'Deadly Monopolies:' An Excerpt From Harriet A. Washington's New Book

The Role Of Patents In Inflating Drug Costs: An Excerpt From 'Deadly Monopolies'

This is an adaption from "Deadly Monopolies" Harriet A. Washington's new book, which explores how the corporate takeover of the medical industry is affecting the healthcare system and the future of medicine. This excerpt examines the role of medical patents in slowing U.S. research and inflate drug costs. The book was released on Oct. 4 by Doubleday.

Expensive medicines are always good: if not for the patient, at least for the druggist.

-- Russian proverb

"Could you say that again?" Heather managed to croak weakly. What she thought she heard had so stunned her she was surprised she could produce any soundat all. Robin, the benefits manager, hesitated a moment. "I said that despite the
changes to the insurance plan, your medication costs will continue to be covered," she replied. "However, there is a deductible, and you will be responsible for the out-of-pocket costs of your medication until the deductible is met."

"And the deductible is $2500?" demanded Heather incredulously. Not waiting for an answer, she continued, "So I have to pay for my meds until I have bought $2500 worth?"


"I was in shock," recalls Heather, 35. "I had walked into the HR conference room for what I thought would be a routine benefits meeting and I was going to leave not knowing how I would pay for my pills. I felt clueless and confused. But I knew I needed my medication." Her medication is called Mysoline, and Heather needs it to function because she suffers from epilepsy. She is also a strong, vibrant woman who volunteers at a food bank and holds down a high-energy position as a publicist for a small New York
City publisher.

But she well remembers being a delicate child beset by allergies and wracked by frequent seizures until her neurologist finally discovered that Mysoline quelled them without triggering her numerous sensitivities. For 24 years she has never missed a pill or a doctor's appointment, and she has been rewarded with a seizure-free life.

After receiving the bad news in January 2008, Heather quickly discovered that area pharmacies only sold the 250mg Mysoline tablets she needs in a three-month supply, for $1200, which she had to borrow. After that, she ordered a one-month bottle online
and subsequently traveled from pharmacy to pharmacy in search of the drug. But:

Suddenly, one day in June, I could not find a pharmacy that carried it anywhere. I called the drug's maker in California and the representative informed me a casual voice that they had stopped manufacturing it, and he didn’t know if or when it would be back on the shelves. He said it like he was saying 'It's sunny outside.' He also said something about it being off-patent or the patent changing hands; I was so nervous, I don't remember. I asked, 'What am I supposed to do? I need it,' and he said airily, 'Oh, there must be a generic.' No, he didn't know the name. No, he didn't know where I could get it. No details or advice: That was it.

Heather's doctor found the generic, which worked safely for her. "Then," Heather recalled, "in the summer of 2009, the company called to tell me that the medication would be back on the shelves in mid-July. I was glad to get it, but I resent the indifference that the drug maker and my employer showed toward my life and health." Heather suffered no physical harm from her ordeal, but it has changed her outlook. "This wasn't elective; this was a necessity, and I was shaken to think that my medical lifeline could be snatched away just like that. I don't think I'll ever see drug companies the same way again."

Mysoline, Heather's medical lifeline, is not a novel "blockbuster" -- usually defined as a drug with annual revenues of over US $1 billion. It is an unfashionable drug introduced in 1950 by a company that is now known as AstraZeneca, and it has been surpassed by many more modern anticonvulsives, although it is less toxic and triggers fewer side effects than most newer drugs.

Mysoline is not even very profitable despite its substantial price tag, because relatively few people buy it. It had vanished from store shelves in 2008 after its maker determined that it failed to meet "certain commercial criteria": it simply wasn't profitable enough. But its sudden, unannounced withdrawal had put Heather and others who depend on it at risk for more than isolated seizures: As its label clearly warns, abruptly discontinuing Mysoline can cause status epilepticus, a life-threatening condition in which the person's body is wracked by repeated, frequent seizures that can kill.

The right to profits

At first blush, one may be tempted to brush aside complaints about profit-driven marketing decisions and argue that a nongovernmental for-profit company has the right to abandon any product that fails to meet its commercial criteria. Ours is an unapologetically capitalist society and 'profit' is not a dirty word. Yet Heather's situation dramatizes how in the absence of sufficient countervailing factors, the weighing of profits over patient welfare has generated American nightmares that arise largely because the US government allows drug companies to set prices without the regulation and controls employed by some countries, such as Brazil and Canada.

