REP. WAXMAN SEES $2 BIL. YEARLY IN POTENTIAL Rx DRUG SAVINGS FROM OTA ESTIMATE OF "EXCESS PROFITS"; R&D MAY DROP BUT INDUSTRY WILL ADJUST, OTA’s WAGNER SAYS
Annual U.S. prescription drug expenditures could be reduced by $2 bil. by eliminating "excess" pharmaceutical drug profits, Rep. Waxman (D-Calif.) believes. The $2 bil. in annual "excess" profits is calculated from a study of drug industry R&D costs by the Office of Technology Assessment. The figure, which Waxman based on industry sales figures for 1991, represents what OTA called the "surplus" return on investment of 4.3% per drug achieved annually by drug manufacturers. Waxman made clear his intent to develop legislation to reduce pharmaceutical costs at a Feb. 25 press conference to release the report. "There are two ways to reduce prices," he said: "We can impose price controls, or we can institute measures to make market forces work." Although the congressman said he currently does "not know what the right" legislative approach is, he contended that "the status quo can continue no longer." The OTA study "found that each drug that it examined yielded a profit of at least $36 mil. more than the profit incentive needed to raise the money for R&D," Waxman noted. The "excess" profit "translates into 4.3% of sales," he said, and "represents roughly a yearly, additional charge of $2 bil. to the nation's health care system." The 354-page study report, entitled "Pharmaceutical R&D: Costs, Risks and Rewards," was requested in 1989 by Reps. Dingell (D-Mich.) and Waxman and endorsed by Sen. Metzenbaum (D- Ohio). Although pharmaceutical R&D "is a costly and risky business," the report maintains, "the financial rewards from research and development have more than offset its costs and risks." OTA said the "surplus" annual profits, equivalent to 4.3% of sales, represent the return achieved by the drug industry over and above the normal profit margin that would be adequate to cover all costs and provide continued investments in a high-risk, research- intensive industry. The average new chemical entity introduced in the U.S. in the early 1980s "returned, net of taxes, at least $36 mil. more to its investors than was needed to pay off the R&D investment," according to the report. "This surplus return amounts to about 4.3% of the price of each drug over its product life." OTA further estimates that sales returns from NCEs approved between 1984-1988 "suggest that the revenue curve from new drugs continues to steepen in real terms," (For PMA's response to the OTA conclusions, see following story). "Over a longer span of time, economic returns to the pharmaceutical industry as a whole exceeded returns to corporations in other industries by about two to three percentage points per year" during the period 1976-1987, after adjusting for differences in risk among industries, the report states. "A risk- adjusted difference of this magnitude is sufficient to induce substantial new investment in the pharmaceutical industry." Waxman said the 2%-3% in "extra profit" attained by the drug companies over the profits of other industries with comparable risk "can and should be used to reduce the prices of prescription drugs." The California Democrat said Congress also could concentrate on industry marketing expenditures to find potential savings. Waxman noted that OTA estimates that the industry spends 22% of total sales on marketing. Waxman said the amount, about $10 bil. annually, is "approximately $2 bil." more than drug companies spend on R&D and represents "money that could be used to cut drug prices." The report actually estimates marketing costs as a scale described in a decreasing percentage of sales: 100% in the first year of marketing; 50% in the second year; 40.9% in years three through nine; and 6.5% in years 10-20. Waxman maintained that further savings could be obtained from the R&D the industry invests each year in me-too drugs. OTA estimated that 42% of the $8 bil. in annual R&D expenditures go to me-too products. The congressman contended that the report "illustrates...that there is a lot of room for reducing the cost of drugs in this country without doing any harm to the research and development" on new products, "which we want to encourage." He noted that he will "strongly support having prescription drugs as a benefit available to everybody" through health care reform. However, he added, "if we're going to make prescription drugs available under a health care benefit, we've got to make sure we're not spending what the drug companies want us to spend because that expenditure alone will bankrupt the country." Instead, Waxman said, the country must "provide the benefit and a way to control costs so that we can afford to cover prescription drugs." The OTA report maintains that an increase in the 1980s in health insurance plans that cover prescription drugs is partly responsible for the increases in drug prices and profits during the decade. Noting that "the number of people with prescription drug coverage increased and [that] the quality of coverage improved" in the 1980s, the report points out: "Health insurance makes patients and their prescribing physicians relatively insensitive to the price of a drug." The report notes that insurance plans with drug benefits "have almost no power to influence prescribing behavior or to control the prices they pay for patented drugs" but that HMOs and hospitals force manufacturers of therapeutically similar products to engage "in more vigorous price competition." Consequently, OTA said, "if price competition among therapeutically similar compounds became more common, the directions of R&D would change and the total amount of R&D would probably decline." The OTA report said it is "hard to judge" whether "a decrease in R&D would be good or bad for the public interest." The report adds that "it is impossible to know whether today's level of pharmaceutical R&D is unquestionably worth its costs to society." Regarding the current interest in government-researched drug products, OTA said the National Institutes of Health and other Public Health Service laboratories "have no mechanism to protect the public's investment in drug discovery, development and evaluation." The report contends that the agencies "lack the expertise and sufficient legal authority to negotiate limits on prices to be charged for drugs discovered or developed with federal funds" (see related story on CRADAs, p. 11). The full after-tax cost of R&D for the average drug, including all financing costs and allowing for inflation, is "roughly $194 mil.," the report asserts. The figure is in the ballpark of the $231 mil. estimate commonly cited by the Pharmaceutical Manufacturers Association. OTA Project Director Judith Wagner predicted at the press conference that the "competitive and resilient" drug industry will successfully adapt to changes in the health care system by becoming more price sensitive. Wagner noted that physicians generally are ignorant about the prices of the drug products they prescribe, as are patients whose pharmaceuticals are covered by insurance plans. Maintaining that companies do not compete on price but through marketing battles to sell prescribers on the advantages of their products, she said: "When and if the market for drugs begins to send signals to the industry that price matters too, the industry will respond." She pointed out that companies currently compete on price for price-sensitive buyers such as hospitals and HMOs. However, she said, "when and if the [entire] market for drugs does become more price competitive, we may also see a decline in the total amount of R&D" invested by the industry "and a change in its research priorities." Nonetheless, Wagner suggested that "this change may not be one for the worse." The "broken market" in the U.S. currently rewards "too much R&D" by sanctioning the highest prices to the newest products, including those representing "marginal" therapeutic advances.
Sign in to continue reading.
New to Pink Sheet?
Start a free trial today!
Register for our free email digests: