The great billion dollar drug scam | by Khadija Sharife

by Oct 13, 2011All Articles

Alongside pneumococcal diseases such as meningitis and pneumonia,rotavirus-related diarrhoea is a primary childhood killer in developing countries, thought to snuff out the lives of 500,000 children each and every year. An overwhelming 85 per cent of these children are African and Asian. The need for medical miracles is as great as ever, but corporate mispricing generates huge profits, while driving up the price of live saving medicines. British-based drug corporation GlaxoSmithKline (GSK) recently offered a five-year deal to supply poor nations with 125 million doses of the rotavirus vaccine – Rotarix – at $2.50 a dose, just five per cent of the current going price in Western markets. Through the GAVI group, the international vaccine agency financed by developed nations such as the UK, it is hoped that GSK and pharmaceutical multinational Merck – who,between them, dominate the rotavirus vaccine market – will provide a secure line of low-cost drugs for as many as forty countries in the near future.

But is it really a discount, and if so, who is paying the cost?  The financing mechanism subsidising the vaccine is named the Advance  Market Commitment (AMC), a pot created by the G8, as well as the World Bank and the Gates Foundation, as a “pull” incentive for drug  multinationals to consider developing countries’ long-term markets for pharmaceutical “public goods”, such as vaccines. Rotarix has taken off well: Since 2007, some 50 million children – through 100 million doses -have already benefited from Rotarix; by 2009, global Rotarix sales reached $440 million – increasing by 50 per cent from 2008, and Merck’s Rotateq reach $564 million in sales.

GSK Chief executive Andrew Witty described the pricing structure as,  “neither a gimmick nor a one-off philanthropic gesture”, but rather  “part of a concerted strategy to change our business model” – designed to combine “commercial success with long-term sustainable contributions”.

Pricing structures and profits
Drug companies such as GSK have often claimed that the high cost of  “innovation” ie: research and development (R&D) is between $1bn and  $1.7bn to bring a new drug to market. The AMC and GAVI – collecting some $4.3bn to finance purchase of vaccinations, were designed with the premise that the high cost of drug multinationals’ R&D must be met.

During the past several decades, the pharmaceutical industry in the US – more than half of which comprises European-based companies – has largely been the most profitable industry in the nation’s economy, thanks to mechanisms such as the lack of a government-imposed pricing structure.  “Free pricing and fast approval secure rapid access to innovation  without rationing,” said Daniel Vasella, the former head of  (Swiss-based) Novartis, of the advantages of doing business in the US.

Drug multinationals claim that US consumers are forced to fund the  necessary research and development in order to keep global innovation going. In Australia, Europe, as well as Canada – the source of much prescription drug “re-importing” by US citizens, where drugs sometimes sell for half the going US price – governments ensure pricing structures render patented drugs affordable.

While drug multinationals generate considerable profits from these  countries, about 50 per cent of global drug industry profits are  generated in the US. In 2006, for instance, global prescription drug  sales totalled more than $640bn – of which almost $300bn were  US-generated sales.

But the real deception is less the Machiavellian tactics used by Big
Pharma to Botox the bottom line than the terrible myth behind the “true” price of innovation: the $1bn pill. From 1996-2005, Big Pharma firms spent $739bn on marketing and administration (M&A): “Administration” costs here include accounting, executive salaries (including bonuses,stock options etc) – as well as human resources expenditure.

“Marketing”, meanwhile, consists of direct-to-consumer advertising,  sales pitches and free samples to doctors, alongside advertising in  medical journals.

A closer look at drug cost
During the same 1996-2005 period, drug companies invested $288bn in R&D and $43bn in property and equipment, while generating $558bn in profit.

From the outset, it is possible to see that R&D ranks second to last in terms of expenses. But the breakdown of R&D itself is opaque: companies do not list actual expenses for the development of a particular drug,claiming that information comprises proprietary and/or confidential commercial secrets.

