Well, I wrote a paper for class recently that turned out quite well, so I thought I’d post it here. It has to do with the nastiness that is the pharmaceutical industry, and although there is so much more that I could dicuss about it, the question posed to me for the paper was “Would facilitating more generic drug manufacturing mean less cutting edge research by large pharmaceutical companies?”
BIG, BAD, PHARMA: The Myth of Research and Development and the Threat of Generic Drug Manufacturers
Drugs are expensive. In 2004, Canadians spent $18 billion dollars on prescription-only drugs (in contrast, spending on services provided by doctors was $16 billion). In 2003, prescription drug costs reached $180 billion in the United States. Why are we spending so much money on drugs?
The answer to this question depends on to whom the question is directed. Pharmaceutical companies would have us believe that prescription drugs cost so much because the price helps to pay for the innovative research they conduct in order to find new treatments for life-threatening illnesses. This paper will show that this claim is a myth perpetuated by the group of large pharmaceutical companies colloquially known as Big Pharma in order to disguise the real reason drug costs are so high – namely, to preserve big profits.
Why ARE We Spending So Much on Drugs? A Simple Answer
The reason we are spending so much money on drugs is that drugs themselves are expensive. A prescription for the antidepressant Paxil® at a 20 mg dose once per day for one month filled by the online pharmacy CanadaDrugs.com costs $61.54 CDN. Multiply that by 12 months, and the cost for the year is $738.48 CDN. The same prescription filled at U.S.-based online pharmacy RxUSA.com (advertising “deep” discounts), totals $86.06 USD, putting the yearly bill at $1032.72 USD. Drug costs in the U.S. are on average one-third to one-half more expensive than in Canada, because the U.S. government does not regulate drug prices. In Canada, the Patented Medicine Prices Review Board regulates prescription drug prices in a number of ways to prohibit excessive pricing.
Why Are Drugs So Expensive? Big Pharma’s Answer
Big Pharma says the reason that drugs are so expensive is because they have to fund the cutting-edge research and development (R&D) that results in new drugs that save lives. The Pharmaceutical Research and Manufacturers of America (PhRMA) web site declares their slogan to be “Disease is our enemy. Working to save lives is our job.” A quote on the home page at this site from PhRMA president Billy Tauzin claims, “We are – as an industry – focused on one thing: the patient.” Sounds great, doesn’t it? Let’s take a closer look.
PhRMA is a U.S. governmental lobby group representing Big Pharma. Their mission is “to conduct effective advocacy for public policies that encourage discovery of important new medicines for patients by pharmaceutical/biotechnology research companies.” This is the rhetoric employed by Big Pharma to promote its products and its image as being dedicated to the public good.
Big Pharma’s Dirty Little Secret: The Truth about R&D
This rhetoric leads the public to believe that Big Pharma devotes a large portion of profits to innovation, research and development of new drug therapies. However, a deeper look at drug company expenditures illuminates the discrepancy between what pharmaceutical companies espouse and what they practice. The largest expenditure for drug companies is not research and development, as Big Pharma would have us believe, but a somewhat ambiguous category called “marketing and administration”. This category consumes 36% of drug company profits on average, while R&D gets a mere 14%. Marketing and administration costs make up two and a half times more of Big Pharma’s expenditures than research and development.
Let’s look at how many new drugs are actually being produced by drug companies. After all, this is the important thing, right? From 1998 – 2002, the U.S. Food and Drug Administration approved 415 new drugs, only 133 of which were new molecular entities – truly innovative drugs. The rest were all variations of existing drugs. These variations are Big Pharma’s main business, because testing an already existing drug for a new indication and/or changing the delivery system of the drug (pills to capsules, time-released formulas, suspensions, etc.) is a lot faster and less expensive than the creation of a new molecular entity. For example, Eli Lilly, the manufacturers of Prozac®, recently brought out a “new” drug called Sarafem®. Sarafem is exactly the same drug as Prozac® (Fluoxetine Hydrochloride), but instead of being packaged in green-and-yellow capsules, it is packaged in pretty pink-and-purple capsules, and is indicated for PMDD (Premenstrual Dysphoric Disorder), a brand-new category of extreme PMS that was never a recognized disorder until the arrival of Sarafem®. (The sales and marketing rights to Sarafem® was recently purchased by drug company Warner Chilcott for $295 million.) This is the daring innovation drug companies claim are responsible for high prescription drug prices.
