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Reference
Sharife, Khadija  (2011) The great billion dollar drug scam.  : -.

Summary
Part one of a two-part series examining methods used by multinational
drug corporations to control markets - and lives.

Khadija Sharife 29 June 2011

Drug corporations such as Novartis and GlaxoSmithKline have stated that
companies producing generic drugs - often Indian - are able to bypass
costs, and sell their 'copied' drugs for a fraction of the price of the
patented product [EPA]

Alongside pneumococcal diseases such as meningitis and pneumonia,
rotavirus-related diarrhoea is a primary childhood killer in developing
countries, thought to snuff out the lives of 500,000 children each and
every year. An overwhelming 85 per cent of these children are African
and Asian. The need for medical miracles is as great as ever, but
corporate mispricing generates huge profits, while driving up the price
of live saving medicines.

British-based drug corporation GlaxoSmithKline (GSK) recently offered a
five-year deal to supply poor nations with 125 million doses of the
rotavirus vaccine - Rotarix - at $2.50 a dose, just five per cent of the
current going price in Western markets. Through the GAVI group, the
international vaccine agency financed by developed nations such as the
UK, it is hoped that GSK and pharmaceutical multinational Merck - who,
between them, dominate the rotavirus vaccine market - will provide a
secure line of low-cost drugs for as many as forty countries in the near
future.

But is it really a discount, and if so, who is paying the cost?

The financing mechanism subsidising the vaccine is named the Advance
Market Commitment (AMC), a pot created by the G8, as well as the World
Bank and the Gates Foundation, as a pull incentive for drug
multinationals to consider developing countries' long-term markets for
pharmaceutical public goods, such as vaccines. Rotarix has taken off
well: Since 2007, some 50 million children - through 100 million doses -
have already benefited from Rotarix; by 2009, global Rotarix sales
reached $440 million - increasing by 50 per cent from 2008, and Merck's
Rotateq reach $564 million in sales.

GSK Chief executive Andrew Witty described the pricing structure as,
neither a gimmick nor a one-off philanthropic gesture, but rather
part of a concerted strategy to change our business model - designed
to combine commercial success with long-term sustainable contributions.

Pricing structures and profits
Drug companies such as GSK have often claimed that the high cost of
innovation ie: research and development (R&D) is between $1bn and
$1.7bn to bring a new drug to market. The AMC and GAVI - collecting some
$4.3bn to finance purchase of vaccinations, were designed with the
premise that the high cost of drug multinationals' R&D must be met.

During the past several decades, the pharmaceutical industry in the US -
more than half of which comprises European-based companies - has largely
been the most profitable industry in the nation's economy, thanks to
mechanisms such as the lack of a government-imposed pricing structure.
Free pricing and fast approval secure rapid access to innovation
without rationing, said Daniel Vasella, the former head of
(Swiss-based) Novartis, of the advantages of doing business in the US.

Drug multinationals claim that US consumers are forced to fund the
necessary research and development in order to keep global innovation
going. In Australia, Europe, as well as Canada - the source of much
prescription drug re-importing by US citizens, where drugs sometimes
sell for half the going US price - governments ensure pricing structures
render patented drugs affordable.

While drug multinationals generate considerable profits from these
countries, about 50 per cent of global drug industry profits are
generated in the US. In 2006, for instance, global prescription drug
sales totalled more than $640bn - of which almost $300bn were
US-generated sales.

But the real deception is less the Machiavellian tactics used by Big
Pharma to Botox the bottom line than the terrible myth behind the true
price of innovation: the $1bn pill. From 1996-2005, Big Pharma firms
spent $739bn on marketing and administration (M&A): Administration
costs here include accounting, executive salaries (including bonuses,
stock options etc) - as well as human resources expenditure.
Marketing, meanwhile, consists of direct-to-consumer advertising,
sales pitches and free samples to doctors, alongside advertising in
medical journals.

A closer look at drug cost
During the same 1996-2005 period, drug companies invested $288bn in R&D
and $43bn in property and equipment, while generating $558bn in profit.

From the outset, it is possible to see that R&D ranks second to last in
terms of expenses. But the breakdown of R&D itself is opaque: companies
do not list actual expenses for the development of a particular drug,
claiming that information comprises proprietary and/or confidential
commercial secrets.

Yet, according to the Harvard Business Review: The cost per new
approved drug has increased more than 800 per cent since 1987, or 11 per
cent per year for almost two decades. Drug corporations such as
Novartis and GSK state that companies producing generic drugs - often
Indian - are able to bypass such costs, and sell their copied drugs
for a fraction of the price of the patented product - often undercutting
the intercontinental firms by as much as 65-99 per cent.

The $1bn cost is derived from a 2003 study [PDF] published in the
Journal of Health Economics by Joe DiMasi et al from the Tufts Center
for the Study of Drug Development. The authors and their organisation
claimed that the study was unbiased, despite the fact that the Tufts
Center is itself some 65 per cent financed by drug companies.

