Healthy Skepticism Library item: 20523

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Publication type: news

Harris G
AIDS Gaffes in Africa Come Back To Haunt Drug Industry in the U.S.
The Wall Street Journal 2001 Apr 23
http://online.wsj.com/article/SB987984200345114882.html

Full text:

In John le Carre’s latest book, “The Constant Gardener,” the bad guy isn’t a Soviet spymaster or a marauding terrorist but a sinister pharmaceuticals giant called KVH.

With his ear for the latest in popular villainy, Mr. le Carre joins an extraordinary global trend. These days, the world-wide drug industry is reeling from an unprecedented wave of public scorn. Coming from so many corners and with such ferocity, the attacks have put the hugely profitable and politically influential industry on the defensive as never before. As a result, the drug makers’ ability to conduct their business as usual — by finding and patenting a few new drugs, pricing them high and marketing them aggressively — may be at risk.

Last week’s decision by the drug industry to drop its patent lawsuit against the South African government is only the latest in a string of business and public-relations setbacks. U.S. college campuses are organizing 1960s-style “teach-ins” to protest drug-company pricing and patent practices. States are threatening price-control legislation. Some of the industry’s traditional business allies, most notably U.S. car makers, are organizing a first-ever campaign to seek breaks on drug prices. Federal prosecutors are investigating an alleged industry-wide scheme to defraud Medicare and Medicaid. The Federal Trade Commission is probing whether the industry has engaged in anticompetitive practices by blocking access to generic drugs.

And the industry’s biggest fear has become a real possibility: Some in Congress are talking about new Medicare benefits that may contain pricing restrictions.
The Pariah du Jour

“I think we underestimated the capacity to be made villains, as people without answers look for excuses,” says Rick Lane, president of Bristol-Myers Squibb Co.‘s BMY -0.92% world-wide medicines group.

How did the pharmaceuticals industry become the pariah du jour?

See the results of a Wall Street Journal/Harris Interactive poll on consumer sentiment toward drug companies.

• * *

Pharmaceutical Makers Agree to Settle Patent Suit on South Africa’s Terms (April 18)

The answer, people both inside and outside the industry agree, has much to do with the African AIDS crisis. In the last two years, the industry responded to international calls for lower AIDS-drug prices in poor nations with a series of gaffes that have tarnished its reputation, weakened its political positions and emboldened its adversaries in a host of battles in the U.S. and abroad.

Worst of all, the AIDS crisis has laid bare a secret the industry has steadfastly guarded for decades: how large a profit it makes on its medicines. By responding to intense pressure and lowering prices to the point of what they say is “no profit,” several drug makers have revealed that some medicines are priced — excluding research expenses — at eight to 10 times their cost of manufacturing and distribution.
Crixivan for $600 or $6,016?

Merck MRK -0.10% & Co., for instance,after refusing for several years to lower the price for its protease inhibitor drug, Crixivan, finally agreed in early March to sell the drug in poor nations for $600 a year per patient, a figure it says represents “no profit” to the company. That compares with the $6,016 wholesale price it typically charges in the U.S. GlaxoSmithKline GSK +0.50% PLC is offeringits AIDS drug Combivir for $730 in Africa, compared with $6,289 in the U.S.

The revelations aren’t going unnoticed by U.S. advocacy groups. “All you have to do is look at how much they’re selling drugs for in other countries to see how high they’re jacking up prices in the U.S.,” says Tim Fuller, executive director of the Gray Panthers, a seniors advocacy group that is pressing Washington to pass a prescription-drug benefit for Medicare recipients. “Their greed is going to be their undoing.”

Industry executives concede mistakes in their handling of the AIDS catastrophe in sub-Saharan Africa, where 25 million people are infected with HIV. “The challenge in the big company is to get it to do the right thing more quickly than inertia and momentum and bureaucracy allows,” says Peter Dolan, chief executive of Bristol-Myers. “You can make a strong case … that we should have gotten there sooner.”

