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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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April 29, 2013

Costing Just Too Much

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Posted by Derek

There's been a lot of rumbling recently about the price of new cancer drugs (see this article for a very typical reaction). It's a topic that's come up around here many times, as would be only natural - scrolling back in this category will turn up a whole list of posts.

I see that Bernard Munos has weighed in on the topic in Forbes. He's not being Doctor Feelgood about it, either:

All this adds up to a giant pushback against the astronomical drug prices that are becoming commonplace. It seems that price tags of $100,000 or above are becoming the norm. Of 12 cancer drugs approved in 2012, 11 cost more than that. As more drugs are offered at that level and their sponsors get away with it, it seems to set a floor that emboldens drug companies to push the envelope. They are badly misjudging the brewing anger.

The industry’s standard defense has been to run warm-hearted stories about the wonders of biomedical innovation, and to point out that drugs represent only 10% of healthcare costs. Both arguments miss the point. Everyone loves biomedical innovation, but the industry’s annual output of 25 to 35 new drugs is a lousy return for its $135 billion R&D spending. . .

That's a real problem. We in the industry concentrate on our end of it, where we wonder how we can spend this much for our discovery efforts and survive. But there are several sides to the issue. From one angle, as long as we can jack up the prices high enough on what does get through, we can (in theory) stay in business. That's not going to happen. There are limits to what we can charge, and we're starting to bang up against them, in the way that a Martingale player at a roulette table learns why casinos have betting limits at the tables. It's not a fun barrier to bump into.

And there's the problem Munos brings up, which is one that investors have been getting antsy about for some time: return on capital. The huge amounts of money going out the door are (at least in some cases) not sustainable. But we're not spending our money as if there were a problem:

Perhaps the mood would be different if the industry was a model of efficiency, but this is hardly the case. Examples of massive waste are on display everywhere: Pfizer wants to flatten a 750,000-square-foot facility in Groton, CT, and won’t entertain proposals for alternative uses. Lilly writes off over $100 million for a half-built insulin plant in Virginia, only to restart the project a few years later in Indiana. AstraZeneca shutters its R&D labs at Alderley Park and goes on to spend $500 million on a new facility in Cambridge.

Munos is right. We have enough trouble already without asking for more. Don't we?

Comments (37) + TrackBacks (0) | Category: Cancer | Drug Prices | Why Everyone Loves Us


COMMENTS

1. Hap on April 29, 2013 1:30 PM writes...

If drugs only cost $43M, or even $1e9, then why do Munos's numbers imply a cost of $3.7-5.5e9/drug? Unless the drug industry is managing to spend more than an NIH in basic research, or the accountants are good enough to hide nearly all of the marketing under R+D, drugs themselves cost too much to deliver. [The separate and redundant issue is how Dr. Light can suggest $43M/drug and not be taken either as a new brand of stand-up comedian ("Laughs, by Merck!") or as a candidate for upper management or psychological treatment.]

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2. NMH on April 29, 2013 1:32 PM writes...

The solution is simple: all insurance organizations (including Medicare) need to be able negotiate prices with drug manufacturers, or refuse to buy costly drugs. Or the insurance industry should offer policies with increased costs if they include treatments with expensive drugs.

On the demand side: the phramaceutical industry should be thankful that we have crappy diets in the west that drive all of this chronic pathology. If we all ate like elderly okinawans the pharmaceutical industry would collapse.

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3. ChristianR on April 29, 2013 1:40 PM writes...

Hi Derek,

I think that many people get this thing backwards. In my opinion, the price tag is not high because drug development has become so expensive, it is drug development that has become expensive because we are able to charge very high prices for the result. The law of diminishing returns tells us that development of each new drug gets more and more expensive the more drugs we try to develop. Rational management will increase the development effort until the expected return on investment has decreased to that of other investments. In this way, high prices lead to expensive drug development.

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4. ChristianR on April 29, 2013 1:41 PM writes...

Hi Derek,

I think that many people get this thing backwards. In my opinion, the price tag is not high because drug development has become so expensive, it is drug development that has become expensive because we are able to charge very high prices for the result. The law of diminishing returns tells us that development of each new drug gets more and more expensive the more drugs we try to develop. Rational management will increase the development effort until the expected return on investment has decreased to that of other investments. In this way, high prices lead to expensive drug development.

