7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
Pharmaceutical High Profits: Languaged Ideology or the Cost of R&D?
Janet Spitz PhD
Associate Professor
School of Business
The College of St. Rose
432 Western Ave.
Albany NY 12203
(518) 454-2032
spitzj@strose.edu
Mark Wickham
CEO
Lakeview Mental Health Services
Geneva, NY
July 15, 2007
Contact first author at the School of Business, College of St. Rose, Albany NY 12203,
spitzj@strose.edu (518) 454-2032. The authors gratefully acknowledge support for this
research from The College of Saint Rose.
October 13-14, 2007
Rome, Italy
1
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
Pharmaceutical High Profits: Languaged Ideology or the Cost of R&D?
ABSTRACT
Pharmaceutical firms and their supporters attribute high prescription prices to costs of
researching and developing the next generation of life-saving drugs. No empirical support for
that free-market claim, however, was found: pharmaceuticals enjoy profits 5 times the allindustry average while investing proportionately less in R&D than other high-R&D firms.
Lack of effective opposition to pharmaceutical prices and profits appears consistent with a
different view: that the phrases and imagery used by pharmaceuticals create a hegemony of
meaning, tying high prescription prices to extended life, progress, efficient markets, and
American freedom. We suggest that re-appropriation of that languaged context may open the
bounds of what counts as knowledge and as possibility for change.
____________
Keywords: pharmaceutical drugs, free markets, language, power, subjective reality.
October 13-14, 2007
Rome, Italy
2
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
1. INTRODUCTION
High health care costs, including the cost of pharmaceutical products, have garnered
considerable attention of late. From about 4.5% of GDP in 1950, 7% in 1970, and 12% in
1990 (Cutler, 1995), the US now spends about $2 trillion per year or a little over 16% of its
GDP on health care (Freking, 2006; Borger et al, 2006); this includes 1 of every 4 federal
dollars budgeted, some $.7 trillion (Hutcheson, 2006).
County, state, and federal governments share, with business, the task of providing
funds for such health care as these entities support, bringing those costs to the attention of
taxpayers as well, if consumers’ attention were not already alerted by their own personal
experience. Recent New York State analysis of county-based property tax rates, for
example, indicates that Medicaid as one aspect of health care costs continues to drive this
tax’s yearly increase, with counties’ share more than doubling in cost from $1.1 billion in
1993 to $2.3 billion in 2003 (Hevesi, 2005); in all, New York State spent $45.8 billion just
on Medicaid in 2005 (Odato, 2006), with total health care spending much higher.
Prescription drug spending helps drive these increases, in some cases more than
doubling in as little as two years (Coulter, 2003). National spending on prescription drugs
increased between 9.05% and 18.35% each year from 1998 to 2004, with all but one year
above 13% (Strunk and Ginsburg, 2004). Pharmaceutical spending reached a 2004 retail
sales total in the U. S. of $168 billion (Kaiser, 2006). Indeed, U. S. consumers spend more
than half the planet’s $317 billion retail prescription drug bill (Gorman, 2004).
Despite the contribution of pharmaceutical drugs to health care expenditures, we as a
nation seem reluctant to place limits on profits earned by these firms; rather, we accept with
an almost faith-based belief the articulated defense that high prices are necessary to offset the
October 13-14, 2007
Rome, Italy
3
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
extraordinarily high cost of researching and developing the next generation of life-saving
drugs, an expense well worth the cost (Cutler, 1994). Unless we as a nation choose to halt
medical progress, high drug prices apparently must remain.
In this paper we suggest that language in this setting becomes a conduit for ideology:
words, phrases and imagery used by those working on behalf of the pharmaceutical industry
in particular, and lax regulation more generally, cast prescription prices in such a way as to
create meanings of lofty goals, extended life, efficient markets, and American freedom.
Using a “parade of sonorous phrases” (Arnold, 1935) pharmaceutical firms, lobbyists,
and generously paid friends evoke a meaning set which people in the U. S. find difficult to
critically evaluate, much less to discard: that enormous pharmaceutical prices and profits are
needed to research and develop the next generation of life saving drugs.
This paper questions whether that scenario is indeed the case: are efficient markets
actually in play such that high drug prices are needed and used for R&D? That is, do costs of
pharmaceutical research and development largely use up high profits? Or are these words of
justification a “speech act” (Derrida, 1977) – a deliberate extension of free market ideology
to frame and bound our thoughts: that prices are determined by market forces, so that excess
profit at business, consumer, and taxpayer expense is merely an appropriate (or random)
market outcome?
