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Executive Summary

An HHS study of pharmaceutical industry "tax credits for therapeutic breakthroughs vs. therapeutic duplicates" is being sought by Senate Aging Committee Chairman Pryor (D-Ark.) in an April 10 letter to HHS Secretary Sullivan. "While the industry minimizes the fact that they produce 'me- too' drugs, or therapeutically interchangeable drug products, it is well-known that drug manufacturers make minor modifications to already-known therapeutic compounds to compete in lucrative therapeutic markets," Pryor asserted. "They then spend enormous sums of money in promotion and marketing to create 'perceived differences' between products." The consumer, Pryor contended, "pays for these 'me-too' drugs" in three ways -- federal tax subsidies, high prices to recoup marketing costs and "'opportunity costs'" of research not conducted on "cures for diseases such as cancer and Alzheimer's." At a March 19 Senate Finance Committee hearing on the HHS budget, Pryor had reiterated his concern about prescription drug pricing and suggested the study to Sullivan. The letter formalizes Pryor's request. Three other study areas are listed: use of the R&D credit to offset marketing costs, marketing of drugs developed with federal assistance, and Sec. 936 tax credits. Overall, Pryor advised the secretary, the study's purpose is to "determine the total nature and value of tax write-offs, incentives and other subsidies provided to the pharmaceutical industry by the U.S. government"; determine how the industry uses these incentives and subsidies; and evaluate whether these policies "need to be revised to meet the current needs of the American health care system." Also, the study should consider "the value of the products reduced . . . and the prices charged for these products relative to the generous subsidies and grants." Does the return "justify" the continuation of these federal benefits, Pryor asked. Pryor's letter does not set a specific turnaround time for the study. Regarding promotional costs, Pryor asked: "To what extent do individual companies use the research and development tax credit to 'write-off' marketing research? In addition, what are the public policy implications of allowing drug companies to use the research tax credit to write-off the expenses of a study whose sole purpose was to include important and influential health care professionals in clinical trials so that they become familiar with the use of a particular company's product?" Pryor also asked Sullivan to investigate issues related to drugs for which development, at least in part, grew out of research conducted under federal grants or in federal labs such as the National Institutes of Health but were subsequently commercialized. "Are drug companies able to reap the benefits both of subsidized research and then additional tax credits on this government supported research?" Pryor's letter asks. "In addition, it is unclear why drug products that are in whole or part subsidized by federal research dollars are not patented by the federal government or at the least, co-licensed by the federal government." Pryor cited the example of AZT (Burroughs Wellcome's AIDS drug Retrovir), as an "excellent case in point" where a federal agency had an "eminent research role" but the product's "patent is now wholly owned by a private pharmaceutical manufacturer." In fact, NIH is seeking patent recognition for early AZT work by the National Cancer Institute ("The Pink Sheet" March 25, T&G-1). Regarding the Sec. 936 credit for manufacturing plants located in Puerto Rico and the Caribbean Basin, Pryor advised that the HHS study should "detail" tax credit amounts "claimed by each pharmaceutical company over the past 10 years" plus the total cost to the federal government. It asks in addition "what positive benefits accrue" to the consumer, "given that there is little evidence" that lower prices result from manufacturing in Puerto Rico. During Finance Committee debate in 1990 on authorizing a referendum in Puerto Rico on self-determination, Pryor had suggested that perhaps the credit should be tied more specifically to the amount of wages firms pay in the commonwealth ("The Pink Sheet" Aug. 6, p. 5).

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