Evidence shows pharmaceutical companies won’t stop price-gouging and risking American lives for financial gain in this time of crises – unless we force them.
Lynn Parramore is Senior Research Analyst at the Institute for New Economic Thinking.
Cross-posted from the website of Institute for New Economic Thinking
In a 2019 Gallup poll, Big Pharma ranked as the most disliked industry in America. Rosie Collington, a graduate student at the University of Copenhagen and a researcher at the Academic-Industry Research Network, knows why: She has studied how major insulin manufacturing companies jack up prices in order to line the pockets of shareholders, leaving many diabetics at risk of kidney failure, blindness, and even death if they can’t afford to pony up.
Amid the Covid-19 crisis, some are hoping pharmaceutical companies can stop prioritizing profits over human life and redeem themselves following decades of abuses ranging from price gouging to tax dodging. But signs are emerging that Big Pharma is looking exploit a public health crisis and engage in activities that could prevent Americans from getting the drugs and treatments they need at prices they can pay. In the following interview, Collington explores what’s at stake with the Institute for New Economic Thinking (INET).
Lynn Parramore: A recent article in Fortune magazine stated that the pharmaceutical industry has “a chance to shine as never before, winning back the trust of a public infuriated with years of soaring drug prices.” Yet already the industry’s behavior is raising alarms, with lobbyists blocking the government’s ability to maintain affordable prices for treatments and companies engaging in questionable profit-seeking moves. How concerned are you?
Rosie Collington: We absolutely should be concerned about the price gouging potential for companies developing treatments and vaccines for Covid-19. Many of the companies at the forefront of drug development for Covid-19 are very financialized, which means that they are primarily focused not on making medicines, but on activities that enrich shareholders and senior corporate executives, such as boosting stock prices through stock buybacks.
So, without intervention, decisions about how to price the medicines will be heavily influenced by the interests of shareholders. Senior corporate executives, with their stock-based pay, are interested in maximizing the amount they can extract from the company. To assume things will be different, that they will behave “morally” in the face of a pandemic, is misguided.
LP: In recent weeks Americans learned that Gilead sought special regulatory status for a drug to treat the virus that would have restricted competition and favored the company with tax credits. (Gilead backed off after a public outcry). How do manipulations like this end up costing people who are sick?
RC: Yes, we’ve already seen Gilead attempt to gain Orphan Drug status for remdesivir – a status that has been used historically by companies to access financial subsidies and market exclusivities originally intended for drugs that treat rare diseases – even if their drug doesn’t fall into that category. Orphan Drug status gives companies greater control over the price of a drug for a longer period – it’s a way of maximizing profits at a greater cost to patients and the public purse.
It’s no coincidence that Gilead also happens to be one of the most financialized pharmaceutical companies out there – my colleagues William Lazonick, Matt Hopkins, Ken Jacobson, Mustafa Erdem Sakinç and Öner Tulum have shown that in the two years after Gilead’s profits soared from sales of its infamously high-priced hepatitis-C drugs, Sovaldi and Harvoni, the company distributed $4.3 billion to shareholders as cash dividends. On top of that the company did buybacks worth $21 billion.
The insulin industry is another case in point. A study I published with INET shows that between 2009-2018 – a period when the list price of insulin increased by over 200% – the three manufacturers that dominate the insulin market distributed $122 billion to shareholders in the form of cash buybacks and dividends. We have to remember that for many people in the U.S., increasing the price of insulin in this way was life-threatening. This was – and still is – their public health crisis. Type-1 diabetes patients need insulin to survive. Various reports from both public health researchers and patient organizations found that, as we would assume, higher prices affect many patients’ ability to access insulin.
The diabetes charity T1International has documented numerous tragic cases of patients dying after attempting to ration their insulin prescription. But this didn’t stop the companies from raising the list price. Distributions to shareholders didn’t halt, either. There is no reason to believe that pharmaceutical companies will act differently in response to this new public health crisis unless they are forced to.
And that’s where we do have some cause for optimism. The backlash Gilead received after seeking Orphan Drug status from patient organizations, patent reform groups, lawmakers, academics, and some media outlets is indicative of the growing awareness that exists around drug pricing and regulation in the U.S. and beyond.