Comparing and contrasting quantitative and qualitative methodologies increases our
understanding of pharmaceutical prices and profits as we seek to combine the explanatory
power of both. Empirically testing the R&D – profit relation sheds lights on market
outcomes. Exploring the manner in which language delineates what may then be discussed
illuminates a pre-market shaping power. When that language works to reinforce and
October 13-14, 2007
Rome, Italy
4
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
legitimate those market outcomes, a simultaneous exploration of both can help us to unravel
the whole cloth composing the language – market mix, and potentially suggest to us an
intervention mechanism by which that tenacious pattern might shift its success from
pharmaceutical to societal profit.
Quantitatively, using a 15 year sample of 202 publicly traded for-profit firms chosen
by high net sales across 23 industry groups, firms that exhibit a wide range of R&D
investments, profits and losses, we find no support for the R&D justification claim.
Pharmaceutical firms enjoyed profit some five times higher than average: 13.9% during the
1988-2003 fiscal year span compared to the non-pharmaceutical industry average of 2.6%.
Among R&D-intensive firms (those who spent at least 6% of their assets in R&D),
pharmaceuticals were found to invest 2.22% less into R&D over the 15 year span than did
the others, but still enjoyed over 4 times the non-pharmaceutical high-R&D profit average.
At the same time we find returns to non-pharmaceutical health care organizations to
be low, equal to the non-pharmaceutical average; this last result suggests that federal policies
designed to cut costs and limit pricing in much lower-margin hospitals and other health care
institutions, while sustaining full prices for pharmaceutical products, as specified in the 2003
Medicare prescription drug benefit law, are unlikely to have any significant impact on
escalating health care costs.
Directed language, however, emerged with strong explanatory power to shape not
only our discussion of health care, but the actual operation of pharmaceutical markets as
well. Integration of the approaches of language, and of free markets, into a single analysis
suggests to us that the mechanism by which we may be able to end our tolerance for
extraordinarily high publicly funded pharmaceutical profits is through language. Combined
October 13-14, 2007
Rome, Italy
5
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
with a numerical critique, reclaiming how the health care debate is framed may enable us to
imagine, define, and enact mechanisms to alter that situation for the greater public good.
2. THE THEORY AND LANGUAGE OF FREE (COMPETITIVE) MARKETS
Classic economic models hold, in the general case, that free (competitive) markets
generate efficient outcomes and thus lead to societal benefit. Under conditions of short-term
utility, profit maximization, and complete information, multiple actors exchange goods and
services at prices that reflect their fair market value (Marshall, 1890) which is to say their
actual costs. With prices just covering costs, including the cost of capital, no measurable
profits may be sustained.
Government regulation of these markets, therefore, can only serve to restrict options
and decrease value and benefits for both private firms and the consuming public: laws
constrain the possible efficient outcomes of the market that would otherwise be free of
interference. For this reason, non-regulated or minimally-regulated “free” markets are
suggested to work best (Friedman and Friedman, 1962). This mainstream view is advanced
by the Chicago School in its adherence to neoclassical economics without serious
consideration of market failures or imperfect competition, a view finding fertile ground not
only in international and domestic policy, (Stiglitz, 2003; Cypher, 2004) but in 7th (Chicago
area) Circuit Court decisions as well (Spitz, 1998).
“Free Markets” as language is compelling. The United States increasingly seeks to
occupy a position of unique leadership on various fronts world-wide. One of these is
ideology, where the U.S. as a nation seeks to promote and symbolize freedom. While some
of our discourse reflects specific elements of freedom in such areas as politics, education,
October 13-14, 2007
Rome, Italy
6
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
livelihood, and choice of domicile and locale, the semantics of free markets occupies much
of our public language.
Language indispensably requires the process of abstracting, simplifying, and of
leaving characteristics out (Hayakawa, 1941). The ability to direct that abstraction and thus
create specific context, is one form of the power to frame and thus bound peoples’ thoughts.
Hayakawa argues that the repeated use of directive language can “influence and to an
enormous extent control future events” (p. 103).
Power “is at its most effective when least accessible to observation” (Lukes, p. 64,
2005); by the time power is visible in open struggle and conflict, it is a much watered-down
version of control. In open conflict, language in its weakened state becomes merely speech,
observed to be “always in some ways out of our control” (Butler, 1997 p. 15); words, phrases
and even meanings become more open to re-appropriation.