Though the findings have been normalised as factual by the media, the
facts have long since been debunked by independent specialists.

The authors surveyed ten large pharmaceutical corporations (between them
responsible for 42 per cent of R&D expenditure in the US, where the bulk
of such work is carried out), examining the R&D costs of 68 randomly
selected drugs, and determined the cost of the development of each at
$802 million (elevated to $1bn when adjusted for inflation).

As the data was submitted confidentially by the drug companies to the
authors, there is no way to verify the quality of the information, nor
was there any accounting for the potential volume of intra-company
corporate mispricing. The names of the firms were not mentioned; nor
were the names of the drugs, the type of drugs; or the status - whether
a priority drug, comprising advanced treatment, or a me too drug - ie:
a variation of products already on the market.

'Demythologising' the costs
For starters, the $802 million figure failed to take into account the
opaque and strange manner of accounting involved, beginning with
capitalised costs. According to the authors, R&D expenditures, must
be capitalised at an appropriate discount rate - the expected return
that investors forego during development when they invest in
pharmaceutical R&D instead of an equally risky portfolio of financial
securities.

As Marcia Angell, US physician, former editor in chief of The New
England Journal of Medicine and senior lecturer at Harvard Medical
School, stated: The Tufts consultants simply tacked it on to the
industry's out-of-pocket costs. That accounting manoeuvre nearly doubled
the $403 million to $802 million.

So, when taking into account updated costs by PhRMA (2006), increasing
overall R&D to $1.32bn, more than $650 million has just been included as
research and development by drug companies claiming mythical profits
that might have been generated, had they invested in, say, Wall Street -
and not the scientific innovation used to justify gross profits from
exclusive patents.

The study also neglected to include corporate tax breaks and subsidies -
as well as deliberate and legal corporate tax avoidance (let alone any
illegal tax evasion).

In the journal BioSocieties, sociologist Donald Light and economist
Rebecca Warburton demythologise the costs of R&D drug development by
also analysing the tax breaks involved in R&D costs.

The US Office of Technology Assessment (OTA) revealed: The net cost of
every dollar spent on research must be reduced by the amount of tax
avoided by that expenditure. The authors used data from official
sources such as the Tax Policy Center, to reveal additional tax savings
of 39 per cent. Cumulatively, taxpayer subsidies and credits reduced the
overall costs from $403 million to $201 million.

Tax secrecy
Moreover, as this Ernst & Young Tax Planning article explains, R&D
costs are usually shifted to high tax jurisdictions to offset costs.
Meanwhile, profits generated by patents are often re-located to
low-tax jurisdictions. Pharmaceutical companies prefer to generate R&D
expenses in high-tax jurisdictions such as the US in order to offset
the costs against taxable income. Yet the cost of R&D does not included
avoided tax. Not surprisingly, most pharmaceutical companies are also
based in low-tax secrecy jurisdictions such as Delaware in the US, where
profits can be shifted into passive profit and intellectual holding
companies.

In an article [originally printed in the New Age newspaper, published
online here] I wrote with John Christensen, the founder of the Tax
Justice Network and a former economic advisor to Jersey, one of the UK's
top tax havens, we revealed how tax secrecy and intellectual property
(IP) was being exploited to profit drug corporations, rather than
serving the needs of vulnerable people.

Pfizer, Novartis, GlaxoSmithKline - as well as over 60 per cent of
Fortune 500 multinationals, all maintain entities in Delaware, taking
full advantage of legal and financial opacity tools. In addition to
banking secrecy and zero disclosure of beneficial owners, Delaware
allows for parent companies to establish holding companies within two
days, producing nothing, conducting no economic activity in the state,
and generally hosting just one shareholder (the parent company). Such
entities, allowing the parent company to pay the newly created entity a
fee for use of IP, serves as a passive conduit converting taxable
income to passive non-taxable profit. The entity's sole purpose is to
own and 'manage' laundered income generated from IP.

The gigantic legal expenses incurred by specialists for developing
patents, legal defence, sourcing the tax havens and other IP-related
issues constitute more costs - included as R&D. This tax optimisation
strategy closely resembles that of high-tech companies depending on
intangible capital for the bulk of their wealth. According to Forbes
magazine, by 1999, three of the four richest people in the world made
their fortune from intellectual property rights. They owed their
fortune, said Michael Perelman, to Microsoft, one of the major holders
of intellectual property rights, befitting the so-called New Economy in
which 'DOS Capital' has supplanted Das Kapital.

