ngin - Norfolk Genetic Information Network
Date:  20 November 2000


Thanks to Hugh Warwick for this. Here’s some intelligent analysis - unlike the recent not-so-Independent article which followed up the ‘standing up to vioelence’ spin in Tony Blair’s recent speech by lumping together GM crop protests with animal rights excesses:

Quote:  “A few years ago biotech companies dismissed their enemies as Greenpeacers and Luddites.  Not any more.  Now there’s a widely supported moratorium on new imports of genetically modified foods in Europe and a very similar sentiment running through the middle of America.  Protesters certainly caught Monsanto flatfooted, lopping $8.6 billion off its market value, so weakening the company it was forced into a shotgun marriage with Pharmacia.  The attack on Monsanto’s seeds, coupled with the recent store-shelf panic over unapproved corn, probably set back crop biotechnology a decade.”

*  *  *
Corporate Saboteurs
Robert Lenzner and Tomas Kellner , Forbes Magazine, 27 November 2000

THE NEW ENEMY OF THE FREE MARKET HAS A FACE   A lot like Katika Kühnreich’sfreckled and delicate, with red hair pulled back in a ponytail.

This 19-year-old student of martial arts from Cologne, Germany came to the Czech Republic recentlyone of perhaps 10,000 like-minded comrades to cause havoc in its beautiful capital, Prague.  More specifically, to break up the latest meeting of the World Bank and International Monetary Fund. “The root of profit is in the exploitation of the working class,” says Kühnreich, her jacket sleeves rolled down to reveal her mantra in black block letters, Kapitalism Kills, Kill Kapitalism.

Half a world away, in Bombay, India, the biggest threat to capitalism isn’t an anarchist.  It’s a 64-year-old entrepreneur named Yusuf Hamied, who is undermining the pharmaceutical industry by selling knockoffs of patented drugs for one-tenth the price or less.

There is palpable rage on the streets of Montpelier, Vt.  Not from kids with dreadlocks and eyebrow ringsbut from retirees who are so fed up with the high cost of prescription drugs that they’re boarding buses to Canada, where they can buy their medicines more cheaply.  The same act of fiscal disobedience is repeated by elderly Arizonans, who spend three hours on buses to Mexico, where they can save hundreds of dollars on their monthly prescription bills.  What’s going on here?

Anticapitalist demonstrations have always been a part of life in this country.  But, until recently, they’ve been pretty much confined to college campuses, where such protests are a perennial rite of passage.  These days, though, resentment against U.S. corporations, and the drug industry in particular, has boiled over into the American mainstream.  The drug industry’s prices are high, its profit margins are fat.  Those profits are at risk.

We’re not talking about fringe politicians or Naderites as the enemies of profits.  We’re talking about Republicans.  Two hundred and ten of them voted for H.R. 4461 or its Senate counterpart, S. 2520.  This is the bill that will, over the dead bodies of the pharmaceutical industry lobbyists, allow wholesalers to import drugs from abroad, so that American consumers can get the benefit of discounted prices charged elsewhere.

The bill was signed in early November by President Clinton.  It will turn the pricing structure of the drug industry on its head.  Right now pharmaceutical houses recoup their billion-dollar research outlays from U.S. customers, while letting customers elsewhere in the world pay a much smaller margin over manufacturing costs.  It is extremely hard for a U.S. politician on either side of the aisle to explain this price discrimination as good for his constituents.

The importation bill, although somewhat limited in its scope, is probably just the opening wedge.  It costs $100 a month in this country for a lifesaving dose of cancer-fighting tamoxifen, $1,200 a month for AIDS drugs, $329 for the world’s most popular drug, Prilosec, which treats ulcers. Social Security pays an average $804 a month.  The U.S. drug industry has made $26.5 billion in profit over the past 12 months.  Add it up:  The drug companies are inevitable prey for anticapitalist legislation.

Why now?  At first the timing seems implausible.  Employment is high, half the country owns stocks and capitalists are still savoring their triumph over communism.  But if the past two decades have witnessed a surge in prosperity for corporations, they have also set the stage for the inevitable backlash.  If profits are high, then we can afford to take corporations down a peg or two, is the implicit logic of the populist movement.  It’s timejust as it was nearly 100 years ago, when President Theodore Roosevelt went after the nation’s biggest monopolies.

