Life saving industry – Investing more in advertising than R&D

By – Stephen O’Brien

 

George W. Merck, president of Merck &Co., a major pharmaceutical company in the twentieth century famously stated in 1929: “We try to remember that medicine is for the patient. We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been.”[i] George Merck’s quote embodies the idealistic nature of the pharmaceutical industry at its inception. He had made it clear how the pharmaceutical industry does play an integral part in the continued prosperity of society.

“We try to remember that medicine is for the patient. We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been.”[i] George Merck’s quote embodies the idealistic nature of the pharmaceutical industry at its inception.

While this may have been the ideology in earlier times, in recent years there seems to have been a shift. Nowadays, there is fewer and fewer innovative developments for antibiotics to combat harsher, untreatable infections. For one, Big Pharma has shunned development of antibiotic-resistant drugs and has proclaimed publicly that there are insufficient economic incentives for development programs to go forward.[ii] The deeper problem is that current incentives reward companies to develop mainly new medicines of little advantage and compete for market share at high prices, rather than to develop clinically superior medicines with public funding so that prices could be much lower and risks to companies lower as well.[iii] This investigative piece will unravel the new norms and unfortunate trends exemplified by the monopolised pharmaceutical industry, showcasing just how much power big companies have and furthermore, how this power had led to less public good being achieved.

The pharmaceutical industry develops, produces, and markets drugs or pharmaceuticals for use as medication.[iv] The global pharmaceutical market is worth US $300 billion a year, a figure that is expected to rise to $400 billion within the next three years.[v] The ten largest drug companies control over one-third of this market, several with the sales of more than $10 billion a year and profit margins of approximately 30%. In particular, due to Ireland’s low corporation tax rates, highly educated workforce and  knowledge development box (KDB) , these factors make Ireland a highly attractive location for the pharmaceutical companies, resulting in Ireland becoming the number one spot for pharmaceutical investment. Irelands KDB is a tax rate for income generated from R&D and intellectual property and is expected to be set in the region of 5pc and 6.25pc.[vi] Eight out of ten global pharmaceuticals and biopharmaceuticals reside here, thereby subsequently integrating their manufacturing operations into the Irish market.

Global advancements in the  technology sector in the 21st century has not curtailed rising drug prices. For example, Former CEO for Turing Pharmaceuticals, Martin Shkreli decided to raise the price of the anti-parasitic drug “Daraprim” by over 5000% in September 2015. Shkreli’s decision to raise the price of Daraprim from $13.50 a pill to $750.00 a pill lead to the media referring to him as the “most hated man in America”. [vii] Deborah Socolar, a healthcare policy analyst and access advocate offered her views on this apparent form of price gouging, stating “That is simply the most visible and extreme example of a now fairly widespread and reprehensible trend in the drug industry. In that case, the drug maker boosted the price of an old generic drug for which there were no competing manufacturers. Shkreli sought what he thought the market would bear is in fact what US policy encourages.”

Although this form of price gouging is not constrained to one company or individual, as a Credit Suisse report indicated, “For twenty leading global drug companies last year, 80% of growth in net profits stemmed from price increases in the U.S.” The US Government Accountability Office (GOA) released a report in 2006, which highlighted the price increase for many brand-name prescription drugs. The GAO report analysed drug prices between the periods of 2000-2008, which identified more than 400 examples of extreme price hikes for brand-name drugs. Most price increases ranged from 100 percent to 499 percent, but increases in excess of 1,000 percent were common as well. [viii]

Nine of the drugs evaluated actually experienced a price increase of more than 2,000 percent — that’s 21 times the original price. [ix]The report identified the growth of drug company monopolies and the drug repacking process, which is buying drugs wholesale and repacking them in smaller packages, as the main culprit of the hyperinflation of pharmaceutical prices. Deborah added “Other drug makers also price as high as they can get away with in the US, where government does not act to offset the monopoly pricing power.”

