The Costs to Live

There are thousands of children and adults …, whose lives are threatened by a deadly illness and whose lives could be prolonged if they had access to some expensive life-prolonging medical technology… We need to address that issue directly as a moral problem.  – Leonard M. Fleck

In 2000, researchers found that the life expectancy for a newly diagnosed patient with type 1 diabetes in some parts of Africa may be as short as 1 year.  While surely there are many reasons to explain this statistic such as inability to make a diagnosis, problems storing insulin (the only medication that will sustain a type 1 diabetic and that must be refrigerated), and medication compliance, this post will focus on the costs of such essential medicines, the costs to live.

The cost to live for many who depend on medications is incredibly high, and rising.  These costs essentially violate the right to health both domestically and abroad.  Here are a few domestic stats:

  • Since 2006, prices for the top 100 commonly used medications rose by 6.6% according to the Government Accountability Office compared to a 3.8% increase in medical costs
  • In 2009, prescription drug spending totaled approximately $250 billion
  • In 1996, out-of-pocket spending for prescription drugs averaged $247[1]
  • In 2001, 21% of adults spent 10% or more of their income on out-of-pocket costs.  In 2010, 32% of adults spent 10% or more of their income on out-of-pocket costs
  • In January 2011 alone, the 75 top-selling drugs rose another 4%
  • Because of the expense, more than 25% of those prescribed a medication don’t take it and 23% cut their pills in half or skipped doses
  • In 2003, 11.7 million people didn’t take their medications because of costs which rose to 36.1 million in 2007
  • $100-300 billion is lost in decreased productivity from those who do not have access to medications

So what does this mean?  Medication prices are climbing, which correlates with the high spending on such medications, including direct costs to consumers as seen in their out-of-pocket expenses.  Note – these statistics only apply to the United States.  While you cannot extrapolate this data internationally (particularly because many other countries have caps on prescription drug pricing and different payment structures), barriers created by such high prices are not unique to this country.

Why the high costs?  Pharmaceutical companies claim primarily that prices must be high to fund their research and development (R&D) endeavors.  Admittedly, to win regulatory approval for a drug takes about $1 billion and 15 years according to Pharmaceutical Research and Manufacturers of America (aka – Big Pharma) and the National Institutes of Health (NIH).  And the number of drugs approved by the FDA dropped from 56 in 1996 to 23 in 2010.

However, nonprofits such as government labs, universities, and research hospitals initiated research for about 10% of the major drugs approved from 1990-2007.  These are often funded through federal monies who then sell their patents and licenses to private pharmaceutical companies to take through testing phases in into the market (made possible by the Bayh-Dole Act of 1980).

In addition, we must consider that a fair amount of  research funding comes from nonprofit advocacy organizations such as the American Cancer Society, Susan G. Komen for the Cure, the March of Dimes, and the Juvenile Diabetes Research Foundation (JDRF), to name a few.  JDRF has funded more than $1.5 billion in research since 1970 and last year alone, provided more than $107 million for type 1 diabetes research.  Susan G. Komen for the cure invested nearly $450 million in 1,736 research projects since 1982.  A plethora of other organizations raise funds for research of innumerable diseases, funds that aren’t coming out of pharmaceutical companies’ profits.  In other words, the money they spend on research comes from your donations and fundraising efforts as well as your tax dollars.

So are costs high because pharmaceutical companies need to recoup R&D expenditures when much of the research is funded by the government and your donations?

Who are these pharmaceutical companies that control the costs of medications?  A few of the top players (and the products you know them for) include:

  • Merck (Cipro, Fosamax, Gardasil, Nasonex, Nuvaring, Pepcid, Singular, Zocor)
  • Johnson & Johnson (Tylenol, Concerta, Topamax, Respirdal)
  • Bristol-Meyers Squibb (Plavix, Abilify, Coumadin)
  • Pfizer (Advil, Chantix, ChapStick, Depo-Provera, Diflucan, Effexor, Enbrel, Lipitor, Lyrica, Neurontin, Nicotrol, Pristiq, Viagra, Xanax, Zoloft)
  • GlaxoSmithKlein (Advair, Avandia, Flonase, Imitrex, Lamictal, Paxil, Wellbutrin, Zantac)
  • Novartis (Elidel, Lamisil, Reclast, Ritalin, Tegretol, Voltarin)
  • AtraZeneca (Crestor, Nexium, Pulmicort, Seroquel, Symbicort)
  • Sanofi-Aventis (Allegra, Ambien, Lantus, Plavix)
  • Roche Group (Avastin, Tamiflu, Valium)
  • Eli Lilly (Cymbalta, Glucagon, Humalog, Prozac, Zyprexa)

Many of these have been and continue merging into even bigger conglomerates with 25 mergers in 10 years.  GlaxoSmithKleine used to be GlaxoWellcome and SmithKline Beecham until 2000, and AstraZeneca was Astra and Zeneca until 1999.  In 2009, Merck merged with Schering-Plough (who merged with Bayer in 2006) and Pfizer merged with Wyeth.  Recently, Sanofi-Aventis (which used to be Sanofi-Synthelabo and Aventis) acquired Genzyme.   As we know, mergers mean fewer and larger companies, which may decrease competition, and decreased competition may lead to increased prices.