The hegemonic power of directive language, then, occurs in a cycle, with its most
potent stage prior to open conflict: it is at this point that our common understanding of how
things fit together (the language-determinant context) leads us to conceptualize elements of
our lives in a patterned way. The language that bounds this pattern is the power that
“determines what counts as knowledge, what kind of interpretation attains authority as the
dominant interpretation” (Flyvbjerg, 1998, p. 226). It is the “network of boundaries that
delimit, for all, the field of what is socially possible” (Hayward, 2000, p. 4).
Social possibility, bound by language, becomes identity: the ways people act, think,
feel, perceive, reason; what people value and how they define themselves all emerge from
social language and action (Hayward, 2000). The social nature of language as a
communicative tool between thinking people contributes to the establishment of a social
October 13-14, 2007
Rome, Italy
7
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
reality, a perceived reality where the characteristics and boundaries of situations are
subjectively, through interaction, determined. This is the intersubjective reality to which
Berger and Luckmann (1966) refer.
Language can, in the abstract, thus be argued to be a powerful dominance tool; those
who control which language and language phrases are spoken prevalently, and thus how
things are framed, also control what is able to be said (Derrida 1996, 1998 transl.; Lukes,
2005). In particular, because the reality of everyday life is intersubjective in character, our
understanding of the world corresponds to the understanding of others so that we share a
common sense (Berger and Luckmann, 1966). This understanding requires a social base
with specific social processes for its maintenance, including specific language, phrases and
terms, which ward against reality-disintegrating doubts.
Using directive language to continuously re-construct context is one such process,
while ridicule as a sanction is another: as long as we remain in the common understanding,
we feel ourselves (or others suggest) that we are ridiculous when doubts about that intersubjective reality objectively arise. In crisis situations, the language of reality-confirmation
becomes explicit and intensive to address any potential threat to the “official” reality, and to
avoid the risk of a social construction breakdown (p.156, Berger and Luckmann, 1966).
The fall of the Soviet Union presented the United States with an increasingly fierce
ideology of identity as “free.” Free from what, or for what, is not entirely clear; what is
central to that identity, however, is the characteristic: freedom. Under that languaged and
imaged symbol, “free” and “markets” are easily bundled, and not easily sorted apart.
Freedom, and free markets, become bound together in the American language in a
way that leaves them value-laden, conflated and confused. Government regulation is
October 13-14, 2007
Rome, Italy
8
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
redefined from constraints on market deceptions or excess (for example, the practice of
intentionally avoiding contract fulfillment, manipulating stock or market prices, hiring
children, paying less than the minimum wage, or conducting business in patently unsafe
working conditions), constraints which many would believe to be good, to limiting individual
freedom (Friedman and Friedman, 1962), which many would believe to be bad.
Pharmaceutical lobbyists are quick to capitalize on this “free market” bundle, turning
language-based subjective reality into tangible results. Among Washington’s wealthiest and
most powerful (Saul, 2005) they are also among the most active, lobbying the Federal Trade
Office over CAFTA (the Central American Free Trade Agreement) some 137 times in 2005,
with pharmaceuticals Pfizer, Wyeth, and Bristol-Meyers’ lobbying agents engaging in 78
separate lobbying acts.
The success of these language framework expenditures in shaping health and medical
policies to reflect the dominant class has been well documented (Birn and Molina, 2005). As
early as the 1950s, the pharmaceutical industry exerted its influence to frame the then-debate
about substituting generics for name-brand drugs. They were successful in defining
substitutions as a health hazard, rather than permitting the centrality of profits to be a
discussion point, resulting in more than 40 states in the U. S. passing anti-substitution laws
(Fachhinetti and Dickson, 1982).
Pharmaceuticals’ efforts to establish favorable language frameworks metamorphize
into profits through other mechanisms as well: plainspoken individuals representing
themselves as grassroots activists testified at Senate hearings in favor of non-regulation and
the continuation of high pharmaceutical prices, neglecting to mention their receipt of direct
and indirect funding by pharmaceutical firms (Gerth and Stolberg, 2000). Pharmaceuticals
October 13-14, 2007
Rome, Italy
9
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
provide frequent gifts, trips, and payments to physicians, clinicians, and their staff; many
medical offices are in daily receipt of lunches purchased from local restaurants by
pharmaceutical representatives who deliver these with drug branding stickers placed on the
food wrappers (Wickham, 2006). The U.S. Government’s Federal Drug Administration, the
agency charged with regulating their product, receives ½ its Drug Evaluation budget from
pharmaceuticals through User Fees (Angell, 2005). In part because of these efforts, the U.