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5. David on April 29, 2013 2:29 PM writes...

Why is a $100K considered a high price for life-saving or life-extending drug? How much of the total cost of treating cancer is taken up by the drug cost (versus cost of physicians, hospital facilities)? Physicians are paid much better than drug researchers. Actually the cost of $100K seems comparable with the costs of an expensive car. Are people complaining about the price of the drug because it provides less value than the car?

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6. Slurpy on April 29, 2013 2:35 PM writes...

David, it's because only 1% of the population can afford that expensive car. It also stands to reason, then, that only 1% of the population could afford that life-saving or life-extending drug. And that upsets 99% of the population.

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7. LeeH on April 29, 2013 2:42 PM writes...

David

The sad fact is that many of the very expensive cancer drugs merely extend life by a few months. It's natural that the cost/benefit analysis of this kind of treatment should (and will) be highly scrutinized, as we continue to dig ourselves into a fiscal hole.

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8. pete on April 29, 2013 2:50 PM writes...

@5 David
So is the argument: give the $100k/yr drug and reduce the cost of the other drugs + tests + doctor & hospital costs a patient may face ?

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9. LeeH on April 29, 2013 2:50 PM writes...

Derek

You may want to edit your Martingale reference. The casinos don't (according to the Wikipedia page you point to) limit bets to prevent people from winning from a Martingale strategy (because you can't really), it's to reduce wild swings in payouts. The truth is that the Martingale strategy usually collapses under it's own weight, because the bettor goes bankrupt before he can cover his previous losses (which IS pertinent to your argument).

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10. Anon on April 29, 2013 4:09 PM writes...

" It seems that price tags of $100,000 or above are becoming the norm"
...for American consumers. We subsidize the cost of everything for the likes of China, India, and to a certain extent western Europe.
We subsidize it in the price we pay for the drugs and in the amount the American tax payer pays for basic research through NIH/DOD/philanthropic organizations/etc. I think Derek once posted an article that the US funds 60+% of the worlds biomedical research.

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11. Anonymous on April 29, 2013 4:10 PM writes...

When a drug treatment costs more than the average family income in this country, it's too much (and I believe that most Americans would agree with that).

There doesn't appear to me much incentive for drug execs to tighten their belt. At some point, the insurers are going to strike back, as they should.

And don't get me started about how some of the local hospitals spend "their" money. Our local hospital's constables have better vehicles and equipment than the state police.

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12. Keith Robison on April 29, 2013 4:54 PM writes...

#8 In limited cases, yes, drug treatment can replace a more expensive treatment. For hematological cancers, drugs can sometimes replace bone marrow transplant, which is phenomenally expensive due to the extensive & specialized hospitalization required.

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13. fat old man on April 29, 2013 4:55 PM writes...

I'm quite tired of hearing all this self-flagellation over the cost of oncology drugs. I have some personal experience in the family with one of the latest, greatest examples with someone close to me getting Avastin for 12 months, until it didn't work for her any longer. Sure, the drug was expensive at $5K a pop, 2X a month. I'll bet you can't guess how much the clinic charged to infuse that drug 2x a month: $10k each time for a total cost of $30K a month, only $10K of which was due to the Avastin. Of course we had had insurance or I would be homeless after this (and the other regimens she has to take) but you see my point, everyone in the chain of medical treatment is getting whatever they can.

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14. Bankster on April 29, 2013 4:58 PM writes...

Pharma has more to do with business than with ethics, and the public pays for the bailout. Not good news...

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15. Oligodendrocyte expert on April 29, 2013 5:56 PM writes...

As a scientist having joined Pfizer from academia just as Viagra was hitting the market in 1998, I saw first hand what I consider the heart of the problem. Sitting in various "team" meetings, one was soon disabused of the naive notion that the price asked for a given successful drug candidate bore some relationship to its ACTUAL cost, including cost-of-goods and a reasonable estimate of its development costs. It quickly became obvious the "game" was to charge as much as could possibly be gotten away with, and that the "we also have to cover all the stranded development costs of failed candidates" mantra used to justify outrageous pricing likely included many things being passed on as "costs" to the consumer (e.g., outsized executive salaries; extravagant business travel; the salary and benefits of those determining just how much could be gotten away with pricing-wise) that SHOULD HAVE BEEN COMING OUT OF CORPORATE PROFITS.