Profits from AIDS treatment
Intellectual property rights management can be a lucrative business
indeed. The first HIV/AIDS treatment, azidothymidine [AZT], sold under
the brand name Retrovir, was manufactured by the company Burroughs
Wellcome, later incorporated into GSK. In 1983, two years after AIDS was
first reported, the US National Institutes of Health and the Pasteur
Institute in Paris identified its cause - the HIV retrovirus. In that
same year, Samuel Broder, head of the National Cancer Institute (an NIH
branch), established a global team to screen antiviral tools, including
the AZT molecule discovered by the Michigan Cancer Foundation,
subsequently acquired by Burroughs Wellcome.

Broder's NIH-NCI team, alongside scholars at Duke University, discovered
the effectiveness of AZT against the AIDS virus and conducted early
clinical trials in 1985. As Marcia Angell explained in her illustrative
book, The Truth About Drug Companies, Burroughs Wellcome immediately
patented the drug and carried out the later trials that enabled it to
receive FDA approval in 1987 after a review of only a few months. The
corporation charged patients upwards of $10,000 per year for treatment
and heavily congratulated themselves on the achievement of life-saving
medicine.

After one such self-congratulatory letter by Burroughs Wellcome's CEO to
the New York Times, Broder and his colleagues from the NCI and Duke
University responded angrily, stating: The Company specifically did not
develop or provide the first application of the technology for
determining whether a drug like AZT can suppress live AIDS virus in
human cells, nor did it develop the technology to determine at what
concentration such an effect might be achieved in humans. Moreover, it
was not first to administer AZT to a human being with AIDS, nor did it
perform the first clinical pharmacology studies in patients. It also did
not perform the immunological and virological studies necessary to infer
that the drug might work, and was therefore worth pursuing in further
studies. All of these were accomplished by the staff of the NCI working
with the staff of Duke University.

Driving the point home, they added: Indeed, one of the obstacles to the
development of AZT was that Burroughs Wellcome did not work with live
AIDS virus, nor wish to receive samples from AIDS patients.

Killer tactics
Paradoxically, the drug Retrovir was classified by the company as an
orphan drug ie: a drug where there exists a market of fewer than
200,000 people - and therefore not likely to be commercially profitable.
This was done to claim 50 per cent credit from the government for the
costs of clinical trials. In 2005, GSK was accused of artificially
boosting their short-term profit by not increasing production to meet
drastically increasing demand - thus creating scarcity for their
patented product. This was seen as a last bid attempt to milk the patent
which was to expire in September 2005. Shortly thereafter, the US
government approved generic versions of the drug.

In Africa, GSK is known for its - literally - killer tactics.

When Ghanaian distributor Healthcare Ltd imported a generic version of
the drug (a combination of AZT and 3TC - known as Combivir) from an
Indian drug company named CIPLA, providing it at an affordable Indian
price (90c per pill), rather than the patented US price ($10 per pill),
GSK threatened the distributor with court, prompting Healthcare Ltd to
cease sales. Yet even as GSK accused CIPLA of violating patent rights,
GSK did not own the rights to Combivir in the West Africa regional
patent office. AZT and other AIDS treatment remained blockbuster drugs
for GlaxoSmithKline, generating $2.4bn profits in the first six months
of 1997, thanks in particular, to AZT and 3TC. By 1998, AIDS was being
referred to as a world-wide health crisis, considered by many as, an
epidemic.

GSK subsequently made billions of dollars from a patent, controlled a
market, and determined the lives - and deaths - of billions of people
worldwide, for something they did not invent. They did claim, however,
that they conceived of it working. This notion was enough to exclude the
NCI scientists, including Broder, from being listed as inventors.

But is this a one-off example?

Part two of 'The great billion drug scam' will be published later this week.

Khadija Sharife is a journalist and visiting scholar at the Center for
Civil Society (CCS) based in South Africa, and a contributor to the Tax
Justice Network. She is the Southern Africa correspondent for The Africa
Report magazine, assistant editor of the Harvard World Poverty and
Human Rights journal and author of Tax Us If You Can Africa.
english.aljazeera.net



The great billion dollar drug scam: part two

The pharmaceutical industry uses dirty tricks to maximise profits at any cost, hurting sick people and taxpayers.
Khadija Sharife 3 July 2011

Vaccines are often priced 40 ‑ 100 times more than the cost of
production, and drug companies cite research expenses as the culprit [EPA]

This is the second of a two‑part series examining the methods by which
multinational drug corporations inflate their expenses and justify their
pricing strategies. The first part revealed how, far from costing the
reported (and widely accepted) $1bn to bring a drug to market, actual
costs may be less than a fifth of that, thanks to accounting tactics and
corporate tax breaks.

Of course, the US government is very conscious of moves designed to
avoid taxation. But little effective action has been taken to tighten
the tax net. In 2005, Congress extended atax holiday to pharmaceutical
corporations, allowing companies to repatriate hidden profits at just
5.2 per cent of the corporate tax rate. At the time, Pfizer had untaxed
profits at $38bn; Merck $18bn; Johnson & Johnson $14.8bn ‑ at least,
those were the profits they were willing to declare.