S. remains the only industrialized nation in the world that lacks government drug price
restraints.
Other efforts emerge through the uniquely U.S. non-regulation that permits drug
firms to advertise directly to consumers, unparalleled elsewhere in the industrialized world.
Pharmaceutical expenditures on marketing exceeded $14 billion in 2004, most on direct
marketing to health care providers (Krueger, 2005), marketing which directly influences the
drugs doctors prescribe (Hollon, 2005). Considerable literature demonstrates the link
between gifts to physicians and their prescribing patterns (Mansfield et al, 2005; Hollon,
2005; Watkins et al, 2003; Kusserow, 2002; Avorn, Chen and Hartley, 1982), a link openly
acknowledged by the pharmaceutical industry itself (Pemberton, 2002). Direct marketing
expenditures to consumers and physicians (“detailing” in pharmaceutical language) run about
twice pharmaceuticals’ expenditures for R&D (Goozner, 2004). In 2004, Pfizer,
GlaxoSmithKline, and Johnson & Johnson spent $16.90, $12.93, and $15.86 billion on
marketing, respectively, to their investments of $7.68, 5.20, and $5.20 billion on R&D
(Ismail, 2005).
At the same time, less than 10% of physicians consider direct-to-consumer
advertising by pharmaceuticals a positive trend in health care (Robinson, Hohmann and
October 13-14, 2007
Rome, Italy
10
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
Rifkin, 2004) since, objectively, decisions to advertise reflect calculations of return on
investment more than an interest in public health (Lexchin and Mintzes, 2002).
Finally, the pharmaceutical industry dovetails its language with those who advance
this framework more generally. Murphy and Topel (2001) and Nordhaus (2002) assert that
the value to current and future generations of Americans from improvements in life
expectancy in recent decades has exceeded $2 trillion per year. Similarly, Newhouse (1992,
p. 3) suggests that “Cost containment policies may result in welfare losses for the insured,
and even increase the number of uninsured.” And Kotzian (2004) asserts that pharmaceutical
R&D is dependent on drugs’ prices: high prices are used for research.
Such advocates argue that the reason marketing advertising to both doctors and
consumers promoting pharmaceutical use grew from $9.2 billion in 1996 to $13.8 billion in
1999, was primarily because advertising provides information people want: consumers like
the fact that pharmaceutical companies are reaching out directly to them; this is not a
problem for health care costs because “the growing level of competition forces drug
companies to keep prices down” (Matthews, 2001).
This is classic economic language, language that works to maintain free market
ideology in the face of objective problems with that social construction, subjectively shared.
When language frameworks bound our ability to challenge a subjective reality that
increasingly mis-fits with our objective reality experience, health care is not the only arena in
which explicit reality-confirmation language may be observed. We face similar difficulty
finding language to discuss enormously high oil prices leading to record-breaking oil
industry profits: should these be mediated, or are they merely the result of the free market?
The Presidential statement, “the price is determined by the marketplace and that’s the way it
October 13-14, 2007
Rome, Italy
11
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
should be” (G. W. Bush as quoted by Hunt, 2006) or a Presidential proposal to ease pollution
controls in oil refining as a mechanism to decrease costs in oil production and thereby
presumably to eventually moderate the price of gas, serve as a social sanction and a
reprimand: it confirms and extends the intersubjective reality into one, unsupported by
objective reality, in which sudden vast increases in the price of a barrel of oil are successfully
tied to steady-state extraction and refining costs with associated emissions.
Such language reminds us that we should feel ridiculous and inappropriate for
holding objective doubts about a subjectively shared reality based on the language of free
markets: free markets are good, they are part of our identity whether in health care or
energy; in some subjectively shared legitimate way, excessive free market outcomes are part
of the value of freedom.
Reality-confirmation language is similarly specific when doubts about the price of
pharmaceuticals arise. “Are there deadly or debilitating diseases that won’t be treated or
cured if price controls are implemented? How many people would die for lack of a new drug
that might have been developed had price controls never been adopted? …Pharmaceutical
companies will spend about $22.4 billion in 2000 developing and testing new prescription
drugs that relieve pain, cure disease and save lives” (Matthews, 2001).1 The Pharmaceutical
Research and Manufacturers of America trade group estimates put the R&D investment at
$33 billion in 2003 (PhRMA, 2004). Were that the case, surely little would be left over for
profit.
