Legal Drugs and Thugs

This article continues the work started previously, which can be found here.

Here are a few less known facts about “the legal drug industry”, in other words – Big Pharma.

The amount usually claimed to be spent by the industry in order to develop a new drug is 1 billion dollars. Some respectable sources go beyond that: an average of 4 billion and up to 12 billion (for an approved Astra Zeneca drug in 2011). These figures speak for themselves and explain the need to set high prices for new drugs in order to keep profits on an ascending trend. But are these figures accurate?

First of all, all Research & Development figures are graciously provided by the industry, for there is no legal constraint to publish them. It is hard to be unbiased in these circumstances for we might not all have the same definition of what is an R&D-related cost (see more here).

One thing that is easier to check though are profit margins for these companies. In 2014, they averaged 20%, a figure only matched by the banking industry! (source: bbc) And this is not a new trend, for the drug industry has been extraordinarily profitable since 1982, with an average return on revenue three-times the one of other industries in the US (source here). Is manufacturing new drugs a risky business? All these companies are so solidly profitable!

Another thing that we know is that the drug industry spends up to twice as much on marketing drugs than on developing them. The ethics are difficult to grasp in their way of prioritizing resources. Speaking of ethics- drug promotion at any cost is also the reason why drug companies are most often fined. Bribery might be illegal in most Western countries – it is common practice in other parts of the world (see for instance the 490 million dollar fine for GlaxoSmithsKline’s bribery attempt in China in 2014 (bbc)). But this is one tactic among many others worth knowing (especially if you desire to improve your multinational thug skills).

R&D is also subsidized with taxpayer money to an unknown extent (not easy to find using free internet searches). Nevertheless, public subsidies for drug research mean that “taxpayers pay twice, first for research and development, and then they pay high prices at drugstore” (said in 2011 Marcia Angell, former editor of the New England Journal of Medicine).

Finally, R&D is a tax-deductible expenditure. After tax deductions, the actual cost of R&D is a quarter to a third of the initial amount. Drug companies have an effective tax rate way below other industries (source). To this we can add various strategies to avoid paying tax, like piling up money in untaxed locations and using it through elaborate schemes like inversions or by reducing apparent earnings.  Earnings can be easily reduced through paying royalties to one’s own subsidiaries. Inversions are a different take on the same tune: they are done by acquiring a smaller company and moving headquarters to the new location, accessing off-shore money in the process (for more see here).

We have assumed all the way that R&D was designed to produce new medicine, with a potential benefit for all mankind in terms of better curing awful diseases like cancer.  Less than 1 in 4 new drugs are truly new – the rest are “me-toos” or very modestly active  (see here and here).

All these aspects paint a picture of an industry that has more to do with banking (besides the astounding 20% profit margin they share) than with the genuine concern to cure and alleviate pain. It is no coincidence that banks are the main shareholders in this industry. Is this the way we want our health managed? Are we ok with the monsters we feed?

For those interested in more, please google “venture philanthropy” and “pay to keep healthy”. Have a safe journey!