Recent Items

Big Pharma Research Cost Defense of High Drug Prices Debunked in Study

Posted on by

Readers may know I have perilous little sympathy for Big Pharma. The industry too often wraps itself in the mantle of science, in particular, claiming its needs its high profits and hence high prices to support its research and development efforts. In fact, it spends more on marketing than on R&D (and perilous few industries sell products with fat enough margins to support the cost of frequent sales calls to small businesses, let alone prime time TV ads). And it is a given that it allocates as much overhead as its accountants will tolerate to its reported R&D levels.

A new and interesting line of attack has been opened against Big Pharma’s defense of its high US prices and its ongoing attacks on Europe and other countries that negotiate discounts. US drugmakers have contended that the rest of the world is effectively free-riding on US research, and that its inability to charge higher prices outside the US limits funding of R&D (ahem, have we forgotten the fact that most really big ailments already have treatments of some sort, making it much less likely that anyone will find a new blockbuster drug?).

But a more granular look at drug pricing within the US shows that drugmakers offer enough discounts here to undermine their attacks on non-US health schemes. And the foreign drug regimes at least assure that everyone in the population is on the same footing, while here, the highest prices fall on those either outside health care plans or in ones without favorable drug pricing, so the burden of higher prices falls disproportionately on lower income people.

From the Financial Times:

Claims by the US drugs industry that the US disproportionately funds research and development of new drugs by paying higher prices than Europe for its medicines have been undermined by a new study to be published soon.

Panos Kanavos and Sotiri Vandoros at the London School of Economics argue in their report that a rigorous like-for-like comparison shows that transatlantic differences in patented medicine prices are modest and declining over time.

In a forthcoming article in Health Economics, Policy and Law, the co-authors conclude that “public prices for branded prescription medicines in the US are comparable to those in key European and other OECD countries”.

Their findings are an embarrassment for the industry, and notably PhRMA, its powerful Washington, DC-based trade body. In the past PhRMA has argued that Europe’s ill-conceived public policies, including price controls and sluggish regulatory decision-making, have chilled innovation and raised doubts among private investors who help to underwrite research.

But the study confirms data released recently by several pharmaceutical groups, including AstraZeneca and GlaxoSmithKline. This data – confirmed informally by senior industry executives – suggests profits in the US are only marginally greater than in Europe.

Yves here. There is one area of difference:

His study concludes that Europe remains a relatively attractive market by volume and price, even though budget deficits have forced through aggressive price cuts in several EU states in recent weeks.

But Mr Kanavos demonstrates that manufacturers of branded drugs do not significantly cut prices to compete with lower cost generic rivals once patents expire. Governments typically have to ensure that prescribers switch to generic alternatives to save money.

Yves here. I am waiting for this study with baited breath. I wonder if they also adjusted for the differences in marketing costs.

Print Friendly
Twitter7DiggReddit9StumbleUpon1Facebook2LinkedIn0Google+0bufferEmail

38 comments

  1. Tyrosine

    I would like to know how much the research budgets are subsidized by governments and universities through direct and indirect subsidies. Knowing the budget doesn’t tell you anything if the entire amount comes from subsidies.

    I’d also like to know the percentage human clinical trials that occur in India where the “cost” (here human cost, and cost of complying with ethical principles) is low.

    1. sapeurcamembert

      I’d also like to know the percentage human clinical trials that occur in India where the “cost” (here human cost, and cost of complying with ethical principles) is low.

      Ethical costs with Big Pharma in USA ? You should suffer from Alzheimer disease…..or you do not remember well the not so old (last 4 years) of scandals, marketing of wrong products for wrong or invented disease or worse thousand of death from products where ethical (????) trial demonstrated their killing power…..(peacemakers, Viox….)..

      America ethic at works….

      The dangers of Viox, manufactured by Merck, were discovered in 2000. The study known as VIGOR (Vioxx Gastrointestinal Outcomes Research) showed an increased risk of serious cardiovascular events, including heart attacks and strokes in patients taking Viox compared to patients taking naproxen. This early warning was ignored by prominent scientists within the FDA and Merck.