The language of free markets does not, however, express what is felt and known by
Americans constrained to speak that tongue: “I only have one language; it is not mine”
(Derrida, 1998 p.1). Because the language of free markets cannot express ideas of fairness,
October 13-14, 2007
Rome, Italy
12
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
for example, or the social value that life’s necessities should be provided at an appropriately
affordable price, then fairness or reasonable health care access for all of a society’s citizens
cannot in this language be discussed. Because of this constraint objections to dominant
policies are difficult to conceptualize and discuss; even more challenging is to articulate
viable policy alternatives.
3. THE PROCESS AND FUNCTION OF MARKETS: OBJECTIVE CHALLENGES
TO LANGUAGE
The actual process of classic free market exchange requires large numbers of buyers,
large numbers of sellers, and a full range of information easily available to all. All players in
this market want to behave opportunistically (Williamson, 1975); however, that desire is
presumed to be thwarted in the classic economic approach by characteristics of the free
market itself.
While sellers wish to maximize profit, the presence of other competing sellers
prevents their setting prices that are “too high” – that is, higher than the actual cost of inputs
including capital, employees, plant, property, and equipment, rolled into the summary costs
of service and production; all of these are openly known. Any attempt by a seller to
overcharge (ie, to make an above-average profit) is countered by a somewhat lower price
offered for the same service or good by another seller, whereupon all buyers flock to the
second offer. Since that second seller also makes an excess profit, a third then charges less,
drawing buyers there. This process of competition on the basis of price continues until all
sellers offer their services and goods at the lowest, most competitive cost-covering price, or
are otherwise differentiated by quality.
October 13-14, 2007
Rome, Italy
13
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
At the same time, buyers may wish to underpay, but no one will sell at that too-low
price: any seller who offers services or products below their actual cost will eventually go
out of business, so price floors are determined by costs of service and production. Buyers
then choose the items they want at the sellers’ lowest possible price.
The extent to which markets actually perform in this way is subject to much debate.
Even theoretically, this scenario happens “at equilibrium” – en route to equilibrium, small
temporary inefficiencies, including temporary profits, are recognized to occur.
Practically, a variety of factors decrease market efficiency; among the most common
of these are barriers to entry and collusion which constrain the number of sellers, work to
hide information, decrease competition and create monopoly-like concentration which results
in ongoing higher profits or rents. Oligopolists or monopolists can expect to extract
additional profit over competitive equilibrium (Masson and Shaanan, 1984); indeed, the
classic definition of monopolistic activity is “unfair competition” (Landry, 1945).
In general, oligopolists are recognized to exploit the potential for “tacit collusion” in
free markets: that collusion is feasible and sustainable under high entry costs, but also in
some cases under free entry market conditions (MacLeod, Norman and Thisse, 1987).
Sellers of prescription drugs, as a rule, are recognized by economists to behave as
oligopolists (Elzinga and Mills, 1997), extracting the price obtainable in their markets
without regards to actual costs. A 2002 Federal Trade Commission report documented
widespread oligopolistic and anti-competitive activities within the pharmaceutical industry
(FTC, 2002), while in the mid-1990s researchers documented serious principal-agent
problems with high marketing-sales ratios in the pharmaceutical industry (Berndt et al,
1995). A current State Of California lawsuit against 39 drug companies for overcharging,
October 13-14, 2007
Rome, Italy
14
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
citing a price to the state of $804.70 for a bottle of a generic high-blood-pressure treatment
available elsewhere for $33.85, suggests that collusion remains a profitable tactic; while the
case is far from settled, GlaxoSmithKline (not the maker of the medicine in question) has
acknowledged that different end-users pay widely varying prices for medicines (Broder,
2005).
To what extent does the pharmaceutical industry experience barriers to entry
including the time and cost of bringing products to market? These costs, including patent
approval, clinical trials and FDA approval, may reach $360 million for a truly innovative
“new” drug (Berndt et al, 1995), although that number is hotly contested. Industry-financed
studies initially claimed $114 million in 1987 dollars, later inflated to $231, $403, and then
$802 million dollars including both post-approval continued clinical trials designed to boost
physician utilization, and the “opportunity cost” of investing those funds elsewhere (DiMasi,
Hansen and Grabowski, 2003), although what that opportunity cost might be when
pharmaceuticals return five times the industry average is not clear. DiMasi, lead author of
the pharmaceutical industry-financed Tufts study, later in 2003 put the cost of drug
development at $897 million (Bioresearch Online, 2003).
