Light Submission - International Trade Administration - Department ...

conversesoilBiotechnology

Dec 3, 2012 (4 years and 8 months ago)

247 views


Pharm
-
BushWar
-
7
-
3REVISED.doc

NEEDS TO CONFORM TO ANNALS RULES “SPECIAL REPORT?”



DRAFT 7/3/04

Revised 7/24/04

Words text 2470

References 604





THE HIGH PRICE OF PATENTED DRUGS: A POLICY ANALYSIS




Donald W. Light, Ph.D.

Professor, University of Me
dicine & Dentistry of New Jersey

Fellow, Center for Bioethics, University of Pennsylvania


Joel Lexchin, M.D.

Associate Professor, School of Health Policy and Management, York University




The
high price of patented drugs in the United States has arisen
since 1998 to be an issue
of pressing concern to the 70 million people who do not have insurance for
prescriptions
,
to employers, to state legislatures trying to cope with Medicaid budgets and state health
benefits, and to many consumer groups.
1

By the summer of 2000, doing so
mething to
bring the prices down was considered the number one issue for both Republican and
Democratic candidates. REF? The sense of urgency led to providing partial coverage, but
at the same high prices, through reform of Medicare in 2003. In 2004, both

Families
USA and AARP issued reports documenting how much the industry keeps raising its
prices,
set
as the highest in the
world
.
2
-
5


A
novel and worrisome response has been mounted by the pharmaceutical industry and
echoed by high government officials. The argument is that prices in other i
ndustrialized
nations are substantially lower because they do not pay for research and development

2

(R&D).
6

The price gap is widening as they lower their prices. Thus, they are ‘free
-
riders’
on Americans, who have to pay for their R&D and who make most of the important new
discoveries. Americans have taken this
argument to heart and are angry about what
William Safire called the “foreign rip
-
off.”
7

Acting on these claims, the Bush
admini
stration has been threatening trade sanctions and using other forms of economic
pressure to get these other countries to raise their prices, extend protections from price
competition and block export of their cheaper drugs.
8, 9

The goal is to get other countries
to pay as much as Americans do. The implicit promise is that if other countries pay
more, American patients or their payers can get relief and pay less.
10

Some
Congressmen, however, have been concerned from the start that this global campaign to

erect a new set of legal barriers to free trade and price competition would harm American
payers and patients.
9, 11
-
13



We
took these claims as hypotheses to be tested. What is the evidence that other
countries do not pay for their R&D? To what extent are Americans saddled with paying
for the R&D of other countries? Is drug research suffering, as claimed,

and if so, by how
much? If prices were increased, by how much would research for breakthrough drugs
increase? Finally, do the claims made and these questions make economic sense? Do
they reflect the way the pharmaceutical world works?


No evidence of
free riding

All the evidence we can find indicates that R&D costs for new drugs are fully paid for in
each country as an annual expense. For example, domestic sales in Canada are reported

3

by 70 pharmaceutical companies to be about 9 times greater than R&D

costs; so they are
easily paid for each year. Audited reports in the UK show that domestic sales just to the
National Health Service are about 6 times R&D costs, fully covered, with substantial
profits after all costs each year.
14, 15

Huge export sales (largely to the U.S. at much
higher prices) are extra. William Safire’s claim of a “foreign rip
-
off” as Americans pay
for the world’s R&D is contradicted by these facts.
7



Price
gap due to rising prices

Studies
confirm that the gap between U.S. and foreign drug prices has been widening, but
the growing diffe
rence is due to pharmaceutical firms raising their U.S. prices, not to
European countries lowering theirs.
2
-
5

As
the
audited figures from the UK show, drug
prices could be substantially lower and still cover research costs, with healthy profits as
well.
Specifically
, at prices about 50% lower
than in the United States, pharmaceutical
firms devoted more of their domestic sales to the National Health Service to R&D than
did U.S. firms and still reported profits of more than 15% on those sales before taxes.
14

The
reason is that the UK has structu
red its incentives to reward R&D, guarantee profits
and yet hold prices down.


