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pan6467 · 12-01-2005, 11:34 AM

Here's part 2 no charts in this one. Please debate the facts.... don't attack the source, that's not debate. That's being defensive and trying to put the other side on a defensive so that they can make a mistake and you can then capitalize on it.... all the while your side shows nothing, proves nothing, and claims victory. But who wins? Not the people, not society as a whole....

LINK: http://www.eriposte.com/health/other...ondrugs_US.htm

Quote:

HEALTHCARE IN THE UNITED STATES: PART II

MYTHS V. REALITIES ON PRESCRIPTION DRUG COSTS
IN THE UNITED STATES

Healthcare costs have been soaring in the United States for some time now. In Part I, I charted some data that was generated by Brian Weatherson (Crooked Timber, 11/20/03) and Kieran Healy (Crooked Timber, 7/14/04 - via Kevin Drum) that compared U.S. healthcare spending and health metrics versus those in numerous other wealthy, capitalist countries. That data showed how, contrary to commonly transmitted conservative fables, higher public spending on healthcare could potentially bring significant benefits to Americans.

In this page (Part II), I cover some relevant issues related to the high prescription drug costs in the U.S. I applaud the pharmaceutical industry for bringing more and more life-saving drugs into the market, but note with some chagrin that greed, rather than high R&D costs, is the main reason for high prescription drug prices for brand-name drugs in the United States. Businesses should be run with profitability being one of the key goals, but profitability should not be an excuse for greed.

I. KEY REFERENCES

II. SPENDING ON PRESCRIPTION DRUGS IN THE U.S.

III. DRUG PRICES AND PRICE INCREASES OF HIGHLY USED BRAND-NAME PRESCRIPTION DRUGS

IV. CAUSE OF HIGH PRESCRIPTION DRUG PRICES

IV-A. INDUSTRY CLAIM: Very High R&D costs are a big reason

IV-B. REALITY: GREED, NOT HIGH R&D COSTS, are a big reason

1. R&D costs by themselves are not really "high" when compared to total profits

2. Industry R&D costs are significantly subsidized by taxpayer-funded research

3. Industry R&D costs are significantly subsidized by lower tax rates and Government subsidies

4. Industry is not really as innovative as it would lead you to believe -- with only a fifth or less drugs being really new (versus "me-too" drugs)

5. Pharmaceutical Industry is usually the MOST profitable industry in the United States (so much for "high" costs!)

6. Rather than R&D costs, the biggest chunk of industry costs comes from advertising and marketing (especially non-innovative drugs)

7. The Pharmaceutical industry is subsidized by highly preferential monopoly power (via astonishingly generous patent "laws") granted by the Governments they successfully lobbied

V. PHARMACEUTICAL INDUSTRY TODAY: FACING A "PERFECT STORM"? PERHAPS, PERHAPS NOT

VI. TENTATIVE CONCLUSIONS

--------------------------------------------------------------------------------

I. KEY REFERENCES

The main references used here are the following:
[1] Marcia Angell, "The Truth about the Drug Companies", New York Review of Books, Vo. 51, Issue 12, 7/15/04
[2] Families USA, "Sticker Shock: Rising Prescription Drug Prices for Seniors"", June 2004
[3] Public Citizen, "Rx R&D Myths: The Case Against the Drug Industry's R&D 'Scare Card' ", July 2001
[4] Progress Report, Center for American Progress, 7/2/04

II. SPENDING ON PRESCRIPTION DRUGS IN THE U.S.

Per Ref. [1]:

Americans now spend a staggering $200 billion a year on prescription drugs, and that figure is growing at a rate of about 12 percent a year (down from a high of 18 percent in 1999).
...
From 1960 to 1980, prescription drug sales were fairly static as a percent of US gross domestic product, but from 1980 to 2000, they tripled. They now stand at more than $200 billion a year.[6] Of the many events that contributed to the industry's great and good fortune, none had to do with the quality of the drugs the companies were selling.

The claim that drugs are a $200 billion industry is an understatement. According to government sources, that is roughly how much Americans spent on prescription drugs in 2002. That figure refers to direct consumer purchases at drugstores and mail-order pharmacies (whether paid for out of pocket or not), and it includes the nearly 25 percent markup for wholesalers, pharmacists, and other middlemen and retailers. But it does not include the large amounts spent for drugs administered in hospitals, nursing homes, or doctors' offices (as is the case for many cancer drugs). In most analyses, they are allocated to costs for those facilities.

