What Don’t We Know About the Pharmaceutical Industry? A Freakonomics Quorum

This blog has regularly featured items on the pharmaceutical industry, including posts here, here, and here.

It was this post in particular, highlighting an interview with the CEO of Genentech, that made me want to post a quorum on the subject. So we’ve gathered up some willing and able candidates — Dr. Stuart Apfel, Zola P. Horovitz, Dr. Harlan Krumholz, Ray Moynihan, and Dr. Cyril Wolf — and asked them the following question:

What’s something that most people don’t know, pro or con, about the pharmaceutical business, whether from an R&D, economic, or political perspective?

Here are their responses. I hope you will find, as I did, plenty of surprises and illumination. Thanks to all of them for their thoughtful contributions.

Dr. Harlan Krumholz, professor of medicine, epidemiology, and public health at Yale:

Science and the public good in a capitalist society depend on the free flow of unbiased information, but it doesn’t always work that way. Events are revealing that many pharmaceutical companies, along with their consulting academic physicians, have engaged in practices that obscure or misrepresent information about their products. Does the public realize the depth of these practices, and their implications for patient care?

Most physicians continue their education and keep up to date with new science by attending lectures given by experts, with the assumption that the information they hear is unbiased. But pharmaceutical companies regularly pay high-profile scientists and physicians, either directly or indirectly, to speak on topics relevant to their products. At a scientific meeting in Europe, I watched an American colleague — a famous cardiologist who was being well compensated for his participation — practice his upcoming speech in front of drug company marketers. After his practice talk, they replaced some slides with ones that presented their drug in a more favorable light. The speaker initially resisted the change, but finally acceded, and his talk the next day was a strong endorsement of his sponsor’s drug.

Another important way for physicians to learn about new therapies, and for scientists to disseminate the results of their studies, is through medical journals. The expectation is that these articles pass through rigorous review, and represent strong science. However, when I worked as an expert in litigation related to Vioxx, an anti-inflammatory drug marketed by Merck, I was surprised to discover that many of the manuscripts on Vioxx were prepared and written by Merck or medical writing companies that Merck had commissioned. The company then often paid academics to become authors, placing their names at the head of scientific studies that were already planned, performed, interpreted, and drafted by the company. Some of these articles had well known authors, and their impact was substantial. The authors’ lack of involvement was not revealed, and, in some cases, the involvement of the company was not even mentioned.

Then there is the problem of company studies, often completed with academics, that never see the light of day. Some recent examples with Vytorin, a cholesterol lowering drug, and Avandia, a blood-sugar-lowering drug, have illustrated this point. Conscientious physicians seeking to learn about those drugs would not have access to all the information available. For Avandia, the information on the unpublished studies became available only because of litigation; even though the data were placed in the public domain, the location was not widely publicized. It was these unpublished studies, eventually uncovered, that led to concerns about the drug’s safety.

Clearly, we are at a critical juncture in the history of the relationship between the pharmaceutical industry and physicians, and the health of patients hangs in the balance. Breaches in professional ethics, which can distort the knowledge upon which clinicians and patients depend, undermine trust in academic physicians and diminish the standing of the pharmaceutical industry.

Academic medicine and the pharmaceutical industry are replete with ethical and talented individuals who dedicate their lives to fighting disease. The credit for many important advances in science lies with industry and its strong collaborative relationships with basic and clinical scientists. The current pattern of misbehavior that is exhibited by many, on both sides, is a pox on the profession and a danger to patients. A key question is: can industry and academics work together to cure this disease?

Zola P. Horovitz, Ph.D, pharmaceutical and biotechnology industry consultant, and member of the board of drug companies including Biocryst Pharmaceuticals, Phyton, Genaera Corporation, and Avigen:

My answer to this question is this: that the United States is subsidizing prescription drug prices for the rest of the world. Most people do not realize that when a prescription is paid for in the U.S., the payer (the patient, his or her insurance company, or the government) is subsidizing the cost of that same prescription in most countries outside the U.S. The pharmaceutical and biotechnology companies price their products to get a return that will support research and development to discover new products. Almost all major new drugs are discovered and developed by these companies, and most are located inside the U.S.