Yet, according to the Harvard Business Review: “The cost per new  approved drug has increased more than 800 per cent since 1987, or 11 per cent per year for almost two decades.” Drug corporations such as  Novartis and GSK state that companies producing generic drugs – often Indian – are able to bypass such costs, and sell their “copied” drugs for a fraction of the price of the patented product – often undercutting the intercontinental firms by as much as 65-99 per cent.

The “$1bn cost” is derived from a 2003 study [PDF] published in the  Journal of Health Economics by Joe DiMasi et al from the Tufts Center for the Study of Drug Development. The authors and their organisation claimed that the study was unbiased, despite the fact that the Tufts Center is itself some 65 per cent financed by drug companies.

Though the findings have been normalised as factual by the media, the facts have long since been debunked by independent specialists.

The authors surveyed ten large pharmaceutical corporations (between them responsible for 42 per cent of R&D expenditure in the US, where the bulk of such work is carried out), examining the R&D costs of 68 randomly selected drugs, and determined the cost of the development of each at $802 million (elevated to $1bn when adjusted for inflation).

As the data was submitted confidentially by the drug companies to the  authors, there is no way to verify the quality of the information, nor was there any accounting for the potential volume of intra-company corporate mispricing. The names of the firms were not mentioned; nor were the names of the drugs, the type of drugs; or the status – whether a priority drug, comprising advanced treatment, or a “me too” drug – ie: a variation of products already on the market.

‘Demythologising’ the costs
For starters, the $802 million figure failed to take into account the opaque and strange manner of accounting involved, beginning with  “capitalised costs”. According to the authors, R&D expenditures, “must be capitalised at an appropriate discount rate – the expected return that investors forego during development when they invest in pharmaceutical R&D instead of an equally risky portfolio of financial securities”.

As Marcia Angell, US physician, former editor in chief of The New  England Journal of Medicine and senior lecturer at Harvard Medical  School, stated: “The Tufts consultants simply tacked it on to the  industry’s out-of-pocket costs. That accounting manoeuvre nearly doubled the $403 million to $802 million.”

So, when taking into account updated costs by PhRMA (2006), increasing overall R&D to $1.32bn, more than $650 million has just been included as “research and development” by drug companies claiming mythical profits that might have been generated, had they invested in, say, Wall Street – and not the scientific “innovation” used to justify gross profits from exclusive patents.

The study also neglected to include corporate tax breaks and subsidies – as well as deliberate and legal corporate tax avoidance (let alone any illegal tax evasion).

In the journal BioSocieties, sociologist Donald Light and economist  Rebecca Warburton “demythologise” the costs of R&D drug development by also analysing the tax breaks involved in R&D costs.

The US Office of Technology Assessment (OTA) revealed: “The net cost of every dollar spent on research must be reduced by the amount of tax avoided by that expenditure.” The authors used data from official sources such as the Tax Policy Center, to reveal additional tax savings of 39 per cent. Cumulatively, taxpayer subsidies and credits reduced the overall costs from $403 million to $201 million.

Tax secrecy
Moreover, as this Ernst & Young “Tax Planning” article explains, R&D  costs are usually shifted to high tax jurisdictions to offset costs.  Meanwhile, profits generated by patents are often “re-located” to  low-tax jurisdictions. Pharmaceutical companies prefer to generate R&D “expenses” in high-tax jurisdictions such as the US in order to offset the costs against taxable income. Yet the cost of R&D does not included “avoided” tax. Not surprisingly, most pharmaceutical companies are also based in low-tax secrecy jurisdictions such as Delaware in the US, where profits can be shifted into passive profit and intellectual holding companies.

In an article [originally printed in the New Age newspaper, published online here] I wrote with John Christensen, the founder of the Tax Justice Network and a former economic advisor to Jersey, one of the UK’s top tax havens, we revealed how tax secrecy and intellectual property (IP) was being exploited to profit drug corporations, rather than serving the needs of vulnerable people.

