Why Pharmaceutical Companies Need to Change
Banking often is the first industry that comes to mind when you think about high profit margins, allegations of collusion, and multibillion-dollar fines and settlements. However, the real frontrunner on these issues is the pharmaceutical industry that produces the medications necessary for saving lives and easing suffering. Undoubtedly, pharmaceutical companies have been developing new drugs and improving old ones. Their actual motivation behind new drug development and enhancement though is profit. This of course is heavily indicative of the industry’s attitude towards health where lifesaving drugs merely function as a means to an end - profit. In their description of today’s pharmaceutical industry the World Health Organization states there is “an inherent conflict of interest between the legitimate business goals of manufacturers and the social, medical and economic needs of providers and the public”. The Pharmaceutical Industry is Extremely Profitable
The global pharmaceutical market is worth $300 billion and is expected to rise to $400 billion within the next three years. There were 12 pharmaceutical companies in the 2014 Fortune 500, and they have some of the highest profit margins of any industry. In 2013, carmakers and the oil and gas industry had average profit margins under 10% and the media industry was slightly over that threshold. Banking and pharmaceuticals both had average profit margins of 20%, but the top pharmaceutical companies profits soared even higher than that already huge margin. The highest profit margin of any company in the banking industry was 29% compared to the 42% profit margin set by US pharmaceutical company Pfizer. Last year not a single pharmaceutical company fell below a 10% profit margins and seven companies had margins over 20% - Elli Lilly, AbbVie, Amgen, Gilead Sciences, Biogen Idec, Celgene, and of course, Pfizer.
With some drugs costing upwards of $100,000, such as those used to treat cancer and hepatitis, and manufacturing costs being a miniscule fraction of these prices, it is easy to see where these profits are coming from. Accusations of profiteering are common, and such high prices have caused pushback such as an open letter from 100 leading oncologists from around the world calling for a reduction in drug prices. However, drug companies cite high research and development costs as the reason for such high pricing.
R&D Costs Are Not As Large as Suggested
In reality, R&D costs are much lower than pharmaceutical companies and their many defenders would like you to believe. It is true that on average only 3 in 10 drugs make it to the market, and only one of those will be a “blockbuster drug” – earning more than $1 billion in revenue per year. But the returns that they get back are still obviously enough to make incredible profits looking at the above margins. In fact, R&D spending is quite small in comparison to the amount of money spent on sales and marketing, which can be more than double the amount spent on R&D. Compare the allocation of costs for some of the largest pharmaceutical companies in the world: Johnson and Johnson, Novartis, and Pfizer spent $8.2 billion, $9.9 billion, and $6.6 billion respectively on R&D in 2013. But on sales and marketing they spent $17.5 billion, $14.6 billion, and $11.4 billion respectively.
Drug companies also point to limited time frames for profit as a reason for high prices. Patents are generally awarded for 20 years and 10-12 of those years are spent on drug development, at a cost of about $1.5 to $2.5 billion dollars. This gives a company 8 to 10 years of exclusive profit from the drug before generics can be made. However, some of these drugs make $3 billion dollars in one quarter, much more than necessary to account for costs and make a profit. The pharmaceutical industry also commonly employs a tactic called “evergreening”, where patents are extended through reformulations. Common examples are combining two existing drugs or creating mirror images of the same compound to legally extend patents instead of creating actual innovations. Pharmaceutical companies, such as UK giant GlaxoSmithKline, have even been accused of paying generic producers to delay their cheaper alternatives
Global Implications
The extreme emphasis on profit means that research and development will have an emphasis on areas that will generate the most revenue. 90% of total medicine purchasing and consumption occurs in the developed world by about 15% of the world’s population. The US alone contributes 52% of market shares while low income countries account for less than 1% of sales. Predictably, pharmaceutical companies now target diseases that the high income countries like the US are most concerned about, often non-communicable diseases such diabetes or cancer. This leaves much of the world’s population and their needs ignored. Of particular concern is the lack of effort to producing new antibiotics to combat the ever increasing threat of “superbugs”, antibiotic resistant bacteria, due to their low fairly low sale prices. Even when diseases that are endemic to poorer regions of the world, such as malaria, are targeted for drug production, prophylactics for travelers from wealthy countries are targeted to maximize profit instead of attempting protect or cure those most afflicted in low and middle income countries.
Moreover, when the drugs that are produced are brought to developing countries, they are often marked up to extremely high prices. Medicines account for 20-60% of health spending in developing countries, as compared to the 18% of richer OECD countries. Moreover, up to 90% of medicine purchases in developing countries are made by family out of pocket payments, causing a huge financial burden. Even at normal prices, medicine is unaffordable for many but with the ridiculously high markups some countries are facing access is nearly impossible. Markup rates as high as 358% in Uganda, 694% in India, and 6894% in El Salvador have been recorded. The big players in pharmaceuticals then delay or block attempts to produce and sell affordable generic drugs that would facilitate access. Political moves to facilitate treatment have historically been swayed by pharmaceutical influence as well, such as when US President George Bush created PEPFAR to help combat the global HIV/AIDS pandemic. Bush nominated Randall L. Tobias, former CEO of Eli Lilly, to head PEPFAR. Unsurprisingly, PEPFAR opted to use line fellow industry member’s pockets by purchasing name brand drugs from US pharmaceutical companies for the program instead of purchasing equally effective generic drugs that had reduced the price of antiretroviral treatment by 99% and would have granted a much larger number of treatments and saved more lives.
The pharmaceutical industry is extremely necessary. Without it, modern medicine and millions of lives would be radically different. However, there is so much opportunity to make an even greater positive impact on the world and still make a profit. The landscape of the pharmaceutical industry is changing with the possible passing of trade agreements like the Trans-Pacific Partnership and multibillion dollar deals between companies such as Novartis and GlaxoSmithKline demonstrating their increase in power. Still, there is hope for the future such as the growing involvement of groups like the Bill Gates Foundation and governments in partnerships with the industry to promote more equitable pricing and research practices.