Americans pay the highest prices in the world for prescription drugs. Drug expenditures in the United States have doubled since 1993 and are expected to double again by 2004, according to a study by the Health Insurance Association of America. Elderly people now spend more on medicine than on doctor bills. Many health plans have cut back on other benefits because of their rising drug bills. About one-third of seniors have no insurance and are therefore paying the highest, nondiscounted retail prices.
The pharmaceutical industry has one defense for the skyrocketing price of drugs: Private-sector labs are chiefly responsible for the breakthroughs in prescription drugs. Any efforts to limit drug prices, especially under a Medicare drug benefit, will short-circuit the medical revolution now underway.
Writing last year in The Wall Street Journal, Schering-Plough Corporation Chief Executive Richard Jay Kogan took aim at politicians and public-interest groups who mislead seniors and other consumers into thinking they can do something about the high cost of medicine. "To imply that increased drug costs come at patient expense is simply dishonest," he said. "There is no other way to help people fight most diseases except through the introduction and widespread use of innovative drugs. Imposing price controls and access limits on drugs will only shift money from research and development to other parts of the health care system."
Alan Holmer, president of the Pharmaceutical Research and Manufacturers Association (PhRMA), told the Senate Finance Committee that the industry's cost of developing a new drug has now reached a staggering $500 million. Controlling the prices Medicare pays for drugs would mean the industry "would attract less investment money that could be used to discover and develop new medicines."
It's a tidy story, but it falls apart under scrutiny. Every independent study that's ever looked at the sources of medical innovation has concluded that research funded by the public sector--not the private sector--is chiefly responsible for a majority of the medically significant advances that have led to new treatments of disease. Moreover, the drug industry's expense for bringing those advances from lab to market is well below the $500-million claim. If one discounts the research clearly aimed at marketing and producing drugs whose contribution to public health does not exceed that of drugs already on the market, the assertion collapses on its face.
A Medicare drug benefit promises to be one of the hottest issues this fall. But adding a senior citizen drug benefit without first ensuring that Medicare pays reasonable prices for drugs would be like throwing gasoline on a raging fire. The government can structure a drug benefit that limits drug prices--without jeopardizing the search for tomorrow's cures. But that will require overcoming the power of one of Washington's most potent lobbies.
Ed DeGrenier of Lombard, Illinois, discovered his two-year-old son Brian had Gaucher disease in 1991, shortly before Cambridge, Massachusetts-based Genzyme General came out with a treatment for the rare genetic disorder. For Brian, one of only about 5,000 Gaucher disease patients in the world, the introduction of Ceredase was truly a miracle.
People with Gaucher disease have a mutant gene that causes the body to fail to produce the enzyme that breaks down lipids (a fatty substance) in the blood. Their lipids build up in the liver and spleen, causing lung, kidney, and bone problems, and anemia. Before Ceredase and its successor drug Cerezyme, average life expectancy for people born with Gaucher disease was 41 years.
But the price tag for Brian's miracle medicine has turned DeGrenier into an activist. His son's fortnightly infusions cost over $8,000. His annual treatment fee has reached nearly a quarter-million dollars. DeGrenier writes letters to congressmen. He battles insurance company bureaucrats who are constantly seeking to cancel his son's coverage and put him in a government-funded welfare program. And he's read up on how Ceredase and Cerezyme came to be.
"This is government-developed technology," he fumes. "This isn't Genzyme working late at night to help sick people. The NIH [National Institutes of Health] did it. But as soon as the government transferred that intellectual property to the company, they lost all control over the pricing."
Cerezyme sales generated $479 million in revenue last year, 70 percent of Genzyme's total. The company cleared $223 million in pretax profits, more than twice the $98 million it spent on research and development, according to filings with the Securities and Exchange Commission. As is often the case in medicine, the science behind Ceredase and Cerezyme can be traced to the pioneering work of one person, Dr. Roscoe Brady, who's been an employee of NIH since the mid-1950s. Winner of the prestigious Lasker Award for his life's work, Brady and his teams discovered the genetic defect that caused the disease in 1964. He spent the next nine years purifying the enzyme glucocerebrosidase from human placentas. That gave him enough material to conduct a clinical trial on two patients. That paper was published in 1974.
At that point, he needed larger quantities of the enzyme to conduct trials on enough patients to determine its safety. Using NIH funds, he contracted with scientists at Tufts University to produce glucocerebrosidase. That proved challenging since ramping up bench science to large-scale purification stripped some of the activation and targeting components from the molecule. But after several more years of painstaking research, the purification problem was solved. "The solution to the problem was all done here at NIH," recalled Brady, who is now 76 and still conducts pioneering research in the field. "All Tufts did was give us large quantities of the enzyme."
