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MERCK AND ROCHE SPENT NEARLY $800 MIL. COMBINED ON R&D IN 1984, EXECS TELL WAXMAN HEALTH SUBCMTE, IN DEFENSE OF PRICE INCREASES

Executive Summary

Merck and Roche combined R&D budgets for 1984 totaled nearly $800 mil., the companies told Rep. Waxman's (D-Calif.) Health Subcmte. at a July 15 hearing on Rx drug price increases. Maintaining that recent price increases have been necessary to support accelerated R&D spending, Merck Chairman John Huck and Roche VP-Pharmaceuticals Herbert Conrad told Chairman Waxman their companies spent $400 mil. and $480 mil.; respectively, last year. Conrad explained that 80% ($384 mil.) of Roche's $480 mil. worldwide R&D budget was allocated to Rx drug development. American Home Products (AHP) Vice President George DeMott, who was also called to testify before the subcmte., said that AHP spent approximately $200 mil. on R&D in 1984, an amount equal to two-thirds of AHP's after-tax earnings for the year. Waxman called the pharmaceutical execs to the Hill to publicly chastise the industry for continuing to raise prices at a time when Congress has provided it with incentives such as an R&D tax credit and patent restoration. In the camera-packed hearing room, Waxman assailed the brandname industry for increasing Rx drug prices an average 56% since January 1981, a rate, he emphasized, "more than double the CPl (Consumer Price Index)." Challenging industry's claims that "increased R&D expenditures" necessitate the price increases, Waxman asked each of the three mfrs. to provide him with figures on "what percentage of the increased cost consumers have to pay goes into R&D increases." Waxman charged that a significant percentage of the price increases go directly to profits. Citing Census Bureau figures showing that in 1984, 13.2% of every sales dollar in the pharmaceutical industry went to profits, Waxman asked: "Doesn't that amount to a pretty substantial increase in profits? "At the same time you may be increasing R&D costs, but you are increasing costs to the consumer far in excess of what you are increasing R&D," he maintained. The Health Subcmte. chairman accused the industry of padding prices and profits "at the expense of. . .the elderly and the poor who are paying out of pocket, increased prices for drugs not reimbursed by anyone else." Waxman cited the examples of two elderly women who had testified earlier in the hearing that continued price increases are making it more and more difficult to obtain the numerous lifeprolonging drugs they need on their small fixed incomes. Pointing out that these are the types of individuals hurt most by the rising cost of drugs, Waxman charged: "Aren't you gouging them?" Merck's Huck took objection to Waxman's assertions, pointing out that his company has been "increasing [its] research expenditures at a rate eight times faster than our price increases." Using a chart plotting Merck's price increases against the CPI since 1968, Huck said that Merck prices "have lagged the inflation that has dominated our economy over much of the past decade, and they Between 1967 and 1973, consumer prices increased 40%, "compared to no increases on Merck products," Huck said. "For the period 1973 through 1981, our prices substantially lagged the Consumer Price Index increases. In the past four years, our prices have increased somewhat faster than the CPI. However, there still remains a very substantial gap between the cumulative increase in consumer prices overall and prices charged by MS&D." Huck maintained that Merck's pricing strategy has saved the American public money because, had the company "simply tied its price increases to the CPI increase, our customers would have had to pay $6 bil. more for Merck drugs." The need for increased prices for newer drug products has been brought about in part due to the Waxman/Hatch law, which has reduced the market shares of older products, Huck said. "One result of the Drug Price Competition Act and the cost containment movement is that the share-of-market of our older products will necessarily shrink in the face of the lower priced alternatives becoming available upon patent expiration," Huck stated. As examples, he cited "the case of indomethacin, [for] which generic competition became available a year ago, and. . . has already captured more than 30% of the prescription market. In the case of hydrochlorothiazide, a diuretic, and amitriptyline, an antidepressant, the generic market holds more than 50% of total Rxs. "As a result, we of the research-intensive part of the industry are more dependent than ever on innovative new products to maintain our economic growth and success," Huck said. "In summary, Mr. Chairman, competition in the long run works. The normal forces of competition -- - spurred by the Drug Price Competition Act of 1984 -- - are working well." AHP's DeMott noted that in the last five years, "our average price increase has been 8.8%, which is really not that much ahead of the CPI." He added: "For that same period, our research has doubled, and in 1985, we're projecting a 23% increase in our research budget." PMA member firms "doubled their R&D investments in the U.S." between 1980 and 1984, association President Gerald Mossinghoff told the subcmte. He said that in 1985, "the industry will spend more than $4 bil. worldwide on pharmaceutical R&D, about four times the amount spent 10 years ago." Waxman also criticized the brandname mfrs. for keeping alive the argument of whether generics are equivalent to pioneer products. When PMA President Mossinghoff declined to answer Waxman's question as to whether the American public can assume that generic drugs are safe and effective, the chairman accused him of "covering up for the kind of propaganda war that's now going on by many of the brandname companies who are trying to discredit their competitors." Waxman said he considers such campaigns "quite despicable because the reality is that those drugs are approved by FDA as being equivalent drugs. What some of these companies are trying to do is to continue a war between brandname and generic drug companies that should be over. Price competition, that's fine; but the war over whether they are equivalent or not. . .should be a decided issue," Waxman admonished. Waxman reminded the pharmaceutical mfrs. that in the lobbying for the patent restoration law, they told Congress that the increased incentives would put downward pressure on prices. He cited Feldene as an example of a product whose price was raised despite the fact it was given additional patent protection. "The price increased by 12% in 1983, and 1984," Waxman said. "Then after they got their four additional years protection, finally they raised their prices another 12% in June, 1985."

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