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Report Attacks Drug Industry Research and Development

By Kathleen Day
The Washington Post


A major government study Thursday attacked the pharmaceutical industry's leading defense for the high cost of drugs, suggesting Americans might be better served if less money were spent on research and development, the expense that companies say justify their drug pricing.

Smaller R&D budgets could induce companies to invest more judiciously in new products and eliminate duplication of drugs already on the market, according to the three-year report by the Office of Technology Assessment, a research arm of Congress, and to Judith Wagner, director of the study.

And lower R&D costs should lead to less-costly prescription drugs, said Rep. Henry A. Waxman, D-Calif., chairman of the House subcommittee on health and the environment and the representative who requested the report.

Most of new drugs introduced in the U.S. market between 1975 and 1989 "offered little therapeutic advantage over pre-existing competitors," the report says.

"Put another way," said Waxman, "58 percent of industry research was invested in so-called `me too' drugs, drugs that are designed to make a profit but which add nothing in terms of therapeutic benefits to patients."

Zantac, an anti-ulcer drug introduced by Glaxo Pharmaceuticals, for example, competed with SmithKline Beecham PLC's successful Tagamet on the basis that it could be taken twice instead of four times a day.

R&D and marketing costs can be trimmed to cut prices, and there would still be plenty of profit left over to make the drug business an enticing one for investors, Waxman said.

The report offers the most comprehensive analysis yet of the pricing practices and costs of an industry on which there is little public information. It supports previous claims by government and Wall Street analysts that drug prices, which from 1980 to 1992 increased 128 percent, or six times the overall rate of inflation, have outpaced most other goods and services largely because that's what the market would bear, not because of expensive R&D.

And it highlights the way health care is paid for in this country: Those who use pharmaceutical products and services often aren't the ones who pay for them, leaving most health-care consumers indifferent to cost.

The drug industry, which has been under siege to lower prices, was quick to defend itself Thursday, saying the report overestimated the industry's revenues while underestimating its costs.

A spokesman for the Pharmaceutical Manufacturers Association said the report focused on drugs introduced in the early 1980s, and therefore "comes to some inaccurate conclusions that simply do not pertain to the marketplace today." He said the report fails to take into account more recent changes in the industry, including the promise by many leading manufacturers to hold price increases to the level of inflation.

The OTA report says a lack of price competition during the 1980s allowed drugmakers to earn profits that ran several percentage points higher every year from 1976 to 1987 than the profits of other industries with similar revenues and risks.

Those extra earnings -- what critics of the industry Thursday called "excess profits" -- were possible because, in today's market, doctors who prescribe drugs and an increasing number of consumers who use them don't pay for them, an arrangement that provides little incentive to shop for lower prices.

The study says each new drug introduced between 1981 and 1983 returned after taxes "at least $36 million more to its investors than was needed to pay off the R&D investment." And it says that in recent years more than 22 cents of each $1 spent on prescription drugs went for advertising, marketing and promotion.

Based on that information and on data from the Pharmaceutical Manufacturers Association, Waxman's staff estimated that while the industry spent $10 billion on advertising in 1991, it spend $8 billion on R&D, with only $4 billion of that on drugs with a "therapeutic gain" over existing ones.

The study said that while it "is hard to judge" whether a "decrease in R&D spending would be good or bad for the public interest," it added that, contrary to the industry's claim, "It is impossible to know whether today's level of pharmaceutical R&D is unquestionably worth its costs to society."

One trend in the 1980s that allowed the run-up in prices was that insurance policies covered more and more people for prescription-drug costs, the report says. In 1977, for example, only 9 percent of those with insurance were covered for drugs. By 1989, more than 30 percent were. Often, such policies require consumers to make a co-payment, usually about $5, whether the prescription costs $10 or $100.

Despite this trend, prescription-drug prices remain one of the largest out-of-pocket medical expenses for most people, particularly the elderly, and that's what has heated up the drug-price issue, health experts say.