TIME: Almanac 1993/TIME Almanac 1993.iso/time/010890/0108206.000

Text File | 1992-08-28 | 14.4 KB | 291 lines

                ¼è                                                            BUSINESS, Page 56

The Price Isn't Right


Drug firms start to feel the heat as the cost of medication
spirals

By CHRISTINE GORMAN -- Reported by Mary Cronin/New York and
Peter Shaw/London


    Jake Green, 75, of Winchester, Ky., learned in 1987 that he
had myasthenia gravis, a rare degenerative disease that attacks
the nerves leading to muscles. Since then, the cost of a
month's supply of Mestinon, the drug produced by Switzerland's
Hoffman-LaRoche that helps control his disorder, has jumped
from $65 to $136. In testimony before Congress last November,
Green told the Senate Special Committee on Aging, "I fear the
day when I will not be able to afford to purchase the medicine
which is keeping me alive."

    Barbara Connell heads the Daystar Care Center, a nursing
home in Cairo, Ill. Her father-in-law, 85, suffers from
congestive heart failure and must spend $190 a month on
medications, including the diuretic Lasix, produced by West
Germany's Hoechst-Roussel. The senior Connell's income from
Social Security totals just $350 a month, and since Medicare
does not cover prescription costs, he has begun drawing on
savings to pay his pharmacy bills. "If he didn't have those
savings, he'd really be in bad shape," says Barbara.

    Derek Hodel, 30, runs a New York City consumer organization
that helps people purchase anti-AIDS drugs. For the past three
months, his People with AIDS Health Group has assisted hundreds
of sufferers from the viral malady in importing aerosol
pentamidine, a powerful drug that effectively prevents
Pneumocystis carinii pneumonia, the leading cause of
AIDS-related death. A month's supply of the chemical retails
for $26 in Britain, where drug costs are regulated by the
government; in the U.S. the price is $150. Says Hodel: "The idea
that people have to import medications to get a good price is
ludicrous."

    Drugstore consumers are feeling the pain of sticker shock
as never before. In the U.S., where $40 billion worth of
pharmaceuticals is sold annually, the price of prescription
drugs has jumped 135% over the past decade; inflation rose 53%.
The same trend holds in Western Europe, another $40 billion
market. To keep costs down, the West German government last
September resorted to stringent price controls on drugs that
could cut pharmaceutical revenues there as much as 40%. Last
month Japanese authorities cut prescription prices an average
of 9.2%. "The price of drugs is running out of control," warns
Democratic Congressman Henry Waxman, chairman of the House
subcommittee on health and the environment and a leading
legislative advocate of lower costs. "If the price increases
continue, the public is going to demand that Congress start
changing the law."

    Major pharmaceutical firms like Merck & Co. of Rahway, N.J.,
and Bristol-Myers Squibb of New York City are keeping a low
profile in the pricing debate. The corporate rebuttal is that
drug firms are honestly struggling to contain their spiraling
costs and turn a profit in a formidably complex and competitive
industry. Research and development costs, the key to corporate
success in the drug industry, have lofted from an average of
$55 million for each new medication in the 1970s  to $125
million today. Regulatory agencies like the U.S. Food and Drug
Administration can take up to seven years to approve a drug
application. That shrinks to 14 years the maximum amount of time
in which a company can recoup its investment before its patent
on a new substance runs out, and thereby pressures the firm to
hike the price.

    Even so, pharmaceutical profit margins are on the rise,
often by substantial amounts. Some stock analysts predict that
earnings for major U.S. drug companies will climb as much as
15% annually over the period from last year to 1991. Although
prescription drugs account for less than 10% of health-care
costs in the U.S., pharmaceutical expenses are growing at twice
the rate of other medical expenditures.

    Hospitals are now requiring staff members to consider a
drug's cost as well as its efficacy before they fill out
prescription forms, and state Medicaid agencies are trying to
hold the line by refusing to pay for some high-priced nostrums.
Corporations with major medical bills are taking their own
cost-control approach. General Motors has started direct
negotiations with pharmaceutical firms to lower
prescription-drug rates, and Rockwell International has opened
its own pharmacy at an Iowa plant. "We're seeing the leveling
out of the market power between purchasers and producers," says
Stephen Schondelmeyer, director of the Pharmaceutical Economic
Research Center at Purdue University in Lafayette, Ind.