No evidence of research decline

There is also no verifiable evidence for the claim that the prices in other affluent
countries are “slowing the process of drug development wor
ldwide.” For example,
according to
OECD
figures, between 1995 and 1999 R&D grew in Germany, the United
Kingdom and Canada by 85%, 51% and 46% respectively, compared to 30% in the U.S.
16


4

Investments in R&D have continued to rise steadily since then as well.
17

Nor can we find
any evidence that these foreign prices “discoura
ge the R&D needed to develop new
products.”


U.S. less innovative, not more

Contrary to claims of American dominance, the latest data from the pharmaceutical
industry itself show that European research teams have discovered more major new drugs
(new molec
ular entities) than their proportional share of global sales, while U.S. teams
have discovered less.
18

Specifically, the U.S. accounts for just over 49% of world sales,
but it took 50% of global R&D expenditures invested in the U.S. to discover 45% of the
new molecular entities that were launched on the world

market in 2002.
18

The most
objective research on cor
porate R&D in the United States reports that just under 12
percent of domestic sales is devoted to R&D, not the much higher figures cited by
industry leaders.
19

In Canada, the figure is slightly lower at 10 percent.
20

In 2000, four
other industrialized countries devoted more of their GDP to R&D for new drugs than the
US.
16

Thus, contrary to what the administration and the pharmaceutical industry claim, in
rel
ative terms R&D spending outside the U.S. is more intense and more productive than
in the U.S.


Limited basic research by industry

The long
-
standing survey of basic and applied research by the National Science
Foundation (NSF) last calculated that 18% of
the total
research
and development (R&D)
budget for the pharmaceutical industry went to basic research, to discover breakthough

5

NMEs
.
21

Industry
-
sponsored figures based on proprietary data are much higher but
cannot be independently verified.
22

Given that the NSF survey found that pharmaceutical
firm
s spend only 11.8 percent of revenues on R&D, this means only 2.1 percent of
revenues goes to discovering new drugs. The net percent after taxpayer subsidies is even
lower. The after
-
tax cost of $1 of R&D expenditures in the U.S. for large companies
appea
rs to be in the range of $0.53 to $0.61
23

This means that net of taxpayers’
contrib
utions, drug companies invest about 1.3 cents of every dollar paid for their drugs
to basic research for “tomorrow’s miracles.”
This
makes good sense, as senior financial
writer, Merrill Goozner, describes in detail.
24

Basic research takes so long and has so
many twists and frustrations that no company can reasonably invest much in it year after
year. Quite sensibl
y, the industry monitors the hundreds of basic science teams around
the world and waits until one of them comes up with a promising breakthrough.



Taxpayers
also paid for all $18 billion in National Institute of Health funds in 1999, as
well as for R&D

funds in the Department of Defense and other public budgets (now
about $30 billion). Most of that money went for basic research, and public money also
supports more than 5000 clinical trials.
25, 26

These figures do not support the industry’s
claim that they spend huge sums at high risk to discover the next generation of
breakthrough drugs.


Government
protections from normal competition, largely cra
fted by industry advocates
and lobbyists, are now more than 50 percent greater than a decade ago.
27

They reward
less risky and cheaper research into variations on existing drugs, where the mechanism of

6

action, general effectiveness and safety profile are already known. Most of this ap
plied
and derivative research produces “new” drugs of little or no therapeutic advantage over
existing drugs. Independent review panels plus a major industry review have concluded
that only 10


15 % of “new” drugs provide a significant therapeutic break
through over
existing drugs.
28
-
30



As one would expect in a market where sellers can set their prices to cover research costs
and receive s
pecial tax treatment, companies have strong incentives to maximize their
research costs. Most of the recent increase in R&D costs has been in late
-
stage clinical
trials.
22

They have become a major vehicle for establishing substantial market share, and
advertising firms are now running clinica
l trials.
25, 31, 32

An international team of experts
estimates that clinical trials could be done for much less than they are at present.
25

To
summarize, basic R&D into drugs that provide significant therapeutic advantages is only
a fraction of overall R&D expendi
tures and total costs could be made much smaller if
clinical trials were not so commercialized.


