he Nonmarket Environment of the Pharmaceutical Industry U.S. spending on pharmaceuticals increased by 19 percent to $131.9 billion in 2000, the fifth consecutive year of increases above 13 percent. Expenditures were expected to top $150 billion in 2001. The expenditures reflected the importance of drugs as health care therapies and the continuing discoveries of new treatments as a result of the industry’s research and development efforts. A study by a research center supported by the pharmaceutical industry reported that the cost of developing a new drug had increased from $231 million in 1987 to $802 million in 2000 (in inflation-adjusted dollars). The expenditures also reflected high prices, heavy marketing expenditures, and high profits. These factors attracted the attention of government officials, activists, and advocacy groups. Public Citizen, a consumer activist organization, published a report arguing that the pharmaceutical industry exaggerated the cost of developing new drugs.27 The Pharmaceutical Research and Manufacturers Association (PhRMA) hired Ernst & Young to evaluate the Public Citizen report.28 Ernst & Young criticized the report and concluded that the pharmaceutical industry paid a higher percentage of its revenues as taxes than all other industries in the United States. Critics responded that the tax payments were large because the industry’s profit margins were so high. In a study based on the annual reports of nine pharmaceutical companies, Families USA reported that eight of the companies spent more than twice as much on marketing as on research and development. Six of the companies had net incomes that exceeded their research and development expenditures. Families USA also reported that prices for the 50 most prescribed drugs for seniors had increased at twice the rate of inflation. PhRMA replied, “The Families USA ‘study’ condemns the pharmaceutical industry for being a success at developing medicines upon which millions of patients depend. When the pharmaceutical industry does well, patients do even better. Because the pharmaceutical industry is profitable, Americans have the best chance in the world of getting the cure for Alzheimer’s, cancer, diabetes or AIDS.”29 One reason pharmaceutical profits were high was that the brand-name companies faced buyers that controlled only small shares of the market. One fear of the brand-name companies was that buyers would join together and use their bargaining power to drive prices down. Maine had passed a law empowering the state to negotiate prices and purchase prescription drugs for its residents. PhRMA filed a lawsuit against the state, and a federal court issued a preliminary injunction preventing the state from implementing the law. The Court of Appeals, however, reversed the lower court decision. The state of Florida passed new legislation to use its purchasing power for drugs included under Medicaid, the federal program administered by the states that funded medical care for the poor. Florida included in its formulary—the list of drugs for which reimbursement would be provided—only those drugs for which the manufacturers agreed to pay rebates to the state beyond the rebates required by Medicaid. Rather than 27 give in to the pressure, Pfizer reached an agreement with the state under which its prescription drugs were included in the formulary without any price discount. Instead, Pfizer agreed to pay for nurses to monitor tens of thousands of patients to make sure they took their medications and had checkups on a regular basis. PhRMA had a different response to Florida’s program. It filed a lawsuit arguing that federal law required that all prescription drugs be available to Medicaid recipients unless a drug had been shown to have no therapeutic benefits. Florida also adopted a counter-detailing program in which pharmacists employed by the state visited doctors to encourage them to prescribe generic drugs rather than the higher-priced brand-name drugs.30 The pharmacists provided a “report card” to each doctor indicating the doctor’s Medicaid prescriptions record. On a regular basis the news media carried articles on developments in the pharmaceutical industry. Since the fortunes of companies depended on the results of clinical trials and the FDA’s drug approval decisions, the business press covered the FDA closely. The business press also covered patent extension decisions and the progress of patent infringement cases. Congress and the Bush administration had pharmaceutical issues high on their agenda, resulting in media coverage of legislative and regulatory reform issues. The nonbusiness media also covered the industry, focusing more on the impact of drugs—and their prices—on consumers. The media was also concerned about the sponsorship of research and clinical testing. Pharmaceutical companies financed research in universities and hospitals and typically retained the intellectual property rights to the resulting discoveries. The scientific and medical press had become concerned about the implications of this trend for the integrity of their publications. The British journal Nature required authors to disclose any financial interests related to the studies they published in the journal. Journals were also concerned about the symmetry of what was published. Pharmaceutical companies were hesitant to disclose negative research results that might undermine products. The New England Journal of Medicine, the Journal of the American Medical Association, and other journals adopted a policy to force pharmaceutical companies that sponsored clinical research to allow researchers to publish unfavorable as well as favorable results. Judges had also become concerned about links between expert witnesses and the pharmaceutical industry. Some judges required expert witnesses to disclose their financial connections to the industry. In an unprecedented action, Blue Cross of California, a unit of WellPoint Health Networks, filed a Citizen Petition with the FDA to switch from prescription-only to over-thecounter (OTC) status three second-generation antihistamines— Allegra, produced by Aventis; Claritin, produced by ScheringPlough; and Zyrtec, marketed in the United States by Pfizer. This would benefit consumers because the second-generation antihistamines were nonsedating, whereas the 100 first-generation antihistamines sold on the OTC market were sedating. A switch would put the