Many of these new drugs are indicated for managing – not curing – chronic rather than life-threatening illnesses, because drug companies can’t make ongoing profits from patients who are cured, or who have a low chance of surviving. In fact, there are special tax-breaks in some countries for drug companies that produce so-called “orphan drugs”, drugs that have such a small target market that the cost of producing the drug and bringing it to market could not be recovered through sales of that drug. Similar legislation is not found in Canadian law, but exists in the United States, Japan, Australia, Singapore, and the European Union. Advocacy groups representing Canadians with rare illnesses are pushing for a federal Orphan Drug Policy that would guarantee funding for research into treatment for rare illnesses and grant financial breaks to drug companies who develop these drugs. The worry is that if drug companies don’t have a financial incentive to research and develop new therapies for rare illnesses, they simply won’t. So much for the claim that saving lives is Big Pharma’s main priority. Further, drug companies are not doing all their own research and development work, but rely heavily on publicly-supported research institutions, such as small biomedical technology firms and universities. It is charitable to say that all this evidence shows Big Pharma’s claim that high prices are necessary to support the high costs associated with research and development is misleading.
Drug Regulation and Patent Protection: The Art of the Deal
The politics of the pharmaceutical industry is extremely complex. Major pharmaceutical companies have long arms and deep pockets, and contrary to what advertising campaigns may say, pharmaceutical companies are interested in one thing and one thing only: profits. Pharmaceutical companies are responsible to their shareholders, not to the public to whom they peddle their wares. It is the responsibility of government to protect the public, not that of the pharmaceutical companies, and to that extent, government has levied legislation at Big Pharma that aims to make them comply with standards of public safety.
Governmental regulatory bodies call the shots when it comes to legalizing drugs. Each of these governing bodies has its own set of guidelines and rules, and if drug companies do not comply, drugs are not approved for distribution and marketing. In both the United States and Canada, regulatory bodies require clinical research trials (CRTs) to ensure the safety and efficacy of new drugs, and both countries also allow marketing exclusivity to companies in the form of patents.
Patent law is quite complex when it comes to pharmaceuticals, and Big Pharma is very adept at manoeuvring the laws to their benefit. Patents are usually obtained before clinical testing of a new drug begins in order to maintain confidentiality regarding the drug’s specific chemical makeup. Once a patent for a pharmaceutical is granted, exclusivity is granted to the patent holder for 20 years in both the U.S. and Canada.  In the U.S., separate exclusivity is given by the FDA, meaning generic forms of the same drug will not be approved for a period of time varying from five years for new innovative drugs to seven years for orphan drugs and an extra three for changes in drugs that are already approved.
However, clinical testing can take several years, and the drug cannot be sold during this time until it is shown to be safe and effective. The time spent on CRTs eats into a drug’s marketable patent life. After a patent’s 20-year life is up, other companies are permitted to manufacture and market the same product. In the pharmaceutical industry, this means less-expensive generic forms of prescription brand-name drugs start to appear on the market, which drastically reduces Big Pharma’s profits. In response, drug companies employ two different methods to extend the life of their products’ patent: first, they try to speed up CRTs, and second, they try to extend the patent.
Speeding up clinical research trials often means truncating the process to one or two trials instead of doing full trials. Often this process is granted conditionally upon the completion of post-marketing trials, or trials that are ongoing past the release date of the drug. This usually involves patient monitoring by physicians rather than costly random-control studies needed to bring a drug to market. This allows the drug company to discover new uses for drugs, which comes in useful for expanding the drug’s market. This also allows for the discovery of side-effects that were not evident in CRTs, and can result in drugs being pulled from the market (Celebrex® is a recent example).
Extending the patent on a drug is a complicated dance that involves extensive legal manoeuvring and is primarily aimed at excluding generic drug manufacturers from producing cheaper versions of brand-name drugs. Generic drug manufacturers do not need to perform the same extensive clinical trials on medications – they simply have to prove their drug is the same as one that has already been approved. However, in the United States, a generic drug company must give notice to the brand-name company that the patent on a particular drug is no longer relevant. The brand-name drug company then may launch a lawsuit for patent infringement, which prevents the FDA from approving the generic drug for an extra 30 months – almost 3 years! This gives Big Pharma plenty of time to sell its drug, market it for new uses, and apply for new patents on minor variations to the drug. Not only do they employ this strategy, but Big Pharma also uses other strategies to extend the life of a drug’s exclusivity, such as staggering patents on a drug, and testing drugs in children (this gives an extra 6 months of FDA exclusivity), which is done for most medications, including those intended to treat adult diseases such as hypertension. In addition, Big Pharma employs its lobby groups, most notably PhRMA, to launch public-awareness campaigns that question the safety of generic drugs.