    The cost conflict is particularly acute for the U.S. drug
industry, which continues to dominate the $130 billion world
pharmaceutical market. Although the global industry has always
boasted its share of non-U.S. giants, such as Switzerland's
Ciba-Geigy and West Germany's Bayer AG, American firms average
40% of their sales outside the country. This year's three
biggest drug-company mergers all involved U.S. companies.
Bristol-Myers (1988 sales: $6 billion) joined Squibb of
Princeton, N.J. ($2.6 billion); Philadelphia's SmithKline
Beckman ($3 billion) merged with Britain's Beecham ($3
billion); Merrell Dow ($1.3 billion) of Midland, Mich., merged
with Marion Labs ($752 million) of Kansas City.
"Pharmaceuticals is the one industry in which the U.S. firms
are the biggest and growing the fastest," says Jay Silverman,
a health-care analyst at the Nomura Research Institute in New
York City.

    The U.S. Congress made an attempt to defuse the drug-price
crisis in 1984 when legislators passed the Waxman-Hatch Drug
Act, designed to encourage companies to manufacture more
non-brand-name versions of prescription drugs. Pharfirms may
sell these so-called generic drugs only after the brand name
has lost its patent protection. The 1984 law streamlined the
FDA approval process for generic drugs, reducing the time from
an average of three years to a few months. Manufacturer sales
of the low-cost drugs thereupon leaped from $3.5 billion in
1984 to $7 billion in 1988.

    The measure proved to be only a partial solution. Last July
a bribery scandal rocked the U.S. industry when three FDA
reviewers pleaded guilty to accepting bribes from generic-drug
companies. The revelations threw doubt on the efficacy of some
generics. Meantime, drug prices continued their upward spiral
-- primarily because of the fundamental forces that drive the
modern pharmaceutical industry.

    Above all, drug companies must contend with the increasingly
complex nature of medicine. Many of the "simpler" bacterial and
viral illnesses whose treatment spurred the rise of great
pharmaceutical concerns have passed from the scene, at least
in the industrialized countries. Polio was virtually eliminated
in developed countries in the late 1950s and early 1960s by
vaccine; rheumatic fever has fallen to antibiotics. Today
doctors must grapple with more complicated disorders such as
heart disease, diabetes and Alzheimer's disease.

    Finding treatments for those and other chronic ailments
requires more sophisticated research, lengthier study and, of
course, larger research budgets. Purdue's Schondelmeyer
predicts that during the 1990s major pharmaceutical companies
will each have to spend a minimum of $500 million annually on
research and development in order to remain competitive. At
present, behemoth Merck (1988 sales: $6 billion) budgets $670
million for R. and D. And since the money for new research must
come from the sale of existing drugs, prescription prices will
be under more upward pressure.

    Heightened safety concerns also add to the cost of drug
development. Compounds for treating hypertension or arthritis,
for example, must be taken for a lifetime. Researchers spend
years conducting expensive clinical trials to ferret out the
various side effects of potential medications, only to discard
many of them. Last month London-based Glaxo Holdings (revenues:
$4.1 billion) announced that it had dropped  Sufotidine from its
development program because the antiulcer drug caused cancer
in mice during long-term testing.

    After a company has satisfied itself that a drug is safe,
it must convince a regulatory agency such as the U.S. Food and
Drug Administration or the British Committee on Safety of
Medicines of its product's worth. This approval process, often
duplicated in dozens of different countries, can add as much
as seven years and millions of dollars to drug development.
Streptokinase, a drug first licensed in the U.S. in the late
1970s by a subsidiary of Hoechst, helps open up clogged
arteries during or after a heart attack and costs less than
$300 a treatment. Its new rival, t-PA, genetically engineered
by South San Francisco's Genentech and approved for use in
1987, costs $2,200 a shot.

    Safety and space-age R. and D. are not the only reasons
behind the run-up in pharmaceutical bills. Ironically, more
competition often seems to spur higher prices as well. In an
increasingly crowded drug market, some major firms have
launched extensive -- and pricey -- advertising campaigns to
give their wares a selling edge. A 15-sec. commercial on
prime-time TV, like the spot for Upjohn's baldness remedy,
Rogaine, can run as much as $150,000. "The trend toward direct
advertising is particularly costly because your target
audience is the consumer, not the physician," says Dr. Jerry
Avorn, associate professor in the program for analysis of
clinical strategies at Harvard Medical School. "That can't help
increasing the price of pharmaceuticals."