second-generation antihistamines under considerable price pressure. In January 2001, Schering-Plough’s third-generation antihistamine Clarinex was approved for sale in the European Union, and in the same month the FDA issued an “approvable” letter for the drug indicating that there were no outstanding clinical or scientific issues. The FDA, however, withheld approval because of quality control problems in Schering-Plough’s New Jersey and Puerto Rico manufacturing facilities. Public Citizen had put pressure on the FDA by writing to the Secretary of Health and Human Services, citing consultants’ reports on the production facilities and FDA warning letters to Schering-Plough. Public Citizen also asked the Secretary of Health and Human Services to undertake criminal prosecution of ScheringPlough. A study by Public Citizen concluded that the probable cause of 17 deaths was asthma inhalers sold without the active medication albuterol. In 1999 and 2000 Schering-Plough had recalled 59 million inhalers because advocacy groups had raised concerns about them. A Schering-Plough spokesperson said that 5,000 people a year died from asthma and that there was “no evidence that a patient was ever harmed by an inhaler subject to any recalls.” He added that “every inhaler returned to the company by a patient claiming injury and alleging the canister lacked active ingredient has been tested and found to contain active ingredient.”31 The pricing and marketing of prescription drugs was of concern to state and federal law enforcement agencies. Twenty pharmaceutical companies were under investigation for price reporting practices associated with the sale of drugs to Medicaid and Medicare. One focus of the investigation was the reporting of high wholesale prices while providing deep discounts to doctors. This increased the doctor’s margin, providing incentives to prescribe the drugs. In 1997 the FDA had revised its regulations, allowing direct-to-consumer (DTC) advertising of prescription drugs. Schering-Plough and other pharmaceutical companies began to advertise directly to consumers through television, radio, and print. The advertisements gave a toll-free number to call for information, referred to magazine advertisements where warnings were given, and instructed viewers to “ask your doctor.” The marketing strategy was to induce consumers to ask their doctors for the drug by brand name. The strategy proved to be very successful, pushing Claritin sales to $2.5 billion in the United States. In 2000 Merck spent $161 million on DTC advertising for Vioxx, which was more than Budweiser spent advertising its beers. PhRMA explained that DTC advertising helped educate consumers and involve them more in their own health care. The National Institute for Health Care Management, a research institute funded by Blue Cross Blue Shield, reported that DTC advertising had increased from $700 million in 1996 to $2.5 billion in 2000 and that the increase was concentrated in 50 drugs. The institute also reported that the increase in pharmaceutical spending was due to an increase in prescriptions written and not to price increases. PhRMA explained, “We have an epidemic of undertreatment of serious illnesses in the United States.”32 The American Medical Association (AMA) took an interest in the DTC advertising issue. The AMA supported the objectives of educating patients and involving them in their own health care but was concerned that the doctor–patient relationship could be strained when patients asked for a drug by brand name. An AMA ethics committee stated, “Physicians should resist commercially induced pressure to prescribe drugs that may not be indicated. Physicians should deny requests for inappropriate prescriptions and educate patients as to why certain advertised drugs may not be suitable treatment options….”33 In 2001 the AMA wrote to the Senate Commerce Committee stating, “Our physician members have expressed concern about the impact that direct-to-consumer advertising has on the physician/patient relationship and on health care costs.” The AMA asked the committee to direct the FDA to study the impact of DTC advertising. The FDA began a review. DTC advertising also attracted the attention of activist and advocacy groups. The Prescription Access Litigation Project filed a lawsuit against Schering-Plough claiming that its advertising of Claritin was deceptive and boosted demand and the price of the drug. Some policy specialists observed that if DTC advertising were restricted, consumers would simply turn to the Internet for information on prescription drugs. The Commission of the European Union (EU) proposed a fast-track approval process for new drugs. The objective was to reduce the approval time from 18 months to 9 to 12 months, which would be faster than the approval time of 14 months in the United States. The Commission also proposed a relaxation of restrictions on DTC advertisements, but not broadcast advertising, for treatments of certain diseases, including diabetes, AIDS, and asthma. In 2001 Bayer withdrew its newly introduced and fastselling cholesterol-lowering drug Baycol because over 50 deaths were associated with its use. The drug had been approved in the United Kingdom, and other EU member states had adopted that decision. Responsibility for monitoring the safety of the drug, however, was unclear. The European Agency for the Evaluation of Medical Products said it had little role in safety because it had not participated in the licensing. The recall brought home to the European governments the confusion in drug safety regulation and the poor communication among the member states. The Medicines Control Agency of Germany faulted Bayer for not having disclosed problems earlier. Post-marketing monitoring of drugs was also an issue in the United States. One concern was the rapid adoption of drugs as a result of aggressive marketing by the brand-name pharmaceutical companies. This meant that if there were side effects not identified in the clinical testing, problems could be extensive.34 BusinessWeek called for an independent body like the National Transportation Safety Board to investigate problems with drugs. Many developing countries faced an AIDS crisis, and the cost of the cocktail of drugs used to treat AIDS was beyond their means. South Africa used its Medicines Act to threaten the pharmaceutical industry with compulsory licensing and parallel imports of AIDS