The Price Isn't Right

By Christine Gorman

Jake Green, 75, of Winchester, Ky., learned in 1987 that he had myasthenia gravis, a rare degenerative disease that attacks the nerves leading to muscles. Since then, the cost of a month's supply of Mestinon, the drug produced by Switzerland's Hoffman-LaRoche that helps control his disorder, has jumped from $65 to $136. In testimony before Congress last November, Green told the Senate Special Committee on Aging, "I fear the day when I will not be able to afford to purchase the medicine which is keeping me alive."

Barbara Connell heads the Daystar Care Center, a nursing home in Cairo, Ill. Her father-in-law, 85, suffers from congestive heart failure and must spend $190 a month on medications, including the diuretic Lasix, produced by West Germany's Hoechst-Roussel. The senior Connell's income from Social Security totals just $350 a month, and since Medicare does not cover prescription costs, he has begun drawing on savings to pay his pharmacy bills. "If he didn't have those savings, he'd really be in bad shape," says Barbara.

Derek Hodel, 30, runs a New York City consumer organization that helps people purchase anti-AIDS drugs. For the past three months, his People with AIDS Health Group has assisted hundreds of sufferers from the viral malady in importing aerosol pentamidine, a powerful drug that effectively prevents Pneumocystis carinii pneumonia, the leading cause of AIDS-related death. A month's supply of the chemical retails for $26 in Britain, where drug costs are regulated by the government; in the U.S. the price is $150. Says Hodel: "The idea that people have to import medications to get a good price is ludicrous."

Drugstore consumers are feeling the pain of sticker shock as never before. In the U.S., where $40 billion worth of pharmaceuticals is sold annually, the price of prescription drugs has jumped 135% over the past decade; inflation rose 53%. The same trend holds in Western Europe, another $40 billion market. To keep costs down, the West German government last September resorted to stringent price controls on drugs that could cut pharmaceutical revenues there as much as 40%. Last month Japanese authorities cut prescription prices an average of 9.2%. "The price of drugs is running out of control," warns Democratic Congressman Henry Waxman, chairman of the House subcommittee on health and the environment and a leading legislative advocate of lower costs. "If the price increases continue, the public is going to demand that Congress start changing the law."

Major pharmaceutical firms like Merck & Co. of Rahway, N.J., and Bristol- Myers Squibb of New York City are keeping a low profile in the pricing debate. The corporate rebuttal is that drug firms are honestly struggling to contain their spiraling costs and turn a profit in a formidably complex and competitive industry. Research and development costs, the key to corporate success in the drug industry, have lofted from an average of $55 million for each new medication in the 1970s to $125 million today. Regulatory agencies like the U.S. Food and Drug Administration can take up to seven years to approve a drug application. That shrinks to 14 years the maximum amount of time in which a company can recoup its investment before its patent on a new substance runs out, and thereby pressures the firm to hike the price.

Even so, pharmaceutical profit margins are on the rise, often by substantial amounts. Some stock analysts predict that earnings for major U.S. drug companies will climb as much as 15% annually over the period from last year to 1991. Although prescription drugs account for less than 10% of health-care costs in the U.S., pharmaceutical expenses are growing at twice the rate of other medical expenditures.

Hospitals are now requiring staff members to consider a drug's cost as well as its efficacy before they fill out prescription forms, and state Medicaid agencies are trying to hold the line by refusing to pay for some high-priced nostrums. Corporations with major medical bills are taking their own cost- control approach. General Motors has started direct negotiations with pharmaceutical firms to lower prescription-drug rates, and Rockwell International has opened its own pharmacy at an Iowa plant. "We're seeing the leveling out of the market power between purchasers and producers," says Stephen Schondelmeyer, director of the Pharmaceutical Economic Research Center at Purdue University in Lafayette, Ind.