      A single attempt was made to warn the public about Vioxx. This attempt failed. Dr. David J. Graham, associate director for science in the FDA Drug Center’s Office of Drug Safety, told Senate investigators that upon mentioning of the risks, he was “ostracized”, “subjected to veiled threats” and intimidated by co-workers at the pharmaceutically controlled FDA.

      The success of Vioxx was the result of ghost writing among medical journals, drug company worship by both medical doctors and shareholders and million dollar marketing campaigns ($100 million per year) paid for by the drug manufacturer. Resultantly, the popularity of Vioxx and other NSAIDS gained surging momentum on the prescription drug marketing. The cold hard facts of science cannot be ignored forever. The Wall Street Journal reported that Merck & Co.’s Vioxx eventually led to more than 27,000 heart attacks and sudden cardiac deaths. Still, Merck’s window of opportunity procured them $2.55 billion dollar annually.

      For the human cost in India please refer to Bhopal where Union-Carbide manages not to compensate for the killing of thousands of live after 20 years…

      American ethic at work….

  2. K Ackermann

    48% of drug R&D is paid for by the public but private industry gets to patent the results.

    I think the government should put up the other 52% and place a wall between drug R&D and drug manufacturing.

    Companies that only design drugs would not be constrained by market size. They would only want to design as many drugs as they can. They can submit a proposal for funding, but the drug patent would be in public escrow.

    The government could fund the development by selling licenses to drug manufacturers who can then use normal market forces to complete and keep costs down.

    Plus, the branding expenses would disappear.

    Money-losing diseases would stand a better chance of getting attention.

    More drugs for much cheaper. That’s progress.

    1. john

      Why can’t the government retain a 1-5% ownership of anything patented/licensed/commercialized that was originally funded by an NIH/NSF/DoD/whatever grant?

      1. Yves Smith Post author

        One of my buddies (lost contact with her) wrote the US’s first contracts for the NIH on the licensing of intellectual property (meaning the NIH funded research findings) in the 1970s. Payments were part of the deal. I have no idea where that stands, the IP is clearly licensed, but I have no idea what if any payments are due (I assume trivial).

  3. bob goodwin

    When an industry has very high fixed upfront costs that must be spread over decades, and relatively low variable costs beyond marketing, then several things will happen. First the industry will consolidate into an oligopoly. Second the pricing structure will be highly variable such that profit is extracted quite differently based on their pricing power in each situation. People on an airplane pay wildly different amounts for seats. Unlike commodities where the price universally sets to the same market price for everyone, the microeconomics are by design highly managed.

    I admit this drives me crazy on many levels, but I am stating it as an observation. I am quite certain that governments can and will influence this process, but as long as it costs $100M to get a risky drug to market that ultimately has 90% gross margin, then I expect big pharma to continue to behave this way.

    I think the big crime is not due to micro-tiered pricing, but rather the regulatory structure and capture that guarantees the permanence of the existing regime.

  4. Brick

    Price differentials between countries may not be that high when compared to other industries, but it might be wrong to assume they don’t matter. One of the major buyers of branded drugs is the wholesale industry which tends to rely on high volume and low margins. Here a 3 percent price differential is important and this is why big pharma sets quotas in certain countries and will stop selling to buyers if they think all the stock will be exported. The point is that price differentials may not have been a problem in the past but might be going forward as big pharma increasingly comes to grip with cross border stock flows..
    I do expect drug prices to come down, but mainly because big pharma is starting to take control of pricing in the retail industry, such that they are starting to take a bigger cut of the retailer’s profit. Realistically they would not do this unless their profits are being squeezed. It seems likely to me that marketing will be increasingly contracted out to the wholesaler and as such it is likely at first glance to appear that marketing expenditure will decline. This area is however the big difference between the US and Europe where there is little point spending lots on marketing when government is the eventual buyer and controls the price.
    I suspect the real reason why big pharma needs the high margins is not for research and development but to buy up smaller companies who take all the research risks. They act rather like the big banks consolidating the industry into large conglomerates.

  5. Lidia

    Not sure about the rest of Europe, but no doubt Italy is still a lucrative market as they have largely resisted the introduction of generics. At my local pharmacy, Aspirin™® is still Bayer aspirin and that’s that. It costs $5-6 for 20 pills. Aspirin and other OTC meds are not sold outside of pharmacies, at least in most regions. The pharmacy network here is itself a monopoly/command-type system of feudal and nepotistic franchises, the drug distribution rights and territory having been carved up and apportioned long ago. Pharmacists here are rich local ‘lords’ who hand down their tenancies within the family.

