The Problems with Big Pharma

Big Pharma is probably the most important branch of manufacturers that provide healthcare products to the healthcare industry.  Along with universal healthcare reform we need meaningful pharmaceutical company reform.  Drug companies are not worthless middlemen like private healthcare insurance companies that are inherently part of the problem because they provide necessary innovation and quality into the healthcare marketplace and unlike private health insurers deserve a reasonable amount of profits.  However there are a few key areas where Big Pharma should be regulated and reformed.

1. Advertising

Below is listed some of the financial information for the largest pharmaceutical companies.

Source Forbes Magazine 2007

The biggest numbers that jump out are the extremely high gross profit margins pharmaceutical companies reap and cost of sales expenses they inure.  It is alarming that these companies spend two to three times more on cost of sales than on research and development.  To give you some reference Wal-Mart only spend 18.8% of it’s revenue on cost of sales.  The reason Pfizer’s tax rate is much lower than the two even thought their gross profit is the highest is because they do spend the most on R&D which does provide huge tax advantages.  This is not necessarily bad to encourage research funding.

In 1997 the FDA relaxed the rules for advertising pharmaceuticals especially in TV and radio.  Before 1997 relatively few pharmaceutical drugs were advertised because the FDA required full disclosure of the indications, health risks and side effects of drugs.  Before 1997 it was just too costly and impractical for drug companies to advertise on TV or radio because this full disclosure would take 3-5 minutes to describe in adds.  That is why we only saw pharmaceuticals advertised in print.

As pointed out in an article this direct-to-market advertizing is a huge reason drug costs have gotten out of control.

“Direct-to-consumer advertisements inflate the cost of drugs, which takes millions of dollars from Americans who cannot afford the costs of living in addition to buying prescription drugs. Since 1997, drug prices have been soaring at a rate of 19 percent each year (Hahn Online). Compared to prior years, the amount that the consumer now ends up paying for drug advertising is tremendous. Approximately 43 percent of the price paid for prescription drugs is channeled directly to the manufacturer’s ad campaign.”

Another inherent problem with direct-to-market advertising of pharmaceuticals is it subverts the whole patient-doctor relationship.  The system should work by a patient describing their symptoms to a doctor, the doctor ordering the appropriate tests and then the doctor making the final diagnosis based on the facts at hand.  Instead we literally have a system where the patient see a pharmaceutical ad and then try to self prescribe a medication that they think they need.  Having talked to doctors a few times about this problem they are the first people to tell you they would outlaw drug ads.

If you are still wondering why the main stream media has been playing antagonist in the healthcare debate go no further than understanding how many billions of dollars they will lose in ad revenue if Big Pharma is not able to advertise their drugs anymore.  That is why you see the MSM using Frank Luntz talking points when questioning the president and other Democrats who are trying to pass universal healthcare reform.

2. Outsourced Research and Development Taxpayers Supply Through the National Institute of Health (NIH)

Much of the fundamental research that ends up benefiting Big Pharma is done through alliances with universities and funded by the NIH.  Yes Big Pharma does fund some of the research but not as much as they should.  While the universities do get some monetary license rewards when they discover new drug treatments and more funding for future research when they are successful, the government gets very little for the billions of dollars we spend to fund projects where drug companies reap the final rewards in many cases.  Moreover most NIH money is spent on research studies that are set up to actually cure disease while Big Pharma is free to spend their research dollars on more profitable drugs that treat chonic disease or worse are used to create the umpteenth erectile dysfunction pill.  Very few large pharmaceutical companies even do the research to create cures like vaccines these days because there is not enough profit in it for them.  People may remember the fiasco during the Bush administration when they outsourced the yearly flu vaccine to a small biotech company in Great Brittain and they ended up making an ineffective vaccine.

For example, just today MIT submitted a press release where they may have discovered a compound that could kill cancer stem cells which could be the beginning of discovering the holy grail for curing cancer.

“A drug that can selectively target and kill the stem cells that drive the growth of tumors has been identified for the first time by scientists who searched more than 16,000 compounds to find it.

Researchers at Massachusetts Institute of Technology and the Broad Institute looked for compounds that could destroy the stem cells, which often resist conventional cancer treatment. One, salinomycin, cut the number of stem cells at least 100 times more than did Bristol-Myers Squibb Co.’s Taxol, a common chemotherapy medicine, according to a report on the findings published today in the journal Cell.”