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16. fat old man on April 29, 2013 7:00 PM writes...

Just in case I wasn't making myself clear before, If my wife had just been getting a bag of saline infused twice a month, the clinic cost would have been $20K per month, so reducing the cost of oncology drugs will not have the impact on the cost of medical treatment that many think it will, and I find it quite hypocritical that a bunch of oncology docs are complaining about pharma costs when their own costs are actually much more outrageous.

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17. Nap on April 29, 2013 7:26 PM writes...

It's all just a giant cat and mouse game between the people billing (drugs and providers) and the people paying (insurers and HHS). They charge 10k for a treatment and they get paid 2k and in the end both are happy with it. The one really getting screwed are the uninsured who have to pay 9.5k after the "generous" self pay discount

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18. Bbooooooya on April 29, 2013 7:31 PM writes...

I wonder how many drugs per year would be a good return?

I assume Dr. Munoz's figure is all drugs per year? Is a Gleevec worth more than a drug to treat the scourge of restless leg syndrome? Probably, but revenue from both looks the same.

The current system of pharma on the US is imperfect, but it seems to me preferranle to that in every other country. As a previous post on this site noted, costs of research would decrease if companies just focused on drugs that will succeed.

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19. Jim on April 29, 2013 8:49 PM writes...

Isn't the R&D budget not the real issue though? I remember reading estimated Pharmaceutical R&D costs in a TechDirt article that showed figures for Marketing that dwarfed anything spent on the R&D side of operations. Is this correct? If so, how does that play into the picture given above?

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20. V on April 29, 2013 11:42 PM writes...

"Oligodendrocyte expert" (post #15) spends year in meetings, teaches self Econ 101. The idea that any company wouldn't optimize their profit margin is a ludicrous idea; if the price wasn't supported in the marketplace, the price signal mechanism would inform the company and adjustments would be made. Instead, we find empirically that these prices *are* supported.


I also find Anonymous (post #11) typical: 'advanced treatments which cost more than arbitrary American income level X are too much' -- meanwhile this same American of average salary earns more than 95% of the world and without a doubt does not donate a substantial fraction of their income to charities which could stop malaria and other 3rd world issues which cause an outsized fraction of the suffering and death in the world.

Then again, only *our* 1st world issues seen through *our* paradigm are important -- right?!

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21. SK on April 30, 2013 4:47 AM writes...

There is no doubt that high priced drugs are becoming the norm - but the patented "blockbuster" pill model currently seems to be the only way for drug companies to recover their billion dollar losses for those failed drugs and sets them up for allegations of price gouging and more bad PR. The blockbuster model also encourages other companies to invest R&D into "me-too" drugs so they can get a slice of that profitable market rather than risk everything on an unvalidated target, so we get fewer innovative drugs as a result.

Wouldn't it make more sense for the US government/health insurers to pay on the basis of improved health outcomes compared to existing first-in-class therapies (e.g. $50k per QALY with reference to the incremental cost-effectiveness ratio)? This happens in Europe and will prevent the me-too problem.

Also, not all drugs/therapies can be patented (e.g. "off-patent", non-novel or "obvious" drugs) or are monopolisable with patents (e.g. second uses and combinations of drugs which can be prescribed "off label", surgical methods, diets). Those therapies might be very socially valuable (and cheap), but with almost no private incentives for clinical developement. Why don't governments/insurers implement a mechanism to incentivise private clinical development of these "abandoned" therapies, which might be relatively "low hanging fruit" having regard to R&D cost/health benefit (e.g. extended FDA-administered exclusivity/prizes/subsidies/royalties/tax breaks)?

The issue is whether single patented single pill blockbuster model is broken and unsustainable.

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22. David on April 30, 2013 7:41 AM writes...

Don't buy the $100K drug or a $100K car if you don't think it gives good value. Buy something cheaper.

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23. Hap on April 30, 2013 8:29 AM writes...

