Pricing structures and profits
Drug companies such as GSK have often claimed that the high cost of "innovation" ie: research and development (R&D) is between $1bn and $1.7bn to bring a new drug to market. The AMC and GAVI - collecting some $4.3bn to finance purchase of vaccinations, were designed with the premise that the high cost of drug multinationals' R&D must be met.
During the past several decades, the pharmaceutical industry in the US - more than half of which comprises European-based companies - has largely been the most profitable industry in the nation's economy, thanks to mechanisms such as the lack of a government-imposed pricing structure. "Free pricing and fast approval secure rapid access to innovation without rationing," said Daniel Vasella, the former head of (Swiss-based) Novartis, of the advantages of doing business in the US.
Drug multinationals claim that US consumers are forced to fund the necessary research and development in order to keep global innovation going. In Australia, Europe, as well as Canada - the source of much prescription drug "re-importing" by US citizens, where drugs sometimes sell for half the going US price - governments ensure pricing structures render patented drugs affordable.
While drug multinationals generate considerable profits from these countries, about 50 per cent of global drug industry profits are generated in the US. In 2006, for instance, global prescription drug sales totalled more than $640bn - of which almost $300bn were US-generated sales.
But the real deception is less the Machiavellian tactics used by Big Pharma to Botox the bottom line than the terrible myth behind the "true" price of innovation: the $1bn pill. From 1996-2005, Big Pharma firms spent $739bn on marketing and administration (M&A): "Administration" costs here include accounting, executive salaries (including bonuses, stock options etc) - as well as human resources expenditure. "Marketing", meanwhile, consists of direct-to-consumer advertising, sales pitches and free samples to doctors, alongside advertising in medical journals.
A closer look at drug cost
During the same 1996-2005 period, drug companies invested $288bn in R&D and $43bn in property and equipment, while generating $558bn in profit.
From the outset, it is possible to see that R&D ranks second to last in terms of expenses. But the breakdown of R&D itself is opaque: companies do not list actual expenses for the development of a particular drug, claiming that information comprises proprietary and/or confidential commercial secrets.Yet, according to the Harvard Business Review: "The cost per new approved drug has increased more than 800 per cent since 1987, or 11 per cent per year for almost two decades." Drug corporations such as Novartis and GSK state that companies producing generic drugs - often Indian - are able to bypass such costs, and sell their "copied" drugs for a fraction of the price of the patented product - often undercutting the intercontinental firms by as much as 65-99 per cent.
The "$1bn cost" is derived from a 2003 study [PDF] published in the Journal of Health Economics by Joe DiMasi et al from the Tufts Center for the Study of Drug Development. The authors and their organisation claimed that the study was unbiased, despite the fact that the Tufts Center is itself some 65 per cent financed by drug companies.
Though the findings have been normalised as factual by the media, the facts have long since been debunked by independent specialists.
The authors surveyed ten large pharmaceutical corporations (between them responsible for 42 per cent of R&D expenditure in the US, where the bulk of such work is carried out), examining the R&D costs of 68 randomly selected drugs, and determined the cost of the development of each at $802 million (elevated to $1bn when adjusted for inflation).
As the data was submitted confidentially by the drug companies to the authors, there is no way to verify the quality of the information, nor was there any accounting for the potential volume of intra-company corporate mispricing. The names of the firms were not mentioned; nor were the names of the drugs, the type of drugs; or the status - whether a priority drug, comprising advanced treatment, or a "me too" drug - ie: a variation of products already on the market.
'Demythologising' the costs
For starters, the $802 million figure failed to take into account the opaque and strange manner of accounting involved, beginning with "capitalised costs". According to the authors, R&D expenditures, "must be capitalised at an appropriate discount rate - the expected return that investors forego during development when they invest in pharmaceutical R&D instead of an equally risky portfolio of financial securities".
As Marcia Angell, US physician, former editor in chief of The New England Journal of Medicine and senior lecturer at Harvard Medical School, stated: "The Tufts consultants simply tacked it on to the industry's out-of-pocket costs. That accounting manoeuvre nearly doubled the $403 million to $802 million."
So, when taking into account updated costs by PhRMA (2006), increasing overall R&D to $1.32bn, more than $650 million has just been included as "research and development" by drug companies claiming mythical profits that might have been generated, had they invested in, say, Wall Street - and not the scientific "innovation" used to justify gross profits from exclusive patents.
In the journal BioSocieties, sociologist Donald Light and economist Rebecca Warburton "demythologise" the costs of R&D drug development by also analysing the tax breaks involved in R&D costs.
The US Office of Technology Assessment (OTA) revealed: "The net cost of every dollar spent on research must be reduced by the amount of tax avoided by that expenditure." The authors used data from official sources such as the Tax Policy Center, to reveal additional tax savings of 39 per cent. Cumulatively, taxpayer subsidies and credits reduced the overall costs from $403 million to $201 million.
Khadija Sharife is a journalist and visiting scholar at the Center for Civil Society (CCS) based in South Africa, and a contributor to the Tax Justice Network. She is the Southern Africa correspondent for The Africa Report magazine, assistant editor of the Harvard "World Poverty and Human Rights" journal and author of "Tax Us If You Can Africa".
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