Showdown at the Border

Happily married and with three children aged 6 to 11, John Colacci thought of himself as a blessed man. He was supported by an extended family, many friends and a can-do attitude as he stood before a packed ballroom at a 2001 colorectal-cancer fundraiser in Toronto. There, he quoted Eleanor Roosevelt: "Yesterday is history; tomorrow is a mystery. Today is the gift: That’s why it is called 'the present'."

The fundraiser was held to raise money to offset the considerable medical expenses of cancer patients like himself. “None of us knows for sure how long we have to live," he continued, "but we always have a choice how we spend our time in the present moment." However, in 2004 Colacci learned that he was running out of time: The Avastin he had been taking since his cancer recurrence had stopped working, and the statistics gave him just 4.6 months to live.

As he anxiously researched his treatment options, Colacci learned that Erbitux, a last-ditch medication for his metastatic colorectal cancer existed, but not for him. (If Erbitux sounds familiar, this is because it is the drug that led to Martha Stewart's jailing over insider trading in 2004: ImClone, the biotechnology company that developed it, was founded by her friend Sam Waksal.) Erbitux helps many cancer patients who do not respond to other medications, but Bristol-Myers Squibb had decided not to launch the drug in Canada because it could not charge a high enough price there.

In 2004, Erbitux cost $US 17,000 a month, making it one of the most expensive cancer drugs. Moreover, it treats colorectal cancer, which strikes 106,000 Americans a year. But it was far from the priciest cancer medication: Zevalin treatments, for an unusual type of lymphoma, cost $US 24,000 a month. By contrast, the Avastin Colacci had been taking was a relative bargain at $C 4,000 a month.

BMS decided to shun the Canadian market, which has long been a thorn in the side of the drug industry because it flatly refuses to pay top dollar for the pharmaceuticals it buys to distribute through its governmental health services. Instead, its Patented Medicine Prices Review Board assesses a drug’s cost in Germany, France, Italy, Sweden, Switzerland, the United Kingdom and the United States, then applies a formula to ensure that Canada pays something near the list's median. For many years, this strategy ensured that Canadians' medications cost less than those of people in most other affluent Western nations, including the US.

Recently, however, drug makers have reacted by playing hardball and refusing to sell their medications in Canada at all -- in essence, holding Canadian patients hostage for a higher price. Because Erbitux was protected by patent, no other company could legally offer it for sale without a license from BMS, leaving patients like Colacci without access to the drug.

So Colacci turned to the United States. During the Erbitux standoff, Canada spent $US 208,125 within a year in order for him to cross the border and undergo weekly treatments with the US-licensed drug at the Roswell Park Cancer Institute in Amherst, N.Y. Colacci was lucky: some other Canadians had to pay similar sums out of pocket.

Was the drug effective? "I got fabulous results from it," Colacci, 43, exalted in 2008. "It literally melted it [the tumor] away."

Bristol-Myers Squibb finally relented and agreed to sell Erbitux to Canadians at their government's price -- a hefty $56,000 for the average course of therapy -- high, but lower than what the Canadian government had paid for Colacci's US drugs, and lower than what we pay in the US. However E. Richard Gold, director of McGill University's Centre for Intellectual Property Policy, sees this less as a happy ending than a cautionary tale. "Both the Commissioner of Patents and the Competition Bureau should be prepared to step in to prevent such abusive behavior in the future."

Surrounded by his family, John Colacci died of cancer on Thursday, June 18, 2009, at the age of 44.

Was the Erbitux worth the astronomical price? Perhaps a better question is, 'Why did it cost $US 208,000?' This is not an isolated case: Eight cancer medicines cost more than $US 200,000 annually, and three others cost more than $US 350,000 a year.

Why do our medications cost so much?

The numbers game

Pharmaceutical companies, principally represented by PhRMA , the Pharmaceutical Research and Manufacturers of America, don't deny that their prices are high: Pharmaceutical firms claim that high prices are necessary to recoup and protect their mammoth investments in developing patented medicines. After the Unites States Patent and Trade Office (USPTO) issues patents for a company's medicines, genes, cell lines, genetically-tailored animals or other medically valuable inventions, and the FDA approves its drugs, the company can realize profits only by exploiting that exclusive patent, they explain.

PhRMA states on its website:

It takes about 10-15 years to develop one new medicine from the time it is discovered to when it is available for treating patients. The average cost to research and develop each successful drug is estimated to be $800 million to $1 billion. {italics mine} This number includes the cost of the thousands of failures: For every 5,000-10,000 compounds that enter the research and development (R&D) pipeline, ultimately only one receives approval … Success takes immense resources.