Generally, a considerable portion (upwards of 12 per cent) of big
pharma's research and development (R&D) costs is Phase IV or
post‑marketing trials of drugs already commercially sold to consumers,
in an attempt to expand sales. The figure was estimated at 75 per cent
of R&D costs by the Tufts Center, said Harvard Medical School's Marcia
Angell.

Since the majority of Phase IV studies will never be submitted to the
FDA, they may be totally unregulated. Few of them are published. In
fact, like all industry‑sponsored trials, they are not likely to be
published at all unless they show something favourable to the sponsor's
drug. If they are published, it is often in marginal journals, because
the quality of the research is so poor, she said.

Innovations and free‑rides
Ironically, the Tufts Center study by Joe DiMasi et al, which estimated
the price of bringing a new drug to market to be more than $800m,
drastically skewed R&D costs by basing analysis not on the general state
of approved drugs but instead on self‑originating NCEs or New
Molecular Entities (NMEs) which comprise only a small portion of drugs
approved annually by the FDA ‑ estimated at 35 per cent (1990‑2000) ‑ a
figure that has since decreased in the past decade.

Pharmaceutical innovation is determined by two crucial factors: a) the
creation of a new molecular entity(NME) ‑ which in itself may or may
not be useful for treatment but which signifies the introduction of a
new, distinct molecular form, and b) an NME that constitutes apriority
drug: ie: a drug that offers, in the words of the FDA,a major advance
in treatment or which provides treatment where no adequate therapy
exists ‑ in short, a therapeutic advance for serious illnesses.

Under the 1992 Prescription Drug User Act, the FDA operates via a
two‑tiered system of review: Standard Review (S) applied to drugs that
offer only minor improvements over existing marketed drugs, and Priority
Review (P), a fast‑track ‑ a six month process since 2003 ‑ pretty
speedy for any company who wants to drive through innovation.

Though the two comprise separate categories, by blurring the
definitions, pharmaceutical companies are often able to misrepresent
NMEs, withinnovations justifying the high costs of patents ie:
exclusive government‑approved marketing rights.

From 2006‑ 2009, just 48 drug innovations (P+ NME) were approved by the
FDA, while an average of 84 per cent of research funding comes from US
taxpayer sources, such as the National Institutes of Health (NIH). Light
and Warburton conclude that the net corporate investment in research to
discover important new drugs is about 1.2 per cent of sales, not 17‑19
per cent.

So, while drug companies claim that the EU has suffered from a lack of
innovation, trailing behind US R&D expenditure by 15 per cent in 2004,
little of this figure corresponds to reality.

Easy free‑riding of the US public funds and R&D is the primary reason
why drug companies have flocked to the US. Just a quarter of NMEs are
estimated by specialists as being actually developed by drug companies,
instead, most are licensed from government/public‑financed labs such as
the NIH and universities ‑ as well as smaller companies.

Acts and licensing
In 2002, then‑CEO of GSK Bob Ingram spoke to the Wall Street Journal on
the subject of licensing: We're not going to put our money in‑house if
there's a better investment vehicle outside. Ingram pointed out that
GSK was eager to reach the levels of other companies, such as Merck,
which received 35 per cent of its revenue from licensing.

The cost differential between a licensed NME and one developed in‑house
is vast: a licensed NME costs just 10 per cent of actual R&D expenditure
(2000) in contrast to an in‑house developed NME at 74 per cent. In 2000,
just 13 per cent of approved NMEs were developed in‑house ‑ a figure
that has not drastically changed.

The system of licensing came about via the Bayh‑Dole Act ‑ named after
Senators Birch Bayh (D‑Ind) and Robert Dole (R‑Kans) ‑ designed to
enable universities and small businesses to patent discoveries that came
about from NIH‑financed research (the primary distributors of taxpayer
funds for medical research) ‑ thereafter granting the patents to
pharmaceutical corporations in exchange for royalties.

The Act did articulate taxpayer protection rights concerning
non‑exclusive licences ‑ if the action is necessary to alleviate health
or safety needs which are not reasonably satisfied, or the action is
necessary to meet public uses.

But Ronald Reagan's 1983 Executive Memo changed tack, liberalising
access to include coverage for large corporations. Prior to this,
publicly financed discoveries were considered knowledge in the public
domain. One further piece of legislation ‑ the Stevenson‑Wydler Act ‑
removed the barriers betweenpublicly funded systems (mainly the
government but also universities) and the private sector.

Weighing the costs
In short, depending on whether or not the NMEs were developed in‑house,
estimates by Light and Warburton ‑ in addition to other specialists,
such as Angell ‑ reveal the costs of R&D as more along the lines of $50m
‑ $200m.