The
Bain Report

A new report supported by the pharmaceutical industry (the Bain Report) and reported to
millions
by
AARP
33

claims to document the “high cost of Europe’s free ride.”
34

Yet the
report contains almost no facts and has no references. It portrays Europe as a “free rider”
that will suffer from less drug innovation and “hig
her morbidity and mortality from
diseases that could be treated with innovative drugs


if they were more readily available
in Europe.”
30

No evidence is provided for this unlikely prediction. Morbidity or mortality

7

are lower in Western Europe than in the U
nited States. No evidence is provided that
therapeutically beneficial drugs are less available in Europe.
The
few facts in the report
are contradicted by reputable published reports, including the report by the European
Federation of Pharmaceutical Indust
ries and Associations.
18



The Bain report does not m
ention that proportionately more new major drugs are being
discovered in Europe, nor that most new drugs have little additional benefits to patients.
The Bain report’s model claims to show a negative economic and social impact in
Germany as a result of “f
ree riding”, but it presents no data or facts and hides many
unlikely assumptions inside its general graphs. The fact that the countries in which
substantial drug research takes place more than pay for the cost of research through just
domestic sales is
ignored.
15, 16

Rather, the “free rider model” and the report are based on
what appears to be a new premise of industry
-
sponsored reports: the more drugs people
tak
e, the healthier they will be, and the more they pay for them, the better off a country
will be. The increased prices and profits from the U.S. market are presented as the ideal.
What may be unsustainable are the rising prices in the United States.


Fre
e
-
riding as an economic myth

(0r) Economic nonsense and doublespeak

Physicians, along with patients, are subjected to economic nonsense that they are
unprepared to discern, even though they spend their lives discriminating between
misleading and scientifi
cally grounded symptoms and diagnoses. Here we outline five

8

economic myths commonly stated as truths about drugs and five kinds of doublespeak,
that is, terms used to mean their opposite.


First, the entire argument that prices are high because there ar
e high fixed costs for
research contradicts basic economic theory that asserts that price has nothing to do with
fixed costs but is set by the market. The argument for high prices to cover fixed costs
only makes sense if companies are asking governments t
o pay for their R&D
expenditures as a social good. In that case, one is calling for society to set prices. What
makes the industry’s argument false is to use the claim for a societal good as a reason to
set corporate monopoly prices. It is effective pol
itical rhetoric contradicted by sound
economics.


Second, which country discovers more drugs is largely irrelevant to how the global
pharmaceutical markets work. It is effective political rhetoric that arouses nationalistic
feelings but has little to do
with the economics of the global drug market. The industry
quickly capitalizes on new discoveries from any country, tests them in countries where it
is most advantageous and then markets the resultant products everywhere where it is
profitable. It is both

remarkable and disturbing when leading health economists promote
either of these arguments that contradict basic economic theory and the economics of the
pharmaceutical industry.
6



Third, the claim that prices in most affluent countries do not pay for research can only be
made through unorthodox accounting meth
ods in which all research costs are written off

9

each year as they occur. Further, R&D is the heart of the industry, and R&D costs are
reduced by tax deductions and credits; so if anything, they are deducted before marketing
and other costs. If revenues wer
e inadequate, it would make more sense to conclude they
do not cover all marketing costs than research costs. Global pharmaceutical companies
report that they invest 2.5


3.0 times more in marketing, plus advertising and
administration than to research c
osts.
35



A fourth myth is buried inside the term “free rider.” This term conveys the image of
someone jumping on for a free ride; but in economics it means the proportional allocation
of fixed costs. For example, if some
buyers (Group A) pay $1 per pill and others (Group
B) pay $2 a pill, and if they each buy a million pills, then a conventional rule in financing
allocates any large fixed cost proportionately, so that Group A is paying half as much of
the fixed cost as Gro
up B. Group A (e.g., Europe) is then said to be “free riding,” though
the term is both inaccurate and moralistic. If, however, the fixed costs are only $300,000
or 1/10
th

total revenues for the 2 million pills, then one could just as easily say that Grou
p
A is more than paying for the fixed costs, while Group B is paying much more than it has
to. This is the flat allocation of fixed costs, and it highlights how much more Group B
(American patients and payers) are paying than is necessary to cover the fix
ed costs of
corporate research.


