Four healthcare CEOs did something extraordinary at the Reiters Health Summit (May 2011):
"They admitted that drug companies
put up prices just for the hell of it."
It was a rare moment of group candor from Big Pharma and its allies,
who usually argue that prices are set by the market or that companies
need high prices to pay for innovative R&D.
(Jim Edwards, "4 Pharma CEOs Admit...," CBS Money Watch, May 17 2011)
Shire (SHPGY) Chief Executive CEO Angus Russell said:
"Prices were just shoved up every year to make more money and meet earnings, to be blunt."
How Drug Companies
Rip Off Consumers and Jack Up Prices
|“Tweak” original drug formulas to create a “new” version with a bigger price tag.|
|Charge individuals the steepest price, big purchasers the smallest.|
|Set prices higher in huge unregulated U.S. market than in nations with price controls.|
|Claim new uses for old drugs and extend patents and monopolies to keep inexpensive generic versions off the market.|
|Spend the huge sums of money on lobbying to keep government at bay.|
|Saturate the media with slick ads, create new brands and generate new demands.|
The United States spends $300 billion a year on prescription drugs -- twice as much as it spends on higher education. It spends more on medicines than do all the people of Japan, Germany, France, Italy, Spain, Britain, Canada, Australia and New Zealand combined.
Melody Petersen, respected author (Our Daily Meds) and journalist (The New York Times, Los Angeles Times), reports, "Drug executives have long argued that Americans should eagerly fork over this money. They say we shouldn't think twice about paying an average of $120 for each brand-name drug we pick up at the pharmacy -- up from an average price of $65 in 2000." (Melody Petersen, "Healthcare Reform Without Drug Price Controls? That's Sick," Los Angeles Times, October 10 2009)
Executives warn if prices were limited, companies would be forced to cut back on scientific research and Americans would get far fewer new medicines. Discovering a drug can take more than a decade, they say, and run up a research bill approaching $1 billion.
Petersen thinks it's painfully clear that Americans are not getting their money's worth from what they pay for medicines. She understands that discovering a new lifesaving drug is expensive, but she questions whether the cost is as high as the industry claims. Why? The drug companies have refused to allow outside scrutiny of what they spend in their labs.
In fact, the companies' actual research costs are one of the industry's most closely guarded secrets. In the 1970s and 1980s, pharmaceutical companies waged a decade-long legal battle to keep even government auditors from reviewing those costs, leaving it unclear whether they include non-scientific costs such as promotion.
Petersen believes that most of the public does not know the truth. She claims, "Over the last 30 years, the industry hasn't focused its efforts on discovering those truly amazing innovations that can change the practice of medicine. Those are the projects that are risky and expensive. Instead, the companies have taken the easy path, ordering their scientists to turn out mostly rehashes of medicines already being sold. It's far cheaper to copy a medicine -- tweaking a molecule just enough so it gets its own patent -- than it is to do the years of work needed to find new and better cures."
This focus on copycat medicines is apparent in the list of drugs approved by the Food and Drug Administration.
"Of the medicines approved between 1990 and 2004,
only 16% were what government reviewers deemed to be actually new and significant.
The rest were medicines we were already using in a slightly different form.
This explains why our pharmacies our stocked with a multitude
of medicines that reduce cholesterol in the same exact way." - Melody Petersen
Once a new drug is approved, the company that made and tested it receives a patent. This means that no other company can make the drug until the end of the patent, which is usually 10-15 years after the drug is released. This allows them to fairly recoup their investment costs. According to the U.S. Food and Drug Administration, patent protection for a drug typically lasts an average of 11 years. A generic drug can enter the market only after the brand-name patent or other marketing exclusivities have expired and FDA approval is granted.
When a patent for a brand name drug expires, any other company can copy the drug and sell a generic version. Under the Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act, generic drug companies don't have to repeat expensive clinical trials. These generic companies must only prove that their product is the same as the brand name drug. This means that generic drug companies do not have to spend as much time and money because they do not have to invent or test the drug for safety and get FDA-approval. This is why generic drugs cost less.
Generics have the same quality, safety, and strength as branded medicines. Most often, the savings range from 30% to 50%. According to the National Association of Chain Drug Stores, the average retail price of a generic prescription drug in 2008 was $35.22. The average retail price of a brand name prescription drug was $137.90. (http://healthinsurance.about.com, February 25 2010)
Sometimes to protect their patents and profits, the drug industry “evergreens” or reformulates a product by claiming some new formulation such as a time-release version or by combining it with another existing drug, marketing it for another illness or even claiming a patent on an inactive ingredient. A minor change extends the effective duration of a product's patent and a product’s profits for at least another three years.
The "new use" patent extends claims for a "known" drug on the grounds of a change in formulation or method of administration rather than an alteration in the active chemical entity. Proponents say "evergreening" fosters continued innovation.