  6. Ina Deaver

    The pricing structure on the books in the US for drugs has nothing to do with the real price being charged. It is exactly like Bob Goodwin says: there is a very elaborate micro-pricing scheme that insures that some get drugs for free or close to it, and others pay the price-list price. The reason, at least as near as I can tell, is the “MFN” clause of medicare/medicaid that insists that, the lowest price you give any private party, you must also extend to medicare/medicaid. I agree with that idea, mind you: but what it leads to is drug reps showing up at the back of the hospital with a carton of free pills as “samples” that don’t get figured into the price they recovered from that hospital for sales.

    The effect is micro-tiered pricing. The appearance is uniform pricing so that fleecing the government can legally occur unimpeded. The same sort of thing happens all the time with other medical devices and supplies. The whole thing is a racket. I suppose I’d have to read the study to see how they took account of this effect – I definitely would doubt that the final price paid by most private dispensers is too much higher than the discount price openly charged in Europe. We just have less transparency.

  7. Neil D

    From the FT article: “In the past PhRMA has argued that Europe’s ill-conceived public policies, including price controls and sluggish regulatory decision-making, have chilled innovation and raised doubts among private investors who help to underwrite research.”

    It seems to me that every business is going to argue against price controls and regulation. It is, after all, the main talking point of libertarians, conservatives, the chamber of commerce, the business roundtable etc.

    I really can’t figure out what everyone actually wants here, except maybe a free lunch.

    Libertarians here should be arguing that health care is best left to the private market. I suppose they will assert that without any government funding, costs will fall to reasonable levels. People requiring expensive or long-term care must be able to fund it themselves or else… what? Charity? Don’t get sick or have an accident if you are poor? Is there evidence that this would work?

    Liberals should be arguing for universal care and I guess shouldn’t care much about innovation. We have government funded research to take care of that. Price controls will work to keep the cost of care down. People already outlive their ability to finance their elder years so…

    Conservatives will argue everything will be fine if we just get rid of the Democrats. They have no plan except to resume looting as soon as possible.

    What is the model that you all prefer?

    1. RueTheDay

      “It seems to me that every business is going to argue against price controls and regulation. It is, after all, the main talking point of libertarians, conservatives, the chamber of commerce, the business roundtable etc.

      I really can’t figure out what everyone actually wants here, except maybe a free lunch. ”

      Let’s start with a discussion on “intellectual property rights”. We can start by calling it what it is – an artificial, temporary, government-granted monopoly privilege on distribution of something”. That’s literally EXACTLY what it is, the term “property” in this sense is largely a misnomer.

      Why do we have copyrights and patents? It is NOT, as is commonly believed by Joe Sixpack, to protect the writer/inventor from the “theft” of his creation. That is literal nonsense, as theft implies that one gains at the loss of another, which does not happen in this case.

      We have these laws for the exact reason as set out in the US Constitution – “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” The idea is that the free market will, if left on its own, produce less than the socially optimal amount of these types of goods, so we must therefore subsidize the market by granting government-enforced monopoly distribution privileges.

      I would advocate dramatically reducing the granting of these protections to only those cases where there is a compelling public interest being promoted and limiting the duration of said protection drastically.

      1. Neil D

        Now there is an idea I can get my mind around. Cut the patent time limits for drugs and medical devices. This is real progress. Of course, that might make prices really, really high as opposed to just really high, but you are on the right track, I think. This is another form of price controls and limitations on profit. Drugs that are expensive to develop or take too long in clinical trials probably aren’t worth the effort anyway.

  8. Chunkton

    Have a look at who owns the Big Pharmas, then check it’s relationship to the AMA, and how it did everything it could to suppress natural options and modalities in the 19th century. It is a monopoly of like minded players pure and simple, it has nothing to do with health and everything to do with profit.

    Pharmaceuticals generally suppress symptoms (except antibiotics and a few others), they do not cure anything. That is not to say that this is not the best approach for acute or surgery type cases, but for many chronic diseases the result is an extended life of the living dead paying every step of the way. Ka-ching.