Pricing innovation

Does it really cost more than $800 million to create a new drug? In 2001, Joseph A. DiMasi, now Director of Economic Analyses at the Tufts University Center for the Study of Drug Development, partnered with the University of Rochester to calculate the answer: Each new drug for the US market takes 12 to 15 years and costs $802 million, a price that had doubled since 1987.

PhRMA praised DiMasi's study and verified the accuracy of its findings, constantly citing the $802 million figure -- often rounded down to $800 million -- in its publications and in interviews that defended high drug prices. But a US government study just the year before had determined that a new drug took from 10 to 12 years to come to market at a cost of $359 million -- less than half that alleged by the Tufts study.

From the beginning, independent expert analysts had wished to scrutinize the DiMasi study’s data, but the individual pharmaceutical companies that had supplied its figures insisted that their numbers were proprietary -- industry secrets -- and over the next year, they successfully fought their release to independent evaluators.

Meanwhile, the $800 million figure gained wide currency and today, a surprising number of people can cite it. Drug makers certainly can: The mammoth price tag, which was recently revised upwardly, to as much as $2 billion per new drug, forms the backbone of their rationale for high prices.

But the industry's financial claims are studded with factual and logical flaws that cause a dramatic overestimation of medications costs. Many of these issues are detailed in financial writer Merrill Goozner's revelatory book The $800 Million Pill.

Among the flaws in the Tufts study :

The Tufts study calculated the costs of atypical drugs.

Instead of a broadly representative sampling of drugs, the Tufts study confined itself to pricing a narrow, atypically expensive selection of drugs that it called "self-originated new chemical entities." These are more commonly called "new molecular entities," or NMEs, and they are the rarest type of medication in that they represent a completely novel treatment for disease, rather than a "retread" of existing medications. Over the 12-year period preceding the Tufts study, only 42 percent of new drugs were NMEs, and only about 26 such drugs enter the global market each year.

By contrast most drugs that appear on the US market today are slightly modified versions of existing drugs, popularly called "me, too" or "copycat" drugs. They are created by tweaking the molecular structure of FDA-approved drugs slightly to produce a closely related drug with similar effects. Or the 'new' drug is chemically unchanged, but it is released on the market in a different strength, or it is reformulated as extended-release pills, syrups, or inhalants. Alternatively, medicines are paired with other drugs, as when Claritin was combined with the decongestant pseudoephedrine to create Claritin-D, to treat people who suffer from allergies and colds. Or, a drug is turned to novel uses, as when Prozac was 'repurposed' as Sarafem for menstrual symptoms.

Although drug makers bolster their demands for high price tags by complaining of a limited time to exploit their 20-year patents, this argument ignores these abundant strategies by which corporations garner new patents or at least gain patent extensions of five to fourteen years.

The resulting doppelganger drugs rarely meet a new medical need but they are familiar, predictable, and relatively cheap to formulate and test. NMEs, however, are more difficult and costly to discover, formulate and to test, which leads to the next of the study's distortions.

The Tufts study calculated the costs of unusually expensive drugs.

Not only did the Tufts calculation include only the atypical, expensive NMEs, it focused on the rarest, costliest kind of NME -- the drug whose development and testing costs are borne wholly by the pharmaceutical industry. Not one of the 68 drugs in the study was developed with any kind of government financial support, which is very unusual.

Government-funded academic researchers are usually responsible for the discovery and innovation that the pharmaceutical industry has capitalized. The early development costs of most drugs are borne by the government, which subsidizes university and other public research through grants. Biotechnology companies tend to develop the university's government-supported drug discoveries, and then the biotechs partner with or are purchased by large pharmaceutical companies. Thus the drug firms acquire the medication and the patent without paying for the taxpayer-subsidized research.

To give just a few examples: Dennis Slamon of UCLA discovered herceptin, which staves off breast cancer recurrence; Craig Jordan of Northwestern University developed tamoxifen, also for breast cancer, and Brian J. Druker of Oregon Health and Science University shepherded kinase inhibitors, which offer tailored, focused attacks on cancer cells rather than the more diffuse attacks that also ravage healthy tissue. Entire families of essential medications such as protease inhibitors for HIV/AIDS, were discovered and initially developed in academia, not in corporate laboratories.

The Tufts study inflated its estimate by adding a spurious 'opportunity cost.'

DiMasi found that the average price of developing an atypical NME drug without any government support totaled approximately $400 million. But he then added an "opportunity cost." that more than doubled the figure, to $802 million.

John Stuart Mill introduced the concept of an opportunity cost as the cost of what one surrenders in one direction in order to pursue an investment in another. If, for example, I use $10 to buy a movie ticket instead of depositing the cash in a savings account, the opportunity cost is the interest I would have earned from the $10. If I wait long enough to calculate it, the value of the interest on that $10 in forsworn savings will double it, to $20.