However, the scientists at Tufts recognized they were sitting on top of a gold mine. In 1981 they left academia to form Genzyme. The low-dose safety clinical trial then underway on eight patients had shown the drug to be remarkably effective in treating the one child in the experiment, but not very effective in the other seven adults. To observers it was clear that with proper dosing, a breakthrough drug was in the offing.
Once on their own, the Tufts scientists hired an economist, Henri Termeer, to run the company. Termeer raised $72 million from private capital markets to build a purification plant along the Charles River. That plant generated enough enzyme from placentas to conduct the efficacy trials that led to Food and Drug Administration (FDA) approval in 1991.
Genzyme's reliance on public science wasn't over yet, though. Purification from human placentas was difficult, costly, and time-consuming. Producing the molecule using recombinant engineering would be cheaper and faster. But for that, they needed the gene. Fortunately, that had been discovered by a scientist at the nonprofit Scripps Institute in California, also on NIH funding. Genzyme licensed the gene and in 1995 came out with the recombinant form of the drug. Despite the reduction in production costs, however, Genzyme never lowered the drug's price when it moved from placenta purification (Ceredase) to the recombinant form of the drug (Cerezyme).
Genzyme's reliance on publicly funded science is hardly unique. In May the Joint Economic Committee of Congress (JEC) released a study of public-sector research in health care in order to justify the large increases in NIH's budget, which is $17.8 billion this year and is slated to rise 15 percent to reach $20.5 billion in 2001. (By comparison, PhRMA's annual survey reports industry will spend $26.4 billion on research and development this year.)
The JEC pointed to a 1997 National Bureau of Economic Research study showing that public research led to 15 of the 21 drugs considered to have the highest therapeutic value introduced between 1965 and 1992. The JEC also cited a 1990 study by Robert Maxwell and Shohreh Eckhardt, "Drug Discovery: A Casebook and Analysis." That study found that 60 percent of 32 innovative drugs would not have been discovered or would have taken much longer to discover without research contributions from government labs and noncommercial institutions.
The picture is the same when one reviews the results of the nation's 30-year war on cancer, which has yet to reduce the overall death rate from the many forms of the disease. (While 62 percent of cancer patients can expect to live five years today compared to 35 percent in 1950, the incidence of the disease has risen dramatically; so the death rate of 126 per 100,000 today is no different than it was 40 years ago.)
Taxpayer-funded research is responsible for many chemotherapy agents. According to the National Cancer Institute (NCI) Web site, the NCI sponsored the investigational new drug applications for 50 of 77 anticancer drugs on the market as of the end of 1995. That work often extended right through to clinical trials. For instance, NCI sponsored 140 clinical trials for tamoxifen, which is produced by AstraZeneca for treating breast cancer.
The most frequently cited cancer drug story, and one worth repeating, is the development of paclitaxel (Taxol). The NCI spent 15 years and $32 million of taxpayers' money to develop what is now the world's most popular anticancer drug, used to treat breast, lung, and ovarian cancers. Bristol-Myers Squibb claims it spent $1 billion to bring it to market.
The drug generated an estimated $1.7 billion in sales for Bristol-Myers last year alone. Jamie Love of the Consumer Project on Technology (CPT), an indefatigable researcher on this subject and the main source for most press accounts that criticize the industry's assertions about its research-and-development costs, has estimated the manufacturing cost of Taxol at around $500 per patient for up to an 18-month course of treatment. Yet Bristol-Myers sells Taxol to patients and their insurers for more than 20 times its manufacturing cost.
Most drugs for treating AIDS also owe their existence to government-funded research. Samuel Broder, the former head of NCI, and four government scientists laid out the government case in a bitter letter to The New York Times in September 1989 after the president of Burroughs Wellcome, now part of Glaxo Wellcome, asserted that his company had discovered and developed azidothymidine (AZT) on its own. AZT was the first effective treatment for slowing the AIDS virus's impact. Broder, who is now chief medical officer at Celera Genomics in Rockville, Maryland, declined to discuss the sentiments he expressed while a member of the public sector, but Broder and fellow scientists wrote in the Times letter that
[t]he company specifically did not develop or provide the first application of the technology for determining whether a drug like AZT can suppress live AIDS virus in human cells, nor did it develop the technology to determine at what concentration such an effect might be achieved in humans. Moreover, it was not first to administer AZT to a human being with AIDS, nor did it perform the first clinical pharmacology studies in patients. It also did not perform the immunological and virological studies necessary to infer that the drug might work, and was therefore worth pursuing in further studies.