Think of what has happened in the past half-dozen years.  Tobacco companies have gone from victory in the courtroom to a $246 billion settlement.  Antitrust prosecutors on both sides of the Atlantic are treated as heroes.  Oil drillers, perennial targets of protesters (see “Damned If You Do”), look like bad guys again, with their prices tripling in two years.  The agricultural biotech industry went from smugness for its scientific accomplishments to a rout in the field of public opinion.

A few years ago biotech companies dismissed their enemies as Greenpeacers and Luddites. Not any more. Now there’s a widely supported moratorium on new imports of genetically modified foods in Europe and a very similar sentiment running through the middle of America.  Protesters certainly caught Monsanto flatfooted, lopping $8.6 billion off its market value, so weakening the company it was forced into a shotgun marriage with Pharmacia.  The attack on Monsanto’s seeds, coupled with the recent store-shelf panic over unapproved corn, probably set back crop biotechnology a decade.

Today, Monsanto; tomorrow,  Merck. “Your heydays are over,  that’s what I tell the drug companies,” says Uwe Reinhardt,  a medical economist at Princeton University.  “I think their 18% rate  of return on assets will be pushed  to a more normal level. Just watch the slaughter.”

Some of that slaughter, paradoxically, will be self-inflicted.  Drug companies face an  excruciating dilemma, where doing the right thing may result in doing themselves irremediable harm.  Price discrimination makes economic sense for a product that has a huge fixed cost (namely,  the R&D that found it) and a small  marginal cost (the cost of pillmaking). You charge full price to a base of prosperous customers large enough to cover the R&D (40% of whose budgets are paid for by the National Institutes of Health, tax-payer funded), then get whatever you can from poorer customers.
It’s also good public relations, if only for a while.  If AIDS-fighting proteases cost $14,000 a year in the U.S. but something close to manufacturing costs $2,000 a year in Africa, that could be seen as a humanitarian gesture.

But at some point uninsured, unprosperous patients in the U.S. want to receive the humanitarian rate.  Once you start making lifesaving drugs available at lower cost to the world’s poorest peopleor to 65-year-olds in the have to explain why you cannot deliver the product at a uniformly low price to everyone.  Here come price controls.  There goes the R&D budget.
The ten largest pharmaceutical companies in the U.S. have had collective sales of $179 billion over the past 12 months and collective gross profit (excess of sales over manufacturing costs) of $121 billion.  It’s that $121 billion in gross profit that is in play if the industry becomes subject to price controls, threatening marketing budgets, as well as R&D (a collective $20.5 billion) and pretax income ($40 billion).

The popular revolt against the pharmaceutical companies began with protesters.  One was Act Up (AIDS Coalition to Unleash Power), a group that wants affordable treatment in the U.S. and to make AIDS drugs available at a fraction of that price to Africans.  Next was Ralph Nader’s Consumer Project on Technology, a five-year-old organization that has lobbied the NIH to release U.S. government-supported medical inventions to the World Health Organization so that they can be made available to the Third World.

Then came Médecins Sans Frontières (Doctors Without Borders), a humanitarian organization that wants drugs widely available to the poor at little or no cost.  MSF is not a radical organization.  Its American chapter gets $17 million a year in funding from U.S. donors, and it won the 1999 Nobel Peace prize for helping out victims of human and natural catastrophes, as well as for documenting massacres in places like Rwanda and Bosnia.  Why shouldn’t it get cheap drugs if that’s what it takes to save lives?

“We have 2,000 volunteer doctors in the field,” says Joelle Tanguy, executive director of MSF. “But they don’t have sufficient supplies of the drugs required.”

Big pharma can’t move fast enough to defend itself in the court of public opinion.  Bristol-Myers made a $100 million gift for clinics and research to help stop the spread of AIDS in southern Africa.  Pfizer has offered to provide Diflucanwhich treats a deadly form of meningitis that often attacks AIDS victims and costs $10 a pill in the to South Africans for two years.
Selective discounting isn’t a death blow to a pharmaceutical company.  Glaxo Wellcome’s Combivir, a patented AZT combination that lists at $8 a pill (a day’s supply) in the U.S., is being offered for between 70 cents  and 90 cents in the Third World.  That open-end commitment is a  “sustainable” price, says James Cochrane, Glaxo executive director,  and shouldn’t shave too much off the $1.5 billion a year the company  gets from AIDS drugs.

But what happens when Americans aren’t willing to pay $8?  You get a drug reimportation bill, known as the Medicine Equity & Drug Safety Act of 2000.

The high cost of prescription drugs so dominated the election season that politicos from both sides were tripping over each other to appear more solicitous to the elderly. “I’m not waiting for the drug companies to come to the table before acting,” says Republican Senator James Jeffords of Vermont, who pushed the bill through the Senate.

