Number 221 September 5, 2003

This Week:

Quote of the Week
U.S. Extortion, Inc.
The Pharmaceutical “Marketing Machine”
High Drug Prices Explained


Special “All Reprint” issue this week! Notice how I write that as if it were a good thing for you, when in fact it is a necessary thing for me, due to my going into the hospital this week (this time for sure!). There are some last-minute unexpected details that I have to attend to, so could find no time to construct the usual made-to-order news and analysis. However, I think the juxtaposing of these three articles—all of them about drugs and medicines—will make them more poignant for those of you who have already seen them. And, since they come from 2 and 3 years ago, many of you recent subscribers will not have seen them. Since we have made such little progress, as a society, in the realm of health care in recent years, all of the articles, I am sad to say, are still very current.

Speaking of being written years ago, this week marks the fifth anniversary of the launching of Nygaard Notes. Issue #01 came out on September 5, 1998. That’s Friday, which would normally be my publication date this week, making it perfect timing. But, as you know, hospital, etc.

OK, hope to be back next week. If not, the week after.

In solidarity,


"Quote" of the Week:

“It is a matter of simple economics: potential return on investment, not global health needs, determines how companies decide to allocate R&D funds."

-- from “Fatal Imbalance: The Crisis in Research and Development for Drugs for Neglected Diseases.” Published by Doctors Without Borders (Medecins Sans Frontieres) in October 2001

U.S. Extortion, Inc.

[The following is an excerpt from “The News, Inc.” an essay which originally appeared in Nygaard Notes Number 87, published on September 22, 2000.]

The job of a headline is to try to capture the main point of an article in a few words. Not only do headlines often fail to do this, they sometimes give an entirely misleading impression of the content of the article above which they appear. To illustrate, we can look at a front-page story from the New York Times of July 19th. The headline sounds like good news: “U.S. Offers Africa $1 Billion A Year For Fighting AIDS; Funds To Help Buy Drugs; Loan Plan Aimed At Assisting Poor Sub-Saharan Nations Overwhelmed by Virus.” If you bother to read the whole article, you read that the loans are intended to be used to buy “discounted” drugs from “five multinational drug companies.” Four paragraphs toward the end of the article tell the real story, so I will quote them verbatim here:

“The United States loans could also help American pharmaceutical companies prevent the spread of generic knock-offs of their profitable AIDS drugs to Africa. Even with heavy discounts of up to 80 or 90 percent – the companies have not yet made public the prices they will charge – some drug makers could still sell their product profitably in Africa.

“The United Nations has said it is exploring the possibility of helping African nations buy generic AIDS drugs from Brazil and India for less money than even the discounted prices Western drug makers might charge for the original product. The drug companies consider generic alternatives a violation of their intellectual property.

“But it seems unlikely that Brazil, India, or other nations that produce such drugs for home consumption would have the export financing available to help African nations buy the goods. The American loans, along with a recent commitment by the World Bank to provide at least $500 million to help African nations set up anti-AIDS initiatives, give added incentive to African nations to treat many of their AIDS- and HIV-infected citizens with Western medicine.

“Even at 90 percent discounts, a typical cocktail of AIDS-suppressing drugs might cost $2,000 a year for a single patient in Africa, more than four times the average per capita income in many of the worst-afflicted countries.”

To translate: Multinational drug companies mark up AIDS drugs by at least 800%, at which price they cannot be afforded by the people most afflicted by AIDS. Other countries can produce these drugs for almost nothing. In order to protect their profits, the drug companies invoke “intellectual property” rights, which are exactly in opposition to the “free trade” our government supposedly favors. Even if other nations try to sell generic drugs to Africa anyway, they will still be too expensive for these countries to purchase without foreign aid. The $1 billion that our government has “offered” to Africa cannot be used to buy these drugs, but can only be used to buy the obscenely-overpriced U.S. “patented” versions. And, as usual, the U.S. “aid” is in the form of loans. Unlike development aid, for which one might be able to argue that loan money will increase the productive capacity of the recipient nation’s economy, the repayment of the principal and interest on loans taken for public health reasons can only guarantee a future net transfer of wealth from the poor countries to the rich.