Drug company revenues (or sales) are a little different, at least as they are reported in summaries of corporate annual reports. They usually refer to a company's worldwide sales, including those to health facilities. But they do not include the revenues of middlemen and retailers.

Perhaps the most quoted source of statistics on the pharmaceutical industry, IMS Health, estimated total worldwide sales for prescription drugs to be about $400 billion in 2002. About half were in the United States. So the $200 billion colossus is really a $400 billion megacolossus.

III. DRUG PRICES AND PRICE INCREASES OF BRAND-NAME PRESCRIPTION DRUGS MOST USED BY SENIORS

Ref. [2] provides an idea of how the prices of common prescription drugs have been increasing in recent years. Key points to note:

The prices of the 30 brand-name drugs most frequently used by the elderly rose by 4.3 times the rate of inflation in 2003. On average, the cost of these 30 heavily prescribed drugs increased by 6.5 percent from January 2003 to January 2004, while the rate of inflation, excluding energy, was 1.5 percent during that same period.
...
Of the 30 brand-name drugs most frequently used by the elderly, all but four have been on the market for over three years. The prices of those 26 drugs increased, on average, by 3.6 times the rate of inflation, or 21.6 per-cent, from January 2001 to January 2004. Inflation for the same period was 6 percent.
...
Not only did the prices of these brand-name drugs increase rapidly, but they also increased often. Fifteen of the 30, or half, had more than one price increase in the one-year period from January 2003 to January 2004. Eighteen, or more than two-thirds of the drugs marketed for the three-year period of January 2001 to January 2004, increased in price more than three times.

As one might expect, PhRMA (the Pharmaceutical Research and Manufacturers Association) has been quick to denounce the Families USA study for focusing on wholesale prices, rather than retail prices that includes discounts. For example, they state here that:

Families USA has chosen to misinform consumers and policymakers by citing only undiscounted prices, while ignoring pharmaceutical companies’ patient assistance programs that offer free medicines, pharmaceutical company discount programs for seniors, and other discounted prices that are widely available to seniors.

Millions of patients without access to needed medicines have been helped through PhRMA member companies’ patient assistance programs. In 2002, an estimated 5.5 million patients received 14 million prescriptions free of charge through these programs. Families USA never mentions these programs. While Families USA concentrates on making political points by misinforming consumers, PhRMA’s member companies are working to help patients unable to afford medicines get the medicines they need. That’s why we’ve created www.helpingpatients.org as a one-stop source of information about patient assistance programs and other types of assistance.
...
They also go on to deride Families USA for ignoring the benefits that new drugs bring (in terms of saving more lives), the under-use of prescription drugs (!) etc.

First of all, the issue of "benefits", while relevant is overblown. By definition, all new products bring some "benefits" to some (or many) consumers, risks to some and no benefits to others. Obviously, PhRMA will agree that it makes no business sense for them to guarantee "immortality" with a new drug if it costs $10 Billion per pill for the consumer. In other words, the bottom line is (and should be) whether or not the company makes enough money to continue to fund more research, make new/improved drugs and remain profitable - and NOT whether the benefits are so great that one should not complain about the price at all. Benefits cannot be divorced from price - but the question is whether the price is fair compared to that paid by consumers for other kinds of benefits they get from other products (e.g., unaffordable car prices may prevent those who need to commute several tens of miles to their jobs from doing so - and thus potentially forcing them into poverty through lost jobs. Does this mean, that the benefit from a car is so vast that no one should complain about high car prices - especially if the price of the same car model significantly increases every year (faster than inflation) rather than decrease (either due to competition or model age)?...)

Secondly, the claim - that using average wholesale prices [AWP] to calculate price increases is misleading - is itself...misleading. Families USA explains why:

Some people suggest that AWP is not an accurate measure of drug prices paid by consumers because so many consumers enjoy discounts negotiated by discount card vendors, managed care organizations, and other bulk purchasers. For example, beginning in June 2004, Medicare will endorse multiple vendors that will market "Medicare approved" drug discount cards. These cards will be available to seniors and others in Medicare, similar to the senior discount cards that have been marketed for years.