    1. Neil D

      I guess if your argument is that pharmaceuticals are snake oil then destroying the industry makes sense. We have all the drugs we need anyway. You have to die of something someday.

  9. Tom Crowl

    We have an interlocking network of perverse incentives.

    I’m not a great believer in conspiracies. But they aren’t necessary. Largely disconnected sectors can enjoy mutual benefit by harming the whole organism… while each thinks its doing a ‘great job’…

    So we have an industrial food sector… that ends up promoting a diet fueling diabetes and the constant ingestion of various toxic additives… (along with a great amount of animal cruelty btw… doesn’t that matter too?)

    And a pharmaceutical industry that makes a fortune out of developing drugs for longterm use.

    That’s the profit focus… not drugs that cure… but drugs that ‘maintain’ or supposedly ‘prevent’ (like Plavix which doesn’t do much more than aspirin but is a blockbuster profit center)…

    Until and UNLESS these sector ‘cross-currents’ so to speak are recognized and systematically addressed we don’t have a prayer.

    I ask you to consider that this is a truism:

    ‘Civilizations’ can and do go ‘insane’… even if most of the individuals within them may not be.

    (In this context I’m referring to the ability to make and execute pro-survival decisions.)

    P.S. (I’m sorry I have to be relentless) One of the key motivators for my development of the Individually-controlled/Commons-dedicated Account concept and structure was to promote and empower the necessary ‘granularity of opinion’ fundamentally necessary in a scaled social organism.

  10. NJDave

    And they raise prices EVERY YEAR.

    What other industry is able to deliver an innovative product and then raise prices on it every year for 10 years or more without changing or improving it?

  11. Pamela

    I would argue one small but important point. Yves, you say that “(ahem, have we forgotten the fact that most really big ailments already have treatments of some sort, making it much less likely that anyone will find a new blockbuster drug?).”

    Yes, there are effective therapies for a number of important ailments (hypertension, high cholesterol, asthma), but there are a whole host of other serious ailments that pharma has hardly made a dent in (cancer, alzheimer’s, obesity, and to some extent diabetes–in regard to prevention of progression). These large gaps in treatment do need to be addressed, but unfortunately the research takes decades.

    Separately, I would like to note that a Tufts Center for Drug Development study (from 2008?) noted that most innovation in the *basic science* comes from academia, while most of the innovation into *application* of that basic science (i.e., for drug development) comes from industry. This is important, because both academia and industry are needed to ultimately make innovative therapies a reality.

  12. Blurtman

    It is a bit disingeuous to claim that pharma has not made a dent on treating cancer. Rituxan, an antibody directed towards B-cells, is a veffective treatment for B cell leukemias and lymphomas. The HER-2 Neu antibody is a breakthrough drug for treating certain types of breast cancer. Small molecule drugs like Gleevec are also huge innovations.

    Cancer is a diverse disease. People are living longer with cancer than ever before.

    A tremendous amount needs to be done, no question. But to state that pharma has hardly made a dent in treating cancer is a very biased and extremely inaccurate viewpoint.

    1. Blurtman

      It is indisputable that the trend for five year survival rates for most cancers is increasing in the USA.

      Spector’s data is selective and biased. No metion of Rituxan in the link you provided. No mention of Gleevec.

      The War on Cancer is about as accurate a term as the War on Terror. Cancer is a very, very diverse disease.

      Try a little unbiased research. Perhaps research the War on Non-Hodgkins Lymphoma. Perhaps read the easy to understand American Cancer Society’s Cancer Facts and Figures. Look at the five year survival statistics, for example.

      Your premise is incorrect, and directly contradicted by unbiased data.

      1. Pamela

        Yes, you’re correct about Rituxan and Gleevec being important therapies; I’m not disputing that (and I didn’t want to get too technical in my original post). However, Rituxan is only indicated for non-Hodgkin’s lymphoma, and the jury is still out on the risk of PML when taking the therapy. Gleevec is only indicated for GIST and a few leukemias.

        The variety of cancers that lack both safe and efficacious therapies is still alarming. I think that it’s fair to say pharma has hardly made a dent in cancer therapeutics if only because the area is so vast and involves an abundance of complicated and elusive mechanisms that have yet to be ‘solved.’

  13. astrogoth

    You are too credulous Blurtman. The war on cancer has always had large propaganda elements. There has been some improvement in age-adjusted cancer death rates since 1971, but they are surprising small and mostly due to less male smoking. The comemrcial media have been far too accepting of baloney such as Dr. von Eschenbach’s claim in 2005 that cancer death and suffering could be eliminated by 2015, if only the NCI got a bigger budget.

    There have been islands of progress, where chemotherapy has made a big difference- childhood leukemia, testicular cancer, some lymphomas. Progress in treatment of most common cancers has been disappointingly slow in spite of use of many $50-100K/year “targeted treatments”. You should read http://www.csicop.org/si/show/war_on_cancer_a_progress_report_for_skeptics/ by Reynold Spector, not a leftist, but a former Merck executive.

    1. Blurtman

      It is indisputable that the trend for five year survival rates for most cancers is increasing in the USA.

      Spector’s data is selective and biased. No metion of Rituxan in the link you provided. No mention of Gleevec.

      The War on Cancer is about as accurate a term as the War on Terror. Cancer is a very, very diverse disease.

      Try a little unbiased research. Perhaps research the War on Non-Hodgkins Lymphoma. Perhaps read the easy to understand American Cancer Society’s Cancer Facts and Figures. Look at the five year survival statistics, for example.

      Your premise is incorrect, and directly contradicted by unbiased data.

  14. Neil D

    I’m starting to understand the hatred of big pharma. Apparently many of Ms. Smith’s… commenters… think drugs are a scam. Great, then stop taking them.

    What? Are you all slaves to marketing?

    1. Yves Smith Post author

      Neil,

      With all due respect, they are greatly overprescribed in the US and YOU KNOW THAT. Studies on safety are short term, and despite regulatory requirements that drug makers report long term side effects, it doesn’t happen. And there is just about NO research on multiple drug interactions (as most you have it on two-drug pairs). How many people over 55 are on three drugs or more?

      I lived in Australia, its Pharmaceutical Benefits scheme did the research on drugs and bought only the ones that had decent efficacy, and negotiated prices pretty hard. Something like 88% of the so-called “new drug applications” in the US are for alternate uses of existing drugs (so the salesforce can market it legally, doctors are free to prescribe for other uses) OR improved formulations of existing drugs (no joke, stuff like a time released version of Wellbutrin so you only need take it 1X a day). The “improved formulations” type were invariably priced well out of line with the added benefits.

      1. Neil D

        We just had a debate over health care reform where the biggest issues were rationing and “death panels”. I don’t think that debate was manufactured Big Pharma, it was manufactured by Ms. Palin and her GOP friends for purely political reasons. I assume you called “BS” on the GOP for that one, but it seems to me your anger is misplaced. Everyone knows health care costs are unsustainable, but no one wants to ration care. If drugs are overprescribed, then take control of the doctors and require them to stop. I’m all for that if you can convince Ms. Palin and the GOP to agree.

        Big Pharma is not the main problem here. You know that the amount spent on drugs is not the main source of health care costs.

        “Prescription drugs account for only one-tenth of total health-care expenditures. But drug spending has increased as a share of overall expenditures over the past decade. Seventy-six percent of respondents blamed drugmakers generally, and 74 percent said drugmakers charged too much for their products.”

        One might argue that drug therapy is better than surgery. What makes more sense: give someone a drug to control cholesterol and blood pressure or have them undergo a bypass after a heart attack?

  15. Juana B. Free

    Sorry, Yves…yours is a superficial analysis at best (and, seemingly, a nearly whole-hearted approval of a study that you haven’t even read yet). Perhaps you should stick to your chosen field of “financial services” (Then again, given that “big Pharma” has at least produced SOME societally beneficial discoveries over the last few decades – while the FIRE sector has produced nearly only HARMFUL “new products” – perhaps you’d be better off shifting your focus).

    Anyhoo…here’s a more thorough analysis:

    http//www.theatlantic.com/magazine/archive/2010/07/no-refills/8133/

    1. Francois T

      Juana,

      Excuse me for being blunt, but if you are going to link to a Megan McArdle article to talk about the intricacies of Big Pharma…only irrepressible laughter will greet you.

      McArdle has no expertise whatsoever in health care or pharmaceutical economics, and it shows in so many ways I wouldn’t know where to start to debunk her article.