Big Pharma’s Patents in a Twist Over Canada
Since the signing of the North American Free Trade Agreement (NAFTA), and the World Trade Organization’s Trade-Related aspects of Intellectual Property Rights (TRIPS), patents are supposed to be honoured between the partners, no matter where the patent originated.  However, Canada has not complied with this part of the agreement in regards to pharmaceuticals, and Big Pharma is not pleased. In fact, Canada has been placed on PhRMA’s watch list as a “priority watch country” for approving generic drugs at the end of the life of a patent held in Canada, rather than waiting for the results of the legal shenanigans Big Pharma’s lawyers perform to extend patents in the U.S. So far, Canada has been unrepentant on this topic, and the generic drug business in Canada is flourishing. This has resulted in cross-border drug-shopping on the part of U.S. citizens (primarily seniors), which is illegal in the U.S. but certainly understandable considering the much higher prices on prescription drugs in the U.S. In retaliation, the FDA published a report in 2004 showing that generic drugs in the United States were less expensive than drugs bought in Canada, and going so far as to question the safety of purchasing drugs in Canada by insinuating that drugs produced in Canada are substandard.
The Pharmaceutical industry is a complicated topic, and this paper has presented a lot of information about the pharmaceutical industry. In conclusion, I want to draw the reader’s attention to two main points. First, drug companies spend two and a half times the amount of money on marketing and administration as they do on research and development, despite their claim that high R&D costs are driving high drug prices. Second, drug companies are mainly interested in protecting their profits, and they spend millions of dollars in legal fees to do it while patients struggle to afford expensive medications. This nonsense needs to stop. Allowing generic drug manufacturers to produce good quality drugs at a fraction of the cost to the consumer does not need to mean that cutting-edge research and development of new drugs on the part of Big Pharma would suffer. There is plenty of profit left at the end of the day to pay for marketing, administration, and the exorbitant salaries of CEOs (Charles A. Heimbold, Jr., the former chairman and CEO of Bristol-Myers Squibb made $74,890,918 in 2001, not including his $76,095,611 in unexercised stock options.) After all, in 2002, the combined profit for the 10 pharmaceutical companies in the Fortune 500 ($35.9 billion) was more than the other 490 companies put together ($33.7 billion). The money for R&D is most definitely there. Enabling generic drug manufacturers to compete in the market might actually have the effect of forcing Big Pharma to walk their talk and start coming up with innovative new medications in order to continue to maintain their large profits.
 Morgan, Steve, “Commentary: Canadian Prescription Drug Costs Surpass $18 billion”. Canadian Medical Association Journal, May 10 2005; 172(10). Accessed March 6, 2006 at http://www.cmaj.ca/cgi/content/full/172/10/1323>
 “Health Insurance Cost”, © 2004 National Coalition of Health Care website. Accessed March 6, 2006 at http://www.nchc.org/facts/cost.shtml>
 Where possible, this paper will make a distinction between the industry in Canada and in the United States. However, since most large drug companies are multi-national, it is difficult to make this distinction, and most data available is U.S.-based. In some cases, I found that access to information specifically in a Canadian context is extremely difficult to obtain.
 “Chapter 1: Excessive Price Guidelines, Section 6: Excessive Price Tests” Patented Medicine Price Review Board. Accessed March 6, 2006 at http://www.pmprb-cepmb.gc.ca/english/view.asp?x=230&all=true>
 Pharmaceutical Research and Manufacturers of America website. Accessed March 6, 2006 at http://www.phrma.org/>
 Pharmaceutical Research and Manufacturers of America website. Accessed March 6, 2006 at http://www.phrma.org/>
 Pharmaceutical Research and Manufacturers of America website, “About PhRMA”. Accessed March 6, 2006 at http://www.phrma.org/about_phrma/>
 Angell, Marcia. 2004. The Truth About the Drug Companies: How They Deceive US and What To Do About It. New York: Random House. Pg 10-11
 Ibid pg 54-55
 Warner Chilcott website, “The Company”. Accessed March 6, 2006 at http://www.warnerchilcott.com/company/index.php>
 This is not to say that drug companies are not producing any new drugs that help to treat illnesses and save lives. It’s just that these are few and far between.