The availability of discount cards does not negate the importance of AWP as a measure of price and, particularly, as a measure of price increases. AWP is the base price frequently used by payers and discount card vendors when negotiating with drug manufacturers. It is often the base from which consumer discounts are calculated. Changes in AWP signal changes in the base price charged to insurers and other payers and changes in the price from which discounts are calculated. As a result, increases in AWP have a direct bearing on prices paid by a wide range of prescription drug purchasers, including consumers using a discount card. Therefore, AWP continues to be a good measure of drug price inflation.

This has also been pointed out by AARP, in their own study which also highlighted high prices of prescription drugs:

[The study] focuses on the price that drug manufacturers charge wholesalers because that is a substantial component of the final retail price. A change in the price the drug manufacturers charge to wholesalers generally results in a similar percent change in the price that you, the consumer, pay.

Talking about discounts or lack thereof, it is also interesting to note the following, as Ref. [1] points out:

For obvious reasons, the elderly tend to need more prescription drugs than younger people—mainly for chronic conditions like arthritis, diabetes, high blood pressure, and elevated cholesterol. In 2001, nearly one in four seniors reported that they skipped doses or did not fill prescriptions because of the cost. (That fraction is almost certainly higher now.) Sadly, the frailest are the least likely to have supplementary insurance. At an average cost of $1,500 a year for each drug, someone without supplementary insurance who takes six different prescription drugs—and this is not rare—would have to spend $9,000 out of pocket. Not many among the old and frail have such deep pockets.

Furthermore, in one of the more perverse of the pharmaceutical industry's practices, prices are much higher for precisely the people who most need the drugs and can least afford them. The industry charges Medicare recipients without supplementary insurance much more than it does favored customers, such as large HMOs or the Veterans Affairs (VA) system. Because the latter buy in bulk, they can bargain for steep discounts or rebates. People without insurance have no bargaining power; and so they pay the highest prices.

It must be clarified that Families USA focuses on drug prices of brand-name drugs, and not generic drugs. They explain the reason for this.

Brand-name-only drugs—drugs for which there are no generic or co-marketed alternatives—are the primary drivers of inflation in prescription drug costs. Since 1999, Families USA has monitored price increases among the 50 drugs most frequently used by seniors. Our studies have consistently found that prices for generics rose only slightly and that prices for brand-name drugs increased by many times the rate of inflation. Because frequently prescribed brand-name drugs are the principal contributor to drug price inflation, they are the focus of this report.

Clearly, this qualification is important. I believe it is relevant to focus on brand-name drugs because these are the ones which presumably are the main results of the drug companies' R&D and investments and therefore play a key role in enabling them to be profitable. Put another way, brand name drugs ostensibly represent the results of the drug companies' innovation and they are the ones that the drug companies have the best justification to price higher.

A final point on pricing and comparison to inflation. One may ask why drug price changes rather than medical inflation - are compared to general inflation. The answer is simple. In this section, we are trying to understand if prescription drug prices are reasonable or not - not whether general medical costs are high or not! Familes USA answers this question in a more nuanced way in their report (page 13).

IV. CAUSE OF HIGH PRESCRIPTION DRUG PRICES

IV-A. INDUSTRY CLAIM: Very high R&D costs are a big reason

As Ref. [1] points out:

Boiled down to its essentials, [the message from the Pharmaceutical Industry] is this: "Yes, prescription drugs are expensive, but that shows how valuable they are. Besides, our research and development costs are enormous, and we need to cover them somehow. As 'research-based' companies, we turn out a steady stream of innovative medicines that lengthen life, enhance its quality, and avert more expensive medical care. You are the beneficiaries of this ongoing achievement of the American free enterprise system, so be grateful, quit whining, and pay up." More prosaically, what the industry is saying is that you get what you pay for.
...
As a spokeswoman for one company explained, "Price increases are not uncommon in the industry and this allows us to be able to invest in R&D."

As Ref. [3] points out:

PhRMA’s central claim is that the industry needs extraordinary profits to fund expensive, risky and innovative research and development (R&D) for new drugs. If anything is done to moderate prices or profits, R&D will suffer, and, as PhRMA’s president recently claimed, "it’s going to harm millions of Americans who have life-threatening conditions."

IV-B. REALITY: GREED, NOT HIGH R&D COSTS, are a big reason

Don't get me wrong here. I am all for the pharmaceutical industry to be profitable and for people who own those industries to make a great living. Indeed, the pharmaceutical industry needs to be thanked for extending the lifetimes of human beings across the globe. That is a noble thing worth applauding.