All of these were accomplished by the staff of the National Cancer Institute working with the staff of Duke University... . They were doing investigator-initiated research in response to a public health emergency. Indeed one of the key obstacles to the development of AZT was that Burroughs Wellcome did not work with live AIDS virus nor [did it] wish to receive samples from AIDS patients.
The Industry's Silent Partner: Taxpayers
One reason the drug industry must rely on the public sector is that its own scientists play a bit part in basic biological research, which uncovers the building blocks of modern medicine. A 1997 National Science Foundation study of biomedical patents found that only 17 percent of key discoveries came from industry. The vast majority were generated by public, not-for-profit, and foreign labs.
Industry officials point out that their research budgets supply about 14 percent of research funding for the nation's 125 academic health centers and thus are major contributors to basic research. But even there, industry-funded studies provide smaller returns than university research funded by NIH. David Blumenthal, director of the Institute for Health Policy at Massachusetts General Hospital and a longtime student of industry-academic cooperation in medicine, points out that investigators who get two-thirds of their money from industry "publish less often and in less prestigious journals. By the measures of scientific productivity and quality, they are working at a lower level than their colleagues. The phenomenon of secondary science exists."
I ran into this phenomenon last year while doing research for an exposé on the pricing policies for Amgen's Epogen, a biotech wonder drug used to treat anemia in kidney dialysis patients. The drug now costs Medicare over $1 billion a year. Two years ago, industry-financed scientists and lobbyists convinced regulators that patients do better when their red blood cell counts are near normal instead of slightly below normal. They deployed a host of industry-funded studies to make their case. Each small increase in red blood cell counts in dialysis patients costs the government hundreds of millions of dollars a year in additional Epogen payments.
And where did Epogen come from, anyway? The molecule, produced in the kidney, was first synthesized by University of Chicago microbiologist Eugene Goldwasser after 20 years of government-funded research. He never patented his discovery, even though he sent a letter to NIH in the late 1970s suggesting it might be a good idea.
The government's inability to track the uses of taxpayer-funded research continues to this day. The 1980 BayhDole Act gave institutions and scientists that receive federal grants the right to patent and license their findings with commercial potential. The law was designed to speed up lab-to-industry technology transfer at a time when American industry was widely perceived as lagging behind its international rivals.
The government took steps to protect taxpayer interests in the process. The law required researchers to report their patenting and licensing activities to the government and gave federal agencies the right to purchase any products derived from government-funded research at a price free of licensing fees. But a General Accounting Office review of 2,000 biomedical patents issued in 1997 to 12 of the nation's largest academic medical centers found the law has been honored mostly in the breach. Records were "inaccurate, incomplete, and inconsistent and ... some inventions are not being recorded at all," the report said. "The government is not always aware of federally sponsored invention to which it has royalty-free rights."
Given the overwhelming evidence that government-funded research is responsible for a preponderance of medically significant knowledge, what justification can there be for the industry claim that it spends an average of $500 million to create a new drug? The figure is derived from a 1991 study by Joseph DiMasi and Louis Lasagna of the Tufts University Center for the Study of Drug Development, which is substantially industry-funded. The study pegged the figure at $231 million. The authors took the number of new drugs approved by the FDA and divided that number into industry research-and-development budgets, discounted for the length of time it took to bring a new drug to market. It has since been adjusted for inflation and the longer development times for new drugs.
Industry critics have long taken aim at the validity of the DiMasi-Lasagna numbers. CPT's Love pointed out in 1993 in this magazine that two-thirds of the development costs came in preclinical research, much of it government-funded.
The industry story also downplays the fact that many "new" drugs aren't medical breakthroughs. The FDA has rated applications to determine which proposed new drugs will get additional resources for expedited review. They rate new drug applications either as a "priority," which is defined as a "significant improvement compared to marketed products," or "standard," which is a drug that "appears to have therapeutic qualities similar to those of one or more already marketed drugs." The term of art for the latter is "me-too drugs."
FDA statistics for the 1990s suggest that about half of industry research is aimed at developing me-too drugs. In 1999, 19 of 35, or 54 percent, of approved new molecular entities were given a priority review by the agency. For the decade, 134 of 311 new molecular entities, or 43 percent, approved for sale were rated a priority. "Is there a need for the 18th quinilone [a family of antibiotics]?" said Dr. Murray Lumpkin, deputy director for review management at the FDA's Center for Drug Evaluation and Research. "It depends on how you define need. If a company needs a certain percentage of the market? I won't comment."
