Pfizer, Inc.
To Bill Mann

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By JrBear
December 10, 2001

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Hello Bill Mann, aka "TMFOtter",

Your Fool On The Hill essay "The Battle Over Drug Prices" raised some interesting points and highlighted some of the issues in the debate about drug costs, but I felt that there was some topspin, perhaps inadvertent, that could be addressed. Of course I don't imagine that writing to you about the problem will have a material impact on the outcome since the entire matter really comes down to lobbyists, politicians and media relations.

1. There are several competing interest groups vying for favorable legislative action. Naturally drug companies have a stake in the debate, as do health insurers, HMOs, Medicare recipients and the uninsured. One point that should not be overlooked by the curious observer wishing to push back the veil of propaganda and public relations spin to see the Deeper Reality speak, is that quite a bit of the media blitz about high drug costs originates from groups that are funded by health insurers and HMOs. Not all of the anti-drug company PR comes from insurers and HMOs, but next time you read an "Oh the high cost of drugs!" study, check the source of the funds -- and perhaps look at the long term double-digit EPS estimates for other health care entities. In reality, there is a battle for the hearts and minds of citizens, with the insurers and HMO's pitted against the drug companies, but who do you think will benefit the most from lower drug costs, insurance companies and HMO's or the public? In your article you quote a study done by Kaiser. Are they really unbiased?

2. When we talk about drug companies in general, we often don't stop and think about the fact that drug companies are just biotech companies with profits. A great majority of biotech companies are eagerly awaiting the day when they too will have a profitable drug approved by the FDA. Most biotech companies have no profits, and thus, the profitable drug companies are at the apex of the biotech economy -- they are the fittest of the fit, the survivors. So when we calculate the cost of a single medicine, let's not forget that nine other potential medicines failed to make it to the market and resulted in total losses of millions and millions of dollars.

3. You wrote: "Over the last two decades the amount Americans have paid for drugs has increased by more than 15% per year, to an estimated $117 billion in 2001."

The drug industry's propaganda arm has created a small brochure.

According to PhRMA, in 1999 increased utilization accounted for 10.1% of the 18.1% yearly total expenditure increase (i.e. people took more drugs). New medicines accounted for 3.8%, while simple price inflation for all drugs accounted for only 4.2%.

In recent years, simple price increases by drug companies have been very limited, but the question is much more complex than that! Each drug retailer charges different prices! So part of the cost of your prescription goes to Walgreen's P&L statement and Cardinal Health -- another double-digit EPS grower -- is also skimming some of the cream! And perhaps your doctor is reimbursed for his services in writing the prescription! Every one in our convoluted, over-regulated, lack-of-free- enterprise healthcare system wants part of the profit from you and your prescriptions. I haven't seen many things as complex as drug pricing, but when you peel away the PR, the entire game is highly profitable for everyone involved! Furthermore, drug distribution companies actually earn profits from generics -- often they earn more from generics -- yet few complain about Cardinal Health growing profits by 20% a year!

4. You also wrote "We're already seeing a clash between the costs and certain peoples' ability to pay for treatments. Novartis' [NYSE: NVS] leukemia drug Gleevec, for example, costs nearly $30,000 per year." What you failed to mention is that Novartis established one of, if not the first systems to charge according to the payee's ability to pay! For an uninsured person earning, say, $25,000 a year, the price of treatment is probably zero (but do check the Gleevec website  for up to date info.)

The fact is, nearly every drug company provides free or heavily discounted prices to poor uninsured sick people (see 2001-2002 Directory of patient assistance programs  -- nearly every big company participates!) So, paradoxically, Novartis may be forced to charge governments and insurance/HMO companies more to help subsidize the poor and their ability to get treatment!

5. Very few people are willing to step up to the plate and address the overall healthcare needs and wants of the entire population in the U.S., of which drug costs are a very small part of the total equation. This is the area I feel deserve the most serious discussion. In theory average life expectancy of 120 years can be achieved, and for those who might afford the best treatment, by 2100 an indefinite lifespan is possible.

The drug, biotech, and medical device makers are all involved in a mad rush to capitalize on the Golden Age of Biology we are in now. Their objective is to cheat Death; nay, to defeat Death! And this objective sets up an unbearable tension and conflict between the insurance/HMO companies and the health solution providers. Insurance is based on covering quantifiable risks, but every year those pesky drug, biotech and medical device companies are inventing new cures for fatal diseases, and new treatments for debilitating diseases. There is no way an insurance company can write an open-ended policy good for the life of the patient because they simply do not know what they are insuring against! It was much easier and more profitable back in the old days when nearly everything was fatal and incurable. The surgeons did very well cutting out tumors, with successful operations to not save the patient's life!

So who is going to pay for all of us to live to be 120? Has anyone considered what that would do to the Social Security system, to say nothing of Medicare? And even if we limit total drug expenditures and fix prices according to our need and desire to possess cheaply what the drug/biotech companies have invented, will that provide healthcare for the uninsured? There are 40 million people in America without health insurance, and since most health insurance is work-related, many of these people are never going to be able to afford to go to a doctor!