Some academic economists are revising economic theory to defend monopoly pricing “Because the patients who used the drug had no alternative, the drug company had a fiduciary responsibility to its shareholders to raise the price to the highest level the users considered their lives to be worth. Because the drug’s current price was clearly below the amount, the company was in fact under-pricing the product.” This view has also been expressed by the likes of Marijn Dekkers, Bayer Pharmaceuticals, Chief Executive Officer “We did not develop this medicine for Indians…We developed it for western patients who can afford it.”[x] Marijn’s comments were a result of Indian company Natco Pharma Ltd’s approval to by the government to produce a copy of Bayer’s cancer drug “Nexavar”, which they’ve sold for 97% less than the original product. [xi] Indian law grants the government compulsory license to domestic companies to produce copies of drugs if the original is not available locally at a reasonable price, regardless of whether they are under patent. Marijn refers to India’s patent laws as ‘essentially theft’. The shift in the attitudes of this industry is exemplified by the contrasting quotes of George Merck and Marijn Dekkers.

“We did not develop this medicine for Indians…We developed it for western patients who can afford it.”

The prioritising of profit over public good is not confined to the pharmaceutical industry, although net profits after taxes consistently remain substantially higher than profits for all other Fortune 500 companies. [xii]This apparent dependence of pharmaceutical companies to maximise profit has seen the patients who consume these pharmaceutical drugs bearing the burden of the industry’s loss of profits. The Credit Suisse report stated, “Many drug companies rely on for sales growth is a pattern of steady increases, year in and year out, on older medicines. Wholesale-price increases for the 30 drugs analysed by the Journal averaged 76% over the five-year stretch from 2010 through 2014. That was more than eight times general inflation.” [xiii] Competition and patents are generally linked to the high price of pharmaceuticals, as to act as an incentive for innovation in research and development.

Experts and drug industry representatives reported to the US GAO that transfers of drug ownership rights and consolidations among drug companies have increased. According to the GAO, the transfers and consolidations limit competition and contribute to extreme price rises. Fewer drug companies competing in a therapeutic class leads to fewer prescription drugs being developed within that class and allows the companies to use their patents and market exclusivity to further increase prices.[xiv]

Phillip Hanlon from the Irish Pharmaceutical Health Association (IPHA) stated “All IPHA members are innovation driven companies. On average it takes about €1.4 billion to develop a new drug and at least 10 years to do so. Only a very limited number of discovery paths actually lead to a viable drug being produced and a company being able to get it on to the market.” Although a study by Donald W. Light in 2011 stated “The mythic costs of R&D are but one part of a larger, dysfunctional system that supports a wealthy, high-tech industry, gives us mostly new medicines with few or no advantages.”[xv]

However, contrary to Hanlon’s statement, the common misconception that pharmaceutical prices are so expensive due to the costs of Research and Development (R&D) has been disproven in recent years. Pharmaceutical companies actually spend 19 times more on marketing than they do on basic research. [xvi] The actual figures of R&D investment show that 84% of worldwide funding for drug discovery research is invested from public sources and government. Professor Light’s study concluded that 90% of drug patents offer no meaningful clinical advantage for patients, but nonetheless impede access.[xvii] The pharmaceutical industry’s significant investment is in the promotion of their goods, rather than in research and discovery, indicating where the current monopolised market’s priority lie, which is in maximising profits, thereby inevitably restricting theses conglomerates from serving a greater public good.

Deborah was previously involved in a study compiling the numbers of operatives, in the marketing section of the pharmaceutical industry, stating “In that old paper, we showed that drug makers employed far more people in marketing than in research. Soon after that (PHRMA) stopped publishing those annual job numbers. Since then, the larger drug makers have been doing even less of their own research, instead buying start-ups that have been developed promising products, or buying/licensing other companies’ products. Their marketing expenditures have grown greatly, with many types of marketing besides advertising to the public, through a variety of options ranging from Direct to consume advertisements, (DTC) medical journals, funding of patient advocacy groups and sponsorship of events.”

Out of 218 drugs approved by the FDA from 1978 to 1989, only 34 (15.6%) were judged as important therapeutic gains. The figures offer a dismal outlook if we compare (1974-94), the industry’s Barral report on all internationally marketed new drugs concluded that only 11% were therapeutically and pharmacologically innovative. The declining therapeutic value of pharmaceutical drugs leads oneself to question why prices for pharmaceutical drugs have skyrocketed.

The American pharmaceutical industry only has to compare their proposed drug to a placebo instead of contrasting the therapeutic gain from the best alternative drug on the market. Studies conducted between 1999 and 2005 show that only 48 % of the approved new medicines were compared with existing medicines at the moment of marketing authorisation. Modern business society ingrains the idea that profit is priority and all else follows second, which inevitably shifts the pharmaceutical industries focus from maximising discovery through research and development. Instead vying to maximise awareness of their goods and deciding to invest in drugs through mergers and acquisitions subsequently maintaining the pharmaceutical oligopoly, which has constrained the industry from serving a greater public good.