The core argument by the Bush administration and the drug industry is that nations in
Group A are “free riders” and should be coerced into paying $2 a pill like Group B. But
there would also be no “free riding” if Group B
’s prices were cut in half to $1 a pill.

10

Solving the so
-
called free rider problem this way makes drugs more affordable and
lowers the ceiling of global prices, while still paying for the fixed costs of research. The
U.S. campaign to raise lower foreign pr
ices simply makes them less affordable and raises
profits even higher for one of the world’s most profitable industries.


A final economic myth lies in the charge that efforts to lower prices for patented drugs by
other countries, and by major employers,

unions and governors within the United States,
are “no different than violating the patent directly” to make cheap copies.
36

This is a
remarkable statement by a star health economist, because it means that normal
competition, in which large buyers use their buying power to seek better value, is a
criminal act and morally offensive. One might ex
pect hired lobbyists to argue that normal
competition is illegal, but not a well
-
trained economist and high government official.


A difficulty in understanding the nature of pharmaceutical policy doublespeak, using
words to mean their opposite. “Competiti
ve liberalization” appears to mean competitive
restrictions, or liberalization from competition for companies. “Free trade” means
restricted trade, or the ability of drug companies to trade freely at prices they set. “Free
markets” for patented drugs mea
ns free from normal competition, so that the longer
competition is delayed, the “freer” markets are said to be. “Openness” means allowing
drug companies to alter pricing agreements in the domestic markets of other countries.
“Reimportation” refers to glob
al free trade of drugs, but makes it sound like a bizarre,
unnatural act.



11

Conclusions

In this analysis, we found no support for any of the five hypotheses, or claims, on which
international pharmaceutical policy is based. Yet policy makers in Europe an
d the U.S.
appear to have accepted these claims from industry sources as facts. Current policies, if
allowed to be carried out, will fix prices at the highest levels for wealthy countries,
eliminate price competition, and raise the starting price for disc
ounting to patients in less
affluent countries. Affordability and access will be harmed both in the United States and
in the rest of the world, with no measurable benefit. Research budgets to discover
“tomorrow’s miracles” might increase by their average

of 1.3% of revenues.




References

1.

Light DW, Castellblanch R, Arrendondo P, Socolar D. No exit and the organization
of voice in biotechnology and pharmaceuticals.
Journal of Health Politics, Policy
and Law.
2003.

2.

Gross DJ, Scho
ndelmeyer SW, Raetzman SO.
Trends in Manufacturer Prices of
Brand Name Prescription Drugs Used by Older Americans, 2000 through 2003.

Washington, D.C.: AARP Public Policy Institute; 2004.

3.

Sager A, Socolar D.
Lower U.S. Prescription Drug Prices Are Vital

to Both
Patients and Drug Makers
-

But instead, U.S. Prices Have Been Rising Rapidly
Relative to Those in Other Wealthy Nations.

Boston: Health Reform Program,
Boston University School of Public Health; 2003.


12

4.

Families USA.
Out of Bounds: Rising Prescri
ption Drug Prices for Seniors.

Washington, DC: Families USA; 2003.

5.

Families USA.
Sticker Shock: Rising Prescription DRug Prices for Seniors.

Washington, D.C.: Families USA; 2004.

6.

McClellan M.
Speech before First International Colloquium on Generic Me
dicine
:
U.S. Food and Drug Administration; 25 September 2003.

7.

Safire W. The donut's hole.
New York Times
, 27 Oct 2003: A21.

8.

Zoellick R. letter. In: David Walker CotUS, ed. Washington, D.C.; 2003.

9.

Weissman R. Comments on the intellectual property c
hapter of the U.S.
-
Morocco
free trade agreement and the impact on access to medicines.
Essential Action

[email]. Available at: ip
-
health@lists.essential.org. Accessed 8 April 2004.

10.

Drug Pricing Study.
U.S. Department of Commerce, International Trade
Ad
ministration
. Washington, D.C.: Federal Register; 2004.

11.

