The $800 Million Pill: The Truth behind the Cost of New Drugsby Merrill Goozner
Why do life-saving prescription drugs cost so much? Drug companies insist that prices reflect the millions they invest in research and development. In this gripping exposé, Merrill Goozner contends that American taxpayers are in fact footing the bill twice: once by supporting government-funded research and again by paying astronomically high prices for prescription drugs. Goozner demonstrates that almost all the important new drugs of the past quarter-century actually originated from research at taxpayer-funded universities and at the National Institutes of Health. He reports that once the innovative work is over, the pharmaceutical industry often steps in to reap the profit.
Goozner shows how drug innovation is driven by dedicated scientists intent on finding cures for diseases, not by pharmaceutical firms whose bottom line often takes precedence over the advance of medicine. A university biochemist who spent twenty years searching for a single blood protein that later became the best-selling biotech drug in the world, a government employee who discovered the causes for dozens of crippling genetic disorders, and the Department of Energy-funded research that made the Human Genome Project possible--these engrossing accounts illustrate how medical breakthroughs actually take place.
The $800 Million Pill suggests ways that the government's role in testing new medicines could be expanded to eliminate the private sector waste driving up the cost of existing drugs. Pharmaceutical firms should be compelled to refocus their human and financial resources on true medical innovation, Goozner insists. This book is essential reading for everyone concerned about the politically charged topics of drug pricing, Medicare coverage, national health care, and the role of pharmaceutical companies in developing countries.
According to pharmaceutical industry officials and a frequently cited study from Tufts University, it costs more than $800 million to discover a new drug. The drug companies explain that they have to put a high price on yesterday's discoveries if they are going to conduct the research that is required to develop the next generation of wonder drugs.
Others disagree. A former chief economics correspondent for the Chicago Tribune, Merrill Goozner, challenges the assertion that the pharmaceutical industry can produce life-saving drugs only if the American people continue to pay high prices for drugs. He does this by asking: "Where do new drugs come from?" and "What do they really cost to invent?"
A Different Perspective
To answer these questions, Goozner investigates the process of drug development for a representative sample of relatively recent discoveries - from their beginnings in academic and government labs to their final approval by the Food and Drug Administration. By taking a close look at the entire process of drug development, Goozner offers a perspective on drug prices that differs with that presented by others, including drug industry officials.
Throughout The $800 Million Pill, Goozner contends that American taxpayers are paying for high-priced drugs twice: once when they support government-funded research with their tax dollars, and again when they pay high prices for prescription drugs. Through case studies that include a number of familiar drugs and pharmaceutical companies, Goozner shows readers that most of the important drugs of the past few decades came about from research at taxpayer-funded universities and the National Institutes of Health. Goozner writes that pharmaceutical companies often step in to reap the profits once the innovation work of others is over.
Goozner also emphasizes in The $800 Million Pill that drug innovation is often driven by individual scientists who have dedicated their lives to finding cures for deadly diseases, and not the pharmaceutical companies.
To highlight the important work that is being done by university scientists, Goozner describes several, including biochemist Eugene Goldwasser, who spent two decades finding a single blood protein that would become the most profitable biotech drug in the world.
How realistic is Tufts University's $800 million price tag for a new life-saving drug? Goozner reports that the Global Alliance for TB Drug Development, funded by the Rockefeller Foundation and the Bill and Melinda Gates Foundation, commissioned a team of former drug company executives to build their own model of what it costs to develop new drugs. He cites their October 2001 report, "The Economics of TB Drug Development," which directly challenges the Tufts study. Although the Global Alliance's research methodology was very similar to the Tufts study, Goozner reports that its bottom line was very different.
"The total costs to discover and develop a new anti-TB drug is roughly estimated to range from $115 million to $240 million. However, it is generally accepted that discovery and development of a new drug to treat TB will require an international, collaborative effort that allows costs to be shared by multiple organizations, lowering ultimately the investment burden borne by a single agency or company," the report said.
Goozner believes that if the industry-funded academic economists at Tufts had factored out the half of industry research that he categorizes as corporate waste - such as the clinical trials whose only purpose, he says, is to get doctors to prescribe their medicine instead of someone else's - their number would have been similar to that of the Global Alliance.