Problem is, people have a pretty easy choice about the $100K car - the economics are relatively easy (how much will it cost? how much can I sell it for later?), and the variables that determine whether it's worth it to someone are readily determinable. And if you don't have the money, whether you want of not, you have the option of moving on and living,

Contrast that to a $100K cancer drug. How much you will pay may not even be clear (if you have insurance, will they pay? how much? good luck getting a clear answer...), so that part doesn't work. The medicine - whether or not the drug is more effective than others one might take - is difficult for people "skilled in the art" to determine, and may require a significant investment to have any chance of figuring out. The value of time isn't easy to determine in any case, not only because we don't want to face death, but because the quality of said life is important and likely undeterminable beforehand. (Also, the amount of time with most of this class of cancer drugs is also unclear - at the moment , most of what exists are incremental improvements with limited extension of life.)

There is also the fact that you choose what you can afford, you may not have to worry about spending any more money, ever (unless it's on your funeral) - in general the choice to cease existing is not much of a choice.

Finally, you have a rather limited time to decide all this, because if you actually manage to catch the cancer when it is treatable, you don't have much time to gather data and figure it all out.

Those two purchases are perfectly analogous. Right?

The underlying problem is that we have done well making resources available to make our lives longer and better, but the costs are rapidly exceeding our ability as individuals to pay. At this point, society has to decide. Are we comfortable with letting people get the health care they can afford (which thwarts much of the justice of the economic system - because starting out poor and starting out rich are likely to lead to drastically different lifespans and opportunities to use one's abilities and will to succeed - besides giving "Your money or your life" an unwanted new meaning)? If not, how do we pay, and who pays? There also seems to be significant research (from sixty years ago) that the market is unlikely to work well to determine pricing and parcel out the goods. How, then, do we (or who?) determine the cost of and access to health care? The drug companies are easy to make look bad, but whoever has to get money for health care (hospitals, insurers, the government) is in the same position. And someone always has to - no money means no good.

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24. annonie on April 30, 2013 8:31 AM writes...

Having experienced many discussions on the pricing of NCEs, including those in oncology, a common theme has been a comparison to existing therapies in the near area. "If their durg A can get that much per dose/month/year/round of treatment, then that is what we should set our price to be, or a little higher or lower". In Oncology, when the first antibody was marketed at a price of approximately 100,000 per year, that became the new comparator, and now all new class of treatments use that comparator as their baseline to set the price of "new-compound".

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25. Hap on April 30, 2013 8:32 AM writes...

Problem is, people have a pretty easy choice about the $100K car - the economics are relatively easy (how much will it cost? how much can I sell it for later?), and the variables that determine whether it's worth it to someone are readily determinable. And if you don't have the money, whether you want of not, you have the option of moving on and living,

Contrast that to a $100K cancer drug. How much you will pay may not even be clear (if you have insurance, will they pay? how much? good luck getting a clear answer...), so that part doesn't work. The medicine - whether or not the drug is more effective than others one might take - is difficult for people "skilled in the art" to determine, and may require a significant investment to have any chance of figuring out. The value of time isn't easy to determine in any case, not only because we don't want to face death, but because the quality of said life is important and likely undeterminable beforehand. (Also, the amount of time with most of this class of cancer drugs is also unclear - at the moment , most of what exists are incremental improvements with limited extension of life.)

There is also the fact that if you choose what you can afford, you may not have to worry about spending any more money, ever (unless it's on your funeral) - in general the choice to cease existing is not much of a choice (because it's a "choice" that negates all other choices).

Finally, you have a rather limited time to decide all this, because if you actually manage to catch the cancer when it is treatable, you don't have much time to gather data and figure it all out.

Those two purchases are perfectly analogous. Right?

The underlying problem is that we have done well making resources available to make our lives longer and better, but the costs are rapidly exceeding our ability as individuals to pay. At this point, society has to decide. Are we comfortable with letting people get the health care they can afford (which thwarts much of the justice of the economic system - because starting out poor and starting out rich are likely to lead to drastically different lifespans and opportunities to use one's abilities and will to succeed - besides giving "Your money or your life" an unwanted new meaning)? If not, how do we pay, and who pays? There also seems to be significant research (from sixty years ago) that the market is unlikely to work well to determine pricing and parcel out the goods. How, then, do we (or who?) determine the cost of and access to health care? The drug companies are easy to make look bad, but whoever has to get money for health care (hospitals, insurers, the government) is in the same position. And someone always has to - no money means no good.