Evergreening claims are made late in the life of the original patent, very often just before it goes off official patent. When successful, evergreening can delay the entry of generic products into the market while the company that manufactures the original product, known as the innovator company, maintains the commercial advantage of a familiar, established brand. (Scott Strumello, "Evergreening Does Not Refer to Trees," Scott's Web Log, July 9 2009)
An example of evergreening? That popular little blue pill, Viagra, ($1 billion a year in U.S. sales) was scheduled to go off-patent in 2012. The drug compound behind Viagra, which was first intended to treat high blood pressure, was originally set to expire next year. Global drug giant Pfizer had applied for a separate patent, which was granted 10-years ago, for the drug’s use for treating impotence.
Teva Pharmaceutical Industries and other generic drugmakers have questioned the validity of the second patent in hopes of being able to sell the popular drug sooner. Teva argued that Pfizer withheld documents when applying for the Viagra patent and that after the initial patent was filed for the drug compound, known as sildenafil, the use of the drug for erectile dysfunction was obvious. If the use was determined to be obvious, then the patent could be deemed invalid.
Facing generic competition, Pfizer started selling a chewable form of Viagra in Mexico. They called it Viagra Jet and said it may also market Jet to other nations in the developing world, if not the United States. (Duff Wilson, "As Generics Near, Makers Tweak Erectile Drugs," The New York Times, April 13 2011)
As it turns out, the company didn't have to rely on evergreening to continue sole production of their patent. Just recently Pfizer won a legal case preventing Teva from producing generic versions of Viagra. A US court ruled the patent Pfizer holds for Viagra is valid until 2019, stopping any other companies from manufacturing unbranded versions. (Alan Rappaport, "Pfizer Wins Case To Keep Viagra Patent," The Financial Times Limited, August 15 2011)
Pay for Delay Deals
Brand-name drug companies also pay generic drug companies to delay bringing their drugs to the market.
Here's how it works. (Carolyn Thomas, "Big Pharma’s 'Pay for Delay' Tactics Keep Generic Drugs Off the Market," The Ethical Nag, ethicalnag.org, April 14 2010)
"Let’s say that a drug company like Bayer Corporation is gearing up for a big sales drop when its antibiotic Cipro loses patent protection. A less expensive Cipro would still be on the market and prescribed by many physicians, but many more docs will now opt for the cheaper generic version of the drug ciprofloxacin for their patients. Cipro will suddenly cease to be a big blockbuster name brand drug for Bayer.
"So Bayer decides to approach three of its competitors, Barr Laboratories, Rugby and Hoechst-Marion Roussel – all manufacturers of generic drugs. According to California Superior Court documents:
'…HMR and Rugby agreed to refrain from selling or marketing a generic Cipro in exchange for a lump sum of $49.1 million and quarterly payments to Barr and HMR that have totalled several hundred million dollars.'
"Bayer is happy because they can continue to sell their blockbuster brand name drug for six more profitable years, long after Cipro’s patent protection is legally lifted. The three competitors are happy because they’re essentially getting paid not to work.The only stakeholders who are not particularly happy are patients. Their access to cheaper generic versions of the brand name Cipro has been effectively blocked.
"Oh, make that two unhappy groups of stakeholders: the other is your neighborhood drug store owners, who earn much higher profit margins on the generic drugs they sell there compared to brand name drugs. So let’s also say that two unhappy American drug store chains called CVS and Rite Aid decide to challenge the Pay for Delay deal. Make no mistake: although they may look like consumer activists and local heroes standing up for their poor deprived customers, they too are looking out for their own profits."
Not everyone pays the same prices for U.S. pharmaceuticals. And prices for different payers are often secret. Neither the government nor the manufacturers disclose that information because the drug industry claims that such information is a trade secret—proprietary information. To make a parallel, the situation is much like passengers on a jet plane all headed to the same destination: no one knows how much the person in the next seat paid for their ticket.
The "best price" is a proprietary federal determination of the lowest price paid by a manufacturer's best customers after rebates and discounts have been applied. Best price is one of the factors used to calculate the rebates owed to state Medicaid programs. Yet certain customers getting some of the best deals are left out of the best price equation. (Bob Huff, "Paying for Life: The Issues Behind Drug Pricing," The Body, HealthCentral Network, November 2003)
Because they want to corner the market on popular drugs, drug makers who manufacture competitive drugs, such as Zocor®, Mevacor® or Lipitor® for cholesterol control, curry favor with volume buyers—federal agencies such as the Defense Department and the Veterans’ Administration—through lower prices. Other bulk buyers, including hospitals, HMOs, insurers and pharmacy benefit managers (PBMs)—the for-profit companies that insurers and large employers hire to administer drug benefits—also get price breaks.