Word Count – 1709

Supplementary Research –

https://www.techdirt.com/articles/20140124/09481025978/big-pharma-ceo-we-develop-drugs-rich-westerners-not-poor.shtml

http://www.nytimes.com/roomfordebate/2015/09/23/should-the-government-impose-drug-price-controls/end-patent-monopolies-on-drugs

http://mobile.nytimes.com/2016/02/28/sunday-review/ask-your-doctor-if-this-ad-is-right-for-you.html?smid=tw-share&_r=4&referer

http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html

http://cepr.net/press-center/press-releases/patent-monopolies-mismarketing-drugs

https://www.dissentmagazine.org/article/patents-against-people-how-drug-companies-price-patients-out-of-survival

https://www.thebureauinvestigates.com/2012/09/28/why-big-pharma-is-bad-for-your-health/

References/ End notes – 

[i] https://books.google.ie/books?id=MjR8rhp0nSMC&pg=PA264&lpg=PA264&dq=%E2%80%9CWe+try+to+remember+that+medicine+is+for+the+patient.+We+try+never+to+forget+that+medicine+is+for+the+people.+It+is+not+for+the+profits.+The+profits+follow,+and+if+we+have+remembered+that,+they+have+never+failed+to+appear.+The+better+we+have+remembered+it,+the+larger+they+have+been.%E2%80%9D&source=bl&ots=YFroIO2st_&sig=XxbgloVGpIVq2vnTdnLsg29syNM&hl=en&sa=X&ved=0ahUKEwiujdaSnorMAhWFDw8KHa7CChcQ6AEIKDAC#v=onepage&q=%E2%80%9CWe%20try%20to%20remember%20that%20medicine%20is%20for%20the%20patient.%20We%20try%20never%20to%20forget%20that%20medicine%20is%20for%20the%20people.%20It%20is%20not%20for%20the%20profits.%20The%20profits%20follow%2C%20and%20if%20we%20have%20remembered%20that%2C%20they%20have%20never%20failed%20to%20appear.%20The%20better%20we%20have%20remembered%20it%2C%20the%20larger%20they%20have%20been.%E2%80%9D&f=false

[ii] http://www.nature.com/nbt/journal/v32/n10/full/nbt.3036.html

[iii] http://www.palgrave-journals.com/biosoc/journal/v6/n1/full/biosoc201040a.html

[iv] https://books.google.ie/books?id=vl3MAwAAQBAJ&pg=PT13&lpg=PT13&dq=The+pharmaceutical+industry+develops,+produces,+and+markets+drugs+or+pharmaceuticals+for+use+as+medication.&source=bl&ots=p-5nIL6Oom&sig=mbVlXkqH0oZRTAWTHtZssWnob1Q&hl=en&sa=X&ved=0ahUKEwiequTfoIrMAhUJVBQKHVimCwAQ6AEIPjAE

[v] http://www.who.int/trade/glossary/story073/en/

[vi] http://www.independent.ie/business/budget/budget-2016-do-you-know-what-the-knowledge-box-is-31576795.html

[vii] http://www.bbc.com/news/world-us-canada-34331761

[viii] http://www.wsj.com/articles/for-prescription-drug-makers-price-increases-drive-revenue-1444096750

[ix] http://www.workers.org/2010/us/drug_prices_0128/

[x] http://www.dailymail.co.uk/news/article-2545360/Pharmaceutical-chief-tries-stop-India-replicating-cancer-treatment.html

[xi] http://www.bloomberg.com/news/articles/2014-01-21/merck-to-bristol-myers-face-more-threats-on-india-patents

[xii] http://khn.org/morning-breakout/dr00004161/

[xiii] http://www.ifpw.com/PDF/FOCUS2015/Focus100815.pdf

[xiv] http://www.gao.gov/new.items/d10201.pdf

[xv] http://www.pharmamyths.net/files/Biosocieties_2011_Myths_of_High_Drug_Research_Costs.pdf

[xvi] http://www.huffingtonpost.com/2012/08/09/pharmaceutical-companies-marketing_n_1760380.html

[xvii] http://www.theguardian.com/commentisfree/2013/feb/22/hiv-aids-deaths-pharmaceutical-industry

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s