However, I just think the facts should be made clear on why drug costs are high, and it needs to be pointed out that contrary to Wall Street's so-called "wisdom", greed and profitability are two separate things when we are talking about what is good for the country as a whole.

1. R&D costs for the pharmaceutical industry are not really "high" when compared to total profits

As Ref. [3] points out:

Using government studies, company filings with the U.S. Securities and Exchange Commission and documents obtained via the Freedom of Information Act, Public Citizen’s report exposes the industry’s R&D claims:

The drug industry’s claim that R&D costs total $500 million for each new drug (including failures) is highly misleading. Extrapolated from an often-misunderstood 1991 study by economist Joseph DiMasi, the $500 million figure includes significant expenses that are tax deductible and unrealistic scenarios of risks.
The actual after-tax cash outlay – or what drug companies really spend on R&D – for each new drug (including failures) according to the DiMasi study is approximately $110 million. (That’s in year 2000 dollars, based on data provided by drug companies.) (See Section I)
A simpler measure – also derived from data provided by the industry – suggests that after-tax R&D costs ranged from $57 million to $71 million for the average new drug brought to market in the 1990s, including failures. (See Section II)
As Ref. [1] points out (bold text is eRiposte emphasis):

Drug industry expenditures for research and development, while large, were consistently far less than profits. For the top ten companies, they amounted to only 11 percent of sales in 1990, rising slightly to 14 percent in 2000.

2. Pharmaceutical industry R&D costs are significantly subsidized by taxpayer-funded research

As Ref. [3] points out:

Industry R&D risks and costs are often significantly reduced by taxpayer-funded research, which has helped launch the most medically important drugs in recent years and many of the best-selling drugs, including all of the top five sellers in one recent year surveyed (1995).
An internal National Institutes of Health (NIH) document, obtained by Public Citizen through the Freedom of Information Act, shows how crucial taxpayer-funded research is to top-selling drugs. According to the NIH, taxpayer-funded scientists conducted 55 percent of the research projects that led to the discovery and development of the top five selling drugs in 1995. (See Section III)
3. Pharmaceutical industry R&D costs are significantly subsidized by lower tax rates and Government subsidies

As Ref. [3] points out:

In addition to receiving research subsidies, the drug industry is lightly taxed, thanks to tax credits. The drug industry’s effective tax rate is about 40 percent less than the average for all other industries. (See Section VII)
Drug companies also receive a huge financial incentive for testing the effects of drugs on children. This incentive called pediatric exclusivity, which Congress may reauthorize this year, amounts to $600 million in additional profits per year for the drug industry – and that’s just to get companies to test the safety of several hundred drugs for children. It is estimated that the cost of such tests is less than $100 million a year. (See Section VIII)
4. The pharmaceutical industry is not really as innovative as it would lead you to believe -- with only a fifth or less drugs being really new (versus "me-too" drugs)

As Ref. [3] points out:

Drug industry R&D is made less risky by the fact that only about 22 percent of the new drugs brought to market in the last two decades were innovative drugs that represented important therapeutic gains over existing drugs. Most were "me-too" drugs, which often replicate existing successful drugs. (See Section VI)
As Ref. [1] points out:

...the pharmaceutical industry is not especially innovative. As hard as it is to believe, only a handful of truly important drugs have been brought to market in recent years, and they were mostly based on taxpayer-funded research at academic institutions, small biotechnology companies, or the National Institutes of Health (NIH). The great majority of "new" drugs are not new at all but merely variations of older drugs already on the market. These are called "me-too" drugs. The idea is to grab a share of an established, lucrative market by producing something very similar to a top-selling drug. For instance, we now have six statins (Mevacor, Lipitor, Zocor, Pravachol, Lescol, and the newest, Crestor) on the market to lower cholesterol, all variants of the first. As Dr. Sharon Levine, associate executive director of the Kaiser Permanente Medical Group, put it,

If I'm a manufacturer and I can change one molecule and get another twenty years of patent rights, and convince physicians to prescribe and consumers to demand the next form of Prilosec, or weekly Prozac instead of daily Prozac, just as my patent expires, then why would I be spending money on a lot less certain endeavor, which is looking for brand-new drugs?[4]
...drug companies no longer have to rely on their own research for new drugs, and few of the large ones do. Increasingly, they rely on academia, small biotech startup companies, and the NIH for that.[7] At least a third of drugs marketed by the major drug companies are now licensed from universities or small biotech companies, and these tend to be the most innovative ones.[8]

5.The pharmaceutical industry is usually the MOST profitable industry in the United States (so much for "high" *any* costs!)

