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June 9, 2004

The $800 Million Pill: The Truth Behind the Cost of New Drugs

Anatomy of a drug patenting case. How taxpayer money pays huge dividends for pharmaceutical rights.

Every year, manufacturers of HIV drugs take in nearly as much as they spent developing those drugs, total. That’s every year. Their profit rate is over 50%, and for this we taxpayers can take a bow. The market for the drugs is subsidized, as it should be. Insurance pays — which means the rest of us pay, whether as ratepayers to insurance companies or taxpayers to the federal government.

Not only that. Most of the cost of developing these drugs came not from the pharmaceutical companies but rather from us taxpayers. The federal government contributed some $10 billion, as opposed to some $5 billion from the pharmaceutical industry. The industry got the patents and the profits while we got the bills.

If that arrangement makes sense to you, you probably won’t be interested in Merrill Goozner’s The $800 Million Pill: The Truth Behind the Cost of New Drugs. Others will. Goozner is the former economics correspondent for the Chicago Tribune, but he doesn’t approach the subject the way economists do — that is, from the standpoint of an abstract market model. Instead he asks how the pharmaceutical industry really works, and how new drugs actually come about.

What he finds does not gibe with the official story line, which posits a lone inventor or enterprising corporation, driven by dreams of patent lucre, and achieving breakthroughs single-handedly by dint of virtue and hard work. That story line has dominated the debates over patents, drug policy and pricing. It led to the policy of granting private patents on research paid for by taxpayers. It has stymied efforts to control drug prices and permit Americans to buy their drugs from Canada where they are less expensive.

Goozner puts the narrative to the test of actual experience. He looks at AIDS drugs, the quest for a cancer cure, the race to map the human genome, and the development of Epo, the drug that launched Amgen — its manufacturer — on its path to riches and helped ignite the whole biotech fervor. It turns out that the official version is essentially a crock. Invention is a social process not an individual one. Researchers build on one another’s findings.

More, the patent often goes not to the most diligent and deserving, but to those lucky enough to join a project at the right juncture, or to schemers who are most adept at playing legal angles. Patents themselves become objects of mountainous litigation that ties up time and resources that should be spent on research. Much of the money that drug companies spend on research goes not towards genuine innovation, but rather towards “me-too” drugs that attempt to poach off territory a rival already has claimed. They spend more money on promotion than on research to begin with.

And on and on. Epogen — Epo for short — is a paradigm case. The drug is used to treat kidney failure, and today accounts for roughly half the $5 billion that Amgen makes annually. It is among the most expensive drugs on the market, but not because it is costly to make or was so costly to develop, for the company at least. Amgen recouped the latter expense in a couple of years. It justifies the high price rather on the grounds that are mantra in the industry: it needs the financial feedstock for the big breakthroughs ahead. (Goozner’s title refers to the industry’s $800 million estimate of the cost of generating a new drug.)

Yet as Goozner points out, most of the research that went into Epo didn’t come from Amgen or from private investors. It came from a quiet academic by the name of Eugene Goldwasser, whose work for two decades was funded by the federal government. Along the way, another researcher tried to grab the patent. Goldwasser himself finally had to hook up with Amgen, to pursue the latter stages of his research. The company almost dropped the project when it didn’t yield fast returns. “Goldwasser couldn’t understand how a private company could be so impatient,” Goozner writes. “He’d spent two decades looking for the molecule. They were ready to quit in less than two years.”

Goozner’s summation of the Epo story is worth quoting in full:

After the artificial version of Epo entered the marketplace, its story turned into a sordid tale of endless patent litigation, adroit marketing, and political fixing designed to discourage rivals, promote the overuse of the drug, and maintain its high price, which is largely paid by the federal government’s Medicare program.

Like all drug companies, Amgen claims that the high price of Epo is necessary to fund its search for innovative new drugs. Yet a close look at Amgen’s research performance during the fifteen years after Epo’s arrival reveals a company whose labs were unproductive by every measure. Its biggest success was coming up with a slightly modified version of the original Epo molecule, which enabled it to go after other companies’ markets. This is the classic ‘me-too’ behavior of large pharmaceutical companies, which innovative start-ups like Amgen were supposed to supplant.

The culture inside Amgen changed during those years. The company used much of its cash bonanza to buy back its own stock (to bolster the price) rather than search for new cures. A new CEO took over who came from the finance side of the operation. “The management of earnings-per-share growth became very important rather than being really innovative,” a former research director said. “It never really developed a culture of taking risks, and became more interested in managing the existing products.”