We have a free market system here that supports this pricing, and helps sustain new R&D. However, countries like Canada, France, Germany, Australia, and others set the prices for prescription drugs sold in their countries, and for the most part they do not allow any premium pricing that can aid the industry in new R&D.

The only solution to this problem would be for our government to force, through trade agreements, these countries to allow better pricing to help cover the cost of new R&D that their citizens will take advantage of, or for the U.S. pharmaceutical and biotechnology companies to refuse to provide the fruits of their discoveries to countries that do not allow a fair return. Unfortunately, these remedies never happen because of political roadblocks.

As the downside pressures on U.S. prescription drug prices increase, and the lack of support continues from the rest of the world to participate in some help for new R&D, the future of finding new and unique lifesaving and quality of life pharmaceuticals appears bleak. As a result, future generations are likely to suffer from our shortsightedness.

Dr. Cyril Wolf, practicing physician and prescription sales researcher:

The best kept secret by the retail pharmaceutical industry is the obscene profits made on generic drugs by the large chain stores. Whereas brand name drugs are all purchased, and therefore sold, for around the same price, generics are obtained for a fraction of that cost. The price at which the generics are sold is determined by the sellers, who thus have the ability to make exorbitant profits on these drugs.

It is for this reason that the chains are always encouraging the public to buy generic drugs “in order to save.” Do they save consumers money? The answer is “yes, but very, very little,” since these drugs are sold at prices not much lower than those of the branded products and are certainly priced well above their cost.

The travesty is that it is those who can afford it the least (i.e., people without health insurance and Medicare recipients without drug coverage) who suffer the most from this. Below, I have tabled the prices of the commonly prescribed generic drugs at Costco, which does not mark its prices up excessively, compared to those charged by Walgreens and CVS in Houston, New York, and Los Angeles. These prices are current as of January 9, 2008.

Metformin (500mg #180)
$14.08 (Costco)
$64.59 (CVS, Houston)
$27.99 (CVS, L.A.)
$56.89 (Walgreens, Houston
$38.99 (Walgreens, N.Y.)
$62.89 (Walgreens, L.A.)

Atenolol (50mg #90)
$5.12 (Costco)
$13.49 (CVS, Houston)
$25.79 (CVS, L.A.)
$20.89 (Walgreens, Houston)
$23.89 (Walgreens, N.Y.)
$20.89 (Walgreens, L.A.)

Methacarbomol (750mg #90)
$18.99 (Costco)
$46.89 (CVS, Houston)
$53.99 (CVS, L.A.)
$49.49 (Walgreens, Houston)
$53.99 (Walgreens, N.Y.)
$56.99 (Walgreens, L.A.)

Lisinopril (10 mg #90)
$10.86 (Costco)
$44.39 (CVS, Houston)
$61.59 (CVS L.A.)
$41.89 (Walgreens, Houston)
$47.89 (Walgreens, N.Y.)
$41.89 (Walgreens, L.A.)

Generic Prozac (20mg #90)
$10.96 (Costco)
$43.99 (CVS, Houston)
$52.59 (CVS, L.A.)
$49.89 (Walgreens, Houston)
$58.19 (Walgreens, N.Y.)
$49.89 (Walgreens, L.A.)

Generic BactrimDS (#20)
$7.53 (Costco)
$11.19 (CVS, Houston)
$13.29 (CVS, L.A.)
$16.99 (Walgreens, Houston)
$17.99 (Walgreens, N.Y.)
$19.99 (Walgreens, L.A.)

Generic Augmentin (875mg #20)
$31.10 (Costco)
$65.59 (CVS, Houston)
$75.59 (CVS, L.A.)
$69.99 (Walgreens, Houston)
$84.99 (Walgreens, N.Y.)
$89.99 (Walgreens, L.A.)