As Ref. [3] points out:

Drug industry R&D does not appear to be as risky as companies claim. In every year since 1982, the drug industry has been the most profitable in the United States, according to Fortune magazine’s rankings. During this time, the drug industry’s returns on revenue (profit as a percent of sales) have averaged about three times the average for all other industries represented in the Fortune 500. It defies logic that R&D investments are highly risky if the industry is consistently so profitable and returns on investments are so high. (See Section V)
As Ref. [1] points out:

In fact, year after year, for over two decades, this industry has been far and away the most profitable in the United States. (In 2003, for the first time, the industry lost its first-place position, coming in third, behind "mining, crude oil production," and "commercial banks.") The prices drug companies charge have little relationship to the costs of making the drugs and could be cut dramatically without coming anywhere close to threatening R&D.

...

The top ten drug companies (which included European companies) had profits of nearly 25 percent of sales in 1990, and except for a dip at the time of President Bill Clinton's health care reform proposal, profits as a percentage of sales remained about the same for the next decade. (Of course, in absolute terms, as sales mounted, so did profits.) In 2001, the ten American drug companies in the Fortune 500 list (not quite the same as the top ten worldwide, but their profit margins are much the same) ranked far above all other American industries in average net return, whether as a percentage of sales (18.5 percent), of assets (16.3 percent), or of shareholders' equity (33.2 percent). These are astonishing margins. For comparison, the median net return for all other industries in the Fortune 500 was only 3.3 percent of sales. Commercial banking, itself no slouch as an aggressive industry with many friends in high places, was a distant second, at 13.5 percent of sales.[11]

In 2002, as the economic downturn continued, big pharma showed only a slight drop in profits—from 18.5 to 17.0 percent of sales. The most startling fact about 2002 is that the combined profits for the ten drug companies in the Fortune 500 ($35.9 billion) were more than the profits for all the other 490 businesses put together ($33.7 billion).[12] In 2003 profits of the Fortune 500 drug companies dropped to 14.3 percent of sales, still well above the median for all industries of 4.6 percent for that year. When I say this is a profitable industry, I mean really profitable. It is difficult to conceive of how awash in money big pharma is.

Drug industry expenditures for research and development, while large, were consistently far less than profits. For the top ten companies, they amounted to only 11 percent of sales in 1990, rising slightly to 14 percent in 2000. The biggest single item in the budget is neither R&D nor even profits but something usually called "marketing and administration"—a name that varies slightly from company to company. In 1990, a staggering 36 percent of sales revenues went into this category, and that proportion remained about the same for over a decade.[13] Note that this is two and a half times the expenditures for R&D.

These figures are drawn from the industry's own annual reports to the Securities and Exchange Commission (SEC) and to stockholders, but what actually goes into these categories is not at all clear, because drug companies hold that information very close to their chests. It is likely, for instance, that R&D includes many activities most people would consider marketing, but no one can know for sure. For its part, "marketing and administration" is a gigantic black box that probably includes what the industry calls "education," as well as advertising and promotion, legal costs, and executive salaries—which are whopping. According to a report by the non-profit group Families USA, the for-mer chairman and CEO of Bristol-Myers Squibb, Charles A. Heimbold Jr., made $74,890,918 in 2001, not counting his $76,095,611 worth of unexercised stock options. The chairman of Wyeth made $40,521,011, exclusive of his $40,629,459 in stock options. And so on.[14]

6. Rather than R&D costs, the biggest chunk of pharmaceutical industry costs comes from advertising and marketing (especially non-innovative drugs)

As Ref. [3] points out:

The industry fought, and won, a nine-year legal battle to keep congressional investigators from the General Accounting Office from seeing the industry’s complete R&D records. (See Section IV) Congress can subpoena the records but has failed to do so. That might owe to the fact that in 1999-2000 the drug industry spent $262 million on federal lobbying, campaign contributions and ads for candidates thinly disguised as "issue" ads. (See accompanying report, "The Other Drug War: Big Pharma’s 625 Washington Lobbyists")
...
The drug industry’s top priority increasingly is advertising and marketing, more than R&D. Increases in drug industry advertising budgets have averaged almost 40 percent a year since the government relaxed rules on direct-to-consumer advertising in 1997. Moreover, the Fortune 500 drug companies dedicated 30 percent of their revenues to marketing and administration in the year 2000, and just 12 percent to R&D. (See Section X)
As Ref. [1] points out:

...the magic words, repeated over and over like an incantation, are research, innovation, and American. Research. Innovation. American. It makes a great story.