“Pfizer, Novartis, GlaxoSmithKline – as well as over 60 per cent of  Fortune 500 multinationals, all maintain entities in Delaware, taking full advantage of legal and financial opacity tools. In addition to banking secrecy and zero disclosure of beneficial owners, Delaware allows for parent companies to establish holding companies within two days, producing nothing, conducting no economic activity in the state,and generally hosting just one shareholder (the parent company). Such entities, allowing the parent company to pay the newly created entity a “fee” for use of IP, serves as a passive conduit converting taxable income to passive non-taxable profit. The entity’s sole purpose is to own and ‘manage’ laundered income generated from IP.”

The gigantic legal expenses incurred by specialists for developing  patents, legal defence, sourcing the tax havens and other IP-related  issues constitute more costs – included as R&D. This tax optimisation strategy closely resembles that of “high-tech” companies depending on intangible capital for the bulk of their wealth. According to Forbes magazine, by 1999, three of the four richest people in the world made their fortune from intellectual property rights. They owed their fortune, said Michael Perelman, to “Microsoft, one of the major holders of intellectual property rights, befitting the so-called New Economy in which ‘DOS Capital’ has supplanted Das Kapital”.

Profits from AIDS treatment
Intellectual property rights management can be a lucrative business  indeed. The first HIV/AIDS treatment, azidothymidine [AZT], sold under the brand name Retrovir, was manufactured by the company Burroughs Wellcome, later incorporated into GSK. In 1983, two years after AIDS was first reported, the US National Institutes of Health and the Pasteur Institute in Paris identified its cause – the HIV retrovirus. In that same year, Samuel Broder, head of the National Cancer Institute (an NIH branch), established a global team to screen antiviral tools, including the AZT molecule discovered by the Michigan Cancer Foundation, subsequently acquired by Burroughs Wellcome.

Broder’s NIH-NCI team, alongside scholars at Duke University, discovered the effectiveness of AZT against the AIDS virus and conducted early clinical trials in 1985. As Marcia Angell explained in her illustrative book, The Truth About Drug Companies, Burroughs Wellcome immediately patented the drug and “carried out the later trials that enabled it to receive FDA approval in 1987” after a review of only a few months. The corporation charged patients upwards of $10,000 per year for treatment and heavily congratulated themselves on the achievement of life-saving medicine.

After one such self-congratulatory letter by Burroughs Wellcome’s CEO to the New York Times, Broder and his colleagues from the NCI and Duke University responded angrily, stating: “The Company specifically did not develop or provide the first application of the technology for determining whether a drug like AZT can suppress live AIDS virus in human cells, nor did it develop the technology to determine at what concentration such an effect might be achieved in humans. Moreover, it was not first to administer AZT to a human being with AIDS, nor did it perform the first clinical pharmacology studies in patients. It also did not perform the immunological and virological studies necessary to infer that the drug might work, and was therefore worth pursuing in further studies. All of these were accomplished by the staff of the NCI working with the staff of Duke University.”

Driving the point home, they added: “Indeed, one of the obstacles to the development of AZT was that Burroughs Wellcome did not work with live AIDS virus, nor wish to receive samples from AIDS patients.”

Killer tactics
Paradoxically, the drug Retrovir was classified by the company as an  “orphan drug” ie: a drug where there exists a market of fewer than  200,000 people – and therefore not likely to be  commercially profitable.  This was done to claim 50 per cent credit from the government for the costs of clinical trials. In 2005, GSK was accused of artificially boosting their short-term profit by not increasing production to meet drastically increasing demand – thus creating “scarcity” for their patented product. This was seen as a last bid attempt to milk the patent which was to expire in September 2005. Shortly thereafter, the US government approved generic versions of the drug.

In Africa, GSK is known for its – literally – killer tactics.

When Ghanaian distributor Healthcare Ltd imported a generic version of the drug (a combination of AZT and 3TC – known as Combivir) from an Indian drug company named CIPLA, providing it at an affordable Indian price (90c per pill), rather than the patented US price ($10 per pill),GSK threatened the distributor with court, prompting Healthcare Ltd to cease sales. Yet even as GSK accused CIPLA of violating patent rights,GSK did not own the “rights” to Combivir in the West Africa regional patent office. AZT and other AIDS treatment remained blockbuster drugs for GlaxoSmithKline, generating $2.4bn profits in the first six months of 1997, thanks in particular, to AZT and 3TC. By 1998, AIDS was being referred to as a “world-wide health crisis”, considered by many as, “an epidemic”.