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26. Doug Steinman on April 30, 2013 10:28 AM writes...

It seems to me that the arguments regarding how to price a new drug are missing the point. In the end, pricing of a new drug is no different than the pricing of a new jet fighter or airliner or computer. The pricing of those is, or should be, determined by the same principles used to price a new drug. The difference is that we are talking about something that could save someone's life so we end up getting emotionally involved. I am not saying that this is wrong but we, as scientists, feel that we have an obligation to be honest not only about how we conduct our research but also about how the result of that research (if are lucky enough to have a compound of ours get to the market) is handled. Maybe we should trust that the business and marketing people have the same sense of integrity that we do and let them do their thing. After all, if the company does not make enough money we are the ones who end up out on the street. It is not an ideal world but it is the only one we have.

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27. Lyle Langley on April 30, 2013 11:07 AM writes...

@#16, f.o.m.:
"Just in case I wasn't making myself clear before, If my wife had just been getting a bag of saline infused twice a month, the clinic cost would have been $20K per month, so reducing the cost of oncology drugs will not have the impact on the cost of medical treatment that many think it will, and I find it quite hypocritical that a bunch of oncology docs are complaining about pharma costs when their own costs are actually much more outrageous."

You made yourself very clear, but it appears you don't know how to do simple math. If the clinics were infusing saline and not drug, the total cost would be reduced by 33% (less the cost of the drug); so, in fact, the overall cost of your health care would be reduced by 33%. Pretty large savings.

@#20, V...
""Oligodendrocyte expert" (post #15) spends year in meetings, teaches self Econ 101. The idea that any company wouldn't optimize their profit margin is a ludicrous idea; if the price wasn't supported in the marketplace, the price signal mechanism would inform the company and adjustments would be made. Instead, we find empirically that these prices *are* supported."

Not a single company is "optimizing" (nice choice or words) profits, they are MAXIMIZING profits. Huge difference. Optimizing means they are doing everything in their power to assure efficiency - Pharma does nothing to this effect. They simply keep everything the same (except trying to outsource) and then say, "what will the market bear". That's not optimizing.

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28. D-Not on April 30, 2013 11:49 AM writes...

The Honeymoon will come to an end. All of a sudden - the decision of the Indian government to grant CLs (compulsory licenses) makes too much sense.

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29. Hap on April 30, 2013 12:00 PM writes...

26: Life is qualitatively different from other goods - if you don't have it, no other good is useful to you. Painful survival can sometimes be worse than none at all, but in most cases, survival means that other goods may be useful, while in its absence, nothing is. That is likely to make health care behave differently than other goods.

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30. alig on April 30, 2013 1:33 PM writes...

Drug prices are just a small portion of the healthcare pie. The problem is society's liability (via Medicare & Medicaid) for healthcare will bankrupt the nation (take a look at the debt clock and notice medicare is the largest unfunded liability). As the boomers become eldigible for medicare and move into their 70s our healthcare system will collaspe. Pharmaceutical spending will be reigned in, but only because all healthcare spending has to be reduced.

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31. wcw on April 30, 2013 2:24 PM writes...

Seems to me that the political vulnerability here is for US health across the board: drugs, treatment, and administration. Pharma is one poster child. There are many others.

When you pay twice as much for the same health outcomes as the rest of the developed world, there is a lot of blame to spread around.

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32. Oligodendrocyte expert on April 30, 2013 4:09 PM writes...

@ #20, V:
In a prior, IVY league undergrad life, Oligodendrocyte expert actually did minor in Economics...and has spent many hours discussing these issues with a childhood friend who is a Wharton School of Business grad. What you so perspicaciously perceive as "support" of drug prices in the current, skewed U.S. healthcare model is, quite simply, an unsustainable mirage.

@ #26, Doug Steinman: "Maybe we should trust that the business and marketing people have the same sense of integrity that we do and let them do their thing." Have you ever worked closely with any of these people? They ARE doing their thing, and therein lies the problem.