 Ibid pg 55-56
 Ibid pg 50-51
 “Towards a Canadian Orphan Drug Policy: Guiding Documents,” prepared by the Canadian Organization for Rare Disorders. Accessed March 6, 2006 at http://www.fragile-x.ca/advocacy%20files/Canada’s%20Orphan%20Drug%20Polic%20y%200805.pdf >
 Ibid, pg 56-57
 Ibid pg 28
 United States Patent & Trademark Office website. Accessed March 6, 2006 at http://www.uspto.gov/web/offices/pac/doc/general/index.html>
 Department of Justice – Patent Act. Accessed March 6, 2006 at http://lois.justice.gc.ca/en/P-4/209129.html#rid-209162>
 Ibid, 177-178
 Ibid, pg 28
 Ibid pg 29
 Ibid 179
 Ibid pg 179-180
 Ibid pg 183
 NAFTA Chapter 17, Article 1709. Accessed March 6, 2006 at http://www.dfait-maeci.gc.ca/nafta-alena/chap17-en.asp?#Article1709>
 “Overview: The TRIPS Agreement,” World Trade Organization website. Accessed March 6, 2006 at http://www.wto.org/english/tratop_e/trips_e/intel2_e.htm>
 Ibid pg 220
 “Study: U.S. Generic Drugs Cost Less Than Canadian Drugs,” 2004, Food and Drug Administration. Accessed March 6, 2006 at http://www.fda.gov/fdac/features/2004/404_generic.html>
 Ibid pg 12
 Ibid pg 11
1. Morgan, Steve, “Commentary: Canadian Prescription Drug Costs Surpass $18 billion”. Canadian Medical Association Journal, May 10 2005; 172(10). Accessed March 6, 2006 at http://www.cmaj.ca/cgi/content/full/172/10/1323>
2. “Health Insurance Cost”, © 2004 National Coalition of Health Care website. Accessed March 6, 2006 at http://www.nchc.org/facts/cost.shtml>
3. “Chapter 1: Excessive Price Guidelines, Section 6: Excessive Price Tests” Patented Medicine Price Review Board. Accessed March 6, 2006 at http://www.pmprb-cepmb.gc.ca/english/view.asp?x=230&all=true>
4. Pharmaceutical Research and Manufacturers of America website. Accessed March 6, 2006 at http://www.phrma.org/>
5. Angell, Marcia. 2004. The Truth About the Drug Companies: How They Deceive US and What To Do About It. New York: Random House.
6. Warner Chilcott website, “The Company”. Accessed March 6, 2006 at http://www.warnerchilcott.com/company/index.php>
7. “Towards a Canadian Orphan Drug Policy: Guiding Documents,” prepared by the Canadian Organization for Rare Disorders. Accessed March 6, 2006 at http://www.fragile-x.ca/advocacy%20files/Canada’s%20Orphan%20Drug%20Polic%20y%200805.pdf>
8. United States Patent & Trademark Office website. Accessed March 6, 2006 at http://www.uspto.gov/web/offices/pac/doc/general/index.html>
9. Department of Justice – Patent Act. Accessed March 6, 2006 at http://lois.justice.gc.ca/en/P-4/209129.html#rid-209162>
10. NAFTA Chapter 17, Article 1709. Accessed March 6, 2006 at http://www.dfait-maeci.gc.ca/nafta-alena/chap17-en.asp?#Article1709>
11. “Overview: The TRIPS Agreement,” World Trade Organization website. Accessed March 6, 2006 at http://www.wto.org/english/tratop_e/trips_e/intel2_e.htm>
12. “Study: U.S. Generic Drugs Cost Less Than Canadian Drugs,” 2004, Food and Drug Administration. Accessed March 6, 2006 at http://www.fda.gov/fdac/features/2004/404_generic.html>
*please note: this paper may not be used in full or in part in any form without the express permission of the author*