But while the rhetoric is stirring, it has very little to do with reality. First, research and development (R&D) is a relatively small part of the budgets of the big drug companies—dwarfed by their vast expenditures on marketing and administration, and smaller even than profits...The prices drug companies charge have little relationship to the costs of making the drugs and could be cut dramatically without coming anywhere close to threatening R&D.
...

Drug industry expenditures for research and development, while large, were consistently far less than profits. For the top ten companies, they amounted to only 11 percent of sales in 1990, rising slightly to 14 percent in 2000. The biggest single item in the budget is neither R&D nor even profits but something usually called "marketing and administration"—a name that varies slightly from company to company. In 1990, a staggering 36 percent of sales revenues went into this category, and that proportion remained about the same for over a decade.[13] Note that this is two and a half times the expenditures for R&D.

7. The pharmaceutical industry is subsidized by highly preferential monopolistic laws (via astonishingly generous patent "laws") granted by the Governments they successfully lobbied

I am all for patents and intellectual property rights, but again, let us not forget that fostering innovation is only one of several roles that any Government has. I realize how naive this sounds in these times, but the goal of good Government is to benefit the majority of the people in the country - not the minority. Patent laws should be robust enough to stimulate innovation but not so egregious that there is a significant disincentive to really innovate or bring real benefits to the majority.

I admit I don't know yet where exactly the line should be drawn, but it is obvious that when an industry is ridiculously profitable and yet claims it has too high costs because of innovation/R&D and needs to raise prices or get Government subsidies to continue to operate, the line has been crossed. What I am highlighting here is that the current patent laws as they apply to the pharmaceutical industry are doing less to foster real innovation and doing a lot more to promote greed - and these laws must therefore be changed.

As Ref. [3] points out:

The industry fought, and won, a nine-year legal battle to keep congressional investigators from the General Accounting Office from seeing the industry’s complete R&D records. (See Section IV) Congress can subpoena the records but has failed to do so. That might owe to the fact that in 1999-2000 the drug industry spent $262 million on federal lobbying, campaign contributions and ads for candidates thinly disguised as "issue" ads. (See accompanying report, "The Other Drug War: Big Pharma’s 625 Washington Lobbyists")
As Ref. [1] points out:

...the industry is hardly a model of American free enterprise. To be sure, it is free to decide which drugs to develop (me-too drugs instead of innovative ones, for instance), and it is free to price them as high as the traffic will bear, but it is utterly dependent on government-granted monopolies—in the form of patents and Food and Drug Administration (FDA)–approved exclusive marketing rights. If it is not particularly innovative in discovering new drugs, it is highly innovative— and aggressive—in dreaming up ways to extend its monopoly rights.

And there is nothing peculiarly American about this industry. It is the very essence of a global enterprise...

The enormous benefits the pharmaceutical industry has obtained through over-friendly treatment in Congress (and the White House) starting with the ("pro-business") Reagan administration is further highlighted in Ref. [1].

These [industry-friendly] laws mean that drug companies no longer have to rely on their own research for new drugs, and few of the large ones do. Increasingly, they rely on academia, small biotech startup companies, and the NIH for that.[7] At least a third of drugs marketed by the major drug companies are now licensed from universities or small biotech companies, and these tend to be the most innovative ones.[8] While Bayh-Dole was clearly a bonanza for big pharma and the biotech industry, whether its enactment was a net benefit to the public is arguable.

The Reagan years and Bayh-Dole also transformed the ethos of medical schools and teaching hospitals. These nonprofit institutions started to see themselves as "partners" of industry, and they became just as enthusiastic as any entrepreneur about the opportunities to parlay their discoveries in-to financial gain. Faculty researchers were encouraged to obtain patents on their work (which were assigned to their universities), and they shared in the royalties. Many medical schools and teaching hospitals set up "technology transfer" offices to help in this activity and capitalize on faculty discoveries. As the entrepreneurial spirit grew during the 1990s, medical school faculty entered into other lucrative financial arrangements with drug companies, as did their parent institutions.

