San Jose Mercury News Friday February 26th 1993 STUDY: DRUG PROFITS EXCESSIVE Pharamaceutical companies spend more on marketing than on research, a report shows WASHINGTON- U.S. pharmaceutical companies are reaping profits far in excess of those realized by other industries, even after deducting the substantial costs of developing new drugs, said a congressional report released Thursday. The study by the Office of Technology Assessment says that of the drugs that came on the market from 1981 through 1983, each one made at least $36 million more for its investors, after taxes, than was need to pay off the costs to develop it. "This surplus return amounts to about 4.3 percent of the price of each drug over its product life," it said. Such profitability is two to three percentage points greater than for comparable industries, even after factoring in the risks of new drug development. Even if R&D and marketing costs were trimmed to cut prices, plenty of profit would be left over to make the drug business an enticing one for investors, said Rep. Henry Waxman, D-Los Angeles, head of the House Health and Environment subcommittee, which requested the study. The report offers the most comprehensive analysis yet of the pricing practices and costs of an industry on which little information is public. It supports previous claims by government and Wall Street analysts that drug prices, which from 1980 to 1992 increased 128 percent, or six times the overall rate of inflation, have outpaced most other goods and services largely because that's what the market would bear, not because of expensive R&D. And it highlights the way U.S. health care is paid for: Those who use pharmaceutical products and services often aren't the ones who pay for them, leaving most health-care consumers indifferent to cost. "The market for prescription drugs is broken," said Judith L. Wagner, the study's director. The report cited a European study that showed more than half of all drugs launched in the U.S. market from 1975 to 1989 offered no medical advantage to existing drugs. Waxman said that U.S.-based drug companies spend about $4 billion a year- or about half of their total 1992 research budget- on research that duplicates existing medicines. He said the report shows drug companies can reduce drug prices and still come up with breakthrough medicines. To bring drug prices down, he said, Congress should focus on redundant research, promotion budgets and excess profits, which he said cost the health care system $2 billion in 1991. Such cuts would not prevent drug companies from earning "handsome profits," Waxman said. The report also challenged a number of other positions drug industry executives give to explain their pricing practices. For instance, it shows brand-name drugs retain 87 percent of their sales and almost 70 percent of the number of prescriptions written within three years of patent expiration. The industry has contended that stiff competition from generic drugs causes a brand-name drug to lose about half its market share two years after its patent expires. Robert Allnutt, a spokesman for the Pharmaceutical Manufacturers Association, said the report focused on drugs introduced in the early 1980s, and therefore "comes to some inaccurate conclusions that simply do not pertain to the marketplace today." HIGH PRICE OF DRUGS Among the findings of the Office of Technology Assessment report on the pharmaceutical industry: There is little relationship between drug prices and the level of competition. Even after patent protection ends for drugs and they face competition from cheaper, generic versions, their prices continue to rise. Drug companies spend an average of about 22.5 percent of total sales, or $10 billion per year, on advertising and promotion- $2 billion more than the industry spends annually to develop new drugs. More than half of the $8 billion in research and development spending goes to produce "me too" drugs, which closely resemble products introduced by competitors. In each year from 1976 through 1987, economic returns in R&D intensive pharmaceutical companies were about two to three percentage points higher than those firms in other industries than have similar high-risk investments.