GSK subsequently made billions of dollars from a patent, controlled a market, and determined the lives – and deaths – of billions of people worldwide, for something they did not invent. They did claim, however,that they conceived of it working. This notion was enough to exclude the NCI scientists, including Broder, from being listed as inventors.

But is this a one-off example?

Of course, the US government is very conscious of moves designed to “avoid” taxation. But little effective action has been taken to tighten the tax net. In 2005, Congress extended a”tax holiday” to pharmaceutical corporations, allowing companies to repatriate hidden profits at just 5.2 per cent of the corporate tax rate. At the time, Pfizer had untaxed profits at $38bn; Merck $18bn; Johnson & Johnson $14.8bn – at least, those were the profits they were willing to declare.

Generally, a considerable portion (upwards of 12 per cent) of big pharma’s research and development (R&D) costs is Phase IV or “post-marketing” trials of drugs already commercially sold to consumers, in an attempt to expand sales. The figure was estimated at 75 per cent of R&D costs by the Tufts Center, said Harvard Medical School’s Marcia Angell.

“Since the majority of Phase IV studies will never be submitted to the FDA, they may be totally unregulated. Few of them are published. In fact, like all industry-sponsored trials, they are not likely to be published at all unless they show something favourable to the sponsor’s drug. If they are published, it is often in marginal journals, because the quality of the research is so poor,” she said.

Innovations and free-rides
Ironically, the Tufts Center study by Joe DiMasi et al, which estimated the price of bringing a new drug to market to be more than $800m, drastically skewed R&D costs by basing analysis not on the general state of approved drugs but instead on “self-originating NCEs” or “New Molecular Entities (NMEs)” which comprise only a small portion of drugs approved annually by the FDA – estimated at 35 per cent (1990-2000) – a figure that has since decreased in the past decade.

Pharmaceutical “innovation” is determined by two crucial factors: a) the creation of a “new molecular entity”(NME) – which in itself may or may not be useful for treatment but which signifies the introduction of a new, distinct molecular form, and b) an NME that constitutes a”priority drug”: ie: a drug that offers, in the words of the FDA,”a major advance in treatment or which provides treatment where no adequate therapy exists” –  in short, a therapeutic advance for serious illnesses.

Under the 1992 Prescription Drug User Act, the FDA operates via a two-tiered system of review: Standard Review (S) applied to drugs that offer only minor improvements over existing marketed drugs, and Priority Review (P), a fast-track – a six month process since 2003 – pretty speedy for any company who wants to drive through “innovation”.

Though the two comprise separate categories, by blurring the definitions, pharmaceutical companies are often able to misrepresent NMEs, with”innovations” justifying the high costs of patents ie: exclusive government-approved marketing rights.

From 2006- 2009, just 48 drug innovations (P+ NME) were approved by the FDA, while an average of 84 per cent of research funding comes from US taxpayer sources, such as the National Institutes of Health (NIH). Light and Warburton conclude that “the net corporate investment in research to discover important new drugs is about 1.2 per cent of sales, not 17-19 per cent”.

So, while drug companies claim that the EU has suffered from a lack of innovation, trailing behind US R&D expenditure by 15 per cent in 2004, little of this figure corresponds to reality.

Easy “free-riding” of the US public funds and R&D is the primary reason why drug companies have flocked to the US. Just a quarter of NMEs are estimated by specialists as being actually developed by drug companies, instead, most are licensed from government/public-financed labs such as the NIH and universities – as well as smaller companies.

Acts and licensing
In 2002, then-CEO of GSK Bob Ingram spoke to the Wall Street Journal on the subject of licensing: “We’re not going to put our money in-house if there’s a better investment vehicle outside.” Ingram pointed out that GSK was eager to reach the levels of other companies, such as Merck, which received 35 per cent of its revenue from licensing.

