Viewpoint -- Pharmaceuticals Need To Wake Up

Dec. 21, 2004
If drug companies don't solve escalating pricing, someone else will.

Normally, I'm not in favor of liability lawsuits. Most of the suits filed these days are frivolous, wasteful and beneficial to few while burdening many. Sometimes, though, lawsuits are the only way to shape equitable and efficient policies and practices in the absence of either the public or private sector doing so. I think this will be the case when it comes to the escalating price of prescription drugs in the United States. While our former and current presidents and both major political parties favor public policy changes to make drugs more affordable, no one in government has been able to solve this problem. The pharmaceutical companies are making their own weak attempts, but these address protecting market share and staving off government intervention and not the actual problem of escalating costs. So what's it going to take? It will take one or a few well-publicized tragic deaths caused by lack of access to expensive drugs, followed by lawsuits, massive penal damages and a call for price controls. Again, I'm not in favor of this, but I think this is the way it's going to go. This is unfair to pharmaceutical companies in some respects. First off, drug companies already give away or discount millions of dollars worth of drugs each year in charitable efforts. Secondly, drug companies need to fund massive R&D and regulatory compliance efforts to bring new drugs to market, and these new drugs, in the broader picture, benefit society at large by advancing medical technology. One might say the drug companies already shoulder a larger share of corporate citizenship than most manufacturers and must invest a ton of money in a drug before it ever lands in a pharmacy. Therefore, rising prices are justified. But here's the thing: In the eyes of most people, they aren't justified and never will be. You can't get around the fact that drugs save lives and alleviate pain, unlike most other consumer products that -- let's face it -- we could all buy less of. The average consumer doesn't care about R&D and regulation and neither does the average politician. They just know that 82-year-old Grandma Jones down the street keeps the lights off all day in an attempt to save money so she can buy her heart medicine. Meanwhile, drug companies, despite having few new drugs in the pipeline, are still pulling in relatively high profit margins. In a year that saw brutal profit declines for many companies, Merck & Co. posted a 15% profit margin in 2001; Pfizer Inc. had a 24% profit margin; Novartis AG of Switzerland had a 22% profit margin. The drug companies' attempts to solve pricing problems have been so-so. In April, a group of companies announced they would issue discount cards to low-income seniors. The White House called this "a very positive development." Other attempts include issuing coupons for free trials or discounts. This is a one-time marketing effort aimed at encouraging consumers to switch to or stick with certain drugs. These campaigns in no way address the core issue: Why does it cost so much to bring drugs to market? The pharmaceutical companies need to be reviewing business processes, suppliers, manufacturing processes, marketing, overhead, distribution and a host of other core functions. Has enough been invested in technology? Has enough cost cutting been wrought from the many pharmaceutical mergers of recent years? Another major problem with the drug sector is that most companies derive a large portion of their income from a few blockbuster drugs, which will eventually lose patents and therefore market share to generics and knock-offs. In response the companies are investing huge amounts of money for the next generation of blockbusters, yet few of these hopefuls reach the pinnacle of the open market. According to a May 2 Wall Street Journal account, for instance, Pfizer has spent $71 million in research for an anti-aging drug it hoped would be the next Viagra. Instead, research showed the drug to have a marginal effect on helping older people keep muscle mass, the drug's purported sweet spot, and development has been stopped. The product-development process for pharmaceuticals is indeed not the same as, say, car parts. Human testing is expensive and -- right now -- irreplaceable, while auto and auto-parts manufacturers have been able to reduce product-development costs via electronic collaboration and simulation. This is a valid point, but have drug companies developed and pushed for enough alternatives? Can some or more of R&D be outsourced? Would more collaboration between companies reduce costs? Certainly, drug companies aren't entirely responsible for the high cost of prescription drugs. But if pharmaceutical companies don't want to see government price controls or massive liability costs, they are going to have to come up with a solution, and it's going to have to be better than coupons and discount cards. Tonya Vinas is managing editor of IW. She is based in Cleveland.

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