Beyond these mergers, pharmaceutical companies have been raising the price of medications in light of worries that their profits will fall when many of their patents expire – the so called looming “patent cliff.”  Pfizer raised the price of Lipitor, which will soon lose its patent, by 11.4% last year. Eli Lilly’s patent on Zyprexa will end this year.  AstraZeneca’s Seroquel will lose patent exclusivity of Seroquel and GlaxoSmithKlein will lose Avandia.  Plavix will no longer have patent protection soon affecting both Bristol Meyers Squibb and Sanofi-Aventis.

Currently, pharmaceutical patents give about 7 to 12 years of protection to a drug (after clinical trials).  After this, generic drug makers can enter the market if they prove their bioequivalence to the FDA (basically showing that their version has the same active ingredient and is identical in dose, strength, route of administration, safety, efficacy, and intended use).  Generic medications escape the cost of R&D and get approval through an FDA abbreviated new drug application.  Once on the market, these medications are sold for 30 to 80% less than their brand-name equivalents.  Wal-Mart and others have taken advantage of these generics, offering a month’s worth of generic medication for only $4.  They estimate this program saved customers $610 million in the first year alone.  Generics mean more can afford medications that were once out of their reach.

Unfortunately, pharmaceutical companies interfere with the ability of generics to come to the market through tactics such as pay for no delay where drug makers settle patent challenges with payoffs that delay generics from reaching the market.  In 1997, Bayer AG paid Teva Pharmaceutical’s Barr Laboratories nearly $400 million for Barr’s agreement not to bring out their generic.  Courts have found that these do not violate anti-trust laws and have upheld these agreements.  After a similar 2006 decision regarding the brand-name drug tamoxifen (used to treat breast cancer in women and men), the FTC has identified 53 such patent settlements which some estimate to cost consumers about $3.5 billion a year.

Will pharmaceutical companies really suffer that much as a result of patent expirations when they’ve been raking in the profits even in these hard times?  According to Fortune 500, many of these companies are doing just fine.

  • Merck was the 14th most profitable company with nearly $13 billion in profits in 2009, a 65.2% increase from the year before.
  • Johnson & Johnson was the 19th most profitable company with about $12.3 billion in profits, which was down 5.3% from 2009.
  • Bristol-Myers Squibb ranked 28th with profits of nearly $11 billion, a 102.2% increase from the year before.
  • Pfizer ranked 33rd with over $8.6 billion in profits, a 6.6% increase from 2008.
  • GlaxoSmithKlein ranked 34th bringing in $8.6 billion also, which was only 2.2% increase.
  • Novartis ranked 35th, with $8.4 billion, an increase of 2.5%.
  • AtraZeneca ranked 40th with $7.5 billion, an increase of 23.3%.
  • Sanofi-Aventis ranked 42nd with $7.3 billion, an increase of 29.8%.
  • Roche Group ranked 43rd with $7.2 billion, a decrease of 13.5%.

It’s hard to imagine that these companies are truly struggling to meet their R&D costs, and thus must keep drug prices high, in light of their substantial profit margins with all companies, except the Roche Group, seeing gains.  Furthermore, many companies are cutting their R&D spending.  Pfizer will cut 9.2%, AstraZeneca will cut 11%, GlaxoSmithKlein 11.6%, and Sanofi-Aventis 8.7%.  They will also cut spending with massive layoffs and axing production facilities.

To sum up thus far, competition is decreasing, profits are rising, generics aren’t entering the market, R&D spending is being cut, and medication prices are rising – meaning more out-of-pocket spending, more who cannot afford their medications, and more grappling with the costs to simply live.

More of the story is yet to be told (as this post is long enough on its own).  In the next few posts I’ll introduce other factors influencing the high prices of medication, the effects of these high prices, and the ethical responsibility to ensure a right to health by ensuring access to essential medications.  Keep in mind, that this is not merely about money, this is about living.

[1] The equivalent of about $340 in present value.

* I use a few terms interchangeably throughout the post including:

  • cost and price
  • drug makers and pharmaceutical companies
  • medications, drugs, and pharmaceuticals

Continue the series:
The Costs To Live – Part 2

The Costs to Live – Part 3

The Costs to Live – Part 4


9 Responses to The Costs to Live

  1. […] is a risk factor, and (b) completely different from type 1 diabetes (which I mention a lot in my Costs to Live […]

  2. […] many news stories focus on the share prices) – which again brings up issues I presented in my Costs to Live […]

  3. […] While Justice Breyer makes an interesting point about using tax payer government monies to fund research on which an individual researcher can gain profit, I still believe the researcher should retain the rights.  The individual researcher really shouldn’t benefit, but the companies that use this research absolutely shouldn’t collect the excessive profits they do on the inventions produced by this federally funded research.  I object to companies receiving these licenses or other ownership rights in these inventions and then complaining about Research and Development costs when the research was already federally funded.  Then under the auspices of needing to recoup R&D costs, raising their prices when the public already paid for the invention. (See my series on The Costs to Live.) […]

  4. Pharma284 says:

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  5. […] then.  This has always remained in my mind and why one of my earliest posts on this blog was about The Costs to Live (a 4-part […]

  6. Its like you read my mind! You seem to know a lot about this, like you wrote the book
    in it or something. I think that you could do with
    a few pics to drive the message home a little bit, but instead of that, this
    is wonderful blog. A fantastic read. I’ll definitely be back.

  7. […] the costs of their medicines – what I call the Costs to Live.  (See The Costs to Live Parts 1, 2, 3, and […]

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