    After a medication has lost its patent protection, many
companies raise the price to recoup some of the losses caused
by the immediate drop in market share. A company can forfeit
as much as 30% of that share in the first year after generic
substitutes become available, but many physicians continue to
prescribe only the brand-name medications they have come to
trust and rely on. When generic versions of the potent heart
medication Dyazide were introduced in the mid-1980s, the drug's
inventor, SmithKline Beckman, raised the compound's price 23%.

    Drug companies argue that they need the money to keep the
all-important R. and D. well from running dry. In the past, one
good blockbuster chemical -- a drug that generates more than
$500 million in sales  annually -- could finance a company's
investigations for years. But as research becomes more
complicated, the patented blockbusters are proving harder to
come by. "By 1992 half of the top-ten-selling drugs in the U.S.
will be off-patent," says Nomura's Silverman. "By 1995 almost
all of them will be off-patent." And that will force less
innovative pharmaceutical companies to raise prices on a wide
assortment of drugs to make up for their lack of new wonder
cures.

    Provided they can get away with it, that is. Opposition to
drug price hikes is growing fiercer, and includes some hefty
corporate nay-sayers. General Motors, which spent $264 million
in 1988 on prescription drugs for its employees, has been
meeting with drug-company representatives to discuss cost
containment. Though the talks are friendly, Thomas J. Morr,
general director of employee benefits for General Motors,
warns, "If we continue to increase our drug expenditures by 33%
per member of our work force, as we did in 1989, we will have
to consider more creative ways to cut costs."

    A growing number of hospitals have embarked on programs to
make physicians better aware of the prices of different
medications. Doctors at Boston's Beth Israel Hospital now order
antibiotics on forms that list the most cost-effective choices.
"The physician still maintains the prerogative of choosing the
drug, but we're educating him or her about costs," says Dr.
Jerry Avorn, the program's director. The hospital is saving
$75,000 to $100,000 a year on its $900,000 antibiotic
pharmaceutical budget.

    Health-maintenance organizations have contributed to the
downward price pressure. Set up to provide medical coverage for
members at a fixed fee, HMOs control pharmacy expenses by using
only the most cost-effective drugs and demanding discounts from
manufacturers. In 1984 less than 4% of employees surveyed by
the Health Insurance Association of America were enrolled in
such health-care plans. By 1988 the percentage had risen to
72%.

    State governments, which have suffered deep cuts in
health-care funding from Washington, are also taking action.
With pharmaceutical costs in his state jumping as much as 18%
annually since 1985, John Alquest, who oversees the $31 million
Kansas Medicaid program, has developed a bidding program for
six frequently used drugs, including the antibiotic cephalexin
and the asthma drug theophylline. He was able to log savings of
$400,000 last year. Pharmaceutical companies have lobbied the
Kansas legislature to block the program, but at least a dozen
other states are considering similar measures.

    In many cases, state governments are only trying to get
discounts that have long been available to federal agencies.
California's $7 billion Medi-Cal program is the largest
consumer of prescription drugs in the state. But according to
John Rodriguez, deputy director of state medical-care services,
Medi-Cal has to pay the highest prices of any government agency
for its medications. Typically, the agency shells out $37.68
for a bottle of 100 tablets of Tolectin, an arthritis
medication, while the U.S. Department of Veterans Affairs, which
has greater authority to haggle over prices, hands over just
$9.31  for an identical bottle. Rodriguez is trying to get
legislators to grant Medi-Cal the same kind of bargaining
authority. Savings could run as high as $40 million a year.

    As the populations of the industrialized nations age, the
demand for lower-priced drugs is certain to intensify. That may
cause some drug firms to rethink the feasibility of researching
more and more expensive high-tech medications -- and will also
increase pressure for mergers and other bids to achieve
economies of scale in the global pharmaceutical business. The
bottom line, says Purdue's Schondelmeyer, is that "we are
approaching the maximum cost for what a patient can bear." If
so, drug companies could face some painful treatment themselves
in the future.