Ever rising high drug prices not needed for R&D, says new report

Washington, DC Sep (TWN Features) - A new report by a US consumer group, ‘Families USA’ refutes the pharmaceutical industry’s claim that high and increasing drug prices are needed to sustain research and development (R&D), an argument not only advanced by industry, but by major industrial countries, the World Trade Organization, and even parts of the World Health Organization.

The report, “Off the Charts: Pay, Profits and Spending by Drug Companies’, by the US consumer health group (, and written by its Executive Director Ron Pollock and Research Assistant Lena O’Rourke, documents that drug companies are spending more than twice as much on marketing, advertising, and administration than they do on R&D.

The report also brings out that drug company profits, which are higher than that in all other industries, exceed R&D expenditures; and that drug companies provide lavish compensation packages for their top executives.

The report comes on the heels of a recent Families USA analysis that found prices rose more than twice the rate of inflation last year for the 50 most-prescribed drugs to American senior citizens.

Among the nine pharmaceutical companies examined in the report - Merck, Pfizer, Bristol-Myers Squibb, Pharmacia, Abbott Laboratories, American Home Products, Eli Libby, Schering-Plough, and Allergan - all but one (Eli Lilly) spent more than twice as much on marketing, advertising, and administration than they did on R&D, and Lilly spent more than one and one-half times as much.

Six out of the nine companies made more money in net profits than they spent on R&D last year.

The report also documents profligate spending on compensation packages for top pharmaceutical executives. The executive with the highest compensation package in the year 2000, exclusive of unexercised stock options, was William C Steere, Jr, Pfizer’s Chairman, who made $40.2 million.

The executive with the highest amount of unexercised stock options was C A Heimbold Jr, Bristol-Myers Squibb’s Chairman and CEO, who held $227.9 million in unexercised stock options.

“Pharmaceutical companies charging skyrocketing drug prices like to sugar-coat the pain by saying those prices are needed for research and development,” said Ron Pollack, Families USA’s executive director. “The truth is high prices are much more associated with record-breaking profits and enormous compensation for top drug company executives.”

Pollack added, “Drug companies’ commitments to research and development are dwarfed by the expenditures of those companies for marketing, advertising, and administration.”

[Such record-breaking profits are mainly due to the monopoly privileges granted to the pharmaceutical companies for their ‘patents’, often involving very small changes in the molecules which would not even qualify normally to be ‘inventions’ that could be patented.

[With the Uruguay Round, and its resulting WTO, these patent privileges, and the abnormal profits have been ‘globalised’ by creating global monopoly rights through the Trade-Related Intellectual Property Rights (TRIPS).

[The public outcry and the drive for ‘reforming the system’ are being sought to be diverted by the talk about the need for such high profits to encourage R&D, and ‘differential pricing’ for the poor in the developing world - an idea being advanced by the WTO secretariat, and particularly its TRIPS division, and by several others.

[A World Health Organization’s macro-economic commission on health, headed by US academic (Harvard) and economist Prof. Jeffrey Sachs, and with which some eminent personalities are associated, is soon expected to produce a report dealing with this and other issues. However, judged by the presentation of Sachs, in a video-conference presentation at the WHO/WTO convened consultations at Hosbjor in Norway (8-11 April), he at least has ‘bought’ this theory of high prices and monopoly privileges for encouraging R&D, and that even stronger intellectual property rights (IPRs) were needed than that provided by TRIPS.]

In 2000, the pharmaceutical industry was, once again, the most profitable US industry, and profit margins in the industry were nearly four times the average of Fortune 500 companies.

According to the Families USA report, three companies - Merck, Bristol-Myers Squibb, and Abbott Laboratories - received twice as much in net profits than they spent on research and development. Three other companies - Eli Lilly, Schering-Plough, and Allergan - received more money in net profits than they spent on research and development.

“The pharmaceutical industry’s repetitious cry that research and development would be curtailed if drug prices are moderated is extraordinarily misleading,’ said Pollack. ‘If meaningful steps are taken to ameliorate fast-growing drug prices, it is corporate profits, expenditures on marketing, and high executive compensation that are more likely to be affected, not research and development.”

The Families USA report is based exclusively on the annual reports submitted by the pharmaceutical companies to the Securities and Exchange Commission (SEC).

Since Families USA periodically reports about price changes for the 50 drugs more frequently prescribed for seniors, the report focussed on the SEC filings for fiscal year 2000 of the nine pharmaceutical companies that market, or are the parent corporations of the companies that market, these 50 drugs.

Mylan Laboratories, a much smaller company than the nine companies analysed, could not be examined since it had not filed its annual proxy statement with the SEC at the time the report went to press.

The report brings out that the 25 highest-paid executives for the pharmaceutical companies that market the top-50 drugs to seniors received a total of $331.6 million in compensation, “exclusive of unexercised stock options, “ in 2000, with compensation ranging from $40.2 million to $5.9 million. And the 25 executives with the largest value of unexercised stock options held a combined total of almost $1.6 billion in 2000 - with amounts held by the individuals ranging from $227.9 million to $22.5 million, an average per executive of $62.7 million and a median of $46 million.

Challenging the industry view that any moderation in prices would result in reduced R&D, the Families USA Report says “The revenues earmarked for advertising, marketing and administration, compared to those for R&D, clearly show that the R&D is not the greatest expense for pharmaceutical companies... to suggest that any moderation in drug prices would reduce R&D ignores the fact that future profits of pharmaceutical companies are dependent on the development of new blockbuster drugs. As a result, these companies cannot afford to de-emphasize R&D.

“In addition, given the relative size of R&D spending compared to spending on advertisement, marketing and administration, it is absurd to suggest that the only discretionary resources that would be altered due to more moderate pricing practices is R&D. This is also evident since net profits exceed R&D spending.  Moreover, the pharmaceutical companies are profligate spenders when it comes to compensating their top executives.

“Thus, if meaningful steps are taken to ameliorate fast-growing drug prices and costs, it is corporate profits, expenditures on marketing, advertising and administration, and executive compensation that are more likely to be affected, not R&D spending.” – SUNS4963

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