Nygaard Notes Alternative Headline: “U.S. In Extortion Bid To Profit >From African Epidemic; Free Trade Opposed For Drug Company Monopolies.


The Pharmaceutical “Marketing Machine”

[This essay originally appeared in Nygaard Notes Number 88, published on September 29, 2000:]

Neither of the “major” party candidates can bring themselves to propose a system of universal national health care, so the “health care” debate in this campaign season has come to consist almost entirely of arguing about the best way to allow our elderly citizens to get the prescription drugs they need. [Editor’s 2003 note: Some things don’t change!] It’s not unimportant. Increasing numbers of Americans are upset that the large private pharmaceutical companies (“LPPC’s”) continue to price their products out of the reach of many Americans (not to mention sick people in other countries; see “The News, Inc.” in last week’s Nygaard Notes).

This past July 6th the Wall Street Journal ran a front-page article headlined, “Drug Firms, Stymied in the Lab, Become Marketing Machines; The Strategy Could Prove Politically Dicey in Era of Expensive Medicine; Following the Hollywood Model.” This single article does more to explain the problem with drug prices, and indirectly the problem with our health care system, than all the candidate debates ever will. I therefore will quote it at length.

There was a time when the LPPC’s (which weren’t quite so “L”) made money primarily by investing in research and development. In those days, profits came from creating drugs that were clearly helpful in addressing health problems. If the drug was truly useful, doctors would prescribe it, consumers would pay for it, and there you had your profits. Those days are gone.

Despite huge research budgets in the pharmaceutical industry, far fewer new drugs are coming to market these days, largely because many of the hoped-for new drugs have hard-to-predict toxic interactions with the thousands of already-existing drugs being taken by Americans. The result is that the LPPC’s are only creating a fraction of the new drugs that they would need to sell to maintain their double-digit profit growth, which “has become the norm in the industry, which is among the most profitable” in the country.

“Simply accepting lower profits isn’t an option for pharmaceutical executives, since doing so could bomb their share prices and make them vulnerable to takeover,” the Journal points out matter-of-factly. Despite their failures in the lab, a spokesman for one of the largest of the LPPC’s, Pfizer, says that they are “very optimistic about the future.” How can this be? The answer is: Advertising. As the Journal puts it, the industry now “relies not only on launching new medicines but increasing the sales of old ones.” And the best way to do that is “boosting marketing budgets.” The idea is to advertise directly to sick people (which sometimes includes convincing us that we are in fact sick) so that we ask our doctor to be sure to give us prescriptions for the most profitable drugs around.

That’s why you’ve been seeing so many TV ads for the allergy drug Claritin, for example. Claritin owner Schering-Plough Corp. spent $136 million advertising it in 1998 alone, more than Coca-Cola spent advertising Coke. “Claritin’s success [$1.7 billion in sales] has been a revelation to industry executives: Buy ads, watch sales soar,” according to the Journal. And soar they have. “The industry’s marketing and administration expenses are generally more than twice those of research and development,” the Journal informs us. And it works: Since 1993, when television advertising of prescription drugs became common in the U.S., sales of prescription drugs have doubled, to $101 billion in 1999. 11% of all health care spending in the U.S. now goes to purchase prescription drugs, up from 8% in 1993.

By proposing that we deal with unaffordable prescription drug prices by expanding publicly-financed programs (i.e. Medicare) to pay the high prices set by profit-hungry megacorporations, candidates Bush and Gore are essentially proposing that we use public tax money to pay the marketing and administration costs that are part and parcel of a health care system dominated by private corporations. Although the details of their proposals differ, both are textbook illustrations of the phenomenon known as “corporate welfare.”


High Drug Prices Explained

[This essay originally appeared in Nygaard Notes Number 118, published on July 27, 2001.]