By contrast, Public Citizen arrived at the sum of $71 million per new drug, after tax,
simply by dividing the total R&D industry expenditures by the number of drugs approved,
over a six year period (Goozner, 2004); this average includes large industry expenditures for
bringing to market the 90% of “new” pharmaceuticals virtually identical to those whose
patent rights are about to expire.2 Neither estimate counts tax incentives which reimburse
the pharmaceutical industry for costs of clinical trials (Angell, 2005), the inclusion of which
further decrease costs.
October 13-14, 2007
Rome, Italy
15
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
Company-financed R&D is designed to be a profit-seeking activity (Scherer, 1983),
particularly given increasingly generous copyright and patent protection legislation (Waxer
and Baum, 2006), including the Hatch Waxman Act and its amendments. If these factors
work to reduce the number of competing firms, and reduce access to protected profits, then
the observed profitability of firms that invest heavily in R&D will be higher than the profits
of firms in industries not so investing.
Controversy also surrounds the benefits to pharmaceuticals of the Bayh-Dole Act,
which enabled private companies to gain and keep patent rights to discoveries funded by
taxpayer dollars. The National Institutes of Health spent some $22.4 billiion in 2004 in
grants – not loans – to drug companies and other research organizations (Agovino, 2004)
compared to some $33 billion spent on R&D by the pharmaceutical industry itself, only some
of whose companies even operate in the U. S. Simple math concludes that American
taxpayer investment in pharmaceutical R&D meets or exceeds that invested by American
pharmaceutical firms.
Through Bayh-Dole, taxpayer dollars are appropriated three times: first as direct
research grants; then as claimed research expenses (for tax credit purposes); and finally as
taxpayer support for pharmaceutical purchases of those same drugs through public health
care expenditures.
Collusion, lobbying for profit enhancing legislation, and direct marketing expense
have created an industry in pharmaceuticals that is singly the most profitable in the United
States: in 2002 the combined profits for the ten drug companies in the Fortune 500 at $35.9
billion were more than the profits for all the other 490 Fortune 500 business put together at
$33.7 billion (AMSA, 2005).
October 13-14, 2007
Rome, Italy
16
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
This situation also creates “welfare loss” – the decrease in benefit to the population
from lack of competition: when firms collude, they innovate less since they have no
incentive to make temporary profits from superior products, instead relying on price fixing
strategies. The 90% of old drugs re-marketed under patents as new suggest that welfare loss
is a very real cost in U. S. health care today.
This welfare loss may be seen in expected length of life. Few Americans realize that
the U. S., with apparently the best health care system, ranks either 27th (Anderson, Smith and
Sidel, 2005) or 28th (Rosenberg, 2006) among countries in the world, in life expectancy at
birth.
In one country comparison, the British Government in 1946 enacted the National
Health Services Act, followed by a United Kingdom pharmaceutical policy (Harris, 1951;
Olson, 1995). Both of these restricted payments to health providers of all types at the same
time that health care was to be provided to all. While market proponents claim British health
care, as a result, is barely adequate, recent research reveals that while the U. S. spends about
twice as much on health care as does the U. K. (Johnson and Stobbe, 2006), the U. S.
population in late middle age is significantly less healthy than the equivalent British
population, and these differences exist at all points of the socio-economic spectrum (Banks,
Marmot, Oldfield and Smith, 2006). This last point suggests that it is not merely economic
or social inequality in the U. S., giving rise to health inequality (Skinner and Zhou, 2005),
that might account for our national ranking in life expectancy as 27th or 28th worldwide, but
rather a tangible collusion-generated welfare loss.
October 13-14, 2007
Rome, Italy
17
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
4. HYPOTHESES
The quantitative and qualitative approaches suggest differing hypotheses about
whether profit resulting from R&D advantage and/or collusion will be short-lived as markets
move toward equilibrium.
