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Patents, research keep costs high

http://www.morningjournal.com/site/index.cfm?BRD=1699&dept_id=499256&newsid=4962734&PAG=461&rfi=9

31st July 2003
Marjk Holthaus
Morning Journal Writer
Lorain

Zocor is supposed to be the same the world over. Used for treating high cholesterol, it's the top selling drug in the world. It's made by Merck & Co., one the world's biggest pharmaceutical companies.

In Canada, 60 tablets of Zocor cost about $55, according to a study released in May, and the average price in France, Germany, Italy, Japan and Britain is about $70. In Lorain County, the same tablets would go for about $116.

It's no fluke that the same pill made by the same company costs much more in the United States.

Many other prescription drugs on the world's list of top 20 sellers -- including No. 2 Lipitor from Pfizer and No. 3 Prilosec from AstraZeneca -- have spreads between their foreign market prices and U.S. market prices ranging from 80 percent to more than 130 percent.

The question of why drug prices are high in the United States is part of a mounting debate on making prescriptions more affordable, especially for seniors, but the answers are being spun so hard and in so many directions they are almost impossible to understand.

Arrayed around the issue are literally hundreds of special interest groups and political forces tugging and pushing Americans to choose sides on a range of proposals, from giving prescription benefits to seniors and others squeezed by high prices, to reducing many of the product protections for drug makers, to even letting Americans get their medicines from cheaper foreign markets.

At the center of all the attention is the U.S. pharmaceutical industry.

Now under attack in the courts, the media and Congress, the drug makers have reason to be defensive, particularly about their profits.

While the overall profits of Fortune 500 companies declined by 53 percent in 2001, the top 10 U.S. drug makers increased theirs by 33 percent, making pharmaceuticals the country's most profitable business.

One reason is the ''blockbuster drug'' phenomenon.

Within the industry, any prescription drug that breaks $1 billion in sales becomes a blockbuster, and in 2001 there were 29 of them, nearly double the number of two years before. According to Fortune, they generated more than $52 billion in retail drug sales last year.

Although the average price per prescription last year jumped 10 percent to $49.84, six times greater than the inflation rate of 1.6 percent, the 29 blockbuster drugs had an average prescription price of $97.71.

Since they accounted for 34 percent of total U.S. drug sales in 2001, blockbusters are clearly driving prices and profits.

Pfizer led U.S. pharmaceutical companies with $7.8 billion in profits in 2001, earning 24 cents on each dollar of sales. It owns the biggest blockbuster drug in the United States, the cholesterol reducer Lipitor, which had sales of $4.5 billion last year. Pfizer also produced other blockbuster drugs such as anti-depressant Zoloft ($2.1 billion in sales), blood pressure reducer Norvasc ($1.7 billion) and Neurontin for epilepsy ($1.4 billion).

A few weeks ago, Pfizer Inc. acquired Pharmacia Corp. for $60 billion, vaulting to $48 billion in revenues and adding the sex-enhancing blockbuster Viagra and Celebrex for arthritis and joint pain.

Merck was the second most profitable U.S. pharmaceutical company, netting $7.3 billion, or 15 cents on the sales dollar. Its cholesterol reducer Zocor was the second highest selling drug in the country, grossing $2.7 billion. It manufactured three other blockbusters: arthritis pain reliever Vioxx ($2.0 billion), osteoporosis fighter Fosamax ($1.0 billion) and asthma reliever Singulair ($1.0 billion).

Pfizer derived almost one-third of its revenue and profits from its four blockbusters and it raised prices on them by an average of 4.9 percent last year, three times the rate of inflation. Merck raised the prices on its four blockbusters by an average of 6.5 percent last year, or four times the rate of inflation.

One reason for the popularity of blockbuster drugs is that they are among the most heavily advertised. Eleven blockbusters were among the 25 most advertised drugs in 2000.

The five drugs that were most advertised direct to consumers in 2000 all became blockbusters in 2001: Vioxx, Zocor, heartburn reliever Prilosec, allergy reliever Claritin and anti-depressant Paxil.

The $160 million Merck spent that year advertising Vioxx was more than PepsiCo spent pitching Pepsi ($125 million) and Anheuser Busch spent hawking Budweiser ($146 million).

Each of the top seven most heavily advertised drugs topped Nike's $78 million ad budget for its shoes.

While blockbuster drugs have flourished, some analysts say 2002 and 2003 may produce even more as the Federal Drug Administration finishes testing on 15 drugs with potential to become blockbusters. These drugs, if approved, could allow patients to treat illnesses like schizophrenia, multiple sclerosis and even prostate, breast and colorectal cancers.

Blockbuster drugs are lucrative because they are so medically effective and they have little or no competition.