So much for the $1bn pill ‑ but what of the costs of development for the
Rotavirus vaccine?

Vaccines are often priced 40 ‑ 100 times more than the cost of
production. Drug companies claim that pharmaceutical research is very
expensive and that R&D costs are extremely high.

Unfortunately for GSK, the usual 5,000 or 6,000 clinical trial
subjects ‑ people involved in Phase III trials ‑ drastically escalated
to around 63,000 to 68,000 people ‑ in order to rule out a perceived
fatal side effect (intussusception) that forced Rotashield off the
market some years earlier.

Prior to the massive Phase III trial, the costs of GSK's trials ranged
from $1.8 million to $2.4 million, stated Light et al. Unlike Merck, GSK
conducted many trials in developing countries, drastically lowering the
potential costs. But even estimating at the higher range, the total
costs for GSK's Phase I ‑ Phase III trials reached between $128m and
$192m ‑ for all 63,000‑plus people.

Few of the clinical trials conducted in developing nations are
investigated by the FDA. A 2008 Pfizer presentation [PDF]showed just 45
of 6,485 (0.7 per cent) of foreign trials were scrutinised. In 2008,
more than 76 per cent of the people used for clinical drug trials were
foreign subjects ‑ some 232,532 people.

The cheapened value of poorer peoples ‑ including better value for
physician must not be underestimated.

One report, dated 2000, by the inspector general of the US Department of
Health and Human Services, disclosed that physicians in the US were paid
$10,000 per patient enrolled for a drug trial ‑ plus a further $30,000
on enrolment of the sixth patient. Costs, no doubt, included as
research and development.

Aside fromcheapness, in developing countries there exists far less
regulation, oversight and awareness; and the poor are unlikely to
litigate if and when damage/deaths occur as a consequence of the drug.
This is particularly lethal when it comes to experimentation on
children. More than 78 per cent of children‑focused clinical trials were
conducted outside of the US.

Vaccines and identification
The Rotarix vaccine was not developed in‑house but was licensed in: In
1988, Richard Ward PhD isolated the human rotavirus strain and developed
a live, orally deliverable vaccine candidate under a licensing agreement
with the Virus Research Institute, which later merged with another
company, to become Avant Immunotherapeutics, a small firm that has often
received grants from the NIH.

As Donald Light, a professor of comparative health policy, and economist
Rebecca Warburton revealed in their paper analysing the development cost
of the rotavirus vaccine, Avant funded a Phase II trial of Rotarix in
1997‑1998 which found the drug gave protection in 89 per cent of cases.
Light et al go on to write that, in 1997, GlaxoWellcome (later GSK)
negotiated global rights and agreed, in exchange, to finance development
costs, paid Avant $5.5 million and agreed royalties of 10 per cent on
net sales.

The rotavirus vaccine signified a radical turning point in the
introduction of vaccines: usually, poorer nations wait out a 15 or 20
year period. GSK's rotavirus vaccination instead proceeded via
regulatory approval not in the country of manufacture, but instead, the
country of first intended use ‑ Mexico.

Why not Africa or Asia?
Mexico proved the perfect site for introduction: since the 1990s, the
government created, expanded and strengthened a national surveillance
system for diarrhoeal disease, noted Walsh and Situ. Hospitals and
clinics had well‑equipped laboratories to identify infectious diseases;
the Ministry of Health regularly monitored and reported cases, as did
the clinics and hospitals, as part of the Mexican Social Security
Institute (MSSI) system.

Since 2004, the Pan‑American Health Organisation (PAHO), comprising more
than forty nations of the Americas, supported ‑ along with other
organisations ‑ the development of rotavirus surveillance systems in
countries including Argentina, El Salvador, Guyana, Uruguay, Suriname,
Trinidad and Tobago and Honduras. Monitoring was engineered
tocharacterise the proportion of diarrhoeal hospitalisations
attributable to a rotavirus infection, serotypes of circulating
rotaviruses, and the seasonality of rotavirus infections, writes Julia
Walsh MD in The critical path for vaccine introduction[PDF]. This
information is fed into economic analyses, a critical element in the
countries' decision on whether to introduce a vaccine.

The good news, for GSK, about Mexico and Brazil, is that the percentage
of population targeted to be vaccinated is more than 98 per cent. In
2006, Duncan Steele from the Initiative for Vaccine Research (WHO)
stated that the Rotarix vaccine was being introduced to Brazil, Panama,
Venezuela and other countries ‑ at a cost of $7 per dose for public
health use. In 2004, Brazil purchased eight million doses (two doses per
child), at the full $7 per dose. Ward would later say that rotavirus
hospitalisations were estimated to be down by 59 per cent.