Drug development, approval, patenting and pricing are complicated by design, and that makes it difficult for the public to scrutinize the system properly. But more people are learning about its flaws, learning about what the shareholders who are getting rich actually do – which isn’t a lot, when it comes down to it. More people are questioning the status quo, and hopefully that will make it difficult for the companies developing Covid-19 medicines to price gouge.
LP: What are some of the most concerning loopholes and shortcomings in drug approval processes that companies may be tempted to use to reap unfair or abnormal profits?
RC: The most egregious aspects of drug approval processes in the U.S. aren’t even loopholes – they are just how the system was designed to function! We’ve already mentioned the Orphan Drug Act, and it is quite likely that other companies developing Covid-19 drugs will also attempt to gain orphan status for their drugs.
But even without that, the absence of price controls in the U.S. health system effectively gives the companies free rein over the amount they can charge for their products. Even in therapeutic areas where multiple, similar treatments exist, “competition” doesn’t mean that the price will be low as a result. In fact, in the past decade, there have been some pretty startling cases where companies that produce similar branded products for a therapeutic area actually increase the prices of their drug almost in sync. This has been termed “shadow pricing,” and we’ve seen it notably in insulin medicines and drugs for multiple sclerosis. If there was ever a reason to dismiss the free market mechanism as fallacy, look no further than the pharmaceutical industry!
In every way that we approach it, the biggest threat to overcoming the Covid-19 pandemic in the U.S. once a treatment or vaccine has been developed will be the absence of price controls. A vaccine will have to be accessible to all who can take it to be effective. Even if there are multiple companies producing a treatment or a vaccine – even if there is “competition” – the price of the drugs will inevitably be high if that’s what the system permits. We’ll end up with a few companies and their shareholders extracting windfall amounts off the back of a pandemic, at a time when millions of Americans have lost jobs and are struggling to make ends meet.
LP: Some might argue that drug companies deserve to make big profits when they innovate. But others have pointed out that the public has long been funding pharma innovation through its support of the National Institutes of Health (NIH) and public university research and that Big Pharma is increasingly doing little innovating of its own. What system of innovation do we need to keep prices at a manageable level?
RC: A few years ago, Bill Lazonick and Mariana Mazzucato developed a “risk-reward” framework for thinking through the issue of who “deserves” the financial rewards from innovation. The question is: Who actually creates value in innovation and who takes on the risks that are inherent in innovation processes?
It’s pretty clear that the shareholders of pharmaceutical companies actually take on relatively minimal risk compared with the state, which is almost always responsible for the initial financial investment in basic science that constitutes the foundation of drug development. That early stage investment is incredibly risky, because very few of the compounds under study will actually be developed into drugs. Researchers at Bentley University in Massachusetts were nonetheless able to identify that every one of the 210 new drugs approved by the Food and Drug Administration in the U.S. between 2010 and 2016 had received funding from the NIH at some stage in their development, worth in total more than $100 billion.
Covid-19 has also brought into sharp focus just how much risk workers take on when they decide to join a company and begin employment there. The U.S. is now on course to reach levels of unemployment unseen since the Great Depression. So when you think about it, shareholders of pharmaceutical companies, who come into the process at a late stage when they can pretty much guarantee they will receive dividends and there is a good chance their share value will increase, don’t actually take on much risk at all.
I would add to the risk-reward framework that by living in the U.S., where there is always, under the current system, the likelihood that the drugs you need to survive will at some point double, triple, quadruple in price, diabetes patients take on a hell of a risk – they take on a risk by virtue of being the market the companies need to profit from innovation. In fact, this is the riskiest part of pharma innovation – because if patients can’t actually access the drug, then how we can say a medicine is innovative? Innovation should be measured by its actual impact in the world, and if patients can’t access a drug, then it’s not having an impact and it’s not an innovation.
So, I would say that any healthcare system that limits the risks to patients accessing their treatments is also the most innovative. We can say that a pharmaceutical innovation is only as good as the healthcare system in which it is delivered.