High prices aside, no one is arguing the new stars of biotechnology don't perform spectacularly, whether it's lowering cholesterol or raising libido. Even when less expensive generic equivalents are available, many physicians prescribe the brand name blockbusters and most patients prefer them.

Blockbuster drugs are part of the reason why more prescriptions are being written and why prescriptions are being shifted to higher-priced medicines. Those two factors, along with price hikes averaging 10 percent, are why expenditures for prescription drugs increased 17 percent last year, making them the fastest-growing component of health care costs.

The drug makers argue the effectiveness of blockbuster drugs comes at a high cost -- to cover research and development and a lengthy approval process -- which justifies their high prices.

For a drug to move from the research and development stage to FDA approval takes 10 to 15 years and costs an average of $800 million, according to the Pharmaceutical Research and Manufacturers of America, or PhRMA, the drug industry's public relations and lobbying arm.

''That is an extremely heavy investment and we expect that that investment be protected,'' said Jeff Trewhitt, a PhRMA spokesman.

The upfront investments necessary to develop new drugs that may or may not produce profits seven or eight years down the road are encouraged by the 20-year patents awarded for many drugs seeking FDA approval. The patents give the drug makers the right to sell the new medicines exclusively, and protects against copying and marketing of their products by rival manufacturers.

''For every five drugs that are researched and developed, only one makes it to market,'' said Trewhitt. ''Drug companies lose millions of dollars in research and development spent on unsuccessful drugs.''

The average 13 years of patent protection usually remaining after drugs win FDA approval guarantees they will have minimal competition when they get on the market. If a drug becomes a blockbuster, high profits for its maker are virtually locked in until the patent expires.

When a drug loses patent protection, generic competition moves into its market niche and profits quickly erode.

Patent protection will expire at the end of this year for Claritin, which is made by Schering-Plough Corp. The $3.1 billion the company pulled in last year will drop by 50 to 75 percent as soon as it happens, according to the Federal Trade Commission.

By 2006, almost 200 patents covering $36 billion in U.S. pharmaceutical sales will expire.

The whole scenario of drug companies recouping long-ago upfront costs by protecting high profits on pills that today cost just cents to make is being vigorously defended by a pharmaceutical industry which is under fierce attack on all sides.

Consumer groups are challenging the industry's claims of high research and development costs, in part to reduce the drug makers' credibility and soften them up for assaults on their vital patent protections.

Public Citizen, a leader in the attack on the drug makers' positions, says the $800 million average claimed by the industry needed to get a drug to market significantly overstates real research and development costs, which are likely to be as much as 75 percent lower.

Public Citizen notes that many drugs brought to market receive financial support from the government at some stage in their discovery and development, and the companies are wrong to factor that into the average.

A number of government studies agree that taxpayers have been the drug industry's silent partner. Many innovative drugs would not have been discovered or would have taken much longer to discover without research contributions from government labs and noncommercial institutions, say the studies.

Nearly 44 percent of all drug research in the United States is funded by American taxpayers through funding of the National Institutes of Health. President Bush proposed increasing the NIH's 2002 budget to $23.4 billion, not so far off the $30 billion which PhRMA says its member companies spent the year before on research and development.

Public Citizen calculates that after eliminating what taxpayers contribute, and adjusting for accounting and tax considerations, the average actual outlay by a company for the research and development of a new drug is only about $240 million.

As the U.S. Senate started debate on prescription costs a month ago, a nonprofit healthcare advocacy group repeated its charge that top U.S. drug companies were spending twice as much on advertising, marketing and administration as they do on research and development.

Families USA said its analysis rebutted drug company arguments that lowering drug prices and promoting the use of cheaper, generic drugs would cut into their ability to develop new medicines.

The widely-reported findings use numbers from the annual reports of nine leading drug companies which show, for instance, that in 2001 Merck spent $6.22 billion on marketing, advertising and administration, but only $2.46 billion on research and development. Pfizer spent 35 percent of its $32.2 billion in revenue on marketing, advertising and administration and 15 percent on research and development.

PhRMA has responded by saying much of the marketing and advertising expenses represents the $10 billion in free samples given each to doctors which are passed along to patients, many of them seniors.

Meanwhile, the actual attack on the drug industry's patent protections is taking place in the courts and Congress.

Generics now account for 46 percent of prescriptions written in the United States, in part because of the Hatch-Waxman Act that was passed in 1984 to clarify drug patents and allow companies to develop and market generic forms of drugs once patents expire. However, the drug industry has been using several loopholes to slow down and keep generics off the market.

The main piece of legislation recently passed by the Senate is a measure aimed at amending the Hatch-Waxman Act to close the loopholes and speed generic drugs to the market. Democrats had hoped to attach a number of amendments to the generic drug measure, including a Medicare drug benefit costing as much as $500 billion over 10 years and a plan to re-import less expensive brand name drugs from other countries.

Republicans in the House have already passed a much smaller Medicare prescription proposal, but it doesn't address generic drugs.

''Every year the patent goes on, the public is getting ripped off,'' said U.S. Rep. Sherrod Brown, D-Lorain. ''The ways they have fought to get patents extended is amazing. These guys have invented new meaning for the word greed.''

''We are the innovators and we fund the millions of dollars of research that goes into making these drugs that save lives,'' counters Trewhitt. ''The patent protection we have, is earned.''

On the legal front, there has been a surge of antitrust and price-fixing lawsuits against drug companies.

Ohio was one of 29 states in a successful lawsuit charging that Bristol-Myers illegally delayed generic competition to its cancer drug Taxol by manipulating patent laws to keep generic versions off the market.

Another lawsuit accuses Astra-Zeneca and Barr Laboratories of getting together to block a generic version of the cancer drug Tamoxifen.

Several other drug makers have recently settled with the Federal Trade Commission over allegations they listed questionable patents to block generics from the market or made payments to makers of generic drugs to delay them. More investigations are under way.

Ohio Attorney General Betty Montgomery is chairing a 35-state drug-price task force that hopes to stop drug companies from inflating prices.

Perhaps most worrisome to the drug companies is that class-action law firms, including some that were prominent in the 1998 tobacco settlement with the states, are courting state attorneys general and public interest groups as clients.

Whether prescription prices in the United States are unfairly high is in the eye of the beholder, and depends on the country and the situation.

Several studies have concluded that Americans without some kind of drug-cost coverage or benefits probably pay more for their medicines than anyone else in the world. That would include the 60 million people, or about one in four, who have no insurance coverage for prescription drugs and the third of the nation's elderly who can't pay for the prescription medications they require.

However, because of the unique U.S. free-market healthcare system, and although they pay more, Americans have unlimited access to the widest selection of drugs and to the newest ones. Those with relatively liberal drug-cost benefits see it as an ideal situation. Due to price controls and market restrictions, people in many other countries have more limited choices or none.

Citizens of a country like Italy where the government purchases all medications and distributes them within a national medical system pay next to nothing, if In Canada, government-sponsored drug plans restrict or exclude the newest and most costly treatments. For example, to hold down its costs, the Ontario provincial government listed only 25 of 99 drugs approved by Canada's federal government in 1998 and 1999. As a result, critics say, seniors in the province were denied new and better medicines for osteoporosis, Alzheimer's and Parkinson's disease.

Like Italy, France directly controls its drug prices. Other countries, such as Germany, the Netherlands and Japan, do it indirectly through social insurance plans. Britain does it through limits on profits.

Examples of how price controls can restrict access to prescription drugs are beginning to be seen in the United States.

Managed care organizations routinely limit access to drugs not on their approved lists. At Veterans Administration clinics, if a physician is asked to prescribe an unlisted drug the cost is not covered.

Several states, including Ohio, are trying to implement purchasing pools or preferred drug lists for their Medicaid programs which lower costs by extracting discounts from drug makers but then limit the availability of drugs not on the list or included in the pool.

The Democrat version of a Medicare prescription benefit made distinctions between ''preferred'' and ''non-preferred'' drugs, which many worry are the seeds of future price controls and drug steering.

Much evidence has been presented that U.S. drug prices are so high because American consumers are subsidizing the costs of drugs in other countries where governments regulate them in different ways.

Other studies counter that although some ''cost shifting'' might take place, most of the differences in prescription prices are explained by flawed studies failing to account for different living standards and per capita spending, consumption patterns, currency exchanges, a much wider use of generics in the United States than elsewhere, product liability, altered drugs, black market medicines and many other variables.

There seems to be more agreement that the United States subsidizes drug research and development for the price-controlled markets in the rest of the world, especially Europe.

The United States is footing the bill for nearly 40 percent of the world's drug research and development. Of more than 150 major new global drugs developed recently, nearly three quarters came from just three countries -- the United States, Britain and Switzerland -- with the United States providing nearly half.

In most other countries, including the entire European Union, where the government is the sole purchaser of medical goods or regulates them through national health plans and social insurance funds, there is a tendency to focus on the direct costs of medications and let other countries cover the cost of research and development.

Called ''free riding,'' the practice is abetted by the fact that the United States has developed the world's most strict and sophisticated regulatory apparatus for pre-market approval of new drugs and post-market monitoring of drug safety.

The inclusion of much of the world's cost for research and development makes U.S. drug prices high. If those higher prices are resisted, as is happening now, and unless there is a global leveling of prices, the U.S. pharmaceutical industry argues the innovation of better drugs and competition will be eroded.
 

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