Generic Zocor (40mg #90)
$11.66 (Costco)
$164.99 (CVS, Houston)
$180.99 (CVS, L.A.)
$194.19 (Walgreens, Houston)
$221.89 (Walgreens, N.Y.)
$194.19 (Walgreens, L.A.)

When I show these prices to my patients, their reaction is always the same: “How can they do this?” The answer, of course, is: “Because they can.”

Dr. Stuart Apfel, founder and president of Parallax Clinical Research and chief medical officer at Elite Pharmaceuticals:

For the majority of people, the great appeal of biomedical science is the potential benefit it presents to human beings through curing disease, extending life, and improving the quality of life. As is generally well-known, biomedical science has achieved much in extending our knowledge of the complex biological processes that make up all living organisms, including ourselves.

Take our understanding of cancer, for example. Over the past two decades, hundreds of billions of dollars have been spent successfully elucidating the genome, identifying genes that may lead to cancer, identifying tumor suppressor genes, defining the molecular mechanisms underlying cell proliferation, unraveling how and why tumor cells metastasize, and identifying molecules that can interact with all of these processes. Yet the survival rate for patients with most malignant tumors is not much improved over what it was in the 1980s.

Consider, as well, neurodegenerative disorders such as Alzheimer’s disease or Parkinson’s disease. Over the past couple of decades, our understanding of the degenerative processes involved in these diseases on a cellular and molecular level has increased enormously, and so too has our understanding of the molecular factors that maintain and promote the survival of the affected population of neurons (nerve cells). Yet their management has not improved much, and the prospects of a cure remain just as they were: remote.

While most people understand in a vague way that modern biomedical science is advancing at a remarkable pace, many people are less aware that we have been far less successful at translating science from the laboratory bench to the clinic. This is not to say that the pharmaceutical industry has been quiescent; total spending on health related research by the drug industry has increased from about $6 billion in 1980 to about $39 billion in 2004. During that period, basic science research has increased the number of potential drug targets (the biological site on which a drug is intended to act) from 500 to more than 3,000.

Still, the total number of truly novel drugs approved each year has remained relatively constant. Part of this discrepancy may be due to the enormous costs associated with developing novel drugs, estimated to be about $800 million in 2002. It is far less expensive, and far less risky in terms of getting approval, to develop so called “me too” drugs that either modify the formulation of existing drugs (a process that often provides patients with important benefits), or developing alternative drugs with mechanisms of action similar to well established drugs.

Market forces will always drive the actions of pharmaceutical companies, which are, after all, businesses like any other. However, society as a whole will benefit from greater risk taking and increased efforts to bridge the divide between laboratory science and the clinic. In recent years, we’ve made progress in closing this gap. Small biotechnology companies (many of which have been spawned as a result of an effort to develop discoveries made in an academic setting) are often less risk averse than the larger companies, and have been largely focused on advancing discoveries from the lab into clinical trials.

There has also been an increased effort stemming from academic institutions (which tend to be short on resources, but where most of the basic science work is done) and the pharmaceutical industry (flush with cash but with limited incentive to focus research efforts on basic science) to work together and bridge this gap on a larger scale. The success of these efforts will be a determining factor in how successful we are at overcoming the most challenging medical problems that confront us today, and in the future.

Ray Moynihan, co-author of Selling Sickness: How the World’s Biggest Pharmaceutical Companies Are Turning Us All Into Patients:

What a lot of people may not know is that for some time now, pharmaceutical company marketing strategies have focused on promoting illness, rather than simply promoting drugs. Underpinning many of the marketing strategies of big drug companies is a very sophisticated and comprehensive plan to widen the boundaries of illness, and create an environment in which more and more formerly healthy people are defined as “sick.” The strategies have many components — the most visible being TV and newspaper ads that make us think that our ailments and inconveniences are the signs and symptoms of genuine medical conditions. A sore stomach is “Irritable Bowel Syndrome,” a mild sexual difficulty is “Female Sexual Dysfunction,” and overactive grown-ups now have “Adult Attention Deficit Disorder.”