Efficient manufacturing?
Presently, unless Merck makes an entry into the international
marketplace, there exists no competition for GSK which already describes
itself as,the main supplier of vaccines to UNICEF and GAVI. According
to GSK, PAHO and other aid agencies intend to purchase enough Rotarix to
ensure immunisation for 80 per cent of the world's children. Avant
estimates that the global market for the drug will generate as much as
$1.8bn annually. Neither GSK nor Merck have published a summary of their
costs.

Light and Warburton estimate that the cost of Rotarix ‑ due to the
incredibly large expense of the almost 70,000‑person trial is as high
$466 million, excluding capitalised costs ‑ and that out‑of‑pocket costs
could be recovered with a single year's profit. From 2008 onward, sales
totalled more than $1bn.

At efficient manufacturing costs of $1.50‑$2 per dose, GSK will make a
jolly profit from the full price in developed nations, and the 98 per
cent successful vaccination target rate in countries such as Brazil.
Once the five‑year period is up, GSK ‑ holding the global monopoly, will
be embedded as part of the national health budget in 40 or more countries.

GSK's home country ‑ the UK ‑ donated the largest chunk of taxpayer
funds to the AMC pot ‑ at $1.34bn, while IP king Bill Gates offered a
further $1bn. Gates claimed that he felt great about the prices GAVI
received but acknowledged that Indian and Chinese manufacturers could
bring the price downsomewhat if they ramped up vaccine output.

No matter that drug companies like GSK actually sat on the GAVI board at
the time such decisions were made.

Developed nations banging the trade‑related intellectual property drum,
and intellectual property captains such as Bill Gates, will not bypass
the anti‑competitive grip of patents ‑ for which there exists no free
market, and where all patent value is opaquely imputed by the company in
question.

This is the flipside of charity, this is a calculated attempt to
sustain the status quo ‑ a world structured on inequality, where the gap
between those with access to medicine, and those without, is not only
undeserved and systemically unjust ‑ but also lethal.

To paraphrase brilliant comedian Chris Rock, drug companies ‑ or drug
dealers, as he put it, don't want to cure you (or kill you). The money
comes from making you live in need.

The great billion dollar drug scam: part two
The pharmaceutical industry uses dirty tricks to maximise profits at any
cost, hurting sick people and taxpayers.
Khadija Sharife

Vaccines are often priced 40 - 100 times more than the cost of
production, and drug companies cite research expenses as the culprit [EPA]

This is the second of a two-part series examining the methods by which
multinational drug corporations inflate their expenses and justify their
pricing strategies. The first part revealed how, far from costing the
reported (and widely accepted) $1bn to bring a drug to market, actual
costs may be less than a fifth of that, thanks to accounting tactics and
corporate tax breaks.

Of course, the US government is very conscious of moves designed to
avoid taxation. But little effective action has been taken to tighten
the tax net. In 2005, Congress extended atax holiday to pharmaceutical
corporations, allowing companies to repatriate hidden profits at just
5.2 per cent of the corporate tax rate. At the time, Pfizer had untaxed
profits at $38bn; Merck $18bn; Johnson & Johnson $14.8bn - at least,
those were the profits they were willing to declare.

Generally, a considerable portion (upwards of 12 per cent) of big
pharma's research and development (R&D) costs is Phase IV or
post-marketing trials of drugs already commercially sold to consumers,
in an attempt to expand sales. The figure was estimated at 75 per cent
of R&D costs by the Tufts Center, said Harvard Medical School's Marcia
Angell.

Since the majority of Phase IV studies will never be submitted to the
FDA, they may be totally unregulated. Few of them are published. In
fact, like all industry-sponsored trials, they are not likely to be
published at all unless they show something favourable to the sponsor's
drug. If they are published, it is often in marginal journals, because
the quality of the research is so poor, she said.

Innovations and free-rides
Ironically, the Tufts Center study by Joe DiMasi et al, which estimated
the price of bringing a new drug to market to be more than $800m,
drastically skewed R&D costs by basing analysis not on the general state
of approved drugs but instead on self-originating NCEs or New
Molecular Entities (NMEs) which comprise only a small portion of drugs
approved annually by the FDA - estimated at 35 per cent (1990-2000) - a
figure that has since decreased in the past decade.

Pharmaceutical innovation is determined by two crucial factors: a) the
creation of a new molecular entity(NME) - which in itself may or may
not be useful for treatment but which signifies the introduction of a
new, distinct molecular form, and b) an NME that constitutes apriority
drug: ie: a drug that offers, in the words of the FDA,a major advance
in treatment or which provides treatment where no adequate therapy
exists - in short, a therapeutic advance for serious illnesses.

Under the 1992 Prescription Drug User Act, the FDA operates via a
two-tiered system of review: Standard Review (S) applied to drugs that
offer only minor improvements over existing marketed drugs, and Priority
Review (P), a fast-track - a six month process since 2003 - pretty
speedy for any company who wants to drive through innovation.