Similarly, if a pharmaceutical company spends, say, $240 million developing a new drug instead of banking the funds, the opportunity cost is said to be the interest it would have earned had it made that deposit. Or the opportunity cost can be the dividends the firm would have earned had it bought stock in Starbucks instead. Or it can be the warm sense of altruism and glowing corporate image the firm would have basked in had it donated the same funds to global hunger relief, because an opportunity cost needn’t be limited to money. But in this case of drug-development costs, money is what is at stake.

In this case, the Tufts analysts decided that the opportunity cost was the loss of the investment income that drug makers could earn had they invested their funds instead of dedicating them to the search for new drugs. Because DiMasi added them only some time later, after they had accrued value with interest, the value of the opportunity costs approximately doubled his estimate of drug development costs.

Although the accounting firm Ernst & Young validated this cost for the Tufts team, Goozner points out that applying the opportunity cost contradicts generally accepted accounting practices, because for a drug company, drug research is not an investment; it is a business expense. If drug companies invested their resources in Starbucks or in global hunger eradication instead of drug design, they would no longer be drug companies. Expending resources on drug design and marketing is not an option for a drug company; it is a necessity and opportunity costs simply do not apply. In fact, only two of the seven studies that the Tufts report references include an opportunity cost. Removing it slashes the $802 million price tag about in half, to $403 million.

The Tufts calculations ignored drug makers' hefty tax benefits.

Pharmaceutical companies receive more tax deductions than any other industry: in fact, after tax benefits are applied, the expense to the industry of each R&D dollar spent is only $0.66. When these tax breaks are applied to the per-drug cost calculations, the cost is further reduced, from $403 million to $240 million.

Tufts' calculations overestimated the actual costs of drug trials—and their necessity.

The report claims that the expense of conducting clinical trials constitutes 70 percent of the cost of bringing a new drug to market. But this is only because clinical trials conducted by the drug industry carry an unusually high price tag, much higher than comparable ones conducted by the government.

The National Institute of Allergies and Infectious Diseases, or NIAID, for example, spent $1.5 billion to conduct 1700 clinical trials between 1992-2001. The agency had to pay for the studies and also for the treatment, care and testing of 100,000 volunteers. The Government Accounting Office found that the average extra cost of maintaining a patient in their clinical trials of an experimental therapy was only $750 more than maintaining him on standard therapy.

In clinical trials conducted by private industry, however, the average additional cost was $2500.

Moreover, a strange practice inflates the cumulative cost of the drug industry's clinical trials:. A CenterWatch study determined that in 2000, the industry spent $1.5 billion on clinical trials of drugs that had already been FDA-approved.

Why? Because industry’s clinical trials include "seeding" trials, in which pharmaceutical sales representatives induce doctors to prescribe a drug to a large numbers of patients. In “switching” trials, large numbers of doctors are induced to change their patients to another medication -- that of the company conducting the trial -- and data on the results also are scrutinized for any impressive-sounding results. The resulting data are collected and exhaustively mined by the company for any positive results that can be used in marketing, advertising and in "physician education" about the product. Such trials often lack a control group, are sloppily designed or otherwise fail to meet FDA standards, but they are useful for spurring sales.

Appalled, the editors of 13 medical journals united to write a New England Journal of Medicine editorial that condemning. "the use of clinical trials primarily for marketing in our view [which] makes a mockery of clinical investigation and is a misuse of a powerful tool."

Financial writer Merrill Goozner calculates that even when it includes the inflated costs of irrelevant clinical trials and of atypically expensive industry-generated NMEs, the corrected cost of bringing a pill to market, using PhRMA's own data, falls to $240 million -- "not chump change, but not $800 million either."

What did other analysts find when they examined the Tufts study? The Global Alliance for TB Drug Development (TB Alliance) a Swiss-based network dedicated to providing needed drugs to the developing world, estimated the cost of a new drug at $150 million to $240 million— identical to the Goozner-corrected $240 million estimate above. The Health Research Group of the Ralph-Nader-founded Public Citizen arrived at a figure of $110 million, which fell to $71 million after tax deductions.

So the Public Citizen, Merrill Goozner and TB Alliance accountings, based on PhRMA's own data, share a ballpark that ranges from $71 million to $150 million ($240 million for the atypical NMEs).

And the $800 million figure so widely touted by drug companies? Public Citizen’s Dr. Sidney M. Wolfe told The New York Times "This is just a thinly disguised advertisement for the pharmaceutical industry to justify continued price-gouging."

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