One of the results has been a growing pro-industry bias in medical research —exactly where such bias doesn't belong.
...
Starting in 1984, with legislation known as the Hatch-Waxman Act, Congress passed another series of laws that were just as big a bonanza for the pharmaceutical industry. These laws extended monopoly rights for brand-name drugs. Exclusivity is the lifeblood of the industry because it means that no other company may sell the same drug for a set period. After exclusive marketing rights expire, copies (called generic drugs) enter the market, and the price usually falls to as little as 20 percent of what it was.[9] There are two forms of monopoly rights—patents granted by the US Patent and Trade Office (USPTO) and exclusivity granted by the FDA. While related, they operate somewhat independently, almost as backups for each other. Hatch-Waxman, named for Senator Orrin Hatch (R-Utah) and Representative Henry Waxman (D-Calif.), was meant mainly to stimulate the foundering generic industry by short-circuiting some of the FDA requirements for bringing generic drugs to market. While successful in doing that, Hatch-Waxman also lengthened the patent life for brand-name drugs. Since then, industry lawyers have manipulated some of its provisions to extend patents far longer than the lawmakers intended.

In the 1990s, Congress enacted other laws that further increased the patent life of brand-name drugs. Drug companies now employ small armies of lawyers to milk these laws for all they're worth—and they're worth a lot. The result is that the effective patent life of brand-name drugs increased from about eight years in 1980 to about fourteen years in 2000.[10] [eRiposte emphasis]

V. PHARMACEUTICAL INDUSTRY TODAY: FACING A "PERFECT STORM"?
PERHAPS, PERHAPS NOT

Ref. [1] suggests that the U.S. prescription drug industry is apparently close to facing a "perfect storm" now:

If 1980 was a watershed year for the pharmaceutical industry, 2000 may very well turn out to have been another one—the year things began to go wrong. As the booming economy of the late 1990s turned sour, many successful businesses found themselves in trouble. And as tax revenues dropped, state governments also found themselves in trouble. In one respect, the pharmaceutical industry is well protected against the downturn, since it has so much wealth and power. But in another respect, it is peculiarly vulnerable, since it depends on employer-sponsored insurance and state-run Medicaid programs for much of its revenues. When employers and states are in trouble, so is big pharma.

And sure enough, in just the past couple of years, employers and the private health insurers with whom they contract have started to push back against drug costs. Most big managed care plans now bargain for steep price discounts.
...
State governments, too, are looking for ways to cut their drug costs.
...
Recently the public has shown signs of being fed up. The fact that Americans pay much more for prescription drugs than Europeans and Canadians is now widely known.
...
The industry faces other, less familiar problems. It happens that, by chance, some of the top-selling drugs —with combined sales of around $35 billion a year—are scheduled to go off patent within a few years of one another.[16]
...
Even worse is the fact that there are very few drugs in the pipeline ready to take the place of blockbusters going off patent. In fact, that is the biggest problem facing the industry today, and its darkest secret. All the public relations about innovation is meant to obscure precisely this fact. The stream of new drugs has slowed to a trickle, and few of them are innovative in any sense of that word. Instead, the great majority are variations of oldies but goodies—"me-too" drugs.

Of the seventy-eight drugs approved by the FDA in 2002, only seventeen contained new active ingredients, and only seven of these were classified by the FDA as improvements over older drugs. The other seventy-one drugs approved that year were variations of old drugs or deemed no better than drugs already on the market. In other words, they were me-too drugs. Seven of seventy-eight is not much of a yield. Furthermore, of those seven, not one came from a major US drug company.[18] (eRiposte emphasis)
...
To be sure, profits are still beyond anything most other industries could hope for, but they have recently fallen, and for some companies they fell a lot...Nevertheless, the industry keeps promising a bright new day. It bases its reassurances on the notion that the mapping of the human genome and the accompanying burst in genetic research will yield a cornucopia of important new drugs. Left unsaid is the fact that big pharma is depending on government, universities, and small biotech companies for that innovation. While there is no doubt that genetic discoveries will lead to treatments, the fact remains that it will probably be years before the basic research pays off with new drugs.
...
The hints of trouble and the public's growing resentment over high prices are producing the first cracks in the industry's formerly firm support in Washington. In 2000, Congress passed legislation that would have closed some of the loopholes in Hatch-Waxman and also permitted American pharmacies, as well as individuals, to import drugs from certain countries where prices are lower...But the bill required the secretary of health and human services to certify that the practice would not pose any "added risk" to the public, and secretaries in both the Clinton and Bush administrations, under pressure from the industry, refused to do that.