‘Not Worth the Cost'
Goozner concludes, "If the pharmaceutical industry continues to insist on double-digit revenue and profit growth year after year in the name of going after the 150th blood pressure control drug or the 20th pain medication, then the public can assert with some confidence through the legislative process that that kind of innovation is not worth the cost."
Why We Like This Book
The $800 Million Pill presents an alternative perspective of an industry that plays a vital role in many people's lives, and provides additional food for thought on the drug prices that many consumers must pay. By breaking down the numbers and using new studies that challenge the costs involved in their development, Goozner offers information that is both timely and relevant for those who rely on medications for survival as well as those who are concerned about their prices. Copyright © 2004 Soundview Executive Book Summaries
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The $800 Million PillThe Truth behind the Cost of New Drugs
By Merrill Goozner
The University of California PressCopyright © 2004 Regents of the University of California
All right reserved.
Chapter OneMe Too
President Franklin Delano Roosevelt had every reason for optimism in the winter of 1936. He had just won reelection in a landslide, and the prospects for the more far-reaching of his New Deal reforms never looked brighter. But just before Christmas, close aides brought word that his only son, Franklin Delano Jr., had a bad case of tonsillitis. With her son's fever soaring, Eleanor Roosevelt called in White House physician George Tobey Jr. He feared the worst. The infection had seeped into the blood, which in those days was a potentially fatal condition.
More out of desperation than any sense that it might help the young man, Tobey gave the president's son a new German drug called Prontosil. When news of the drug first appeared in the medical literature a year earlier, most American doctors scoffed. How could a derivative of a chemical dye cure a bacterial infection? But to Tobey's surprise, young Roosevelt's fever quickly subsided. A few days later the press heralded both the medicine and the miraculous recovery in the first family. "New control for infections," the New York Times headlined its front-page story. The era of wonder drugs was underway.
Prontosil not only heralded in the modern era of drug therapy, it ushered in the modern era of drug marketing. It helped transform the Depression-era pharmaceutical industry from a sprinkling of small firms peddling a handful of cures (an early 1930s symposium listed only seven diseases amenable to drug treatment) to the modern corporations that we know today: vertically integrated giants that can develop, produce, and, most important to their bottom lines, market drugs.
Prontosil was discovered by Gerhard Domagk, a young physician on the staff of Bayer Laboratories in Elberfeld, Germany. Inspired by the pioneering work of fellow countryman Paul Ehrlich, who had discovered the first drug treatment for syphilis, Domagk spent five years screening hundreds of Bayer's industrial dyes and their derivatives for their antibacterial properties. Five days before Christmas 1932, he discovered that one of his red dyes cured a handful of mice that he had infected with deadly streptococcus. Over the next two years, while ignoring the social upheavals around him that brought Adolph Hitler to power, Domagk and physicians on the staff of the local hospital injected dozens of patients with the new drug. It not only killed streptococci but had powerful effects on patients suffering from a host of life-threatening infections like rheumatic and scarlet fever, which had been the scourge of children for centuries.
Domagk published the first report about his miraculous cures in February 1935 in an obscure academic journal. Researchers around the world immediately began trying to replicate his results. A husband-and-wife team in France soon discovered that it wasn't the dye that killed the streptococci, but one of its constituent chemicals, which only became active after the patient metabolized the original drug. The active ingredient in Prontosil, they discovered, was sulphanilamide, a common industrial chemical that was no longer patented and that no one had ever thought to test against bacteria.
Within months, every drug company in the world began synthesizing their own versions of sulphanilamide. Bayer was left without any financial remuneration for the pioneering research of Domagk and his colleagues. German dictator Adolph Hitler's health ministers, meanwhile, heaped scorn on his extraordinary achievement. They called the medicine quackery and in late 1939 forced Domagk to write a letter to the Caroline Institute in Stockholm turning down his Nobel Prize.
As war clouds gathered over Europe, dozens of companies in England, France, Germany, and the United States began peddling their own versions of the miracle sulfa drugs. These first copycat drugs, usually called me-too drugs by industry insiders, created a problem that has bedeviled the industry thereafter-the propensity for some of the newer versions of the drug to be less safe than the ones that already existed. In 1937, a small Tennessee firm named Massengill and Company started making a liquid form of the medicine because it believed southerners and children preferred it that way. Since sulfanilamide did not dissolve in water or alcohol, company chemists opted to suspend the drug in diethylene glycol, an industrial solvent used to make antifreeze. No one at the company thought to test the product for safety before it began selling the concoction. Later testimony showed that no one at the company even bothered to look up diethylene glycol in a textbook. Within weeks of the medicine's initial marketing, more than one hundred people were dead, most of them children. When questioned by the dozens of reporters who poured into Tennessee to cover the tragedy, the company's president refused to take responsibility. His chief chemist committed suicide.