If profit is necessary to fund R&D, those profits are fully utilized. In that case,
market concentration becomes only an incidental by-product and no “real” excess profits
exist. Under this scenario, objective and subjective reality are the same, consumers benefit
from free market exchange, and only average rates of return should be observed, after R&D
expense, over time. Therefore:
H1: Being a pharmaceutical firm has no effect on profit over time, controlling for
investment in R&D; pharmaceutical profits will equal profits of other types of firms.
Alternatively, if language is a powerfully delimiting social construction tool, then
objective reality and subjective reality diverge. Although R&D is claimed to use up
pharmaceutical profit in efficiently operating free markets, this is merely a speech act. In
objective reality, collusion and opportunistic behavior permit pharmaceutical profits to be
greater than the profits of other firms, even beyond their investment in R&D, and to the
extent that the subjective-objective divide is sustained, this profit excess will endure.
Therefore:
October 13-14, 2007
Rome, Italy
18
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
H2: Being a pharmaceutical firm has a positive effect on profit over time, controlling for
investment in R&D; pharmaceuticals make consistently higher profit than do other types of
firms.
5. MODEL, SAMPLE, AND METHODS
5a. Model.
The R&D justification hypothesis for pharmaceutical profit leads to the model,
Profiti,t = f ( Pharmaceutical industry, R&D as a % of asset (organization) sizei,t, Service firm
dummy )
where
- Profit is the individual (ith) firm’s annual reported net profit margin at time t;
- Pharmaceutical industry is a dummy variable with 1 the yes condition (company is a
pharmaceutical firm), and 0 the no condition (company is any other firm);
- R&D is reported expense as a percent of total reported asset dollar value for each (ith) firm
at time t, and
- Service is a dummy variable for service industry firms (1=yes; 0=no, the organization is a
production firm).
In other analyses, R&D expense, and organization size as asset dollar value were also
explored separately to test whether the main result remained, independently of detailed
model structure. It did. We report results of the more parsimonious model.
October 13-14, 2007
Rome, Italy
19
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
5b. Sample.
The sample was collected from 15 years of published annual reports from for-profit
firms. Selected firms were the 10 largest companies in their industries, and showed a wide
range of profit and loss, investment in R&D and non-investment therein, and included both
production and service firms. After cleaning the data for missing values, and excluding firms
that did not report R&D amounts as a separate entry (while keeping firms reporting R&D at
any value, including zero), there were 202 companies over 23 two-digit SIC code industries
represented in all, over the 15 year 1988-2003 period of time. Because of mergers, buyouts,
start-ups, and the like, a few of the companies enter the data set for only a few years.
Pharmaceutical firms carry SIC code 2834. All numbers were gleaned from published
Annual Reports.
To verify representativeness of the sample, a comparison of means and standard
deviations between firms that reported R&D and those that did not, indicated similar
characteristics overall, such as the mean and range of net profit margin, asset size, and
selling, general, and administrative expense. Analyses of firms failing to report R&D as a
separate expense was limited to descriptive statistics and was used for comparison only. We
limit further analysis to organizations declaring R&D as a separate expense because of the
centrality of that variable to our topic.
A subsample of firms reporting high levels of R&D was created for further analysis:
these organizations reported R&D expenditures as a percent of assets, greater than or equal to
the overall sample mean of 6.08%. This subsample compared equivalently to the larger
sample in terms of asset size and range of profitability, although naturally fewer firms (106)
and industries were represented.
October 13-14, 2007
Rome, Italy
20
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
Finally, a comparison of profitability between the firms in our sample, both
pharmaceutical and otherwise, and Fortune-500 firms publicly reporting profits, indicates
that our sample, while representative, slightly understates the pharmaceuticalnonpharmaceutical profit difference (Public Citizen, 2003), suggesting our analysis offers a
more conservative test.
5c. Methods.
Descriptive statistics (means, standard deviations, minimum and maximum values,
and coefficients of variation) for the full sample of organizations declaring an R&D value,
and for the subsample of high-R&D firms, bivariate (Pearson) correlations, and Ordinary
Least Squares regression analyses are reported.
6. RESULTS AND INTERPRETATION
6a. Means.
Means of selected variables, shown in Table 1, indicate that pharmaceutical firms
enjoy substantially higher net profit margins than do non-pharmaceutical firms, whether
those non-pharmaceuticals are production, service, or health service organizations. The full
R&D sample is shown first, with results for the high-R&D subsample next.
