While at work yesterday, sitting in the employee lounge for my 15 minute coffee break, I could not help but notice the new pharmaceutical ad playing on the flat screen TV. It was your typical “slice of life” ad that Big Pharma likes to run, showing grandpa working in his wood shop, or a young chef baking a cake, or a mother dancing at her daughter’s wedding, you know; the sort of Norman Rockwell feel good stuff. In this case, while I can’t recall the name of the drug or the slice of life acted out on the TV screen, I did hear the announcer mention that this new drug was for those who are having difficulty with an opioid addiction and for whom another drug, whose name I can’t recall, is not working. The ad went on to show the people enjoying life, presumably having taken this new drug and now free of opioid addiction. The last few seconds was a fast talking announcer telling you to ask your doctor and then list the many possible side affects. You know the drill.
What stuck me about this was that opioid addiction is now as commonplace as psoriasis, erectile dysfunction, diabetes, or any other common aliment that the drug companies are trying to make a buck off of. Only in this case, the ailment was started by Big Pharma and now, adding insult to injury, Big Pharma is offering a cure, at a price. It’s like the arsonist offering to sell you access to the fire hydrant. Anything for a buck.
It does not have to be this way. As economist Dean Baker points out, government funding of pharmaceutical research is now accomplished via the patent process. Corporations argue that the costs of developing drugs is so high, they need big government to underwrite the cost by granting monopoly rights of the sale of such drugs to the public. In the case of new opioids, this proved to be a disaster. We essentially handed companies like Purdue Pharma a license to print money, as much as they wanted for as long as the patent lasted. The Sackler family became America’s newest Billionaire Family. Ah, the American Dream fulfilled. God Bless Capitalism. All hail the Free market. Purdue Pharma, like any company, exists to make a profit. That’s capitalism. Who could blame Purdue Pharma for simply wanting to increase sales? Sure, some people were hurt by their product, but some people get hurt in car accidents with with their Ford Mustangs, and it’s not like that’s Ford’s responsibility.
Capitalism is fine with consumer goods. Health care, pharmaceuticals, matters of life and death are not “consumer goods”. Allowing them to be governed as such lead to the opioid crisis.
There is a simple remedy. Again, as Dean Baker points out, all we need to do is have 100% funding of all pharmaceutical research and development. As it stands, our federal government is already responsible for 75% of all new pharmaceutical discoveries, so this would not be a massive change in policy; more an expansion of something that is already working for the public good. Yes, this will mean higher taxes.
If you are still reading my post at this point, that’s a good sign. Higher taxes are inevitable under this plan, but along with higher taxes will come lower costs for pharmaceuticals as all drugs will be generic. Also, under this plan, capitalism will not be as much of a factor, clearly not enough so that one can become a billionaire by selling generic drugs and so, things like the opioid epidemic will be a thing of the past. Finally, once we get to the point where we have universal single payer, M4A or whatever you want to call it, we’ll all be better off. Okay, not all of us, the Sacklers and their ilk will suffer. I am content to let that happen.
I’m pretty sure public advertising of prescription drugs was once banned.
The USA and New Zealand are the only countries in the world where it is legal to advertise prescription drugs. I also believe that the advertising costs are part of the “R&D” costs that pharmaceutical companies cite to support the high cost of drugs.
@I also believe that the advertising costs are part of the “R&D” costs that pharmaceutical companies cite to support the high cost of drugs.:
Meh, not really.
The exploding R&D costs happen because our clinical standards of safety and effectiveness are correctly getting more and more rigorous while the disorders we tackle become harder and harder to treat.
I agree with you that the fundamental issue is our attempt to use market mechanisms to fund the necessary research. I don’t see advertising as a significant factor in all this.
I contributed to the effort to sequence the human genome for the first time. The companies I contracted for pursued this as part of “target discovery” and “drug discovery”. The first is identifying possible molecular sites where a medication might be therapeutic. The second is finding candidate chemicals that might be therapeutic when somehow delivered to the previously-identified target.
Even at the turn of the century, when I did this work, the pipeline that connects these early stages to a finished output of effective and safe medications was well over a decade. Thousands of possible targets are needed before the search for a drug can begin, and hundreds of thousands of candidate drugs are needed before it makes sense to even begin serious drug development. It takes years to go from discovery to clinical trials. Most drugs that enter clinical trials fail during those trials. This process is staggeringly — blindingly — expensive. No one company can do new drugs from start to finish any more.
In a market-driven model, the profits from the handful of effective and safe drugs that enter the market each year must pay for the thousands of failed attempts and millions of blind alleys needed to get there. For better or worse, the business driver for the patents is to provide a short period of exclusivity and high prices so that companies that produce those drugs can sustain the decades-long effort to make them available. The Faustian bargain made in the US is that American consumers get access to these drugs first and therefore pay the most for them.
The US introduces more effective and safe new medications than any other nation in the world. That’s the most significant reason why our prescription drug costs are so high. Advertising costs are a tiny piece of that pie.
