The Pharmaceutical Industry

Merrill Goozner, former chief economics corrrespondent for the Chicago Tribune, is a professor of journalism at New York University. Andrew Sullivan, a senior editor at the New Republic, writes daily for andrewsullivan.com. This week, they discuss whether the pharmaceutical industry needs to charge high prices to protect innovation. 

I have complete confidence that you’d have the drugs you need to stay alive if government and university-based researchers had been the only ones involved in AIDS research. Why do I say that? HIV-carriers like yourself were demanding it, and offering their bodies by the tens of thousands to join clinical tests to get the job done. Had the pharmaceutical industry continued to hold back, the government would have been forced to fund every stage of the process, including manufacturing (there are historical precedents for that, by the way; anyone interested should look up the history of diphtheria antitoxin). When it comes to fighting HIV, necessity was the mother of the government’s invention, not industry R&D.

Regarding Third World readiness to use HIV meds: You interviewed a friend who had experience in the Peace Corps. I interviewed doctors who are in the field combating AIDS in South Africa and Thailand. Yes, there are villages in remote parts of Africa and Asia plagued by HIV that lie beyond the reach of public health campaigns. But the United Nations AIDS organization, the World Health Organization, governments, philanthropic organizations, and now finally even the drug companies themselves believe that a comprehensive approach to the worldwide AIDS epidemic—including access to affordable medicine—not only has the chance of stemming the rising tide of damage being done by this disease, but in the process may also help these countries develop a public health infrastructure that will benefit their long term development. Call me naive if you wish. Are you suggesting these groups not try?

But most of your post dealt with drug-industry economics, so let me turn to those arguments. By the way, I never suggested the drug companies were “evil capitalists” who  “shouldn’t be rewarded in the marketplace.” It’s the size of the rewards that are being questioned. And when it comes to life-saving drugs whose price puts them beyond many peoples’ grasp even here in the good ol’ USA, that’s a question whose answer should be based on facts.

You quote a study that says a 20 percent return on investment is reasonable, and if their R&D were considered investment rather than expensed, it would fall to just 9 percent. Duh, of course it would. And watch how fast a lot of R&D would dry up if they had to show a return on that investment. That’s why firms are allowed to expense R&D and are even given tax credits to encourage it. But that accounting means current users of the drug—not investors—pay for future discoveries. That’s why consumers have the right to ask if that money is being well spent. In most industries, the marketplace sorts it out. Take high-tech, for instance. Chip, software, and telecom firms also spend bundles on R&D at the expense of current users. But consumers don’t have to buy their products if they don’t want to. That’s not true about drugs.

You raised the issue of drug price inflation. Comparing Bureau of Labor Statistics’ price data for drugs to other prices is a meaningless exercise, since the industry is experiencing rapid product and demand change. The facts are that U.S. drug expenditures rose at a double-digit rate every year since 1995 and soared 15 percent last year to $105.6 billion. Why is that happening? In part because surging marketing budgets, including over $2 billion in slick TV ads once deemed illegal, have consumers pestering their doctors for the most expensive items in a drug class, even when much cheaper and equally effective generics are available. A study by the National Institute for Health Care Management (funded in part by those evil capitalists in the insurance industry) showed that the fast-growing drugs were those that were advertised the most.

You led your response with the efforts of Novartis to develop a leukemia drug, an example of critical drug-industry research. I’ll grant your point by repeating again what I’ve said every time I’ve written about the drug industry. Its labs are filled with dedicated scientists doing yeomanlike work in the service of mankind. And when their work pays off, it should benefit their employers. What I question is how much. Must an industry meeting a vital human need be the most profitable industry in America?

On the other hand, you seem unwilling to grant my point that industry labs are also filled with scientists conducting marketing-driven research whose sole purpose is to extend patents or come up with replacement drugs of dubious additional medical benefit. If it’s war by anecdote you want, check out Nexium, the latest antacid from AstraZeneca. It is no better than Prilosec, the $5 billion blockbuster coming off patent that it will replace. In fact, Prilosec contains Nexium. Only a quirk of chemistry allowed its patenting. The public long ago paid for the benefits of reduced peptic ulcer hospitalizations that you referred to in your post. But now, through the help of what I am sure will be a slick advertising campaign, they will get to pay for it again. And again. And again. For another 20 years.