Saturday, July 19, 2008

Corruption In America's Pharmaceutical Industry

Take an educated guess. Which American institution (not counting the Government) employs the most lawyers? The insurance industry? Real estate? The automobile industry? The travel industry, which would include the air carriers as well as the plane manufacturers? All would be intelligent guesses, and all would be wrong. The answer is the "generic" pharmaceutical industry. The word, "generic," is used to differentiate this from the other pharmaceutical industry which is called, "research based." One employs lawyers, the other employs scientists and marketing people. One consists of drug makers with names that nobody recognizes, and the other is a list of companies like Pfizer and Merck and Johnson & Johnson.

Why so many lawyers? Because they have only one job, but it is gigantic. The generic drug lawyers are charged with breaking patents. Here's how the system works. A big research-based company like Pfizer might spend 30 billion (with a B) dollars each year on research. This work is aimed at discovering new compounds, of which about 1 in 100 eventually proves worthy of development. Of that development group, about 1 in 5 finally makes its way into the marketing machine, and then to doctors and patients. By that time, the original patent protection has been whittled down to something between 10 and 13 years before the patent expires. When the patent expires, the generic drug makers begin to sell their "knock offs" at a greatly reduced price, and the industry statistics show that about 90% of the drug usage switches from the research-based company to the generic company. In other words, the company that discovers and develops the new pharmaceutical has only about 10 to 13 years to recoup the research investment and show a profit from the sales.

The estimated 90% switch to generic label usage upon patent expiration has huge financial implications for the research-based company that holds the patent. Take the case of Pfizer's Lipitor, the largest selling drug in the world. When Lipitor gained FDA approval in 1996, it helped send Pfizer stock value into a stratospheric climb that culminated in 2001 with a price per share over $48, and this was after a three-for-one stock split. 2007 sales for Lipitor exceeded 6 billion dollars, but if the past switching pattern hold true, 90% of this could go to generics in 2010 when the patent expires. This is partly why Pfizer stock closed near $17 last week, nearly down to one third of its 2001 value.

If that's not complex enough, consider this. In addition to just the simple economics, part of the pressure driving patients to switch to generic drugs comes from the U.S. Congress and the AARP- two of America's most powerful institutions. So why should the average person care what happens to the big research-based companies? Because all our lives depend on fresh research, and not just for exotic disease cures. Bacteria constantly mutate, and because of this antibiotics lose their effectiveness over time. If drug companies don't keep pace by developing new antibiotics, we could find ourselves back in a time when simple pneumonia could be a deadly killer. Generic drug makers are not in the research business, and would be of little benefit in such a scenario.

So this cautionary tale has elements of big business, intense competition, huge profits within very limited time frames, lawyers working behind the scenes, monetary choices that effect virtually everyone, and life and death health choices that effect the entire human race. Add to that, an extraordinary complexity of operation and two sides to every issue. All of this makes the total pharmaceutical industry difficult to understand. And when people cannot easily understand something, they tend to suspect corruption. That's where the corruption issue comes into a discussion of America's pharmaceutical industry.

See also
Our Daily Meds
Don't Blame Kindler
Killing The Goose That Lays Golden Eggs

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