Allen T. Letter to Robert B. Zoellick, U.S. Trade Representative.
cptech.org
.
Available at:
www.cptech.org
. Accessed 19 Dec, 2003.

12.

Allen T.
On Completion

of the U.S.
-
Australian Free Trade Agreement.

Washington, D.C.: U.S. Congress; 10 February 2004.

13.

Allen T, Bereuter D, Berry M, et al. Letter to the President of the United States.
Washington, D.C.: Congress of the United States; 2003 (17 Oct):2.

14.

De
partment of Health (UK).
Pharmaceutical Price Regulation Scheme
-

Report to
Parliament.

London: Department of Health (UK); various.

15.

Pharmaceutical Price Regulation Scheme(UK).
Sixth Report to Parliament.

London: PPRS; 2002.


13

16.

Patented Medicine Prices

Review Board.
A Comparison of Pharmaceutical
Research and Development Spending.

Ottawa (CA): PMPRB; 2002. PMPRB Study
Series S
-
0217.

17.

EFPIA (European Federation of Pharmaceutical Industries and Associations.
The
Pharmaceutical Industry in Figures 2004
Edition.

Brussels: EFPIA; 2004.

18.

European Federation of Pharmaceutical Industries and Associations.
The
Pharmaceutical Industry in Figures.

Brussels: EFPIA; 2003.

19.

National Science Foundation. Research and Development in Industry: 2000.
Arlington, VA
: National Science Foundation, Division of Science Resources
Statistics; 2003.

20.

Patented Medicine Prices Review Board.
Annual Report 2001.

Ottawa: Patented
Medicine Prices Review Board; 2002.

21.

National Science Foundation.
Research and Development in
Industry.

Washington
DC: National Science Foundation; various.

22.

DiMasi JA, Hansen RW, Grabowski H. The price of innovation: new estimates of
drug development costs.
Journal Of Health Economics.
2003;22:151
-
185.

23.

Bindra G, Sturgess J.
Assessment of Cu
rrent Competitiveness of Canadian R&D in
the Pharmaceutical Industry.

Ottawa: Industry Canada; 1996.

24.

Goozner M.
The $800 Million Pill: The Truth Behind the Cost of New Drugs
.
Berkeley: University of California Press; 2004.

25.

Bassand J
-
P, Martin J, Ry
den L, Simons M. The need for resources for clinical
research.
Lancet.
2002;360:1866
-
1868.


14

26.

Love J.
Evidence Regarding Research and Development Investments in Innovative
and Non
-
Innovative Medicines.

Washington DC: Consumer Project on Technology;
22 Sep
t 2003.

27.

National Institute for Health Care Management.
Prescription Drugs and
Intellectual Property Protection.

Washington D.C.: National Institute for Health
Care Management; 2000.

28.

Barral PE.
20 Years of Pharmaceutical Research Results Throughout
The World:
1975
-
94.

Paris: Rhone
-
Poulenc Rorer Foundation; 1996.

29.

Prescrire International. A review of new drugs and indications in 2002: Financial
speculation or better patient care?
Prescrire International.
2003;12(64):74
-
77.

30.

National Institute fo
r Health Care Management Research and Education
Foundation.
Changing Patterns of Pharmaceutical Innovation.

Washington DC:
National Institute for Health Care Management, Research and Education
Foundation; 2002.

31.

Peterson M. Madison Ave. has growing rol
e in the business of drug research.
New
York Times.

22 Nov, 2002.

32.

Moyers B. Science for Sale [television]. Public Affairs Television. 11 Nov 2002,
2002.

33.

Gilbert J, Rosenberg P. Europe's "free rider" on drug prices is anything but free.
AARP Global
Report on Aging
; 2004:8
-
9.

34.

Gilbert J, Rosenberg P.
Addressing the Innovation Divide: Imbalance Innovation.

Boston: Bain & Company; 2004.


15

35.

Families USA.
Off the Charts: Pay, Profits and Spending by Drug Companies.

Washington DC: Families USA; July 20
01.

36.

McClellan M.
Speech before First International Colloquium on Generic Medicine
:
U.S. Food and Drug Administration; 25 September 25 Sept 2003.