Drug Bust: Killing the golden goose - pharmaceutical price controls - Industry Overview

In an unprecedented series of 60-second radio spots in Michigan last fall, the head of Pfizer's Ann Arbor research labs told listeners about the wonders and woes of pharmaceutical research. David Canter's scientists had objected to being cast as villains by Michigan politicians railing against the high costs of drugs, so he took to the airwaves to explain the realities of what it costs to produce pharmaceuticals. He made a compelling case -- pointing out, for example, that dry holes are all too common in research: "Just one out of every 25 drugs we try to develop succeeds, and the one success has to pay for the 24 failures."

Betsy Raymond, a spokesman for Pfizer, further points out that the company's researchers "don't spend 15 years developing a medicine so that people who need it can't have it." Drug companies don't want to spend an average of $800 million to bring a new drug to market only to see a generic-drug company offer a cheaper rip-off, or face price controls that would prevent them from recouping their enormous investment.

In the new year, however, when Congress will debate whether to add a drug benefit to Medicare, the pharmaceutical industry will be up against a very hostile audience. Polls have found that almost 80 percent of the public supports price controls on drugs, while a majority believes that people have a right to affordable drugs, that prices are too high, and that price controls would have no negative consequences. Given their constituents' conviction that they can receive something for nothing, politicians are -- unsurprisingly -- willing to deliver what the public seemingly wants.

The Senate has already passed legislation to allow the re-importation of U.S.-made drugs from price-controlled Canada. Other measures against the drug companies are being advanced in both the House and the Senate. State lawmakers, too, are doing their best to cripple drug innovation: Republicans in New York are touting a bill that would make it a felony to sell any drug in the state at a higher price than any other charged worldwide.

The drug companies recently even had to fight off a serious threat from the putatively friendly Bush administration: During World Trade Organization negotiations in Geneva in November, it seemed that U.S. Trade Representative Robert Zoellick was going to acquiesce to a popular proposal that would effectively have stripped patent protections from U.S. companies for virtually any drug. Last year, the WTO agreed to allow poor countries to ignore drug patents when faced with epidemics like HIV. (Of course, largely owing to the assault on patents for AIDS drugs, the number of these drugs in development has fallen by 33 percent over the past five years.) This year, a majority of countries wanted to extend the patent grab to any self-declared epidemic: Egypt argued it should include erectile dysfunction. Having crippled their own drug industries, these countries are determined to do the same to the U.S. companies now responsible for the development of more major new drugs than the rest of the top ten industrial countries combined. A drug-company insider is convinced that the industry was spared the devastating blow only because a negative Wall Street Journal editorial was handed to one of the American negotiators -- in the nick of time -- over breakfast in Geneva.

The industry's case against crippling new regulations is compelling, but its overall P.R. campaign so far is failing. There appears to be a backlash against those ubiquitous, gauzy ads that feature older couples happily strolling along the beach owing to some new prescription drug that has boosted their well-being; foes of the industry are asking why money is devoted to ads instead of toward reducing drug prices. And the issue-oriented ads aren't faring much better: One industry lobbyist in Washington sees them as a naive attempt merely to avoid being demonized as the tobacco industry has been. The tobacco industry, of course, was vilified because it had a dangerous product for which it didn't charge enough. The pharmaceutical industry is in a different situation entirely: It is accused of having a terrific product that it should be willing to give away.

The tobacco industry does, however, offer valuable lessons for the drug companies on how to fight back. Four years ago, when Congress was primed to pass huge new tobacco taxes and saddle the industry with new liability and regulations, they fought back with a $45 million ad campaign that killed the legislation by labeling it a big-government, high-tax monstrosity. The pharmaceutical industry's frustrated supporters would like to see a similar attempt to educate the public now, with such lines as, "Price controls are hazardous to your health," "There is no such thing as a free cure," and "We're not expensive, disease is expensive."

Grace-Marie Turner, president of the Galen Institute, explains that although drug costs represent only 9 percent of health spending, they wind up being a lightning rod for overall costs because the prices are so visible in over-the-counter purchases. Another factor is that outpatient spending on prescription drugs almost doubled between 1990 and 1998 -- but surveys indicate that higher prices for existing drugs are responsible for only a quarter of the increased expenditures. Drugs account for a larger share of health spending because more people are using them, and because there has been a shift to newer, more expensive drugs.