And even House Majority Leader Dick Armey, once immovably opposed to undermining the drug industry’s price structure, decided he couldn’t hold back the populist tide and collected support for the bill.

Drug companies hate the reimportation billwhich amounts to price controls.  The pharmaceuticals argue, among other things, that consumers won’t really save that much, given the costs of repackaging the pills from blister packs to vials and the extra U.S. health inspectors who will have to examine the imported medicines.

The real objection, of course, is the prodigious threat to profits.  AstraZeneca, for example, pulled down $573 million last year from tamoxifen, the most widely prescribed breast cancer drug around, which has to be taken for up to five years.  A three-month supply (180 pills) costs $298 in the U.S.but only $26 in Canada. Eli Lilly’s antidepressant Prozac throws off $2.6 billion in annual sales, retailing at $115 for 45 capsules in the U.S., and $35 north of the 49th parallel.

How bad a hit to the drug business is anyone’s guess at this stage.  Constantine L. Clemente, Pfizer’s executive vice president for corporate affairs, says that in the worst case, his company could lose 10% to 20% of its U.S. sales, projected at $14 billion next year.  “These are uncharted waters,” he says. “We could be hurt.”

Expect another blow to the pharmaceutical industry early next year. In March Congress will hold hearings on whether to reduce the length of monopoly protection from 20 years to maybe 10.
Spearheading the effort in this country will be American consumer groupsand health maintenance organizations, which will insist (true or not) that prescription drugs are a major culprit in driving up health care costs.  Financially battered HMOs will band together, says Princeton’s Reinhardt, and insist on sharp discounts from listed retail prices.

Once again, how can lawmakers of any stripe resist the populist swell?

“The drug industry sits in the hand of the government,” says Reinhardt. “Ultimately, they will be pushed around by the government.”

They may not have long to wait.  Their patents are already endangeredby something called compulsory licensing.  This allows a foreign government to take away an exclusive product when the health or safety of a nation is at risk.  Under compulsory licensing, a generic manufacturer is allowed to produce a drug discovered by a U.S. pharmaceutical in exchange for a licensing fee.  Those fees vary from deal to deal. Still, says Francis Palumbo, a pharmacy professor at the University of Maryland, they never compensate for the opportunity costs of being undersold by a generic.  Compulsory licensing would have a “drastic impact,” says Pfizer’s Clemente.  “It would make it impossible to develop lifesaving medicines from the human genome system.”

But it’s already happening just outside the boundary of patent laws.  Indian entrepreneur Yusuf Hamied is trying to revolutionize the drug industry in the Third World.  A Ph.D. chemist trained at Cambridge University, Hamied is the chief executive of Cipla, a publicly held, $220 million (sales) company that produces ingredients identical to blockbuster drugs developed by multinationalsbut sells them at 5% to 10% of their U.S. market prices.

Hamied is personally worth $550 million today because back in 1972  he convinced India’s health minister, a family friend, to revoke the nation’s patent laws.  Now, he says, he is willing to supply AIDS drugs at a reasonable profit over his cost of production. Like providing d4T (a Bristol-Myers Squibb drug that reduces the viral load in HIV patients and sells for $4.50 a pill) to Nader’s Consumer Project on Technology at 10 cents a tablet.  Or offering a free year’s supply of Nevirapine, Boehringer-Ingelheim’s $8-a-pill drug that helps protect newborns from contracting the AIDS virus from their HIV-infected mothers, to the leading AIDS hospitals in Durban and Johannesburg, South Africa. (Boehringer is now offering to give the medicine away for a couple of years.)

“My idea of a better ordered world is one in which medical discoveries would be free of patents and there would be no profiteering from life or death,” says Hamied, paraphrasing India’s late prime minister Indira Gandhi.  He is a big advocate of compulsory licensing.

Drug companies can take small comfort in the fact that Hamied might be out of business in five years. As a signatory to the World Trade Organization’s Trade Related Aspects of Intellectual Property Rights agreement, India must by 2005 reinstate product patents.

But by then it may be too late.  The noose around the drug companiesfrom public interest groups, the elderly, politicians and HMOscan only draw tighter.  One WTO executive puts the issue in blunt but believable terms:  “Either the prices give or the patent system will have to give.”

Hugh Warwick
tel/fax:      +44 (0)1865 716498   pager:        04325 613406
176 Campbell Road
“be reasonable, demand the impossible now” - robb johnson

ngin bulletin archive