February 15, 2008 (Vol. 28, No. 4)

Drug Firms Focus Sights on Shareholder Profits rather than Innovative Therapeutics

According to Bill Burns, chief of Roche’s pharmaceutical division, the dominant business model in pharmaceuticals is the “me-slightly-different-marketed-like-hell” model. It is a model based on overpromotion of me-too drugs in order to transform them into blockbusters. It is also a model, according to Burns who was quoted in a 2005 Barron’s article, from which the industry has to depart.

In the meantime, expensive new drugs with low therapeutic benefits continue to flood the market. “Today’s medicines finance tomorrow’s miracles,” says GlaxoSmithKline’s advertising slogan. Pharmaceutical firms remind us endlessly that the high price of drugs is justified by the high costs of therapeutic innovation. The exceptional profit rates of this industry are thus, frequently justified by the hope they give sick people. Profits, we are told, are the key to R&D, and R&D promises to bring better health.

The fact is that while the pharmaceutical industry’s financial situation has never been better, the situation in terms of therapeutic innovation has never been worse. The industry’s business model seems more than ever based on the aggressive promotion of low-benefit drugs. This model’s sole purpose is to extend the lifetime of patents on existing drugs. Blockbusters are created through enormous promotional campaigns aimed at every level of the medical establishment.

Marc-André Gagnon

The goal is to influence prescription habits even if the drug prescribed does not result in improved health. For instance, the New York Times recently reported that although the minimum 40% of statin prescriptions are considered baseless, recent clinical trials showed that Zetia, a cholesterol-lowering drug prescribed to one million people a week, plus generic Zocor did not have any medical benefits over Zocor alone.

In a 2007 issue of Prescrire, a French independent medical journal that analyzes new drugs entering that country’s market every year, it was reported that, of the 535 new drugs entering the market in 2006, 10 represented a significant therapeutic progress, 469 did not contribute to the progress of the existing pharmacopeia, and 17 were labeled by doctors as potential dangers for public health. From this perspective, it is not surprising to learn that entire generations of new drugs (e.g., to fight schizophrenia or hypertension) are, in fact, less efficient than the preceding generation, even if they cost 10 times more than the previous drug for which the patent has expired.

Economists have a hard time explaining this state of affairs. They normally believe that the profits of a firm are a reward for the social wealth it has created. Traditional market corollaries, however, do not apply to this industry, which has a great monopolistic capacity. As the business historian Alfred D. Chandler wrote in his 2006 book, Shaping the Industrial Century: The Remarkable Story of the Evolution of the Modern Chemical and Pharmaceutical Industries, barriers to entry have been so high since the 1920s that no new company has managed to become one of the world’s top 30 pharmaceutical firms since then.

Access to the market is so restrained that smaller firms have no choice but to let themselves be bought by bigger players. This is the only way they can gain access to global distribution networks. Should we then be surprised when we observe that, in this industry, for every dollar spent in real investment to create new productive capacities (gross fixed capital formation), $10 are invested to buy back already existing productive capacities (mergers and acquisitions).

R&D versus Marketing

Research and development has become secondary for the dominant firms, which have managed to externalize the bulk of R&D to smaller players that they will simply buy back in case of promising results. The focus of bigger players is rather to transform medical practices and habits with big-scale promotion campaigns.

In a recent study published in PloS Medicine in January, Joel Lexchin and I showed that, in the U.S., the pharmaceutical industry spends two times more on promotion than on R&D. Of the almost $58 billion spent annually to promote drugs, only $4 billion is earmarked for direct-to-consumer advertising. Thus, on average, $61,000 is spent per year per practicing physician. We consider those numbers to be incomplete since they do not include off-label promotion or other possible unethical forms of promotion.

The top pharmaceutical firms have become brand-management firms. Their relative promotional budgets are more significant than those of pure brand-management firms like PepsiCo. Pfizer spends more promoting Celebrex than Budweiser spends promoting its beer.

Pharmaceutical promotion has reached every level of medical research and practice. Big pharma funds universities, supports pseudoscientific publications, donates massive quantities of samples, sponsors continuing medical education, and makes frequent doctor visits.

Advertising campaigns demonstrate increasing stealth. According to a 2007 PloS Medicine article by Sergio Sismondo, confidential documents from Pfizer, made public in a trial, showed that 85 scientific articles on sertraline, the antidepressant Zoloft, were coordinated by the firm’s public relations company. Pfizer had itself produced a critical mass of articles that were favorable to the drug; Sismondo places the number between 18% and 40%, thus allowing its representatives to drown out any unfavorable study to convince doctors. The Vioxx scandal rests on the same premise.

Necessary Change

This general state of affairs is increasingly in the news and the public is more and more aware of the abundance of drugs with unfulfilled promises and the paucity of genuine breakthroughs. In a page 1 story in Le Monde last month, it was disclosed that drug companies themselves are pining for a new business model based on innovation and one in which the image of life-saving researchers in white coats could replace the image of greedy sales representatives descending on physicians.

We must not overlook the fact, however, that with net returns on equity of 28% for the ten top pharmaceutical firms in the last decade and with 77% of all net benefits going to shareholders, this low-innovation, aggressive-promotion business model is a financial success. As long as new regulations or the public do not transform the actual financial incentives of this industry, we should not underestimate the entropic force of a business model that serves well the interests of the shareholders’ wallets, even if it is to the detriment of patients’ health.

What do you think? We invite you to post comments on this topic.

Marc-André Gagnon is completing a Ph.D. dissertation in political science at York University about capitalization in the pharmaceutical industry and teaches economics, political science, and sociology at Université
de Montréal and Université du Québec à Montréal.
E-mail: [email protected].

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