmithKline makes Tagament, Flonase, Valtrex, Wellbutrin and the anti-anxiety drug Paxil.

Their annual reports reveal at least in part where the drug companies revenues go, and also help explain their priorities. In 2000, Fortune 500 drug companies channeled 17 percent of revenue into profits, 30 percent into marketing and administration and spent just 12 percent of revenues on research and development (R&D). Taken as a group, eight of the 10 most profitable Fortune 500 drug companies devoted more of their revenue to profits than to R&D.

Thus the question: What is the secret of the drug company success, be it in good times or bad? The answer is simple: Money lots of it invested in lobby efforts and political campaigns. It has paid off handsomely, as witnessed by the fact that the industrys clout has kept the Republican-controlled Congress from providing prescription drug coverage through Medicare, despite overwhelming public support for the program.

According to the National Institute for Health Care Management, drug spending rose 40 percent from 1998 to 2000 growth that has pushed up the cost of health care for everyone, insured and uninsured alike. It has also been a major factor in increasing the cost of Medicaid.

In 1997-98, the pharmaceutical/health products industry spent more than $148 million lobbying Congress and the president second only to the insurance industry and more than Big Tobacco! By June 2000 that had increased to $278.5 million.

The 297 members of the drug industry lobby include such Washington insiders as Haley Barbour (former chairman of the Republican National Committee), Linda Daschle (wife of Senate Minority Leader Tom Daschle) and C. Boyden Gray (former counsel to President George Bush).

The drug industrys political spending came to more than $230 million for the 1999-2000 election cycle. This record amount includes: approximately $170 million for lobbying; almost $15 million in direct campaign contributions; at least $35 million in campaign ads by the drug industry front group, Citizens for Better Medicare; and $10 million funneled to the U.S. Chamber of Commerce for pro-drug-industry campaign ads.

Republicans were the chief beneficiaries of this largesse. In 1992, 52 percent of the industrys contributions went to GOP candidates and committees. In 1996, the Republican share of drug industry contributions climbed to 71 percent. In the 2000 cycle, 78 percent of industry contributions went to Republicans.

The top 10 drug companies accounted for $24.4 million in lobbying expenses in the first half of 2000. By comparison, thats 62 percent more than what the top 10 companies and trade associations in the automotive industry spent.

From 1997 through 1999, the pharmaceutical/health products industry and its employees spent more than $14.8 million on federal campaigns through unlimited soft money donations to national political parties and contributions to candidates.

In addition to working the halls of Congress and buying congressional candidates, drug companies spent more than $8 billion and employed 83,000 sales representatives last year to woo doctors. They provided them with gifts, meals and trips, as well as another $8 billion worth of free drug samples.

The industry trade association says pharmaceutical companies are working on 300 medicines to cure cancer and another 150 to deal with heart disorders. Apologists for the industry claim it costs $500 million on average to bring a new drug to market.

However, research done by Public Citizen showed that R&D costs for all new drugs brought to market (including failures) ranged between $71 million and $150 million.

Drug companies have been able to stymie price controls or other government intervention by repeating over and over again that such intervention would interfere with its ability to save lives.

Dr. A. Dale Console, former medical director of E.R. Squibb & Son, debunked that claim when he said that the pharmaceutical industry is unique in that it can make exploitation appear a noble purpose.

Even Merck CEO Raymond Gilmartin has admitted there is no direct link between R&D costs and prescription prices.

The price of medicine is not determined by research costs. Instead, it is determined by their value in preventing and treating disease, he said, meaning that price is determined by whatever the market will bear.

Many of the so-called blockbuster drugs stemmed from basic research at the National Institutes of Health or in academic laboratories supported by the NIH. Only two of Bristol-Myers Squibbs top 10 drugs, which include Excedrin, Coumadin, a blood-thinner and Glucophage, used by diabetics, were discovered in-house. The number of innovative drugs reaching the market has actually declined in the past five years.

In addition to benefiting from publicly funded research, the pharmaceutical industry enjoys generous tax breaks that leave it paying tax rates that are lower than those of almost every other major industry. Finally, federal patent laws give new drugs generous market monopolies that allow companies to charge whatever price the traffic will bear, since prescription drugs are not discretionary consumer products. For millions of patients, though, they are necessary to health and even survival.

Margaret Washington, 80, of Washington, D.C., is one of those patients. She suffers from high blood pressure, arthritis and heart ailments. Washington takes seven prescription drugs every day. Her monthly prescription drug costs exceed $250. Her primary source of income is $543 each month from Social Security benefits.

Margaret Washingtons problem, like that of many elderly citizens, is that Medicare doesnt provide coverage for prescription drugs. That means 13 million Americans under Medicare must pay top retail prices for their prescriptions, double the prices prescription drug makers charge their most favored customers, such as the Department of Veterans Affairs.

In other words, if the Medicare program were to get the same price discount the Veterans Administration receives, the price of drugs could be cut in half for Medicare beneficiaries without supplemental insurance.

Data gathered by Public Citizen shows that manufacturers charged U.S. pharmacists an average of 1.7 to 2.9 times more than they charged pharmacists in 16 European and North American countries for eight blockbuster drugs. Had U.S. consumers paid the same price for these eight drugs as their counterparts paid in the 16 countries studied, they would have saved more than $2.1 billion an average of $41.56 per prescription.

Many of the abuses of the pharmaceutical manufacturers were documented during two-and-a-half-year hearings conducted by then Sen. Estes Kefauver (D-Tenn.), chair of the Senate Subcommittee on Antitrust and Monopoly, as long ago as the late 1950s. Kefauver said the evidence compiled during that investigation was massive and damning: What we are confronted with in the ethical (prescription) drug industry is the existence of prices which, by any test and under any standard, are excessive.

Kefauver drew distinctions between medicines and other products that too many politicians ignore. [N]o one should have the right to withhold from the public products which are vital to the health of mankind, and no one should make a monopoly profit on the sale of such products, he said at the conclusion of the hearings.

Kefauver traced the central cause of exorbitant drug pricing to the U.S. system of granting two forms of patents to drug companies: one on products and the other on the processes and methods used to manufacture them.

The United States, he emphasized, was the only major nation that did not and does not safeguard public welfare by imposing price controls or other price limitations when it grants product patents on medicines.

Kefauvers committee also studied the origins of basic drug inventions since 1875 that constituted basic advances in the healing arts.

The study showed that 10 times as many basic drug inventions were made in countries without product patents as were made in nations with them. He also found that countries that did grant product patents had higher prices than those who did not.

None of Kefauvers recommendations were adopted, with the result that, for the last 42 years, American consumers have paid countless billions of dollars in tribute to drug companies.


Although the Alliance of Retired Americans has made the fight for prescription drug coverage for all Medicare beneficiaries its number one legislative priority in the 107th Congress, the 2.5 million-member organization says there are other ways to alleviate the high cost of prescription drugs and check the growth in prices.

Allow the reimportation of drugs by pharmacies and health plans;

Require drug companies to give local pharmacies the best price they give to their most favored customers;

Enact state initiatives to control prices;

Close loopholes in existing legislation that allow brand-name companies to obstruct entry of generic competitors;

Reinstate requirement of reasonable pricing on products that were researched and developed using taxpayer monies;

Authorize the federal government to buy drugs in bulk and at discount for Medicare beneficiaries;

Open the market to more competition by shortening the length of patents and/or eliminating the practice of patent extensions;

Enact compulsory licensing;

Authorize the National Institute of Health to develop a yardstick for comparing prices.


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