Behind the TV ad scenes are a myriad of marketing strategies designed to grow the markets for drugs by both expanding old diseases and, sometimes, sponsoring the creation of new ones. Companies work with medical groups, patients groups, politicians, and the media to help shape and re-shape public attitudes toward illness — sometimes funding the very panels of experts that decide where to draw the line between sickness and health.

The soaring costs of healthcare mean that pharmaceutical companies are attracting more and more public attention. But it is high time that there was more scrutiny of how these corporations are working to widen the boundaries of illness, turn more healthy people into patients, and essentially change what it means to be human by putting death and disease at the center of life.


Paul

It seems from that Z Horowitz to imply that other countries (Canada, France, Germany...) are intentionally pushing R&D funding requirements to the US. I work extensively in the pharma space in US, Canada, UK, Germany... None of these other countries are trying to do antyhing to the US, they are simply being more responsible "consumers" and acting in the interests of their patients and asking straight forward questions like...

Why should I pay more for that new drug when it doesn't do anything more than these other 3 that cost 30% less?
If you can prove it is better and cost effective then you deserve and will receive a premium over other therapies?
Why should you be allowed to raise prices 3-6% a year when inflation is 1.6-2%?

Money saved asking these kinds of questions for me-too drugs could be better invested to help those being treated with high priced innovative therapies in badly needed diseases? Which other countries generally fund when the evidence is there.

$30 billion in R&D is a big number. The problem may be more about how that money is spent and optimized. How much of that is wasted now on questionable pursuits aimed at squeezing more dollars out of a waning brand? Or a phase IV trial meant to increase physician experience?

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Ann Poorboy

For the sake of transparency, I will disclose that I do work in medical education.

In response to the comments on "selling sickness," I take some offense. The writer states that a sore stomach if IBS is not a real disease. Tell that to the woman whose daughter could barely eat without suffering a great deal of pain, whose education was dictated by what her insides were doing to her. If it weren't for the public advertising, she might have done her own research and fought to get her daughter the necessary treatment. People don't often know there is now something that might help them and this level of public education is vital if consumers as patients have some knowledge and can take some control of their own healthcare. I see this practice as empowering the average patient instead of the paternalistic system we had before, where doctors (who do make mistakes) held all the knowledge and we had to blindly take their advice. Today's system is a much better place for patients. Then I would ask the authors, aren't you also profiting by writing books thare aren't completely objective. They write that pharmaceutical advertising needs additional scrutiny. Besides the five regulatory bodies they are under, besides the fact that congress, managed care organizations, and the media have a microscope over them, what more do you want?

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John Whitney MD

Dr Apfel states the Pharm. industry spent 30 billion on research in 2004. How big is this number, really? As the above responder said it is less than they spend on marketing! Dr Apfel is an insider; perhaps that is how he knows.
In the past, the Pharm's have been reluctant to disclose how much they really spend on research. It is likely the 30 b figure in mostly for 'me too' drugs. Most of the basic science is financed by taxes and charity, as is most clinical work on 'breakthrough' drugs. Thus the 30 b figure is likely helping the drug co's much more than patients.

Chuck

Bearymore, I didn't read Dr. Wolf's contribution as an implication that name-brand drugs are a better bargain. I think his point is that there is a much higher profit margin on generics than most people realize, and that our local pharmacies are gouging us.

KLee

Bearymore, I think you have seriously misinterpreted Dr. Wolf's statement. I think he is trying to show us that there is a wide range of generic drug prices and consumers should be careful to shop for the lowest prices. I don't know how you ever got the impression that he was advocating the purchase of brand-name drugs.

I am very grateful for his input and I have been forwarding this article to everyone I know.

Streaker

The main thing I just learned is to start buying my drugs from Costco. Thanks!

bearymore

I quote Dr. Wolf, "Do they [generics] save consumers money? The answer is "yes, but very, very little," since these drugs are sold at prices not much lower than those of the branded products and are certainly priced well above their cost."

I took the tone of this comment in conjunction with the rest of Wolf's answer to imply that he was saying that retailers gouge you for generics, brand name drugs cost only a little more, so why let yourself be gouged by the retailers -- a pretty good roundabout defense of brand name drug prices.