The bottom line for Big Pharma is inventing cures negatively affects their bottom line so they are simply not doing this type of fundamental research enough.

3. An Army of Pharmaceutical Reps

While providers like hospitals, doctors and nurses are being squeezed by Medicare and Medicaid and even private insurers to cut back costs and salaries, Big Pharma is still making huge profits.  This gives Big Pharma the unique ability to “prime the pump” in the healthcare industry since they are one of the few groups that can entertain doctors and administrative staff.  A big joke amongst Big Pharma reps is you need one of two things to be a successful pharmaceutical sales rep.,  a nice golf swing or pair of legs.  This army of pharmaceutical reps literally act like illicit drug dealers providing millions of “free samples” that doctors give to their patients to get them hooked on a drug patients eventually will end up spending thousands of dollars on in many cases.  It is not to say that the vast majority of those patients do not need those drugs but if they knew the costs up front they might ask for alternative options, especially since most free samples are the most expensive drugs.

4. No Clear Mechanism to License Patented Pharmaceuticals

In many cases pharmaceutical companies want to license the manufacture of drugs they have under patent to other manufacturers because they can get their monetary rewards through a license agreement and not have the burden of producing those drugs in large quantities.  Some pharmaceutical companies are very good at R&D but not very cost efficient when it comes to actually scaling up to manufacture large quantities of product.  Some drug companies would simply like to invent the drugs and get there rewards through licensing.

I am intimately familiar with the licensing story behind Plavix which is an anti-coagulant drug I need to take because I have a stint.  Plavix was developed by a joint partnership with Bristol-Myers Squibb/Sanofi Pharmaceuticals.  For a long time it was a very expensive patented drug formulary.  Then the two partnership pharmaceutical companies licence the manufacture of the drug to two smaller pharmaceutical companies that could manufacture them more cheaply.  So for about a year I was able to buy the drug at less than half the cost.   But in this case the two drug companies in the partnership squabbled because one wanted to make a deal with only one drug manufacturer instead.   So what ended up happening was that they sued each other over the original agreement.  It ended up  that the top shelf Plavix is currently the only drug left on the market, in the US where the case was decided.  So of course the cost for this prescription more than doubled again.

The problem is there is no clear mechanism for patented drugs to be licensed so their manufacture can be outsourced leading to huge savings for the consumer.

Suggested Regulations and Reforms for the Pharmaceutical Industry

Much emphasis is put on the ability of government to negotiate drug prices through Medicare and universal healthcare reform and that is an important part of the equation.  The best way to deal with the pharmaceutical industry is to regulate and reform it though separate legislation not in the universal healthcare bill.  Frankly it is a big enough challenge combining universal healthcare reform and Medicare reform in one bill.  A separate bill to regulate Big Pharma should have a few key elements.

1. Advertising drugs on TV and radio should be outright banned like it is in most countries.  There is simply no justifiable reason to advertise drugs when it should be up to doctors and patients to determine which drug or drug combination are most effective for treating the patients disease and symptoms.

2. Pharmaceutical companies should be required to match NIH research funding at a 1 to 1 ratio or greater if they could eventually make profits off of making and selling the final drug treatment to the healthcare market.  This ensures putting “skin” in the game so Big Pharma shares the risks as well as the rewards of fundamental research.

3. Free samples should be eliminated or at least to obtain free samples a patient should qualify based on need.

4. Regulations should be put in place to streamline drug licensing so fewer conflicts arise that only negatively affect the consumer.

5. Of course, drugs prices should be negotiated on a cost plus basis, especially for generics when used by patients in government programs.

Big Pharma takes big risks and it costs millions to introduce new drugs.  But these factors are a compelling reason why pharmaceutical companies should cut unnecessary costs like advertising so those costs can be passed onto the consumer.  Drug companies will still be able to add innovation and make justifiable profits because of the risks they take but their current business model where they spend money on advertising like Coca Cola or Pepsi makes no sense for a necessity.  If Big Pharma wants to benefit from NIH funding and research being carried out in universities it must pony up more of the funding and stop making ridiculous drugs people do not really need.