This is what happens to science when the money motive becomes supreme. Meanwhile, the contributions of taxpayers and the knowledge commons are ignored. In the much-publicized race to map the human genome, the media cheerleaders overlooked that the sophisticated machines that made the undertaking possible had been developed with funds from the Department of Energy, which was interested in research on radiation damage. (The internet began in a similar manner under the Department of Defense.) Much of the genome research itself was funded by taxpayers as well.

Yet now, gold diggers are filing patents by the thousands, to try to stake a claim to the genetic boon. These are components of our own bodies we are talking about here, not just stuff in the ground. Future researchers will need both lawyers and deep pockets to navigate these proliferating patents.

The rest of us will have to pay a king’s ransom to use any cures that arise from the research that we ourselves paid for. Not without reason did a leading British researcher call the rush to patent genome sequencing for commercial gain “totally immoral and disgusting.”

Even drug companies are alarmed because they know that patents on basic genetic materials and life processes will become tollgates for all further innovation. It will be as though someone could patent the English language and collect a royalty from everyone who uses it. (The Patent Office even is granting patents on metabolic processes that occur naturally in the body.) The major companies actually have set up a nonprofit consortium to catalogue a particular kind of gene — called single nucleotide polymorphisms or SNPs — and keep them in the public domain. In other words they have gone open source, to this extent at least.

It all adds up to a kind of Aesop’s fable, in which greed destroys what generosity has created. The love of gold is killing the goose. Steering research according to patent claims and corporate profit involves great unreckoned costs. Goozner describes, for example, how the major pharmaceutical companies resisted the concept of a “cocktail” of different drugs to combat AIDS — i.e., a cooperative approach — because each one hoped to find a blockbuster drug that would corner the market for itself. (The cocktail eventually emerged nevertheless.) There’s also the diversion of research dollars into “me-too” drugs, in which drug companies work minor variations on the successful offerings of their competitors instead of developing ones that are genuinely new.

While drug companies are contriving pills that aren’t really needed, they are ignoring problems for which there is great and urgent need. There have been no new drugs for diseases that plague the developing world, for example, such as tuberculosis, malaria and black fever. The reason is not that these defy solution. Potential cures exist today. “Some are sitting in academic labs waiting for a commercial developer,” Goozner observes. “Some are gathering cobwebs on industry shelves.” The problem is that the people who need the cures do not have money to pay for them. In the strict market model of medicine, a disease that afflicts people without money — and who therefore cannot muster “demand” for its cure — functionally does not exist.

Perhaps the worst part is the neglect of the single best health care system — namely, prevention and public health. When medicine becomes a commodity, there is a vested interest in disease. The weight of the society shifts towards medical cures instead of common-sense prevention. Goozner shows how the Reagan Administration, which championed the marketizing of the medical system, virtually halted federal inquiry into the environmental sources of cancer. “Investigators who wanted to explore questions about the concentration of certain cancers among subgroups like blue-collar workers and minorities, or clustered in certain parts of the country, were rarely funded.”

All these points have been made before. Goozner’s special contribution is to show that they are warp and woof of the way the drug industry operates — and increasingly, federal research policy. The book is not always easy going. The material is dense; and while Goozner strives to keep the style accessible and journalistic, the forest sometimes does slip back into the trees. A reader’s persistence is amply rewarded, however. This is a book that truly needed to be written.

Goozner does not argue for a totally socialized model, which has pathologies of its own. He urges instead a host of measures to keep parasites from abusing the patent system and nudge drug companies more in the direction of genuine innovation. There should be more rigorous trials to weed out “me-too” drugs, for example, and closer scrutiny of whether new drugs truly are worth the price. Congress should create, within the National Institute of Health, an institute on clinical practice, to advise doctors on the best ways to use the available drugs. This would replace the huckstering of drug company “detailers” with something closer to real science.

The dynamics of the industry are such, Goozner says, that universities, nonprofits and the federal government will have to play a primary role, especially in basic research that makes possible the development of new drugs. The absence of a direct profit motive actually could be a plus. Most of us know the reply of Jonas Salk, who discovered the first polio vaccine, when Edward R. Murrow asked him why he didn’t seek a patent. “Could you patent the sun?”

Eugene Goldwasser is less famous but no less on point. Back in the late 1970s, he had to submit a report to the federal government because his work might be patentable. Years later he was searching through his files to help Amgen prepare for another chapter in its endless patent litigation, and came upon that report. “They never responded, and I didn’t follow up,” Goldwasser said. “I was too busy doing science.”