The cost differential between a licensed NME and one developed in-house is vast: a licensed NME costs just 10 per cent of actual R&D expenditure (2000) in contrast to an in-house developed NME at 74 per cent. In 2000, just 13 per cent of approved NMEs were developed in-house – a figure that has not drastically changed.

The system of licensing came about via the Bayh-Dole Act – named after Senators Birch Bayh (D-Ind) and Robert Dole (R-Kans) – designed to enable universities and small businesses to patent discoveries that came about from NIH-financed research (the primary distributors of taxpayer funds for medical research) – thereafter granting the patents to pharmaceutical corporations in exchange for royalties.

The Act did articulate taxpayer protection rights concerning non-exclusive licences – if the action “is necessary to alleviate health or safety needs which are not reasonably satisfied”, or the action “is necessary to meet public uses”.

But Ronald Reagan’s 1983 Executive Memo changed tack, liberalising access to include coverage for large corporations. Prior to this, publicly financed discoveries were considered knowledge in the public domain. One further piece of legislation – the Stevenson-Wydler Act – removed the barriers between”publicly funded” systems (mainly the government but also universities) and the private sector.

Weighing the costs
In short, depending on whether or not the NMEs were developed in-house, estimates by Light and Warburton – in addition to other specialists, such as Angell – reveal the costs of R&D as more along the lines of $50m – $200m.

So much for the $1bn pill – but what of the costs of development for the Rotavirus vaccine?

Vaccines are often priced 40 – 100 times more than the cost of production. Drug companies claim that pharmaceutical research is very expensive and that R&D costs are extremely high.

Unfortunately for GSK, the usual 5,000 or 6,000 clinical trial “subjects” – people involved in Phase III trials – drastically escalated to around 63,000 to 68,000 people – in order to rule out a perceived fatal side effect (intussusception) that forced Rotashield off the market some years earlier.

Prior to the massive Phase III trial, the costs of GSK’s trials ranged from $1.8 million to $2.4 million, stated Light et al. Unlike Merck, GSK conducted many trials in developing countries, drastically lowering the potential costs. But even estimating at the higher range, the total costs for GSK’s Phase I – Phase III trials reached between $128m and $192m – for all 63,000-plus people.

Few of the clinical trials conducted in developing nations are investigated by the FDA. A 2008 Pfizer presentation [PDF]showed just 45 of 6,485 (0.7 per cent) of foreign trials were scrutinised. In 2008, more than 76 per cent of the people used for clinical drug trials were foreign “subjects” – some 232,532 people.

The cheapened value of poorer peoples – including better “value for physician” must not be underestimated.

One report, dated 2000, by the inspector general of the US Department of Health and Human Services, disclosed that physicians in the US were paid $10,000 per patient enrolled for a drug trial – plus a further $30,000 on enrolment of the sixth patient. Costs, no doubt, included as “research and development”.

Aside from”cheapness”, in developing countries there exists far less regulation, oversight and awareness; and the poor are unlikely to litigate if and when damage/deaths occur as a consequence of the drug. This is particularly lethal when it comes to experimentation on children. More than 78 per cent of children-focused clinical trials were conducted outside of the US.

Vaccines and identification
The Rotarix vaccine was not developed in-house but was licensed in: In 1988, Richard Ward PhD isolated the human rotavirus strain and developed a live, orally deliverable vaccine candidate under a licensing agreement with the Virus Research Institute, which later merged with another company, to become Avant Immunotherapeutics, a small firm that has often received grants from the NIH.

As Donald Light, a professor of comparative health policy, and economist Rebecca Warburton revealed in their paper analysing the development cost of the rotavirus vaccine, Avant funded a Phase II trial of Rotarix in 1997-1998 which found the drug gave protection in 89 per cent of cases. Light et al go on to write that, in 1997, GlaxoWellcome (later GSK) negotiated global rights and agreed, in exchange, to finance development costs, paid Avant $5.5 million and agreed royalties of 10 per cent on net sales.