The policy dilemma we face is what we want to replace the current system with. If we attempt to simply remove patent protections, disallow high prices, and so on, then the result will be that the flow of new drugs will simply stop. It will take decades for other countries to catch up with current US research and development capabilities and facilities.
If we want the production of these new drugs to continue, then we have to be willing to make the enormous investment of public funds needed to continue the research and pipelines. Federal funding of basic science has been declining for decades under both Republican and Democratic administrations. Federal research grants have been an ever-shrinking share of overall biopharm research for the same period. All those trends need to be reversed if we expect the current rate of new drug introduction to continue.
A serious argument can be made that the entire paradigm is misplaced. American culture spends trillions of dollars producing cancer-fighting drugs while expanding consumer lifestyles that cause cancer. It might be that the American — or world — economy cannot afford the cost of continuing to extend expected human lifetimes.
I think these are profoundly big and difficult issues. They require more than party lines, bumper stickers, and campaign promises.
This explains part of costs, but I think is missing important pieces. Very high executive pay plus record profits distributed to shareholders (or gobbled by private equity) are large drivers of cost that can’t be explained by the high cost of R&D. This is even starker in the non-novel markets where huge increases in the price of drugs like insulin or epiPens are solely due to greed, not any reasonable effort to cover costs of other R&D.
And yes, we need massive increases in government funded research on this (and thousands of other things). We have the money to pay for so much more but we choose not to, and obviously that’s because we have a corrupt system.
Advertising is not a huge part of spending, but it does have some impact on the company side. But it also has other impacts of causing people to request brand name drugs. The direct marketing and kickbacks to doctors is more pernicious but some states are increasing protections there. Doctors pushing a brand name drug over a generic or a new drug over a functional equivalent can lead to 10X, 20X, 30X+ the price that has to get covered, either by insurance or out of pocket.
A lot of Pharma should probably be nationalized. 🙂
I think the impact of high executive pay is more a matter of appearance than actual financial impact. Distributions of profits are much more significant.
Overall worldwide R&D spending in the pharma industry is in the vicinity of $150-200 B/year (according to sites like this). More than half of that is spent in the US. The same source reports that the total NIH-funded academic research budget was $33.1 B.
The largest individual spender was Roche, at $9.2B. Roche paid its CEO (Severin Schwan) $13.4M that same year.
I invite you to take another look at those two numbers. That’s $9.2B in R&D spending vs $0.013B in CEO compensation (I normalized the units to make comparison easier). So Roche spent about 0.14% of its R&D budget on compensation for its CEO.
Dividends are a different story. According NASDAQ, Roche spent about $7B/year for each of the five years from 2013-2018. That’s about 70% of its net income.
Roche’s gross income was about $56B in 2018. If 70% of its net income was $7B, then its net income was about $10B that same year. So Roche spent about $46B to get $10B, and distributed $7 B to shareholders.
According to sites like this, the pharma industry as a whole spent $6.4B on advertising in 2018. That’s in the vicinity of 3-4% of total industry R&D spending.
The bottom line here is that executive compensation and advertising are insignificant parts of pharma industry economics. Dividends are more significant. Still, paying dividends is after all the reason why public-traded corporations exist. I don’t see evidence that pharma is paying excessive dividends.
It seems to me that the takeaway is that the capitalist market-driven approach to pharmaceuticals is the real issue. I think the question is what we propose to replace that with.
I think you have to look at more than just CEO pay to see full executive pay, and this is another example of inequality – increased pay at the top while it is all passed on to the consumer. Yes, it is not the lion’s share of cost changes, but adding those salaries plus increases in advertising certainly do impact the costs. Those plus the larger issue of increased, distributed profit is why drug price increases are outpacing R&D increases. Prices have increased by more than 50% across the board in the last decade. R&D has not.
Your example of Roche seems plainly excessive. That $7B isn’t going back to research.
Absolutely. I like nationalization, but that’s me. Or maybe just requiring 51% employee ownership. Or requirements on the use of subsidized research. If you base a drug on NIH funding, the level of profit you can make or what you can do with it should be capped. But, taxing the shareholders and executives much more would also get it done.
@ That $7B isn’t going back to research:
For better or worse, you have a different definition of “excessive” than the standard used in the current economy. Roche does not exist to perform or fund research. Roche, like every publicly-traded corporation, exists to increase shareholder value. It is against the law for any publicly-traded company to do anything except maximize shareholder value.
@alternatives:
Yes indeed, these are kinds of alternatives we need to explore.
What would be the danger of the US government funding all drug research and making all drugs available on the generic market?
The danger is that US government would fail to provide the enormous investments needed to sustain that drug research.
The resulting risk is that companies would stop producing new drugs. The “generic market” exists only because it is possible for drug creators to collect high returns during the period of exclusivity. If there is no period of exclusivity, then there are no high returns. If there are no high returns, the drug creators will find some other way to make money.
We have to decide whether or not we want new drugs. If we decide that we want new drugs, then we have to decide how we want to pay for the necessary research.
US government funding requires significant new taxes (or even higher deficits). So far, neither party has demonstrated a desire to propose that.