Though the two comprise separate categories, by blurring the
definitions, pharmaceutical companies are often able to misrepresent
NMEs, withinnovations justifying the high costs of patents ie:
exclusive government-approved marketing rights.

From 2006- 2009, just 48 drug innovations (P+ NME) were approved by the
FDA, while an average of 84 per cent of research funding comes from US
taxpayer sources, such as the National Institutes of Health (NIH). Light
and Warburton conclude that the net corporate investment in research to
discover important new drugs is about 1.2 per cent of sales, not 17-19
per cent.

So, while drug companies claim that the EU has suffered from a lack of
innovation, trailing behind US R&D expenditure by 15 per cent in 2004,
little of this figure corresponds to reality.

Easy free-riding of the US public funds and R&D is the primary reason
why drug companies have flocked to the US. Just a quarter of NMEs are
estimated by specialists as being actually developed by drug companies,
instead, most are licensed from government/public-financed labs such as
the NIH and universities - as well as smaller companies.

Acts and licensing
In 2002, then-CEO of GSK Bob Ingram spoke to the Wall Street Journal on
the subject of licensing: We're not going to put our money in-house if
there's a better investment vehicle outside. Ingram pointed out that
GSK was eager to reach the levels of other companies, such as Merck,
which received 35 per cent of its revenue from licensing.

The cost differential between a licensed NME and one developed in-house
is vast: a licensed NME costs just 10 per cent of actual R&D expenditure
(2000) in contrast to an in-house developed NME at 74 per cent. In 2000,
just 13 per cent of approved NMEs were developed in-house - a figure
that has not drastically changed.

The system of licensing came about via the Bayh-Dole Act - named after
Senators Birch Bayh (D-Ind) and Robert Dole (R-Kans) - designed to
enable universities and small businesses to patent discoveries that came
about from NIH-financed research (the primary distributors of taxpayer
funds for medical research) - thereafter granting the patents to
pharmaceutical corporations in exchange for royalties.

The Act did articulate taxpayer protection rights concerning
non-exclusive licences - if the action is necessary to alleviate health
or safety needs which are not reasonably satisfied, or the action is
necessary to meet public uses.

But Ronald Reagan's 1983 Executive Memo changed tack, liberalising
access to include coverage for large corporations. Prior to this,
publicly financed discoveries were considered knowledge in the public
domain. One further piece of legislation - the Stevenson-Wydler Act -
removed the barriers betweenpublicly funded systems (mainly the
government but also universities) and the private sector.

Weighing the costs
In short, depending on whether or not the NMEs were developed in-house,
estimates by Light and Warburton - in addition to other specialists,
such as Angell - reveal the costs of R&D as more along the lines of $50m
- $200m.

So much for the $1bn pill - but what of the costs of development for the
Rotavirus vaccine?

Vaccines are often priced 40 - 100 times more than the cost of
production. Drug companies claim that pharmaceutical research is very
expensive and that R&D costs are extremely high.

Unfortunately for GSK, the usual 5,000 or 6,000 clinical trial
subjects - people involved in Phase III trials - drastically escalated
to around 63,000 to 68,000 people - in order to rule out a perceived
fatal side effect (intussusception) that forced Rotashield off the
market some years earlier.

Prior to the massive Phase III trial, the costs of GSK's trials ranged
from $1.8 million to $2.4 million, stated Light et al. Unlike Merck, GSK
conducted many trials in developing countries, drastically lowering the
potential costs. But even estimating at the higher range, the total
costs for GSK's Phase I - Phase III trials reached between $128m and
$192m - for all 63,000-plus people.

Few of the clinical trials conducted in developing nations are
investigated by the FDA. A 2008 Pfizer presentation [PDF]showed just 45
of 6,485 (0.7 per cent) of foreign trials were scrutinised. In 2008,
more than 76 per cent of the people used for clinical drug trials were
foreign subjects - some 232,532 people.

The cheapened value of poorer peoples - including better value for
physician must not be underestimated.

One report, dated 2000, by the inspector general of the US Department of
Health and Human Services, disclosed that physicians in the US were paid
$10,000 per patient enrolled for a drug trial - plus a further $30,000
on enrolment of the sixth patient. Costs, no doubt, included as
research and development.

Aside fromcheapness, in developing countries there exists far less
regulation, oversight and awareness; and the poor are unlikely to
litigate if and when damage/deaths occur as a consequence of the drug.
This is particularly lethal when it comes to experimentation on
children. More than 78 per cent of children-focused clinical trials were
conducted outside of the US.

Vaccines and identification
The Rotarix vaccine was not developed in-house but was licensed in: In
1988, Richard Ward PhD isolated the human rotavirus strain and developed
a live, orally deliverable vaccine candidate under a licensing agreement
with the Virus Research Institute, which later merged with another
company, to become Avant Immunotherapeutics, a small firm that has often
received grants from the NIH.