LP: Is there a danger that pharmaceutical companies focused on profits might interfere in the process of developing treatments for Covid-19? I’m thinking, for example, of a recent report of an infectious disease doctor at Yale trying to launch a clinical trial for a drug to treat the virus and receiving a threatening letter from a big pharma company.
RC: I’m not an expert in intellectual property law, but I do know that the ability of these companies to extract such disproportionate value in drug development is fundamentally enabled by a legal-regulatory infrastructure that is set up to protect the profit motive in drug development above all else and to enable senior executives and hedge-fund managers to extract those profits for their own personal benefit.
Government-funded researchers based in universities, drug repurposing non-profits, and other organizations that consolidate incredible expertise but ultimately don’t have a lot of money behind them are simply no match for laws designed to prop up the power of drug executives – laws which these companies often lobbied hard to introduce – and the legal teams they wield.
LP: How might the pandemic influence norms that Big Pharma has defended concerning high prices and strict patent rules? What needs to change?
RC: Perhaps more than ever before, people are becoming aware that within the current system, their lives may actually depend on the behavior of big pharmaceutical companies. It’s been a wake-up call, motivating more and more to learn about how drug development works, how much government contributes financially to it, and the injustice of profiteering from something that many will need to survive. The public outcry in response to Gilead’s attempt to access Orphan Drug status is an indication that the times could be a-changing.
And this pandemic has come at a really promising moment in patient organizing and activism. Historically, patient campaigns have been largely reticent to challenge the extractive tendencies of the pharmaceutical industry, often because – particularly in the U.S. – they have received funding directly from pharmaceutical companies and opted to direct efforts elsewhere as a result. At the beginning of the last decade, as insulin prices first began to climb sharply, there was a conspicuous absence of criticism from the established diabetes patient and medical research charities in the United States. But in 2013, along came Elizabeth Pfiester – a type-1 patient herself – who established T1International, which has done perhaps more than any other organization to get insulin pricing on the political agenda in the U.S. in recent years, winning the attention of Democratic candidates and lawmakers of all stripes, and establishing a network of local campaigners in states across the country.
We’re also seeing greater awareness about share buybacks and their role in shareholder value extraction – not just in the U.S., where they made headlines throughout March and April, but also in Europe. The Danish government even announced that it would not provide any financial support to companies during the Covid-19 pandemic that pay out dividends, buy back their own shares, or are registered in a tax haven. This kind of intervention to protect the public interest and ensure that a few aren’t able to profit at the expense of the rest of us is unprecedented. Hopefully we’ll see more of it.
LP: This is a big question, but should there even be a profit motive involved when it comes to public health?
RC: The short answer is: No. Not when we consider how profits are actually used by pharmaceutical companies today. In recent decades, fewer and fewer of the profits these companies make have been invested in R&D or distributed to workers who develop the drug. Profits have increasingly come to serve the interests of shareholders above all else. If profits from drug sales were invested in R&D and other productive areas of the company that foster innovation and distributed to employees as a reward for their work, there is perhaps some argument to be made for profits in pharmaceuticals.
But then we really need to be asking why the revenues from drug sales, which people need to survive, should even constitute the source of funding for the development of future medicines. Again, insulin is an interesting case in point. One of the drug companies that manufactures insulin, Novo Nordisk, though heavily financialized, does maintain about 25% of its share capital through a holding company, which then uses revenue from this to invest in R&D. But there are still two big issues with a profit-driven model where profits are used for R&D. The first is that there is very little public control over what drugs the company can research and develop. This means that companies are able to decide to develop drugs on the basis of their profitability alone, rather than their public health impact. Drugs for common conditions are therefore a popular choice for companies – just think of how many different medicines exist for depression.
The second question we should pose to a profit-based model of drug development – using the example of insulin again – is well, even if the profits from higher-priced insulin were being used for R&D, why should type-1 diabetes patients in the U.S. be providing the funding for the development of some new drug? There are other ways we can structure the financing of drug development, that would render the profit motive obsolete and enhance access to patients.
Since I first began working in access to medicines policy, I’ve become increasingly convinced by arguments to socialize the costs of developing new drugs and creating a public option for drug manufacture for life-saving medicines. That makes a lot more sense than a system where a few patient groups within the population are essentially footing a large chunk of the bill for collective drug development.