Saturday, February 10, 2007

Bad Medicine: Big Pharma's Not On Your Side

Greetings, fellow nerds.

Today's medicines fund tomorrow's miracles. That's what GlaxoSmithKline's publicity department decided was the most palatable excuse for the high cost of drugs: we charge a lot to make more magic bullets to fight new and ominous plagues. It's "pay up or die," with a sugar coating.

"Funding miracles" is stretching the truth a bit (as I will show), but I don't fault GlaxoSmithKline or any of the other big pharmaceutical companies. The way we've set up drug research has public and private incentives badly misaligned.

Today I'm going to show the two biggest ways in which our interests are misaligned, and in the next post I'm going to suggest a fix which will provide an incentive for drug companies to do the most good possible for humanity while still making boatloads of cash.

First Flaw: Drug Companies are Promotion Companies

The overwhelming majority of drug company revenue goes to drug promotion, not drug discovery. Let's take a look at the raw data on drug company revenue and research and development (R & D) expenses in 2004. (From MedAdNews, September 2005. Wikipedia link here for those without a subscription.)
(USD billions)
R&D Spending
(USD billions)
2Johnson & Johnson47.3485.203
6Hoffmann-La Roche25.1634.098
9Abbott Laboratories19.6801.697
10Bristol-Myers Squibb19.3802.500


Less than $1 for every $7 of drug company revenue is spent on finding new drugs. Now, I have nothing against a company making a tidy sum of money off of its investments, especially when some degree of risk is involved. However, > 600% return on investment is excessive, and indicative of a serious failure of the free market, which is supposed to deliver goods with minimal overhead.

I lied: that $6 isn't all investor profit. In fact, the majority of it goes to promotion: direct promotion to doctors, HMOs and even patients themselves. Here's a more honest slogan for GlaxoSmithKline: "Today's ad campaigns fund tomorrow's ad campaigns."

Second Flaw: Half of R & D has Minimal Benefit

Of the sliver of funding which goes to drug discovery, about half of it goes towards providing novel (and thus patentable) but not superior medicines for diseases we can already treat. Here's a link to a review of "The $800 Million Pill" (which quantifies the money wasted on redundant drugs) by BusinessWeek. I'm linking to this review because it defends the actions of drug companies within the system (as do I) without asking how we could make the system give better incentives for companies to do good for humanity (which is the whole point of my 21st century capitalism idea).

Essentially, since companies can only make money off patented drugs and since patents typically last only about 20 years, there's a huge incentive to discover new cures to already-controllable diseases. The new cures don't even have to be superior: marketing departments of big pharmaceutical corporations have enough muscle to push new drugs into the marketplace regardless of whether or not they're needed.

Drug Discovery: 7% Efficient?

In total, only about 7% of the money paid for drugs goes to finding new useful medicines. It's a tautology then that any solution resulting in as much (or more) useful R & D funding while lowering the cost of drugs would be a good thing for humanity. If you're tempted to counter that it's a good idea to maintain non-productive sectors of the economy (like the $282 billion per year drug companies spend on things other than useful R & D) to create jobs, you should familiarize yourself with the parable of the broken window. In any case, I'm going to introduce a system which beats today's 7%-efficient system in my next post.

In truth, 7% might even be an overestimate of the efficiency with which our drug expenses fund cures. Recently, a group of scientists from the University of Alberta discovered that a small and un-patentable molecule (dichloroacetate, DCA) might cure most cancers with little side effects. (At excessive doses, DCA can cause trouble, but then again, so can water - see line 202.) Whether or not DCA will turn out to be one of "tomorrow's miracles," it's unsettling that the major drug companies have avoided studying it like the plague due to an absence of profit motive. It underscores the fact that drug company revenue really doesn't work in the public's best interest. It's time to align our interests more strongly - I'll suggest one way to accomplish this in the next post.


Eighty-six percent of the cash you pay for your meds funds mostly advertising, not R & D. Half of the remaining 14% goes to try to produce new medicines which aren't better than old ones - they're just patentable. The remaining 7% of drug company revenue is devoted to new cures, but only those new cures which might result in a patentable drug: any promising treatment which isn't patentable will be suppressed.

You're getting a raw deal. Let's change the incentive system for big pharma so that they want to be on our side.


PS If you agree with me, let's try to generate a buzz. Forward a link of this to your friends. If you disagree with my facts or my reasoning, please post your findings as comments.


Cranmore said...

I hate to split hairs (rodent or otherwise), but the proposition that 14% of revenue is all that goes to R & D does not lead to any conclusion that 86% goes to promotion.

What about costs of production? What about the profits going into the jeans of the drug companies' shareholders? Promotion may be a big number, and bigger than R & D, but you haven't convinced us (i.e. me) that it's 86%.

LeDopore said...

You're right: the remaining 86% gets split between promotion, production and profit. Among these three, I hope that promotion is the biggest expense; although I just checked Pfizer's profit margin and it's around 30%: larger than I had assumed.

I also hope that production costs are low compared with R & D costs, but maybe I should look into this a bit more.