The Big 4? The four largest purchasers of pharmaceuticals within the federal government: the Department of Veterans Affairs, the Department of Defense, the Public Health Service, and the Coast Guard. The Big 4 often get pricing below Federal Supply Schedule (FSS) on brand name drugs.
The only official price released by a pharmaceutical company is called the wholesale acquisition cost (WAC), which is the list price that industry middlemen are supposed to pay to the pharmaceutical maker. The wholesaler, in turn, distributes the drug to pharmacies for retail sale.
A more widely quoted price for drugs is the average wholesale price (AWP), which is an average of list prices quoted by wholesalers to pharmacies. But because of an arcane system of discounts, rebates, and charge-backs, almost no one pays the "official" price.
The acquisition cost (AC) is the actual amount that a pharmacy pays for its drug inventory. This cost varies depending on the quantity purchased, as well as on the rebates and discounts available to the pharmacist. Large buyers can obtain significant discounts: you can almost be sure that a drugstore chain like Duane Reade is paying less for pharmaceuticals than an independent neighborhood drugstore, although this may not translate into lower prices for consumers.
After acquiring a drug, the pharmacy then resells it to consumers with or without an additional markup, plus something called a dispensing fee added on. The dispensing fee is a charge for the professional services of the pharmacist, plus an additional percentage of the drug's cost to cover overhead and profit. Each of these steps may be regulated or fixed by prior agreement. For example, some Medicaid programs may limit the dispensing fees charged by retail pharmacists.
As an example, take tenofovir (Viread), produced by Gilead Sciences.
(A) The published WAC is $360 for a 30-day supply;
(B) An online pharmacy advertises it for $435;
(C) A state ADAP program may pay $380.
(D) Gilead has offered tenofovir to antiretroviral treatment programs in developing countries at $39 per month, roughly the company's cost of manufacturing.
Want a surprise (at least according to one survey in New York City)? A survey (2003) of 155 New York City pharmacies found the highest prices at the biggest chain stores, which charged, on average, eight percent more than mom-and-pop stores. Shockingly, the report also found that chain stores in the poorest neighborhoods charged prices well above the citywide average, meaning that those who can least afford high drug prices in New York are paying the most. (Bob Huff, "Paying for Life: The Issues Behind Drug Pricing," The Body, HealthCentral Network, November 2003)
What does a person pay? Uninsured, cash-paying individuals pay the most. Katharine Greider, author of The Big Fix: How the Pharmaceutical Industry Rips Off American Consumers, says on average the same drug that costs a cash-paying patient $100 costs the federal government $58 and costs private insurers or PBMs $70 to $95. (Mike Hall, "What Drug Companies Aren't Telling You,"American Federation of Labor - Congress of Industrial Organizations, aflcio.org, 2011)
One way to rein in the questionable practices, pricing and other abuses of the pharmaceutical industry would be to pass tough new laws and regulations, including price controls that most other nations use to keep medicine affordable for their citizens. But according to Greider, the drug industry’s powerful presence in Washington, D.C., makes such legislation next to impossible.
In 2011, the pharmaceutical industry can count on a team of 825 lobbyists to influence legislation seeking to limit the industry’s power or decrease its profits, such as new prescription drug benefit legislation for seniors or prescription drug price controls. Cost totals for the industry reached $115,571,832.
Speaking of lobbying, in the 1999-2000 election cycle “drug companies spent more money to influence politicians than did insurance companies, telephone companies, electric companies, commercial banks, oil and gas producers, automakers, tobacco companies, food processors and manufacturers—more, in short, than any other industry,” Greider writes.
“Most of that—about $177 million—went to hire lobbyists from 134 firms,
including 21 former members of Congress.
The industry also gave $20 million in campaign contributions
and spent $60 million on issue ads.”
(Mike Hall, "What Drug Companies Aren't Telling You,"
American Federation of Labor - Congress of Industrial Organizations, aflcio.org, 2011)
A Final Word
Public Citizen issued a major report on drug company research and development issues, which received considerable national media attention. It was also used by ABC News in a Peter Jennings special Bitter Medicine. ("Would Lower Prescription Drug Prices Curb Drug Company Research and Development?" http://www.citizen.org, 2010) Here some reasons why lower prescription prices would not curb R&D:
* New drug discoveries are much cheaper than the industry claims
* Huge profits allow for price elasticity
* Lower prices will induce demand
* Drug companies will shift priorities
* Future research costs will decline
* Industry R&D risks are significantly reduced by taxpayer-funded research
* Drug company advertising is growing faster than R&D
* Price cuts could foster more drug innovation
Entire "What Drug Companies Aren't Telling You" Article: http://www.aflcio.org/aboutus/thisistheaflcio/publications/magazine/0503_bigfix.cfm#jackupprices
Entire "Would Lower Prescription Drug Prices Curb Drug Company Research and Development?" Article: