Prescription drugs and their costs are high on political agendas this campaign season. Unfortunately, many candidates are seeking to score cheap points by attacking the nation’s pharmaceutical industry, the most innovative in the world. We’ve heard the industry accused of free-riding off taxpayers, earning ‘huge profits’ by manipulating patents, marketing ‘me too’ drugs instead of finding new cures, and falsifying the results of safety tests.
The not-so-secret agenda of those making these misleading charges is to create a new prescription drug entitlement for seniors (and perhaps for everyone) that won’t bankrupt the country’s taxpayers. By demonizing the drug industry, they hope to build public and political support for draconian price controls on prescription drugs.
Price controls have never worked, and they won’t work this time on prescription drugs. Instead, they would cripple drug research and limit access to life-saving drugs, with terrible consequences for the health of all Americans.
A frequently made accusation is that the pharmaceutical industry puts ‘profits before patients.’ According to Fortune magazine’s annual ranking of the top 500 companies, the 14 companies that make up the ‘pharmaceuticals’ category had a median profit (as a percent of revenue) of 18 percent, which indeed is more than any other industry’s median.
The most profitable drug company on the Fortune list is Amgen (28 percent). Three other companies came in at 24 percent. Pharmacia and Abbott both report 7 percent, according to Fortune, and Gemzyne was at negative 9 percent.
But compare these numbers to Coca-Cola’s 20 percent profit; Bank of New York (19 percent); Mellon Financial (33 percent–more than any drug company); Microsoft (29 percent); Oracle (24 percent); Gannett (publisher of USA Today–13 percent); Knight-Ridder (15 percent); AT&T (13 percent), and SBC Communications (16 percent).
Yes, most drug companies are profitable, but no more so than many other companies in other fields. There are companies in other industries that are even more profitable–and a Coca-Cola never saved a life.
The principal reason profits tend to be high in the pharmaceutical industry is because it is willing to take risks that other industries avoid. Pharmaceutical companies invest about 17 percent of sales in research and development, more than nearly any other industry and well above the average for all industries of 3.9 percent.
Industry critics claim drug companies get a free ride from spending on basic research by the National Institutes of Health. But according to the Pharmaceutical Research and Manufacturers Association, the trade association for the manufacturers of innovative drugs, industry outspent NIH $26 billion to $18 billion in 2000. According to NIH itself, only four out of the 47 best-selling drugs were developed in part with NIH funding.
According to PhRMA, 78 percent of the industry’s spending on R&D goes toward finding new drugs. At the current time more than 400 new medicines for cancer, 122 for heart disease and stroke, and 24 for Alzheimer’s are undergoing testing. The number of new drugs being produced is rising over time: Twenty new drugs were approved by the Food and Drug Administration in 1988 and 23 in 1989, compared with 27 in 2000 and 24 in 2001.
According to a study from a managed care advocacy organization, 80 percent of ‘new’ drugs are not ‘significantly different’ or ‘proven to be more effective’ than drugs already on the market. We can understand why cost-cutters at HMOs might wish to tell their patients this, but it is impossible even for experts to characterize changes to prescription drugs as being medically ‘insignificant.’
Doctors have different opinions about the best drugs and therapies available. That’s not greed or conspiracy; it’s medicine. No two patients are exactly alike, and no two doctors have past experiences so similar that they will always make the same diagnoses or prescribe the same medicine. In cases such as depression, where symptoms can change over time and are often elusive, the only way to determine the best drug for a patient is by trial and error.
Critics say changes that allow a drug to be taken less frequently is unimportant, but such a change is known to actually save lives. Getting patients, particularly those who are elderly, to take their medication on a prescribed schedule can be very difficult. Moving from two pills a day to one, or one a day to one a week, improves patient compliance and can prevent serious medical complications.
Critics allege that drug manufacturers are allowed to market new drugs that haven’t been proven to be better than those already on the market. This is true. But why should a product have to be proven superior to all other products currently available before it can be sold? Such a requirement is not imposed on any other industry because competition among producers, even of very similar or even identical goods and services, benefits consumers. It is by allowing producers to advertise the prices of competing products that markets ensure consumers get the best products at the lowest prices.
Critics charge that drug companies use patents to create monopolies on certain types of drugs so they can charge higher prices. However, there are 170 drugs available for high blood pressure. Many of those drugs have existing patents. So what do we really have? Monopoly or strong competition?
The country’s Founding Fathers thought intellectual property rights were so important that patents and copyrights are the only property rights affirmatively protected in the U.S. Constitution (Article 1, Section 8). Patents reward innovation by protecting an inventor from competition during the 20 years following the granting of a patent, provided the inventor makes public details about his or her invention.
The patent system has worked well in the drug industry. U.S. drug companies are responsible for some 90 percent of all the world’s new drug discoveries each year, and a growing number of foreign drug companies are relocating to the United States to enjoy our patent protections.
This has not occurred at the expense of consumers. Generic drugs–inexpensive copies of innovative drugs–have rapidly increased their market share and now account for nearly 50 percent by volume of prescription drugs. That’s clear evidence that the nation’s patent system is correctly balancing the interests of consumers and inventors.
Drug companies surrendered some of their patent protections a decade ago to allow generic manufacturers to begin selling products sooner than they otherwise could. This accommodation was made despite the fact that about nine of the 20 years of patent protection granted will be taken up with testing, trials, and FDA delays. This leaves the companies with only 11 years, on average, to recover their R&D expenses and earn a profit. And keep in mind that a patent doesn’t mean no competition, only competition from marketers of exact duplicates of the patented medication.
Some critics complain that new drugs are tested against placebos rather than existing drugs. But there is a good reason for this: The FDA has set the rules this way. Drug companies have little control over the drug-approval process, so criticizing them when they are playing by the rules doesn’t make much sense.
The FDA’s drug-approval process requires new drugs to be safe and more effective than placebos, not more effective than existing drugs. Even achieving this level of quality assurance is astonishingly time-consuming and expensive: It requires nine years and costs more than $800 million to get a new drug approved in the United States. No one counts how many lives could be saved, or how much suffering would be avoided, if the approval process were shorter and less expensive.
Problems and side effects that might not show up in a sample of 3,000 people may show up when 100,000 or 1 million patients use the drug. When that happens, the drug companies may change the warnings on the labels or sometimes pull the drug off the market. No one can know all the possible side effects until a drug is distributed widely.
One of the more outrageous charges is that researchers cover up side effects and problems with new drugs because they make money off the research. However, research money from a drug company goes to the department of the medical school doing the research and does not enrich individual researchers. Moreover, researchers have to report back to the medical school’s Institutional Review Board that oversees human research.
If anything looks suspicious, the IRB can request an explanation or stop the protocol. Sometimes the researchers stop it. But these trials typically involve 30 academic medical centers, 50 or 100 doctors, and perhaps hundreds of nurses and support staff. To imply that all of these scientists, administrators, doctors and nurses are in the pockets of drug companies, and that their IRBs are all asleep at the wheel, is both insulting and ludicrous.
Giving senior citizens greater access to prescription drugs is an important matter of public policy that ought to be widely discussed. But demonizing the prescription drug industry does not advance that discussion, and in fact turns our attention to false issues and policy proposals that simply wouldn’t work.
Whether one drug is better than another is, and ought to be, decided by patients in consultation with their physicians. Only they can decide whether the trade-offs of benefits, costs and risk are worthwhile. The political campaign will be full of people attempting to second-guess patients and their doctors. We should not go down that road.
Joseph Bast is president of The Heartland Institute, a public policy institute based in Chicago, and Merrill Matthews is a contributing editor of Health Care News, a monthly publication of The Heartland Institute. This essay first appeared in the Sunday, September 22, 2002 issue of the Chicago Sun-Times.
Joseph Bast is a Senior Fellow at The Heartland Institute. He cofounded Heartland in 1984, serving as executive director then as president & CEO until January 2018. His research and writing focuses on climate change and energy policy.
Merrill Matthews, Ph.D., is a resident scholar with the Institute for Policy Innovation, a research-based, public policy think tank.