The life expectancy for blacks in America is about 69, compared to 74 for whites, with only about 0.6% of the difference attributable to violent crime. What accounts for the rest of the difference? It is very mysterious, but part of the problem is higher unemployment and lower average income for blacks. Heck, the U.S. has only been desegregated since the 1960's! If the insurance companies and HMO's dislike the idea of paying for medicines, they like the idea of socialized medicine even more. Their concern for the high prices paid by Americans rings hollow with me. If you want to ensure that everyone has some minimal level of health care then you could start by eliminating the bureaucratic overhead at the average insurance company. The very systems they use to deny claims and track risk experience are part of the high cost of health too. The reality is that even if you reduced the cost of prescriptions to zero many Americans would still be unable to afford healthcare -- and we see this effect in South Africa, where no amount of price-cutting by Merck will get health care for South Africans unless the S.A government decides to spend more money (or the U.N. steps in.)

6. You write, "And yet, according to a Kaiser study, research and development expenses make up only 14% of total drug company revenues, less than both net profits (18%), and more damningly, marketing expenses (16%)." Notwithstanding the source of unnamed study -- Kaiser, an insurance/HMO company -- there is an element of concern in the 16% marketing expense figure. But the spin is backwards and backward thinking. Why shouldn't drug companies be able to advertise their products? Anecdotal evidence may suggest that embarrassing problems such as Erectile Dysfunction, frequent urination, baldness, incontinence, psoriasis, fungal infections, etc. are very common and that when people watch TV and learn that their favorite sports superstar isn't too ashamed to go to the doctor, they go too! When people go to the doctor to get Viagra they quite often learn that they have heart problems, and their erectile "dysfunction" is a symptom of a more serious problem that left untreated could be fatal and would definitely cost more than the pills. Does anyone imagine that the HMO's are actively encouraging their patients to utilize every possible drug remedy to help improve their Quality of Life? I don't.

More important in the question of marketing expenses is something that has puzzled me for a long time. Drug sales seem to increase in proportion to the size of the sales force employed by the drug companies! I do not understand that but I imagine that doctors are like everyone else and are overwhelmed by the exponential rate of increase in information. Perhaps doctors need drug salesmen to advise them on the latest and greatest treatments available? It seems to me that one thing that would reduce costs would be to do away with drug company sales forces. Why not set up a vast A.I. database system that would integrate all known data about available drugs, drug interactions, the patient's vitals and symptoms, and historical outcomes in similar cases? Perhaps the healthcare would be improved and the number of mistakes would be reduced along with overall costs?

7. You wrote, "And rather than spending those billions in consumer advertising, drug companies would be well served to focus upon a system that will alert doctors to potentially dangerous combinations of drugs, something that killed an estimated 100,000 Americans last year." That topic is basically a monopoly of the Hearst Corporation's subsidiary "First DataBank". They have been automating drug data and drug interactions for more than 20 years, all for the profit of the secretive and private Hearst empire! In other words, it has already been done. Mistakes in prescribing are more likely to be reduced by an A.I. system like I have outlined above which would help ensure that doctors can efficiently solve each individual's problem without making preventable errors, especially those pernicious errors of omission. Also, computerized pharmacies like Merck-Medco -- and pharmacists in general -- are working hard to prevent unfortunate drug combinations from being prescribed.

8. I want to add one more thing, then I promise to stop writing. The time an average drug patent provides marketing exclusivity is only about 12 years. The statutory 18 years is eaten up by time in clinical trials and time spent getting to market, and even that only covers the U.S. Many other countries don't recognize U.S. drug patents at all, and the socialized medicine systems of the U.K., the E.U. and elsewhere have failed to finance the explosion of drug invention. The most inventive and productive drug companies are here in the U.S., thanks largely to greater profitability in America. So the key point to remember is that after the 12 or 18 years are up, the lifesaving molecule and the scientific know-how to use it are freely available to everyone on the planet. If R&D expenditures by drug and biotech companies are reduced, and new medicines are invented more slowly and come to market later, then many millions of people will die, here and abroad. If we leave it up to the Feds to invent these things, well, they probably won't. The people working to save your life, your childrens' lives, and the lives of your grandchildren are NOT the insurance/HMO companies or the government -- they are the people working at Pfizer, and Merck and Novartis, Amgen, Biogen, Abgenix, Neotherapeutics, and at thousands of other companies, many of while will never earn any profits.

Bottom line in all of this? It is totally complex and really, the government is not helping things much with all of the healthcare regulations. They have set up an incentive system that is illogical and paper intensive, while establishing such rigorous standards for quality that all healthcare costs are increasing at double-digit rates every year, not just drug costs! Most of us don't see the true cost of health care though because it is buried in the national budget via the tax code, and it is hidden in the records of the insurance/HMO companies. As a shareowner in a number of drug companies, I would prefer that you attack the system as a whole, but I recognize the fact that people have different opinions shaped by their life experiences, and I respect that. We should all ponder long and hard the idea that as people who live in a free country and espouse liberty and personal responsibility, we should plan on paying more to live better and longer lives. Consider: why is it cheaper to live in a ghetto than in a luxury gated community? As Robert A. Heinlein wrote: TANSTAAFL -- i.e. There Ain't No Such Thing As A Free Lunch. Me? I'm trying to get rich enough to be able to afford health care.

OK! Live long and prosper, Bill Mann!


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