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Big Pharma Is A Two-Faced Friend
By Marcia Angell, The Financial Times
July 19, 2004
The big drug companies are launching what one reporter called a "charm offensive". Stung by recent polls showing that Americans hold them in the same low esteem as tobacco companies, they have decided to work on their image. To that end, Pfizer, the world's biggest drug company, announced earlier this month with much fanfare that it would give uninsured Americans a discount on their drugs and an even bigger discount to uninsured, low-income people. The company calls the programme, improbably enough, Pfizer Pfriends. Other drug companies are thought likely to follow their lead.
Why are Americans so angry with the pharmaceutical industry? First, prescription drug prices are sky high and rising fast, and many in the US cannot afford them any more. Second, Americans are now well aware that they pay the highest prices in the world, and they resent the fact that it is illegal to import cheaper drugs from other countries. They know that Canadians can get exactly the same drugs for half to two-thirds the price, and they no longer believe that the ban on imports protects them from counterfeit drugs. Finally, they are beginning to realise that drug companies charge the highest prices to those least able to pay - the uninsured (ironically, the very people Pfizer Pfriends is supposed to help). Particularly vulnerable are Medicare recipients without supplementary insurance. Large insurers and government programmes - such as the Veterans Affairs System - can bargain for steep discounts. But the new Medicare bill expressly prohibits Medicare from doing that - no doubt a gift from a grateful Congress to the industry that so lavishly contributes to the politicians' election campaigns.
Drug companies have a stirring defence. They assert that high prices are necessary to cover their research and development costs, and that Americans are charged more because other countries are unwilling to pay their fair share. The implication is that the industry is eking out a precarious living. They also counter that they more than earn their keep, because they produce innovative medicines that improve and extend lives and avoid the need for more expensive treatments.
But the facts show a different picture. For years, the pharmaceutical industry has been making huge profits, while spending relatively little on R&D. For more than two decades it was the most profitable industry in the US. In 2002, for example, the 10 drug companies in the Fortune 500 made profits of 17 per cent of sales, compared with a median of 3.3 per cent for all the Fortune 500 companies, and spent only 14 per cent of sales on R&D. Even last year, when the industry was bumped from first place by the crude oil and commercial banking industries, its profits were more than 14 per cent of sales, well above the median of 4.6 per cent and about equal to its R&D expenditure.
Pfizer declined to say how much the Pfizer Pfriends programme would cost, but its investors should not be concerned. According to The New York Times, Pfizer executives said the cost would not significantly affect the company's profits. Whoever thought it would? In fact, given the low marginal costs of producing the drugs, the company could come out ahead if it gets a large enough tax deduction.
Moreover, when discounts are announced, you have to ask what the base price is from which they will be calculated. Drug companies routinely increase the prices of their top-selling products at rates far in excess of inflation. Discount cards are being offered to senior citizens in the wake of the new Medicare drug bill, but most offer cuts of only 10 to 25 per cent while, according to the American Association of Retired Persons, prices for the most commonly used brand-name drugs rose 28 per cent over the past three years. It is a little like department stores: first they raise prices, then they drop them and call it a "sale".
Americans are also catching on to the fact that the industry is nowhere near as innovative as it claims. Most of its efforts are directed towards making variations of top-selling drugs already on the market - called "me-too" drugs. It then spends staggering sums promoting them to doctors and patients as improvements. Real innovations are few and far between.
Let us look at the numbers. The Food and Drugs Administration classifies drugs according to whether they offer an advantage over products already on the market to treat the same condition. It also classifies them by whether they are new chemical agents or old agents used in new ways. Over the four years beginning in 2000, only 10 per cent (32 of 314) of the drugs approved by the FDA were new agents considered likely to be better than drugs already available. Of these, only seven came from the top 10 US companies. None came from Pfizer. The remaining 90 per cent were mostly "me-too" drugs likely to offer no increase in efficacy.
It will take far more than a charm offensive and the announcement of a discount programme for the uninsured to reverse the souring American view of the pharmaceutical industry. If drug companies spent less on marketing "me-too" drugs and more on discovering and developing truly innovative products, it would reassure sceptics. But the industry also needs to moderate its prices and make them more transparent and equitable, which it could easily do and still remain immensely profitable. In short, it needs to curb its greed.
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