@ #27, Lyle Langley: BINGO! Yahtzee! Survey says... (in my best Jim Carey voice).

@ #31, wcw: "When you spend twice as much for the same health outcomes..." Actually, we in the U.S. pay 1.8 times as much as the rest of the developed world for health care, for outcomes that are 37th in the world as of ~2011.

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33. pez on April 30, 2013 7:30 PM writes...

@ #19 " I remember reading estimated Pharmaceutical R&D costs in a TechDirt article that showed figures for Marketing that dwarfed anything spent on the R&D side of operations. Is this correct?"

Firstly, if marketing did not bring more revenue than the cost, companies would not do it, would they? So although it annoys us R&D scientists, its irrelevant what marketing costs, relative to R&D funding.

Secondly, you have to be careful of the agenda of the person adding up the numbers. Some measures of reporting include ALL studies done post-FDA-approval as 'marketing', even though expensive studies are increasingly mandated by the FDA as a condition of approval. Or, the true cost of free samples can be accounted for in several ways, most of which do not reflect a lost prescription.

An academic analysis in 2008 which is too inferior to honor with a citation actually cherry-picked the highest possible numbers in each such quazi-comparable categorization from two independent pharma spending reporting sources, to unsurprisingly come up with a number that was higher than either source calculated! It was data selection that would be rightly condemned if it came from a Pharma, and yet got published in PLOS and has been widely cited ever since.

Pharma is naturally maximizing profit, it is their fiduciary responsibility and it is criminal to do anything but that. Pharma is owned by shareholders to whom it pays profits as dividend, just like other blue chip companies. The Pharma dividend is currently not larger than any other type of industry. If Pharma was succeeding in making any profit that was egregiously more than the payout in dividend, you would hear about the shareholder lawsuits.

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34. alig on May 1, 2013 7:59 AM writes...

@33
Actually, the way individuals in the marketing & sales departments are paid may not lead to maximized profits. The individuals are trying to maximize their income by reaching current year sales goals. However, because they used illegal sales tactics to reach those goals, the companies are paying billions in fines. The individuals never have to pay the fines, so they are doing what they are incentivized to do, but the fines over the past couple years have increased enough to wipe out all of the extra profit.

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35. Pugs on May 1, 2013 12:59 PM writes...

What "illegal sales tactics" are being used?

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36. SK on May 2, 2013 8:33 AM writes...

@35

Looks like "off-label" marketing mostly.

Pfizer fined US$2.3 billion in 2009 for off-label marketing of painkiller Bextra. GlaxoSmithKline fined $3 billion for improper off label marketing and failing to report safety data regarding Paxil, Wellbutrin, Avandia and the drugs. Abbott Laboratories settled for US$1.6 billion regarding the off-label marketing of anti-seizure drug Depakote. Johnson & Johnson could be fined US$2 billion for off-label marketing of its anti-psychotic Risperdal. In 2009, Eli Lilly agreed to pay $1.4 billion over the marketing of its antipsychotic Zyprexa , and in 2007, Bristol-Myers Squibb paid US$515 million to resolve allegations of illegal drug marketing and pricing.

It seems to be cheaper for drug companies to market off-label, get billions of additional sales and pay the fines rather than conducting the clinical trials to prove safety and efficacy for the new indications. Theres also a huge lack of incentives to research new indications, because of "skinny-labelling" practices allow generics to get on the market and then doctors can prescribe the cheaper generics "off-label".

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37. Oligodendrocyte expert on May 2, 2013 5:05 PM writes...

NOTE: going forward, the FDA's ability to fine pharmaceutical companies for off-label marketing practices is actually under fire, given a 3 December 2012 2nd U.S. Circuit Court of Appeals opinion that such marketing practices are protected under the First Amendment's free speech provision. The FDA has decided not to appeal this decision to the Supreme Court, given the decision only applies to the few states within the jurisdiction of the 2nd Circuit Court of Appeals. The FDA may be "whistling past the graveyard," but they claim the ruling will not significantly hamper their enforcement of the off-label marketing ban. STAY TUNED.

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What If Drug Patents Were Written Like Software Patents?
Stem Cells: The Center of "Right to Try"