As Donald Light, a professor of comparative health policy, and economist
Rebecca Warburton revealed in their paper analysing the development cost
of the rotavirus vaccine, Avant funded a Phase II trial of Rotarix in
1997-1998 which found the drug gave protection in 89 per cent of cases.
Light et al go on to write that, in 1997, GlaxoWellcome (later GSK)
negotiated global rights and agreed, in exchange, to finance development
costs, paid Avant $5.5 million and agreed royalties of 10 per cent on
net sales.

The rotavirus vaccine signified a radical turning point in the
introduction of vaccines: usually, poorer nations wait out a 15 or 20
year period. GSK's rotavirus vaccination instead proceeded via
regulatory approval not in the country of manufacture, but instead, the
country of first intended use - Mexico.

Why not Africa or Asia?
Mexico proved the perfect site for introduction: since the 1990s, the
government created, expanded and strengthened a national surveillance
system for diarrhoeal disease, noted Walsh and Situ. Hospitals and
clinics had well-equipped laboratories to identify infectious diseases;
the Ministry of Health regularly monitored and reported cases, as did
the clinics and hospitals, as part of the Mexican Social Security
Institute (MSSI) system.

Since 2004, the Pan-American Health Organisation (PAHO), comprising more
than forty nations of the Americas, supported - along with other
organisations - the development of rotavirus surveillance systems in
countries including Argentina, El Salvador, Guyana, Uruguay, Suriname,
Trinidad and Tobago and Honduras. Monitoring was engineered
tocharacterise the proportion of diarrhoeal hospitalisations
attributable to a rotavirus infection, serotypes of circulating
rotaviruses, and the seasonality of rotavirus infections, writes Julia
Walsh MD in The critical path for vaccine introduction[PDF]. This
information is fed into economic analyses, a critical element in the
countries' decision on whether to introduce a vaccine.

The good news, for GSK, about Mexico and Brazil, is that the percentage
of population targeted to be vaccinated is more than 98 per cent. In
2006, Duncan Steele from the Initiative for Vaccine Research (WHO)
stated that the Rotarix vaccine was being introduced to Brazil, Panama,
Venezuela and other countries - at a cost of $7 per dose for public
health use. In 2004, Brazil purchased eight million doses (two doses per
child), at the full $7 per dose. Ward would later say that rotavirus
hospitalisations were estimated to be down by 59 per cent.

Efficient manufacturing?
Presently, unless Merck makes an entry into the international
marketplace, there exists no competition for GSK which already describes
itself as,the main supplier of vaccines to UNICEF and GAVI. According
to GSK, PAHO and other aid agencies intend to purchase enough Rotarix to
ensure immunisation for 80 per cent of the world's children. Avant
estimates that the global market for the drug will generate as much as
$1.8bn annually. Neither GSK nor Merck have published a summary of their
costs.

Light and Warburton estimate that the cost of Rotarix - due to the
incredibly large expense of the almost 70,000-person trial is as high
$466 million, excluding capitalised costs - and that out-of-pocket costs
could be recovered with a single year's profit. From 2008 onward, sales
totalled more than $1bn.

At efficient manufacturing costs of $1.50-$2 per dose, GSK will make a
jolly profit from the full price in developed nations, and the 98 per
cent successful vaccination target rate in countries such as Brazil.
Once the five-year period is up, GSK - holding the global monopoly, will
be embedded as part of the national health budget in 40 or more countries.

GSK's home country - the UK - donated the largest chunk of taxpayer
funds to the AMC pot - at $1.34bn, while IP king Bill Gates offered a
further $1bn. Gates claimed that he felt great about the prices GAVI
received but acknowledged that Indian and Chinese manufacturers could
bring the price downsomewhat if they ramped up vaccine output.

No matter that drug companies like GSK actually sat on the GAVI board at
the time such decisions were made.

Developed nations banging the trade-related intellectual property drum,
and intellectual property captains such as Bill Gates, will not bypass
the anti-competitive grip of patents - for which there exists no free
market, and where all patent value is opaquely imputed by the company in
question.

This is the flipside of charity, this is a calculated attempt to
sustain the status quo - a world structured on inequality, where the gap
between those with access to medicine, and those without, is not only
undeserved and systemically unjust - but also lethal.

To paraphrase brilliant comedian Chris Rock, drug companies - or drug
dealers, as he put it, don't want to cure you (or kill you). The money
comes from making you live in need.
www.pambazuka.org

Khadija Sharife is a journalist and visiting scholar at the Center for
Civil Society (CCS) based in South Africa, and a contributor to the Tax
Justice Network. She is the Southern Africa correspondent for The Africa
Report magazine, assistant editor of the Harvard World Poverty and
Human Rights journal and author of Tax Us If You Can Africa.

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