On the whole, though, drug makers defend their cautious approach. They argue that if demands for lower-priced drugs and reduced patent protection spread to diseases other than AIDS, the ripple effect could be disastrous. Drug companies say it would be impossible to sustain the profit growth demanded by Wall Street, not to mention undertake the sort of costly, high-risk research that leads to life-saving drugs. The companies poured $26.4 billion into research last year, according to the Pharmaceutical Research and Manufacturers of America, the industry’s major trade group.

“Do you want us to give these drugs away for free?” asks Jean-Pierre Garnier, chairman and chief executive of Glaxo. “Then there won’t be any more drugs to treat AIDS or anything else. Isn’t it ironic that the companies that brought the drugs to market are the ones being criticized for people dying?”

The pharmaceuticals industry has suffered and survived previous hits to its public image, such as a price-fixing scandal and the thalidomide controversy in the 1960s. A decade ago, the industry was smarting from reports showing that its prices were rising well above the annual rate of inflation. And Bill Clinton effectively battered the drug makers in his 1992 presidential campaign.

But for much of the 1980s and 1990s, the industry was on a roll. Drug-company share prices in the late 1990s rose more than twice as fast as the rest of the S&P 500, and profits soared above those of all other major industries. The main reason: An aging population was gobbling up more — and more expensive — drugs.

But there was another reason: A federal law called the Hatch-Waxman Act, which passed in 1984, spurred drug companies to protect patents and prices more zealously than ever before. That’s because the law, while it extended the patents of many drugs, also eased the entry of generics into the marketplace once those patents expired. The companies were essentially put on an innovation treadmill, constantly coming up with new and better drugs and charging as much as the market would bear.

For years, this aggressive approach paid off. The only threats to the drug companies’ business came from repeated Democratic proposals to have the U.S. government buy drugs at discounts and distribute them to seniors — the industry’s best customers. But with the help of generous campaign donations, the industry beat these challenges back.

Then came a startling development: In 1996, new combinations of retroviral drugs were shown to prolong the lives of AIDS patients. Pharmaceuticals companies were hailed as heroes. But the discovery would have unanticipated consequences.

By 1998, a newly-formed agency within the United Nations started asking the big pharmaceuticals companies for steep price reductions on the drug cocktails. Officials at the agency, called Unaids, determined that the potent drug combinations could double the life-expectancies of some poor people infected with HIV. But the price of the cocktails — between $10,000 and $15,000 a person per year — had to be reduced by a factor of 10 before most Africans, their employers, aid agencies or governments could hope to buy them.

At first, the industry said no. Its rationale was that even if the prices were lowered, Africa’s inadequate health and distribution infrastructures wouldn’t be able to deliver medicines to people who needed them. Instead, the companies argued, money should be spent bolstering fragile health systems.
Revealing Profits

Inside the companies, however, there was another concern. According to people familiar with the situation, executives were worried that slashing prices would reveal the industry’s large profit margins. For example, after a series of orchestrated attacks by activists, Pfizer Inc. PFE +1.12% in December agreed togive away its antifungal drug Diflucan to certain AIDS patients in South Africa, rather than lower its price and reveal the scope of its profit. Pfizer’s brand sells for $10 a daily dose, while generic versions produced in India and Thailand, where Pfizer’s patent isn’t recognized, sell for less than $1 a daily dose.

“If the company had lowered its price to what generic makers charged, it would have shown the world what its profits were,” says Mark Heywood, a leader of Treatment Action Campaign, a South Africa activist group. “People elsewhere might have started wondering why it has to charge so much.”