Sure, $55.96 compared to $14.08 is a pretty piece of gouging, but I'd hardly call it "not much lower" than $151.97 -- unless, that is, I was trying to make an implied point about the value of brand name drugs.

r.w.

let's give credit where credit is due. Costco's pricing on the above listed drugs was in response to Wal-mart's $4 drug plan that was rolled at 15 months ago. I tell people to buy their drugs at Wal-mart and buy their stock in Walgreens.

Bobby Wallace

Bearymore, I think the very first sentence of Dr. Wolf's comments sum up his position quite well:
"The best kept secret by the retail pharmaceutical industry is the obscene profits made on generic drugs by the large chain stores."
And if you still think he is advocating name brand drugs, click on his name in the post above and read the previous post where he is quoted.

Also, Dr. Wolf just so happens to have been my doctor for the last 20 years and I can assure you that he favors generics over name brand medicines.

J Coleman DC

I can't resist making a mildly provocative follow-up to my previous post, just in case anyone's still following this thread.

Hasn't the following thought occurred to any of the commenters in this thread?

The successful drug czar never uses his own product (because he knows crack would seriously undermine his position of power). The tobacco company CEO doesn't smoke. And the casino owner never plays roulette. I've often wondered how many GP's actually use any of the drugs they prescribe for their patients.

As for myself, I am fortunate not to have health problems. Still, I visit my chiropractor regularly and cheerfully pay his full fee with cash. In fact, I wouldn't hesitate to pay double his fee of $50 each and every time, simply because I know the functional integrity of my spine and central nervous system is essential to the performance of every other body system.

I hope I never need medical care, but if I do, it will only be because my life depends on it, and in that case, I probably won't argue about the price.

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Charlene

The price discrepancy between Costco and Walgreens was as great or greater 3 years ago.

Chuck

Leslie Rose, I don't know the context in which you say "the elite are favored," but the hospital pricing schemes I've encountered are designed to charge the highest prices to patients paying cash. While that does screw the uninsured who are not covered by CMS, it also screws the extremely wealthy patients -- particularly those from other countries who come to top-tier institutions in the States for care. Is it ethical for a hospital to charge a Saudi Arabian businessman the maximum price in order to compensate for CMS payments that barely cover costs? Likewise, is it ethical that an uninsured person who does not qualify for Medicare or Medicaid can often find ways to not pay their bill, provided they know how the system works?

michael from BKLYN

How does Zola Horowitz sleep at night knowing that she is dishonestly advocating exporting our abusive system to the rest of the world? Dishonest? Yes. A system of monopoly is not free market. Free market would do away with patents. I'm not suggesting that we do that, but where there is monopoly, there needs to be price controls.

Dean

Marketing and advertising of pharmaceutical products is a big problem. As others have pointed out, the resources spent advertising new drugs exceed the resources spent developing them. Not only does this directly drive up the cost of prescription drugs, but it has a number of additional negative effects. For example, in order to be approved, a new drug need not prove more effective than existing therapies, only that it is more effective than placebo. Lots of drugs coming onto the market are not necessarily more effective than the options already available, but they are almost always more expensive. If these drugs are effectively marketed to consumers who have insurance (and are thereby price insensitive), and to busy doctors who don't want to take the time to explain to their patients why a new drug isn't any more effective despite, these new drugs can easily replace less expensive and equally effective options. The net result - rising health care costs.

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Tom

Zola P. Horovitz is full of it. She (he?) is trying to get us to believe that prices would be lower in the U.S. if these other countries would step up and pay their fair share. Anyone with any exposure in economics knows that's absurd. Prices in the U.S. are set at what the market will bear; what Canadians pay for their drugs is immaterial. Horovitz' entire response is total nonsense, and intended to whip up criticism of socialized medical programs in other countries.