The cost conflict is particularly acute for the U.S. drug industry, which continues to dominate the $130 billion world pharmaceutical market. Although the global industry has always boasted its share of non-U.S. giants, such as Switzerland's Ciba-Geigy and West Germany's Bayer AG, American firms average 40% of their sales outside the country. This year's three biggest drug-company mergers all involved U.S. companies. Bristol-Myers (1988 sales: $6 billion) joined Squibb of Princeton, N.J. ($2.6 billion); Philadelphia's SmithKline Beckman ($3 billion) merged with Britain's Beecham ($3 billion); Merrell Dow ($1.3 billion) of Midland, Mich., merged with Marion Labs ($752 million) of Kansas City. "Pharmaceuticals is the one industry in which the U.S. firms are the biggest and growing the fastest," says Jay Silverman, a health-care analyst at the Nomura Research Institute in New York City.

The U.S. Congress made an attempt to defuse the drug-price crisis in 1984 when legislators passed the Waxman-Hatch Drug Act, designed to encourage companies to manufacture more non-brand-name versions of prescription drugs. Pharmaceutical firms may sell these so-called generic drugs only after the brand name has lost its patent protection. The 1984 law streamlined the FDA approval process for generic drugs, reducing the time from an average of three years to a few months. Manufacturer sales of the low-cost drugs thereupon leaped from $3.5 billion in 1984 to $7 billion in 1988.

The measure proved to be only a partial solution. Last July a bribery scandal rocked the U.S. industry when three FDA reviewers pleaded guilty to accepting bribes from generic-drug companies. The revelations threw doubt on the efficacy of some generics. Meantime, drug prices continued their upward spiral -- primarily because of the fundamental forces that drive the modern pharmaceutical industry.

Above all, drug companies must contend with the increasingly complex nature of medicine. Many of the "simpler" bacterial and viral illnesses whose treatment spurred the rise of great pharmaceutical concerns have passed from the scene, at least in the industrialized countries. Polio was virtually eliminated in developed countries in the late 1950s and early 1960s by vaccine; rheumatic fever has fallen to antibiotics. Today doctors must grapple with more complicated disorders such as heart disease, diabetes and Alzheimer's disease.

Finding treatments for those and other chronic ailments requires more sophisticated research, lengthier study and, of course, larger research budgets. Purdue's Schondelmeyer predicts that during the 1990s major pharmaceutical companies will each have to spend a minimum of $500 million annually on research and development in order to remain competitive. At present, behemoth Merck (1988 sales: $6 billion) budgets $670 million for R. and D. And since the money for new research must come from the sale of existing drugs, prescription prices will be under more upward pressure.

Heightened safety concerns also add to the cost of drug development. Compounds for treating hypertension or arthritis, for example, must be taken for a lifetime. Researchers spend years conducting expensive clinical trials to ferret out the various side effects of potential medications, only to discard many of them. Last month London-based Glaxo Holdings (revenues: $4.1 billion) announced that it had dropped Sufotidine from its development program because the antiulcer drug caused cancer in mice during long-term testing.

After a company has satisfied itself that a drug is safe, it must convince a regulatory agency such as the U.S. Food and Drug Administration or the British Committee on Safety of Medicines of its product's worth. This approval process, often duplicated in dozens of different countries, can add as much as seven years and millions of dollars to drug development. Streptokinase, a drug first licensed in the U.S. in the late 1970s by a subsidiary of Hoechst, helps open up clogged arteries during or after a heart attack and costs less than $300 a treatment. Its new rival, t-PA, genetically engineered by South San Francisco's Genentech and approved for use in 1987, costs $2,200 a shot.

Safety and space-age R. and D. are not the only reasons behind the run-up in pharmaceutical bills. Ironically, more competition often seems to spur higher prices as well. In an increasingly crowded drug market, some major firms have launched extensive -- and pricey -- advertising campaigns to give their wares a selling edge. A 15-sec. commercial on prime-time TV, like the spot for Upjohn's baldness remedy, Rogaine, can run as much as $150,000. "The trend toward direct advertising is particularly costly because your target audience is the consumer, not the physician," says Dr. Jerry Avorn, associate professor in the program for analysis of clinical strategies at Harvard Medical School. "That can't help increasing the price of pharmaceuticals."