A Pfizer spokesman defends the Diflucan giveaways. “There is no better price than zero,” he says. “For patients in sub-Saharan Africa, the difference between a medication that costs $5,000 and one that costs $500 a year is not material. Most Africans can’t afford it at any price.”
A Landmark Deal

Meanwhile, pressure for widespread discounting intensified. Last May, the industry struck a landmark deal with the U.N. to sell AIDS drugs to poor countries at price breaks of as much as 80%. However, the industry imposed a series of caveats, such as limiting the offers to countries that could demonstrate they had an adequate health infrastructure. As a result, negotiations between countries and companies dragged on for months, and few people received the lower-priced medicines. Ultimately, drugs were delivered to fewer than 2,000 people in just three African countries: Rwanda, Senegal and Uganda.

“We were proceeding along the lines that you do in any market — like contracting with a managed-care organization or with Wal-Mart,” says Raymond Gilmartin, chairman of Merck. Such negotiations often take many months, Mr. Gilmartin says. “But it was creating the impression that our offer wasn’t real and that there were too many strings attached.”

In addition, several high-profile gaffes continued to make the drug makers look hard-hearted. Late last year, Glaxo representatives sent a letter to an Indian generic-drug maker, Cipla Ltd., accusing it ofviolating Glaxo’s patent by seeking to sell low-priced versions of Glaxo’s drugs in Ghana. Glaxo later conceded it had no valid patent in Ghana. Glaxo has since said the letter and a similar one it sent to Cipla when Uganda began importing generics were the mistakes of an “overzealous” company official.

Two months ago, pressure on the industry further intensified. Cipla announced that it would sell AIDS drugs in Africa for 40% less than even the reduced prices called for in the U.N. deal. The Indian company conceded that it couldn’t possibly supply even a fraction of the drugs needed in Africa. But Cipla’s move reflected poorly on brand-name drug makers, because it suggested that even the prices they agreed to under the U.N. deal would reap them profits.

In the hopes of finally squelching complaints, Merck in early March announced that it would sell its two AIDS drugs in Africa and other very poor nations at cost — 90% below their U.S. prices. Within several weeks, Bristol-Myers and Abbott Laboratories ABT +0.74% followed with similar pledges.

Shortly thereafter, activists drew world media attention to the South African lawsuit, in which 39 drug makers were trying to block a national law that eased the purchase of patented drugs from generic makers. In one of the industry’s more visible public-relations stumbles, the lawsuit’s named defendants included Nelson Mandela, the antiapartheid hero who was president of the country when the law was passed.

The industry’s capitulation in the suit last week could further embolden countries such as India, Thailand and Brazil, whose lax intellectual property laws allow them to defy patents and turn out cheap knock-offs of expensive Western drugs. Even Cuban president Fidel Castro has promised to get into the act by pirating patented AIDS drugs.
Concerns Close to Home

For now, the industry’s most urgent concerns are much closer to home. At least 40 state legislatures are debating measures to control drug costs, efforts that represent serious threats to the industry’s profits. Some legislators are proposing price controls, which the industry will likely defeat through legal challenges.

The industry is also fighting state efforts to create regional drug-purchasing pools that could squeeze big discounts from companies. Currently, such pools are being debated in at least eight states, including Georgia, Maine and New Mexico.

Pharmaceuticals companies poured $80 million into last year’s Congressional campaign — a record for any industry. But with their credibility weakening in the public eye, the companies could face a tougher time fending off a Medicare prescription-drug benefit that includes some type of government-mandated price controls.

Even a few months ago, the industry believed its opposition to such a benefit, backed by the Republicans it helped elect, was unassailable. Now, Democrats have become emboldened about a plan that the industry fears could eventually lead to price controls. President Bush’s Medicare proposal, to provide grants to the states to help buy drugs for seniors, is all but dead. And there are other challenges for the drug industry on the federal front. For example, Republican Sen. John McCain of Arizona and Democratic Sen. Charles Schumer of New York have proposed a bill that would reform the Hatch-Waxman Act to make it even easier for generic drugs to enter the market.

Senate Finance Committee Chairman Charles Grassley, an Iowa Republican and longtime ally of the big drug makers, says the industry “is on the defense” on Capitol Hill. “They know they can no longer take for granted that their message is getting through,” he says.