drugs. Thirty-nine international pharmaceutical companies filed a lawsuit against the South African government but later dropped the lawsuit and agreed to substantial price reductions.35 PhRMA opposed the practice of deep discounts for drugs for developing countries because it contributed to “parallel trade.” Parallel trade was the importation of drugs by developed countries that had been exported with deep discounts to developing countries. The industry argued that parallel trade resulted in the importation of adulterated and counterfeit drugs or drugs that had been improperly stored and handled and thus imposed a safety risk on the importing country. A bill introduced in Congress, however, would authorize pharmacies and wholesalers to purchase prescription drugs that had been exported from the United States. Brazil faced high costs of purchasing AIDS drugs and negotiated price reductions with several drug companies, but Roche refused to offer a substantial reduction. Brazil then announced that it would issue a license to a Brazilian company to produce a generic version of Roche’s drug.36 Roche conceded and reduced the price to Brazil by an additional 40 percent. The protection of intellectual property rights was an important issue for the brand-name pharmaceutical companies. The industry supported the World Trade Organization (WTO) and its enforcement of the TRIPS (Trade-Related Aspects of Intellectual Property Rights) Agreement. The United States filed a trade complaint with the WTO against Brazil for its law allowing compulsory licensing for drugs not manufactured in the country. The pharmaceutical industry criticized India for restrictions on imports of pharmaceuticals and for encouraging a domestic industry that copied drugs under patent. A 1972 Indian law allowed companies to copy a patented drug if they used a different manufacturing process. Pharmacists prescribed much of the drugs in India, and the drug companies competed for their attention. Brand-name companies began offering gifts to pharmacists if they prescribed the company’s drugs, and Indian companies began to provide bonuses of free drugs. GlaxoSmithKline provided color television sets to pharmacists who met certain targets. Patents provided the most important protection for intellectual property in the pharmaceutical industry. The patent on Schering-Plough’s Claritin was scheduled to expire in December 2002, and with the FDA and in Congress the company sought without success to extend the market exclusivity. To delay the entry of competitors, Schering-Plough filed a patent infringement lawsuit against 10 generic pharmaceutical companies, claiming that their versions of Claritin would, when ingested, necessarily produce a metabolite on which ScheringPlough held a patent. The courts had not upheld this “metabolite defense,” but neither had they rejected it. At a minimum, the lawsuit could delay entry of the generics. To resolve a lawsuit, Schering-Plough reached a settlement with Upsher-Smith Laboratories and American Home Products regarding their generic versions of K-Dur. Schering-Plough paid $60 million to Upsher-Smith, which then agreed not to market its drug. Upsher-Smith had received a 180-day exclusivity period as a result of being the first company to develop a generic version, so other companies could not market their generic drugs during that period. In April 2001, the Federal Trade Commission voted unanimously to file civil charges challenging the agreement as a violation of the antitrust laws. In addition to using patent infringement defenses, brandname pharmaceutical companies used FDA rules to stave off generics. The patent on Bristol-Myers Squibb’s blockbuster diabetes drug Glucophage expired in September 2000, and the company had initially been successful in staving off the generics by inducing patients to switch to two new versions of the drug that were not chemically equivalent to Glucophage. Based on new clinical tests, the FDA had approved Glucophage as safe for children, and Bristol-Myers received exclusive rights until 2004 for use by children. A 1994 FDA rule required that labels must contain dosage and use information for children, but generics could not include such information on their labels because Bristol-Myers had exclusive rights to the data. The dilemma for the FDA was that its rule technically might block all generic versions of Glucophage. The dilemma had delayed the FDA approval of 14 generic versions for months, and Bristol-Myers was prepared to file a lawsuit if the FDA required provision of dosage and use information. Medicare did not provide prescription drug benefits, and only about one-third of the elderly had prescription drug insurance coverage. Congress wanted to provide prescription drug benefits under Medicare, but Democrats in Congress sought to provide roughly twice the coverage supported by the Bush administration. The pharmaceutical industry had opposed the legislation based on concerns that it would increase buyers’ bargaining power relative to the pharmaceutical companies. In response to congressional attempts to provide prescription drug coverage under Medicare, the Bush administration reached an agreement with pharmacy-benefits managers (PBMs) to negotiate drug discounts with pharmaceutical companies. The pharmaceutical companies opposed the plan because of the price pressures it would create. Two pharmacy associations, the National Association of Chain Drug Stores and the National Community Pharmacist Association (NCPA), filed a lawsuit to block the drug discount plan. The pharmacists opposed the plan because they feared being forced to shoulder the discounts. The pharmacists were also concerned about direct competition from PBMs. In attempting to lower pharmaceutical expenditures, PBMs had begun to operate mail-order prescription refill services, making them direct competitors to the independent pharmacists. The NCPA, with 25,000 members nationwide, responded by launching a campaign to pressure state governments to increase their regulation of PBMs. The PBMs argued that the NCPA campaign was intended to increase its members’ profits.
1. Characterize the issues, interests, institutions, and information in the environment of the pharmaceutical industry.
2. Which issues will be addressed in which institutional arenas, and which interests will be active on those issues?
3. Where are these issues in their life cycles?