Aaron

Ray Moynihan does have an important point about drug companies convincing people that they have ailments that require expensive drugs. However, he needs to look more closely at adult ADHD before making a judgment. I am a college student with ADHD, so I face a lifetime struggle with adult ADHD. I also have several adult friends who have struggled for decades. ADHD is a difficult problem to work with, so being helped by a drug isn't overmedication. It's something that can make the difference between employment or unemployment; full use of skills or skills wasted; a good education or a failed education.

Dave

Dear Dr. Levitt and Mr. Dubner,

One of the least understood and most important keys to understanding the pharmaceutical industry are the connections between pharmaceutical companies and insurance companies. What is the process for getting a drug on a formulary? You may have noticed that if there are five name brand drugs for a given treatment, your insurance carrier will only have one listed on the formulary.

A former colleague of mine for many years was involved in that process, and he describes it like this: the pharmaceutical companies offer a "rebate" to the insurance company if their drug gains market share, therefore the insurance company is incentivised to not have competing drugs in its formulary. The pharmaceutical companies compete heavily to get that spot, and the rebate is a big part of the deal, so pharmaceutical companies often hire consulting firms to advise them on how to make competitive bids. The consulting company reviews all of the pharmaceutical company's contracts with insurance companies and gives back advice on how to become more competitive. In so doing, the consulting company adds the pharmaceutical company's contract details to the consulting company's database (gathering this data was what my former colleague did). The more times the consulting company is hired the better their advice becomes.

A result of this is that the pharmaceutical company has either 100% market share or 0% market share depending on which insurance carrier people get their drugs. What about those people who don't have drug coverage? Two pharmaceutical companies are not going to battle each other trying to maximize market share among the uninsured for two reasons. First, they don't want that competition to put the insurance company in the position of trying to get a better deal (if the insurance company used all its buying power to negotiate $0.10/tablet, the pharmaceutical company won't want to be seen offering the tablet over the counter at $0.08/tablet.). Second, the pharmaceutical company does not want uninsured purchasers driving up the rebate payments it has to make to the insurance companies.

The net result of this is that the pharmaceutical companies have a strong incentive to focus sales of their drugs through the formularies, and not through the uninsured. Therefore, the uninsured face an anticompetitive market. If pharmaceutical company A charges $3/tablet, pharmaceutical company B may respond by charging $12/tablet.

I have never read an article anywhere where the mechanics and effects of these interactions are explored. The companies involved in this keep their contracts and records confidential, and understanding the process requires some expertise. Often, it's the people at the consulting firms who have had the best look at this, which is not the place most people would suspect. I offer this to you as a suggestion for what could be very fruitful research.

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Mubic

While i hate phrama, i do agree that foreign countries free-riding is in part driving up drug costs. If the foreigners were forced to pay a little bit more, profit margins would grow even bigger for pharma, increasing the incentive for new firms to enter. There would be more competition, and ultimately more drugs and lower prices.

Unrelated, ultimately it seems like information needs circulate more freely. Those doctors who get paid by pharma should have their names and payoffs listed in a registry. The government and insurance companies should hire "drug reps" of their own, handing out pamphlets to doctors detailing available generics as well as the cheapest places to buy them. Clinics should have a computer terminal where, after receiving a perscription, the patient can enter in some basic info and the computer will tell them the cheapest and most convenient places to buy drugs (and if generics are available). If the patient is an old-ass, the nurse will do it for them and give them a print out with all the prices. It seems like insurance companies would pay for this. I work in the dna sequencing industry and almost all of the private sector firms refuse to list their prices. You end up with one firm charging 4 times more than another for the same exact service. They get away with this because its such a hassle to get a price quote.

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Jack

We are 30th in the world or something in life expectancy and the writer thinks other countries are the problem for not funding our executive bonuses that are 10 times theirs? I have noticed a huge change in my local chain after a series of buyouts from reasonable prices, variety, and native speakers, to a philosophy of the consumer as the target in a free fire zone, to be milked, gutted, and discarded by slave labor.

jay

Dr Wolf left off many pharmacies and showed costco was the lowest. The New York Times magazine ran an article last year, and found several stores to be similarly low priced along with Costco, like Target, Walmart and Sam'e Club.