POST OF THE DAY
Pfizer, Inc.
Re: To Bill Mann

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By TMFOtter
December 13, 2001

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jrbear:

As promised, I want to take the time to respond to your remarkable post. At the outset, let me stipulate that the issues I brought forth in the article were not what I want to happen, or what I believe should happen, but rather what I fear will happen given certain realities of politics, human nature, and the fight for profits among companies.

I'll go through your issues point by point.

1. Neither I nor anyone should have any illusions about the origin of funds for studies demonstrating the high cost of prescription drugs, the inefficiencies of HMO's or old people falling dead in the streets. Lobbies spend millions to protect or press out their billions. It's what they do. What they are seeking to do, of course, is capture some politician's mind with a message that his or her constituencies can really get behind. No matter what, opposing lobbies are going to shade a discussion to their advantage. My point was that pharmaceutical companies ought to operate in a way so that their opponents have less to grapple. When the big pharma companies have annual net profit margins of 20%+, that then becomes an easy target.

2. I'll go you one further. Really, the only companies that consistently earn more than their cost of capital in the pharmaceutical industry are the enormous first-run pharmas. Even well run generics, like Watson Pharmaceutical, occasionally blow up. But those big companies have such a high profile and are generally included in the major indices and as such are going to be the ones that are used for demonstration.

3. Agreed on the complication, and I doubt that regulation will fix anything but the drug companies, to ill effect. Still, regular price increases are not the issue so much as the tendency to release new drugs with marginally higher efficacy at a significantly higher price point. New drugs and price increases, in combination, equal 8% of the total growth in expenditure. As you point out, it would be a mistake to read too much into this data point, but 8% per annum increase in price due to new models and price increases is well above the rate of inflation. Again, just something people with an agenda could sink their teeth into.

4. Yes, every company provides some benefit to the poor. I certainly don't want to argue that companies should be compelled to do so, because I don't think that they should. One of my cousins is an executive at Purdue Pharmaceutical, the company that makes Oxycontin, which has suddenly gained popularity as a street drug. As a result, the company must spend millions to make Oxycontin abuse-proof.

Should we assume that Purdue is profiteering if they pass this added cost on to patients, almost none of whom have ANYTHING to do with abuse of the drug? No. But what I am saying is that when a company has a drug with a price tag of $30k per year, and it has enormous net margins and enormous advertising expenses, it is going to leave the company and its industry vulnerable to government action if there is a large constituency that cannot gain access to that drug. Again, I don't think that gov't action would be good. I do think that it would be smart of drug companies to minimize the risk of this happening.

5. I agree with this assessment. Insurance adjustment where there is no true way of determining the life of the contract or the potential liability is nearly impossible to do. I don't have any real philosophical insights into the cost/morality argument you bring up. At some point, given the potential for infinite expense, someone has to make a determination: is it more important to give a 112-year-old treatment for liver failure, or to provide cancer treatment to a 40 year old? In a system where the best balance is determined, the market will have a huge place in this determination. But maximization does not only demand that participants get as large a return as possible, it also demands that those participants are as efficient as possible.

6. For the first point, this survey came from the Henry Kaiser Foundation, not Kaiser Permanente, the HMO. There is no formal relationship between the two, though obviously the Kaiser Foundation is concerned with health care issues and it would not be overly paranoid to consider that its interests and Kaiser the company's are probably associated.

Advertising does not only come in the form of "direct to consumer". Drug companies spend most of their budgets advertising to doctors using some fairly lavish events to do so. There is, of course, nothing wrong with this, but I doubt that the drug companies have done much in the way of testing the efficacy of this investment of their dollars.

7. I think we agree on this point. AI methodologies are crucial to limit adverse reactions. A pharmacist once said that if a person takes 14 drugs, the last 7 are treating adverse reactions caused by the first 7.

8. Again, I believe in the need for these patents, and if I had my way they would be extended and enforced internationally. The recovery time needed when a blockbuster drug comes along is too bloody short. This again does not speak to my belief system, but that of appearances. If the drug companies are not careful, they will find themselves regulated further in regard to price recovery, in regard to universal availability, etc. This would be a bad thing, as it would decrease the overall quality of therapies available over the long run. That we believe this is the case does not mean that politicians will not try to rein in the "greedy drug companies". That is the danger, and I fear that the drug companies must use due care to protect themselves, not only through their immense lobbying efforts, but in simply trying to appear less "greedy".

I'm with you- seeking to have the ability to self-insure.

Foolishly-
Bill Mann

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