The industry is also being hit with a tidal wave of government investigations and civil and criminal lawsuits. The litany of charges includes illegally overcharging Medicaid and Medicare, paying kickbacks to doctors, engag-ing in anticompetitive practices, colluding with generic companies to keep generic drugs off the market, illegally promoting drugs for unapproved uses, engaging in misleading direct-to-consumer advertising, and, of course, covering up evidence. Some of the settlements have been huge. TAP Phar- maceuticals, for instance, paid $875 million to settle civil and criminal charges of Medicaid and Medicare fraud in the marketing of its prostate cancer drug, Lupron.[19] All of these efforts could be summed up as increasingly desperate marketing and patent games, activities that always skirted the edge of legality but now are sometimes well on the other side.

Given all that an idealist might think that the pharmaceutical industry would develop a genuine interest in reforming itself. As Ref. [1] points out, the answer so far is a resounding NO.

How is the pharmaceutical industry responding to its difficulties? One could hope drug companies would decide to make some changes—trim their prices, or at least make them more equitable, and put more of their money into trying to discover genuinely innovative drugs, instead of just talking about it. But that is not what is happening. Instead, drug companies are doing more of what got them into this situation. They are marketing their me-too drugs even more relentlessly. They are pushing even harder to extend their monopolies on top-selling drugs. And they are pouring more money into lobbying and political campaigns. As for innovation, they are still waiting for Godot.

The news is not all bad for the industry. The Medicare prescription drug benefit enacted in 2003, and scheduled to go into effect in 2006, promises a windfall for big pharma since it for-bids the government from negotiating prices. The immediate jump in pharmaceutical stock prices after the bill passed indicated that the industry and investors were well aware of the windfall. But at best, this legislation will be only a temporary boost for the industry. As costs rise, Congress will have to reconsider its industry-friendly decision to allow drug companies to set their own prices, no questions asked.

For the moment, as long as Congress and the White House are both controlled by Republicans, it is unrealistic to expect that the problem of high prescription drug costs is going to be alleviated. Indeed, given that the hidden goal of the egregious 2003 Medicare Bill was, arguably, to make it worse for most taxpayers and consumers - using intimidation and fraud as the preferred tactics to push this Bill through to benefit Big Pharma (particularly the numerous companies that have themselves been involved in some form of fraud or another) - any hope that prices won't go up even higher in the future is wishful thinking. Already, as Ref. [4] has pointed out, prices have gone up since the Medicare Bill was passed, largely (already) negating any supposed benefits from this Bill for consumers. So, in the immediate future, the Pharmaceutical industry looks to be in good shape to weather the "perfect storm".
[ASIDE: The excellent Center for American Progress has been covering the Medicare Bill scam and other issues relating to Medicare rather comprehensively here.]

VI. TENTATIVE CONCLUSIONS

High prescription drug prices (for brand-name drugs) in the U.S. have little or nothing to do with high R&D costs in the pharmaceutical industry. While it is worth applauding the pharmaceutical industry for bringing more and more life-saving drugs to the market, it is a fact that the industry is usually the most profitable one in the U.S. and continues to complain about profitability despite that. It is an industry that benefits substantially from Big Government, taxpayer subsidies and monopolistic laws, while reaping the ensuing windfall of record-high profits, unmatched by any other industry in most years. Thus, the main reason for high prescription drug prices is simply the age-old reason: greed. Needless to say, greed cannot be addressed until those who incentivise greed remain in power. It is as simple as that.

With the Republican Party controlling both houses of Congress and the White House, and ideological right-wingers in the party currently running the show, we can fully expect prescription drug prices (for brand-name drugs) to continue to keep going up, with marginal, if any, relief for consumers and seniors in the short-term. Unless conservatives with a conscience take over the reins of the Republican party, or power changes hands, persistent activism through educating and motivating the masses is likely to be the only approach that has some probability of bringing good results (namely lower and fairer prescription drug prices, that allow pharmaceutical companies to make good but reasonable profits).