In a recent interview, DiMasi agreed that a substantial portion of industry research is aimed at developing drugs that provide little innovation for the nation's medicine chest. Would it be fair to say that 40 percent of industry research and development is aimed at me-too drugs, I asked. "That's a reasonable assumption," he said.
Dr. Sidney Wolfe, the longtime head of Public Citizen's Health Research Group, points out, "What is driving the pharmaceutical industry is the need to create new drugs to replace drugs that are already on the market but coming off patent. There are 80 products to treat high blood pressure; the next one to come on the market is likely to be more dangerous than what is already on the market."
Industry lobbyists reject the charge that much industry research is, from a medical standpoint, unnecessary. "Incremental improvements in drugs have produced the vast majority of clinically important medicines introduced in the last 50 years," an industry handout says. It cites a Georgetown University study showing that 72 percent of 39 me-too drugs in fact had clinical advantages over their competitors. Moreover, the new drugs lowered prices by introducing competition into the market, the handout says.
Again, the evidence is mixed. In 1997 SmithKline Beecham won FDA approval for carvedilol (Coreg), a beta blocker for congestive heart failure. SmithKline launched the drug with much fanfare and won a significant share of the crowded market. However, a study completed last year showed it was no more effective than metoprolol, a generic beta blocker on the market since 1978. Yet the new drug sold for three times the generic's price.
In fairness, some searches for me-too drugs intended mainly to take market share from competitors or to replace older drugs coming off patent may yield clinically useful innovations. Some close cousins of rival drugs may in fact work better in some fraction of patients or may have lesser adverse effects for a given patient. In a world with infinite resources, such marginal research outlays would be defensible. But in the real world, they drive up drug prices and keep many patients from the drugs they need.
Research driven by scientific inquiry and public health goals, namely work funded by public agencies, is likely to produce a better use of scarce dollars than research driven by the entrepreneurial desire for market share. Drug companies have a legitimate role in bringing new medicines to market, but it would be better public policy to lower drug prices, even at the cost of deterring some private investment, and to rely more heavily on publicly funded research.
There's another set of facts about consumer drug expenditures worth remembering: Drug firms' vaunted research-and-development budgets are rivaled by their marketing campaigns. IMS HEALTH, which tracks the industry closely, reports that direct marketing costs for pharmaceutical firms totaled $13.7 billion in 1999 or 55 percent of their collective research-and-development budget that year. The fastest-growing industry expenditure is direct-to-consumer advertising, which leaped 40 percent to $1.8 billion last year.
Pharmaceutical firms' research-and-development budgets are also dwarfed by their profit margins, which are by far the highest among U.S. industries. A Congressional Research Service report released last December showed that the pharmaceutical industry declared $24.8 billion in pretax profits in 1996, a year when the industry spent a total of $16.9 billion on research.
Prescriptions for Reform
No one doubts that the pharmaceutical industry has played a crucial role in the development of the drugs that are transforming medicine and prolonging many lives. Many pathbreaking medicines came solely from industry labs, filled with dedicated scientists. The industry is instrumental in bringing the discoveries of government-funded researchers from the lab bench and the experimental clinic to market.
But that doesn't mean they can't do their jobs more efficiently and without imposing undue financial hardships. A good start is recently enacted legislation, sponsored by Representative Bernie Sanders of Vermont, to restore "reasonable pricing" clauses on any NIH-funded research that leads to patents and commercialization of drugs and medical devices. They were eliminated in the mid-1990s after industry lobbying. The problem, however, is that these clauses were never adequately enforced. We need legislation to ensure that publicly funded innovations are broadly available at moderate prices.
Government, or insurers who handle any new drug benefit for the elderly, should be given the power to negotiate bulk discounts with pharmaceutical firms. Democratic Representative Tom Allen of Maine has one such bill. The Clinton administration's proposal gives that power to regional contractors. A better approach would be to empower Medicare to negotiate drug prices directly. Why should seniors pay the highest price for drugs when pharmacy-benefit managers and insurance companies are already negotiating discounts for their clients? In addition, drug companies should be required to conduct clinical trials for proposed new drugs, comparing the safety and effectiveness of these drugs against both placebos and existing alternatives.
Over the past century, the pharmaceutical industry's evolution toward science-based medicine has largely been driven by public research and careful government regulation. It's time for a new set of rules that will give Americans both affordable medicine and research priorities genuinely devoted to developing the next generation of cures. ¤
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