The incident led an outraged Congress to alter the 1906 Pure Food and Drug Act. The original Progressive Era legislation, which had been created in response to public outrage over contaminated food, had drugs in its title but did little to regulate the industry. The Massengill tragedy put an end to that. For the first time, companies were required to prove to an expanded Food and Drug Administration (FDA) that their drugs were safe for human consumption before they could put them on the market.
The advent of FDA drug regulation radically transformed the pharmaceutical marketplace. Companies began marketing their wares directly to doctors-either through advertising in medical journals or through office visits (called detailing in the trade because the salesmen provided physicians with the latest details on new medicines) instead of through the traditional channels, which to that point had been largely newspaper and magazine advertising.
The result was intense competition among many companies in the still limited marketplace for scientifically proven medicines. Detailers would crowd physicians' offices, leaving behind free samples and various trinkets. But it was very difficult to differentiate their products. Every version of the new sulfa drugs, for instance, had basically the same medical outcome. Textbook economics took over. The price of the new sulfa drugs plunged.
The pattern was repeated when the first miracle antibiotics came along in the years immediately after World War II. The government, which had developed the mass production techniques for penicillin as a wartime measure, licensed the drug to five firms. Those firms engaged in a fierce competition for sales. Between 1945 and 1950, the price of penicillin plunged from $3,955 to $282 a pound.
The pattern happened yet again with the next generation of antibiotics. In the late 1940s Selman Waksman and his colleagues at Rutgers University in New Brunswick, New Jersey, developed streptomycin, a derivative of bacteria-killing microbes that he had found in soil. Waksman, a soil botanist, made his discovery by pursuing the reasonable assumption that soil must contain something that killed bacteria since they didn't survive burial. His drug proved to be the first effective treatment for tuberculosis, earning Waksman the Nobel Prize and making him America's most celebrated research scientist until Jonas Salk and the first polio vaccine came along in the mid-1950s. But unlike Salk, who would refuse to patent the polio vaccine ("Could you patent the sun?" Salk answered Edward R. Murrow when he was asked who owned the vaccine on See It Now), Waksman patented streptomycin and licensed it to Merck Research Laboratories in nearby Rahway, whose engineers and scientists had done much of the production work.
Waksman's decision to seek a patent on his discovery represented a second watershed event in the evolution of the modern drug industry. For the first time, the Patent and Trademark Office (PTO) gave seventeen-year exclusivity to the chemical modifications and the processes that created a product-streptomycin-that in its raw state had been part of nature. Merck wouldn't benefit from that decision, however. Worried about a public backlash against a private company generating massive profits from scientific research conducted at a public university, Waksman convinced Merck to return the license for streptomycin to the nonprofit Rutgers Research Foundation. The drug was then licensed broadly and sold generically. The price of the miracle drug soon fell to rock-bottom levels, a repeat of the penicillin story.
The industry recognized it had to deal with its disastrous experience with the first three antibiotics. A number of firms had already deployed chemists to develop new microbe killers using Waksman's techniques. Three firms quickly came up with new medicines comparable to streptomycin. They patented the results despite the fact the uses of the new drugs were virtually indistinguishable from their predecessors. However, without the government or Waksman to prod them, they refused to license the new medicines to other firms. Given the similarity in medical outcomes from the various antibiotics now on the market, an intense competition for market share should have broken out. But this time, just the opposite occurred. The price of the new drugs, marketed as improved versions of the generic antibiotics penicillin and streptomycin, soared.
