Big Pharma: Healer or Monopolist?

In a classic case of "your money or your life," the pharmaceutical industry is desperately resisting progressive prescription drug legislation at both the state and federal levels. The industry supports federal subsidies for drug purchases by seniors, but it opposes any limits on the prices it charges citizens or governments. It defends its stance with an old form of blackmail: tinkering with its prices will rob the industry of any incentive to discover new life-saving drugs.

The Senate race here in my home state of Maine features prescription drug legislation as a major issue. The incumbent Republican, Susan Collins, has been a recipient of substantial financial support from drug companies. Her opponent, Chellie Pingree, is a target of industry enmity for her authorship of a state law empowering state government to negotiate drug prices on behalf of seniors just as it does for Medicaid recipients. More recently Pingree attacked the industry for "starting to look like Big Tobacco." Industry defenders denounced her in the local press, but if anything her claim only understates its history of deceptive and monopolistic practices. Since this issue will play a key role in many contests where progressives are running, the industry's claims demand close scrutiny.

Who controls prices? Should Maine or other states -- or the federal government -- have the right to negotiate volume discounts for selected subsets of its population? The industry claims that giving any level of government such authority interferes with the free market and amounts to price controls. Yet the market for prescription drugs is about as free as Cuban elections. Drug producers are granted 17-year patents on their drugs, providing them monopoly power. In any market where one or a few firms have sole production power, control information, and confront many buyers, consumers are easily exploited. Profits are far higher than are needed to insure socially optimal levels of investment. Allowing consumers to negotiate collectively merely starts to level the playing field. Prices would be established through a more equitable negotiation process, not by bureaucrats -- or the industry -- as is now the case.

Diminished profits? It is likely that such a regime would drive down drug prices, though hardly anywhere near as much as if patent protections were eliminated. Nonetheless, the effect on industry profits is hardly as clear. Margins on each prescription would be reduced, but demand for drugs would also expand in a society where many elderly now forego needed medication because of costs.

Industry profits drive research? Another insidious line in the industry's standard litany is the claim that high profits fund research into new blockbuster drugs. Consider some industry statistics. In the year 2,000, prescription drugs were an approximately $100 billion industry. Based on evidence from other nations that do not protect patents, economist Dean Baker has calculated that production costs for these drugs was about $25 billion (Dollars and Sense magazine, May/June 2001). That left $75 billion available for research. By the industry's own figures, only $22 billion was spent on research into new drugs. (A substantial portion of this sum, perhaps as much as 20%, went into research on so-called copy cat drugs. These drugs generally offer no major therapeutic advantage, but allow firms to take market share from new blockbuster drugs. Such drugs do more for the corporate bottom line than for our health. )

Where did the rest of the money go? In any market, firms have an inordinate incentive to steer consumption toward those goods on which they enjoy monopoly pricing power. Baker points out that "The rest of the money went mainly to: Marketing -- The industry spends tens of billions each year to convince us (or our doctors) that its new drugs are absolutely essential and completely harmless. Protecting patent monopolies -- Pharmaceutical companies regularly stand near the top in contributing to political campaigns … Profits -- The pharmaceutical industry consistently ranks at the top in return on investment. It pulled in more than $20 billion in profits for 1999."

If -- and this is a big if -- new drug legislation does reduce industry profits, industry will still need to continue at least its current minimal commitment to drug research and thus monopoly patents. Without new patents, it loses any ability to command high prices and profits.

Big Pharma and the blockbusters? Perhaps the most deceptive of all industry lines is its repeated implication that major blockbusters depend solely on corporate initiatives. Many of the most celebrated current and past blockbusters were developed not primarily through corporate initiatives but through government grants to universities and other research centers for basic and applied research. The federal government currently spends $18 billion a year in biomedical research. In addition, our tax-deductible contributions to universities, private foundations, and charities provide another $10 billion worth of research funding. Such major advances as AZT and, historically, penicillin and the polio vaccine, were developed in this manner. Yet after funding the initial research, the public is now often fleeced again to pay high prices for drugs on which the industry has gained a patent.

Major pharmaceutical firms already benefit from patent protection and federal research. In the unlikely event that merely asking for public accountability in return reduces their already limited commitment to new drugs, there is an easy answer. The money consumers and governments save on prescriptions can go to support increased research by state and private colleges and universities.

Asking government to play so key a role in medical research priorities sound radial until we realize that it already does and until we fully ponder the implications of the current system. As Baker puts it, current corporate research priorities depend on "whether the company can get insurance companies to pay for the drug, whether it can effectively lobby legislators to have Medicaid and other government programs pay for it, and whether it can count on the courts to fully enforce its patents against competitors … It is hard to believe that publicly accountable bodies that are charged with directing research for the general good would not produce better results."

The bang for the buck with federal research dollars has been at least as great. Curbing big pharma is well worth the price, especially when we realize there are better alternatives if the industry delivers on its vicious threats.

John Buell lives in Southwest Harbor, Maine, and writes regularly on labor and environmental issues. Email

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