[Ip-health] BBC News 6 November 2014: Pharmaceutical industry gets high on fat profits

Ruth Lopert ruth at lwchealth.org
Thu Nov 6 11:25:45 PST 2014


Pharmaceutical industry gets high on fat profits
By Richard Anderson, Business reporter, BBC News

Imagine an industry that generates higher profit margins than any other and
is no stranger to multi­billion dollar fines for malpractice. Throw in
widespread accusations of collusion and over­charging, and banking no doubt
springs to mind. In fact, the industry described above is responsible for
the development of medicines to save lives and alleviate suffering, not the
generation of profit for its own sake

Pharmaceutical companies have developed the vast majority of medicines
known to humankind, but they have profited handsomely from doing so, and
not always by legitimate means. Last year, US giant Pfizer, the world's
largest drug company by pharmaceutical revenue, made an eye­watering 42%
profit margin. As one industry veteran understandably says: "I wouldn't be
able to justify [those kinds of margins]." Stripping out the one­off $10bn
(£6.2bn) the company made from spinning off its animal health business
leaves a margin of 24%, still pretty spectacular by any standard.

In the UK, for example, there was widespread anger when the industry
regulator predicted energy companies' profit margins would grow from 4% to
8% this year. Last year, five pharmaceutical companies made a profit margin
of 20% or more ­ Pfizer, Hoffmann­La Roche, AbbVie, GlaxoSmithKline (GSK)
and Eli Lilly


With some drugs costing upwards of $100,000 for a full course, and with the
cost of manufacturing just a tiny fraction of this, it's not hard to see
why.  Last year, 100 leading oncologists from around the world wrote an
open letter in the journal Blood calling for a reduction in the price of
cancer drugs. Dr Brian Druker, director of the Knight Cancer Institute and
one of the signatories, has asked: "If you are making $3bn a year on
[cancer drug] Gleevec, could you get by with $2bn? When do you cross the
line from essential profits to profiteering?" And it's not just cancer
drugs ­ between April and June this year, drug company Gilead clocked sales
of $3.5bn for its latest blockbuster hepatitis C drug Sovaldi.

Drug companies justify the high prices they charge by arguing that their
research and development (R&D) costs are huge. On average, only three in 10
drugs launched are profitable, with one of those going on to be a
blockbuster with $1bn­plus revenues a year. Many more do not even make it
to market. But ... drug companies spend far more on marketing drugs ­in
some cases twice as much ­ than on developing them. And besides, profit
margins take into account R&D costs.

The industry also argues that the wider value of the drug needs to be
considered.  "Drugs do save money over the longer term," says Stephen
Whitehead, chief executive of the Association of the British
Pharmaceuticals Industry (ABPI). "Take hepatitis C, a shocking virus that
kills people and used to require a liver transplant. At £35,000 [to
£70,000] for a 12­week course, 90% of people are now cured, will never need
surgery or looking after, and can continue to support their families.  "The
amount of money saved is huge."

True, but just because you can charge a high price for something does not
necessarily mean you should, especially when it comes to health, critics
such as Dr Drucker might say. Shareholders, who big pharma companies
ultimately have to answer to, would have little time for such an argument.

No loyalty

Big pharma companies also say they only have a limited time in which to
make profits. Patents are generally awarded for 20 years, but 10­12 of
those are typically spent developing the drug at a cost of about
$1.5bn­$2.5bn.  This leaves eight to 10 years to make money before the
formula can be taken up by generic drug companies, which sell the medicines
for a fraction of the price. Clearly for a real blockbuster, it can take a
matter of months to recoup development costs. Once this happens, sales fall
by 90%­plus. As Joshua Owide, director of healthcare industry dynamics at
research company GlobalData, explains, "Unlike other sectors, brand loyalty
goes out the window when patents expire

This is why pharma companies go to such extraordinary lengths to extend
their patents ­ a process known as evergreening ­ employing "floors full of
lawyers" for this express purpose, one industry insider says. For a drug
raking in $3bn a quarter, even a one­month extension can be worth huge sums
of money.

New formulations, combining two existing drugs to give a wider use, and
enantiomers ­ a mirror image of the same compound ­ are some of the legal
ways to eke out patents. But some drug companies, including the UK's GSK,
have been accused of more underhand tactics, such as paying generics to
delay the release of their cheaper alternatives.  As the loss of sales at
the big pharma companies far outweighs the revenue made by the generics,
this can be an attractive arrangement for both parties.

Courting doctors

But drug companies have been accused of, and admitted to, far worse. Until
recently, paying bribes to doctors to prescribe their drugs was commonplace
at big pharmas, although the practice is now generally frowned upon and
illegal in many places. GSK was fined $490m in China in September for
bribery and has been accused of similar practices in Poland and the Middle
East. The rules on gifts, educational grants and sponsoring lectures, for
example, are less clear cut, and these practices remain commonplace in the
US. Indeed a recent study found that doctors in the US receiving payments
from pharma companies were twice as likely to prescribe their drugs. This
may well exacerbate the problem of overspending on drugs by governments. A
recent study by Prescribing Analytics suggested that the UK's National
Health Service could save up to £1bn a year by doctors switching from
branded to equally effective generic versions of the drugs.

Big pharmaceutical fines

$3bn   Glaxo SmithKline, 2012, over promoting Paxil for depression to under

$2.3bn  Pfizer, 2009, over misbranding painkiller Bextra

$2.2bn Johnson & Johnson, 2013, for promoting drugs not approved as safe

 $1.5bn Abbott, 2012, over illegal promotion of antipsychotic drug Depakote

$1.42bn Eli Lilley, 2009, for wrongly promoting antipsychotic drug Zyprexa

$950m Merck, 2011, for illegally promoting painkiller Vioxx

Source: ProPublic Getty

This all may change when new rules in the US and UK will force doctors to
disclose all gifts and payments made by the industry. Drug companies have
also been accused of colluding with chemists to overcharge for their
medicines and of publishing trial data that highlight the positive at the
expense of the negative. They have also been found guilty of mis­branding
and wrongly promoting various drugs, and have been fined billions as a
result. The rewards are so great, it would seem, that pharma companies have
continually been prepared to push the boundaries of legality.

'Undue influence'

No wonder, then, that the World Health Organisation (WHO) has talked of the
"inherent conflict" between the legitimate business goals of the drug
companies and the medical and social needs of the wider public. Indeed the
Council of Europe is launching an investigation into "protecting patients
and public health against the undue influence of the pharmaceutical
industry". It will look at "particular practices such as sponsoring health
professionals by the industry... or recourse by public health institutions
to the knowledge of highly specialised researchers on the pay­rolls of

No matter what the outcome of such investigations, however, the
pharmaceutical industry is facing fundamental change, as the traditional
model of developing drugs breaks down due to rising costs and scientific
advances.mThe cosy world of big pharmaceuticals is under threat like never

*This is the first in a two­part series on pharmaceutical companies. The
second, looking at how and why fundamental change will take place in the
industry, will be published on Friday, 7 November.*

Dr Ruth Lopert
LWC Health Pty Ltd

Web: www.lwchealth.org     |  Email: info at lwchealth.org
Tel: (AUS) +61 2 6172 1400  |  (FRA) +33 605 664 971 |  (US)  +1 202 415

More information about the Ip-health mailing list