The rotavirus vaccine signified a radical turning point in the introduction of vaccines: usually, poorer nations wait out a 15 or 20 year period. GSK’s rotavirus vaccination instead proceeded via regulatory approval not in the country of manufacture, but instead, the country of first intended use – Mexico.

Why not Africa or Asia?
Mexico proved the perfect site for introduction: since the 1990s, the government created, expanded and strengthened a “national surveillance system” for diarrhoeal disease, noted Walsh and Situ. Hospitals and clinics had well-equipped laboratories to identify infectious diseases; the Ministry of Health regularly monitored and reported cases, as did the clinics and hospitals, as part of the Mexican Social Security Institute (MSSI) system.

Since 2004, the Pan-American Health Organisation (PAHO), comprising more than forty nations of the Americas, supported – along with other organisations – the development of rotavirus surveillance systems in countries including Argentina, El Salvador, Guyana, Uruguay, Suriname, Trinidad and Tobago and Honduras. Monitoring was engineered to”characterise the proportion of diarrhoeal hospitalisations attributable to a rotavirus infection, serotypes of circulating rotaviruses, and the seasonality of rotavirus infections”, writes Julia Walsh MD in The critical path for vaccine introduction[PDF]. This information is fed into economic analyses, a critical element in the countries’ decision on whether to introduce a vaccine.

The good news, for GSK, about Mexico and Brazil, is that the percentage of population targeted to be vaccinated is more than 98 per cent. In 2006, Duncan Steele from the Initiative for Vaccine Research (WHO) stated that the Rotarix vaccine was being introduced to Brazil, Panama, Venezuela and other countries – at a cost of $7 per dose for public health use. In 2004, Brazil purchased eight million doses (two doses per child), at the full $7 per dose. Ward would later say that rotavirus hospitalisations were estimated to be down by 59 per cent.

Efficient manufacturing?
Presently, unless Merck makes an entry into the international marketplace, there exists no competition for GSK which already describes itself as,”the main supplier of vaccines to UNICEF and GAVI”. According to GSK, PAHO and other aid agencies intend to purchase enough Rotarix to ensure immunisation for 80 per cent of the world’s children. Avant estimates that the global market for the drug will generate as much as $1.8bn annually. Neither GSK nor Merck have published a summary of their costs.

Light and Warburton estimate that the cost of Rotarix – due to the incredibly large expense of the almost 70,000-person trial is as high $466 million, excluding capitalised costs – and that out-of-pocket costs could be recovered with a single year’s profit. From 2008 onward, sales totalled more than $1bn. At “efficient” manufacturing costs of $1.50-$2 per dose, GSK will make a jolly profit from the “full price” in developed nations, and the 98 per cent successful vaccination target rate in countries such as Brazil. Once the five-year period is up, GSK – holding the global monopoly, will be embedded as part of the national health budget in 40 or more countries.

GSK’s home country – the UK – donated the largest chunk of taxpayer funds to the AMC pot – at $1.34bn, while IP king Bill Gates offered a further $1bn. Gates claimed that he felt “great about the prices” GAVI received but acknowledged that Indian and Chinese manufacturers could bring the price down”somewhat” if they ramped up vaccine output. No matter that drug companies like GSK actually sat on the GAVI board at the time such decisions were made.

Developed nations banging the trade-related intellectual property drum, and intellectual property captains such as Bill Gates, will not bypass the anti-competitive grip of patents – for which there exists no free market, and where all patent value is opaquely imputed by the company in question. This is the flipside of “charity”, this is a calculated attempt to sustain the status quo – a world structured on inequality, where the gap between those with access to medicine, and those without, is not only undeserved and systemically unjust – but also lethal.

To paraphrase brilliant comedian Chris Rock, drug companies – or drug dealers, as he put it, don’t want to cure you (or kill you). The money comes from making you live in need.

Khadija Sharife is a journalist and visiting scholar at the Center for Civil Society (CCS) based in South Africa, and a contributor to the Tax Justice Network. She is the Southern Africa correspondent for The Africa Report magazine, assistant editor of the Harvard “World Poverty and Human Rights” journal and author of “Tax Us If You Can Africa”.

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