Part one of a two-part series examining methods used by multinational drug corporations to control markets - and lives.
IMAGE 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
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
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.
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.'
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'.
The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera's
Source: Al Jazeera