After a medication has lost its patent protection, many companies raise the price to recoup some of the losses caused by the immediate drop in market share. A company can forfeit as much as 30% of that share in the first year after generic substitutes become available, but many physicians continue to prescribe only the brand-name medications they have come to trust and rely on. When generic versions of the potent heart medication Dyazide were introduced in the mid-1980s, the drug's inventor, SmithKline Beckman, raised the compound's price 23%.

Drug companies argue that they need the money to keep the all-important R.- and-D. well from running dry. In the past, one good blockbuster chemical -- a drug that generates more than $500 million in sales annually -- could finance a company's investigations for years. But as research becomes more complicated, the patented blockbusters are proving harder to come by. "By 1992 half of the top-ten-selling drugs in the U.S. will be off-patent," says Nomura's Silverman. "By 1995 almost all of them will be off-patent." And that will force less innovative pharmaceutical companies to raise prices on a wide assortment of drugs to make up for their lack of new wonder cures.

Provided they can get away with it, that is. Opposition to drug price hikes is growing fiercer, and includes some hefty corporate nay-sayers. General Motors, which spent $264 million in 1988 on prescription drugs for its employees, has been meeting with drug-company representatives to discuss cost containment. Though the talks are friendly, Thomas J. Morr, general director of employee benefits for General Motors, warns, "If we continue to increase our drug expenditures by 33% per member of our work force, as we did in 1989, we will have to consider more creative ways to cut costs."

A growing number of hospitals have embarked on programs to make physicians better aware of the prices of different medications. Doctors at Boston's Beth Israel Hospital now order antibiotics on forms that list the most cost- effective choices. "The physician still maintains the prerogative of choosing the drug, but we're educating him or her about costs," says Dr. % Jerry Avorn, the program's director. The hospital is saving $75,000 to $100,000 a year on its $900,000 antibiotic pharmaceutical budget.

Health-maintenance organizations have contributed to the downward price pressure. Set up to provide medical coverage for members at a fixed fee, HMOs control pharmacy expenses by using only the most cost-effective drugs and demanding discounts from manufacturers. In 1984 less than 4% of employees surveyed by the Health Insurance Association of America were enrolled in such health-care plans. By 1988 the percentage had risen to 72%.

State governments, which have suffered deep cuts in health-care funding from Washington, are also taking action. With pharmaceutical costs in his state jumping as much as 18% annually since 1985, John Alquest, who oversees the $31 million Kansas Medicaid program, has developed a bidding program for six frequently used drugs, including the antibiotic cephalexin and the asthma drug theophylline. He was able to log savings of $400,000 last year. Pharmaceutical companies have lobbied the Kansas legislature to block the program, but at least a dozen other states are considering similar measures.

In many cases, state governments are only trying to get discounts that have long been available to federal agencies. California's $7 billion Medi-Cal program is the largest consumer of prescription drugs in the state. But according to John Rodriguez, deputy director of state medical-care services, Medi-Cal has to pay the highest prices of any government agency for its medications. Typically, the agency shells out $37.68 for a bottle of 100 tablets of Tolectin, an arthritis medication, while the U.S. Department of Veterans Affairs, which has greater authority to haggle over prices, hands over just $9.31 for an identical bottle. Rodriguez is trying to get legislators to grant Medi-Cal the same kind of bargaining authority. Savings could run as high as $40 million a year.

As the populations of the industrialized nations age, the demand for lower- priced drugs is certain to intensify. That may cause some drug firms to rethink the feasibility of researching more and more expensive high-tech medications -- and will also increase pressure for mergers and other bids to achieve economies of scale in the global pharmaceutical business. The bottom line, says Purdue's Schondelmeyer, is that "we are approaching the maximum cost for what a patient can bear." If so, drug companies could face some painful treatment themselves in the future.

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CREDIT: TIME Chart by Joe Lertola

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With reporting by Mary Cronin/New York and Peter Shaw/London