In last week’s “Tales from the Cancer Front,” I told the tale (amusing, or sickening, or both) of the surprise $2,400 pharmacy bill to be paid out-of-pocket, with which we were presented at the end of my partner’s first chemotherapy session. The subject of this essay is the larger context for this personal affront.

Despite the rhetoric of “free trade” that one hears from most of our elected “leaders,” in fact most of them—certainly President George “Free Trade” Bush—have a decidedly ambivalent position toward the “freedom” that they claim to support so strongly. This is illustrated by the near-unanimous support in official circles for pharmaceutical patent protection. Patent protection for prescription drugs, which the big pharmaceutical companies like to call “intellectual property rights,” is the opposite of “free trade.” Anyone who claims to support “Free Trade” and who also supports patent protection is lacking in either knowledge or sincerity.

Currently, the U.S. government grants to corporations who develop new drugs a 17-year monopoly, called a patent. In exchange for granting these corporations monopoly rights, what do consumers (sometimes known as “people”) get in return?

Supposedly, this patent protection provides the incentive for the pharmaceutical companies to make the investments in research that have allowed them to develop the drugs we all need (or think we need) and use every day. But is this how it really works? Perhaps more importantly, is this how it should work? As they say in the business pages: “Let’s look at the numbers.” (Warning: The following numbers are so big that no one can really understand them—just do your best.)

Depending on who you listen to, the pharmaceutical industry spends between 20 and 30 billion dollars a year on “research and development” (R&D). This is a lot of money, no doubt. Consider, however, that U.S. consumers spent about $106 billion last year on prescription drugs. Much of that spending is due to the monopoly pricing that comes with patent protection. Economist Dean Baker estimates that “the free market price for drugs averages about one-quarter of the monopoly price.”

Mr. Baker’s number is a guess (albeit an educated one) and, if anything, is conservative. The cost of a now-common AIDS drug “cocktail,” for example, is currently about $10,400 per patient per year at monopoly prices. An Indian drug company called Cipla, Ltd, on the other hand, has recently said that it would make available the same cocktail—in direct defiance of U.S. patent law—for a price of about $350 per patient per year, or about one-thirtieth the cost of the monopoly price. Using the same reduction factor, my partner’s recent $2,400 out-of-pocket bill for cancer drugs (eventually reimbursed by insurance) could have been as low as $80 in the absence of monopoly pricing.

Still, let’s say that Mr. Baker’s estimate is correct, and that “only” 75% of the cost of prescription drugs is due to monopoly pricing. This means that the elimination of this patent protection would save consumers about $79 billion per year, or about 30% more than the federal government spends on education each year.

In other words, patent protection “earns” an extra $79 billion for the pharmaceutical companies every year, and only about one-third of that goes into research (even less if you take out the money companies spend trying to “copy” already-profitable drugs that have been patented by their competitors.)

Where does this extra $50 billion go? Marketing, for one thing. Most of the major drug companies spend more on marketing these drugs than they do on R&D, often considerably more. Quite a bit of this surplus revenue is given to support the election of politicians who will preserve monopoly patent rights (i.e. campaign contributions; pharmaceutical companies rank near the top in this area). In addition, the pharmaceutical industry is the most profitable industry in the United States, harvesting returns of more than 18.5% for their investors, or more than four times the average of 4.5% for all Fortune 500 companies.

Who Will Do the Research?

If the drug companies didn’t do all this research and development, who would? The federal government already spends about $18 billion per year on biomedical research through the National Institutes of Health and the Centers for Disease Control. Universities, private foundations, and charities conduct another $10 billion worth. The list of drugs for which government and other non-profit research has been in large part responsible includes penicillin, the polio vaccine, and the anti-AIDS drug AZT, according to Baker. It was government research, in fact, that developed one of the chemotherapy drugs my partner received just this week, Taxol.

So, my idea is that we eliminate this patent protection and replace the corporate research spending with publicly-funded research. Some would complain about the increase in taxes that would be necessary to replace the lost investments by the pharmaceutical firms. But once it was explained that the $30 billion in increased taxes was in exchange for a savings of $79 billion in the retail cost of prescription drugs, I think most Americans would see the light.