A decade later, the Federal Trade Commission launched a massive investigation into the antibiotic cartel. It turned up overwhelming evidence showing the industry refused to compete against one another on price even though every company was charging far more than the cost of production and a reasonable return on its investment. Yet the agency refused to crack down. In essence, it accepted industry's argument that it was sufficient that competition took place in arenas other than price, such as the frequency of dosage or the method of getting the drug into the body. "The producers regained this market power by differentiating their products along the lines that any other consumer good is differentiated," economic historian Peter Temin wrote. "Since the therapeutic effects of the drugs appeared to be identical, other-more familiar-quality dimensions had to be employed. So the firms intensified their advertising, their detailing, and their reliance on company identities. The postwar pattern of integrated drug companies competing by introducing and marketing new drugs was beginning to take shape."
Throughout the 1950s, drug companies, often drawing on the latest research emerging from academic labs but sometimes relying on their own resources, discovered class after class of new medicines. Antidepressants, antacids, anti-inflammatory medicines, antihistamines, and new chemicals for controlling blood pressure became mainstays of the modern medicine chest. Whenever one company broke new ground, other firms in the industry would introduce copycat versions of the original molecule within a very short time. The me-too drugs almost always entered the market at the same or within a few percentage points of the innovator's price.
By the early 1960s, popular anger over the high price of drugs led Senator Estes Kefauver of Tennessee to hold a series of hearings on the drug industry's behavior. A Yale-trained lawyer who had arrived in Washington in the late 1930s as an idealistic New Dealer, Kefauver by the early 1950s had became one of Washington's most powerful and closely watched senators, largely because of his well-publicized attacks on organized crime. But after his support for civil rights and principled opposition to the demagogy of Senator Joseph R. McCarthy cost him a shot at the presidency, he turned his attention to abusive corporate practices, using his chairmanship of the Senate Subcommittee on Antitrust as a platform. "I keep feeling that mergers, consolidations, and cooperation between large blocs of economic power are on the increase, and that this is bound to lead to total abuse of our free-enterprise system, and inevitably, to total state control-in short, statism," he told New Yorker writer Richard Harris in 1961. "That is something none of us want."
In a series of hearings between 1960 and 1962, Kefauver focused public attention on the drug industry's penchant for spending much of its time and resources developing copycat drugs, which, in defiance of every economics textbook, rarely resulted in competition on price. He called numerous medical professionals and former industry executives to testify. At one point, Kefauver pressed the former head of research at E.J. Squibb to estimate how much corporate drug research was driven by the desire to come up with me-too drugs. The retired executive replied that "more than half is in that category. And I should point out that with many of these products it is clear while they are on the drawing board that they promise no utility. They promise sales."
Ironically, the 1962 amendments to the Food and Drug Act that resulted from the hearings did little to curb the industry's penchant for pursuing me-too drugs. They required drug companies for the first time to prove their drugs were not only safe but effective. That change was put into effect largely because of the thalidomide tragedy, which came to light as the hearings were drawing to a close and was only prevented in the United States by the stalling tactics of an eagle-eyed FDA physician.
The first great era of drug discovery, then, which stretched roughly from 1935 to the mid-1960s, could also be called the era of molecular modification. Once a researcher-often in the public sector-identified a new chemical class that was effective against a disease state, every major drug company put chemists to work coming up with their own versions that could do roughly the same thing. "The great drug therapy era was marked not only by the introduction of new drugs in great profusion and by the launching of large promotional campaigns but also by the introduction of what are known as 'duplicative' or 'me-too' products," noted pharmacologist Milton Silverman and physician Philip R. Lee of the University of California at San Francisco. Surveying the drug scene in the early 1970s, they counted more than 200 sulfa drugs, more than 270 antibiotics, 130 antihistamines, and nearly 100 major and minor tranquilizers. Most of the new drugs "offer the physician and his patient no significant clinical advantages but are different enough to win a patent and then be marketed, usually at the identical price of the parent product, or even at a higher price."
The biotechnology revolution of the late 1970s and 1980s and the NIH-funded explosion of knowledge about cellular interactions set off a second wave of drug innovation.
Excerpted from The $800 Million Pill by Merrill Goozner Copyright © 2004 by Regents of the University of California. Excerpted by permission.
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Meet the Author
Merrill Goozner is former Chief Economics Correspondent at the Chicago Tribune. Winner of six Peter Lisagor Awards, Goozner is a contributing editor for The American Prospect. His work has also appeared in the New York Times, Washington Post, Boston Magazine, Columbia Journalism Review, Washington Monthly, Fortune Small Business, Slate.com, and Salon.com, among other publications.
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