Monday, December 04, 2006

Will activists lament Pfizer's $1 billion loss?

I can’t tell you how often I have heard people whine about the “excessive profits” that pharmaceutical companies earn on some specific drug. A Google search on “pharmaceutical greed profit” turns up well over a quarter of a million hits.

One “activist” is quoted by the World Socialist Web Site as claiming that “Drug companies are killing people by charging excessive prices.” and “The greed of AIDS profiteers is killing impoverished people with AIDS.”

These activists tend to find a drug that has turned a high profit and harp about it endlessly. Other drugs, which inflict massive losses are not mentioned. Take the case of Pfizer and the drug torcetrapib, a drug that raises good cholesterol and ought to reduce heart attacks. Pfizer, according to the New York Times, has invested over $1 billion in just this drug alone.

It was widely seen as a major break through that would benefit millions. But testing shows it has side effects and it has been scuttled. The head researcher noted: “This drug, if it worked, would probably have been the largest-selling pharmaceutical in history.”

And if it had worked, and was the largest selling drug in history, then Pfizer would have been constantly attacked for their greed and excessive profits. Will any activists now lament the $1 billion lost?

Pfizer is cutting staff by 10,000. It has already said it will be reducing its sales force by 2,200. The company says it has to cut its spending by $4 billion. Some of the drugs that it produced, which succeeded, are losing their patent protections shortly. Among them are Zoloft and Zithromax.

Other promising drugs are in the pipeline and may be profitable. But those are several years away from market. The regulatory system on drugs is very time consuming and costly. It can take years to get approval. Some of those “promising” drugs may turn out to be a torcetrapib rerun.

Anti-market “activists” frequently demand that profits for companies like Pfizer be “limited”. Yet there is no way to limit losses. And more drugs fail than succeed. For every one drug that goes to market thousands are shelved. And of those that do go to market only 30 percent cover their costs.

The typical scam from “activists” is to take the profitable drug and announced how much it cost to develop just that one drug. They then show how the profits were vastly higher than the costs and cry “unfair profits,” “corporate greed”. What they ignore is the cost for the thousands of experiments that didn’t work, where there are no profits just losses. They ignore the fact that successful drugs must pay for unsuccessful ones. Profitable drugs also pay for the drugs that do make it to market but lose money.

While the costs of the drugs are mentioned the “activists” rarely mention the “savings”. And most people never consider this issue.

Someone who is HIV+ can reduce their rate of hospitalization by taking drugs. Yes, they spend more on drugs in the process but they also spend less on hospital care. It is estimated that new AIDS “cocktails” cut hospital costs by $2,000 per year. And the older treatments were less effective. In 1995 the number of U.S. deaths from AIDS was 50,610. By 2000 it had dropped to 15,245.

A paper for the National Bureau of Economic Research by Frank Lichtenberg found: “Replacing 1,000 old prescriptions with 1,000 new prescriptions will increase drug costs by $18,000 but will reduce the number of hospital stays by nearly six. Since the average cost of a hospital stay is $7,588, a total reduction of $44,469 in hospital costs could be expected.” Even this underestimates savings “because use of new drugs reduces average length of stay as well as the number of stays.” This research found that the savings in non-drug medical expenses “is about four times the increase in the costs of the drugs -- so reducing the age of drugs substantially reduces the total cost of treatment.”

But the critics only look at the extra cost for the new medicines and not the extra benefits. One study found that the average 1998 price for drugs introduced in 1992 was $71.49 for each prescription. The older drugs these replaced averaged $30.47. The critic would notice the doubling of the prescription price but ignore that the financial benefits of the drugs for the patient exceeded the additional costs. “[R]eplacing older drugs with newer counterparts would have several important benefits: reductions in mortality, morbidity, and total non-drug medical costs. People taking new drugs were significantly less likely to die by the end of the survey than those taking the older medications. They were also significantly less likely to miss days at work than people taking old drugs.”

The bottom line is that newer drugs improve the life of the patient and cut total medical costs. There are cheaper, older, generic drugs that would cut the cost of drugs per year but raise the cost of medical care in general.

The average profit of pharmaceutical companies is higher than the average company but then the research and development costs are much higher as well. An above average return reflects above average costs. And future R&D is paid for from these returns. Less profits mean less investment in future drugs. It is no coincidence that where drug prices are strongly regulated new developments are rare. The sad thing about the torcetrapib failure is not just the $1 billion loss but the future absence of billions in profits that would fund future research as well.

Another dishonest tactic used by “health activists” is to take the marginal cost of additional pill and compare it to the selling price. Say that drug X sells fro $3 per tablet. But once in production the production cost per pill might be 10¢. This is considered proof of the greed of the industry. After all the profit per pill is $2.90. But this assumes zero costs for R&D for this drug and it ignores the costs of drugs that failed to make it to market. The 10¢ may pay for that one pill but where does the money come from for everything else?

As the New York Times noted the failure of torcetrapib is “a big loss for Pfizer and heart patients.” The company lost $1 billion in investigating this dead end. And heart patients will see no improvements in their condition.

Now it seems to me the Times headline is very perceptive. What is a big loss for Pfizer is also a big loss for patients. And what would have been a big gain for Pfizer would have been a big gain for patients. Next time some new drug makes record profits I hope the New York Times remembers this headline and what it means.

Addendum: Pfizer stock dropped about 12% in value in early trading as a result of this bad news. The company projects that flat revenue for the next two years. And in 2010 one of its most profitable drugs, Lipitor, goes into public domain.

Update: Pfizer stocks closed down for the day at 11%. The market value of the company declined by $21.3 billion as a result of the failure of this one drug.