      If you want some real information derived from knowledge about Pharma, start with the Carlat blog; its focus is in psychiatry, but it is a very good reflection of what Pharma in the US is all about. Health Care Renewal blog is also among the top guns, and for good reasons. PharmedOut by Dr. Adrianne Bergman-Fuchs is also very good.

      Hooked: Dr. Howard Brody at Ethics, Medicine and Pharma, Managed Care Matters by Joe Paduda, Evidence in Medicine, Science in Medicine are also highly rated blogs written by people who have front-line expertise in the field.

      McArdle is a complete nobody in Pharma and health care compared to any of these people. And at the risk of repeating myself, I just can’t spend the time needed to refute her article…it’d take too long because it is so bad.

    2. Yves Smith Post author

      Juana,

      Please make a substantive argument rather than making ad hominem attacks. And I know this terrain better than you think. I’ve worked on medical device deals (multiple ones) and know attorneys in one of the top law firms in the US in FDA regulations, many of its partners are former FDA commissioners. And BTW, there are drugs they REFUSE to take and advise clients not to take. What does THAT tell you?

  16. Darling

    Most drug research in the US is funded in some way by the US taxpayer. Take any major research university or organization (such as the Scripps Research Institute in La Jolla-TSRI).

    US drug companies partner with scientists that are funded by NIH grants to monopolize all discoveries made at these institutions.

    It’s a I’ll give you $1 but you give me $3 logic that only works because both the scientists and the corporations view the NIH dollars as ‘free money’.

    The scientist was getting the grant anyway, so getting a little extra money from the company is a bonus. Never mind that all the generated intellectual property goes to the company. Sandoz basically monopolized all the research coming out of TSRI for years.

  17. Francois T

    From the FT article: “In the past PhRMA has argued that Europe’s ill-conceived public policies, including price controls and sluggish regulatory decision-making, have chilled innovation and raised doubts among private investors who help to underwrite research.”

    Private investors should look at the facts. And the fact is, there is no proof whatsoever that the US lead in pharmaceutical research. If anything, Statist Europe in the top dog:

    http://brodyhooked.blogspot.com/2009/08/europe-leads-us-in-drug-research-phrma.html

    If some heads explode after reading the article…well, just remember that life is tough.

    1. Glen

      Big Porno doesn’t cure or kill people and probably pays more taxes (less tax breaks), but other than that I’m drawing a blank.

      1. doc holiday

        Oh for pity sakes Glen, Big Porno saves people every day and from what I’m seeing lately, they often wear the same uniforms — so let’s not be hasty and judge a book by its covers or lack there of.

        And, as an aside, both industries even share problems with behavioral addictions, abuses and tend to prey on the weak. The big difference I see, is that BIG pharma conducts studies … I mean they engineer and manipulate studies and fit data to falsify results — so IMHO, BIG Porno kills fewer people and BIG Porno is more ethical.

        1. Glen

          Those are all good points.

          Maybe we can get some stimulus funding for Big Porno and get some more people honest jobs.

  18. Mr.Sparkle

    @Brick – I tried to make a similar comment today about Big Pharma buy-outs of smaller biotechs but it seems to have been eaten by WordPress. Let’s have another go:

    Yves,

    Thanks for highlighting this research. When the Wyeth/Pfizer deal was going through, there was a lot of hand-wringing over the implications for the industry and layoffs, etc. I decided to look at their annual reports for 2007. Turns out on a combined basis, Wy/Pfi spent a bit $11B in R&D in 2007 but at the same time spent $22.1B on SI&A (Sales, information & administration.)

    I’ve long thought it more appropriate to look at Big Pharma more as “Big Marketing,” since they seem to get a lot of their new drugs by buying up the most promising start-ups or cutting deals with them. Contrast those numbers with a company like Medarex which spent $198M on R&D and <$50M on "General & Administrative" during 2007. They have (or had) a partnership with Bristol-Myers.

    Anyone that has followed or gambled in biotech knows the perils of the group. Huge gains or total wipe-outs seem to be the rule in the sector. Big Pharma on the other hand, just watches the field and scoops up the winners, leaving the risk to be born by IPOs, private equity, or whoever.

Comments are closed.