Pharmaceutical profits at 13.91% are 5.31 times the non-pharmaceutical average of
2.62% over this 15 year period. Because health service organizations earned 2.66%, we may
guess that the large profits enjoyed by pharmaceutical firms are not also enjoyed by other
members of the health service professions. Drug profits were 5.23 times the nonpharmaceutical health service average.
October 13-14, 2007
Rome, Italy
21
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
With respect to R&D, pharmaceutical firms invested on average 8.78% of their assets
in R&D, while non-pharmaceuticals in the full sample invested 5.60%, suggesting that at
least some monies earned by pharmaceuticals do in fact get invested in what one hopes will
become the next generation of life saving drugs.
Dummy variables for organization type indicate that pharmaceutical firms make up
some 15% of this sample, with non-pharmaceutical production organizations composing 58%
and service firms making up the difference at 27%.
Among the subsample of R&D-intensive firms (that is, those investing at least 6.08%
of assets in R&D), pharmaceutical profits remained extraordinarily high at 13.73% with
10.85% R&D investment, compared to a 2.87% profit for non-pharmaceuticals who invested
on average a considerably higher 13.07% in R&D. Even among the high R&D investing
group, pharmaceuticals made 4.78 times more than other firms. What is more, they garner
this almost five times profit while investing 2% less than other high R&D-investing firms.
This last result is an interesting one, suggesting that R&D investments in and of
themselves carry no guarantee of higher profits, especially among production organizations.
That pharmaceuticals, who are after all production firms, are able to sustain a profit even
higher than the service firms, says something about their control of the market.
6b. Correlations.
The Pearson Correlation Matrices for the full sample, Table 2a, again indicates a
positive relation between net profit margin and being a pharmaceutical firm. Profit is
negatively correlated with R&D as a percent of assets: that is, the more firms spent on R&D,
October 13-14, 2007
Rome, Italy
22
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
the less money they make. Service companies make neither more nor less profit than other
firms.
Pearson Correlations for the high-R&D subsample, Table 2b, show a similar profitpharmaceutical link. In this case the negative relation between R&D investment and net
profit margin is considerably more pronounced. However, among the high R&D spenders,
pharmaceuticals are again shown to spend significantly less on R&D than other firms.
6c. OLS Regression Results.
Results of the Ordinary Least Squares Regression Analyses are shown in Table 3 for
the full and high-R&D subsample. Being a pharmaceutical firm is associated with
significantly higher profits, controlling for R&D investment as a percent of asset size, and
organization type.3 R&D investment is associated with significantly lower, while being a
service firm mattered to profit only in the high R&D group.
Beta values in Table 3 (columns 2 and 4) show that being a pharmaceutical firm
contributed nearly twice as much to profit as did (negatively) investment in R&D among the
full sample, and ¾ as much among the high R&D group.
Collectively, these results offer support for the second hypothesis, H2, that language - not efficiency -- drives pharmaceutical economic activity and profit. No support was found
for H1, that efficient markets cause temporary profit to disappear: pharmaceutical firms’
profit was sustained. Pharmaceuticals were shown to experience substantial and significant
profits, compared to the profits of comparable firms.
7. CONCLUSION
October 13-14, 2007
Rome, Italy
23
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
“Mastery begins, as we know, through the power of naming, of imposing and
legitimating appellations” (Derrida, p. 39, 1998).
To the question of whether pharmaceutical drug costs are justified by R&D expense,
the results of this investigation show that pharmaceutical firms do indeed invest some of their
monies in R&D, as do many other types of production and service firms, but this investment
does not account for their extremely large ongoing profit. Moreover, their R&D investment,
including monies actually paid for by NIH grants, is actually lower than the investment of
others who habitually spend a great deal on R&D as well. So pharmaceuticals make about
five times more money than everyone else, and they don’t spend that profit on R&D. Worse,
they provide a mastery of health care language that prevents objective, considered discourse,
deliberation of alternatives, and thoughtful challenge in a nation whose global life
expectancy ranks 27th or 28th.
In this context, it is difficult to engage in public discourse about advancing public
health “because a language to express the values animating that mission has not been
adequately developed” (Wallack and Lawrence, 2005, p. 567). The first “language” of
American culture is individualism, they note, language that dovetails nicely with individual
action in free markets. A second language is needed to enable meaningful discourse about
national health care to emerge, a language of interconnectedness and community.
Derrida suggests that we take the language that we have, and “Let us make it say
what it does not know how to mean to say, and let us allow it to say something else” (p. 6768, 1998). This promises the impossible: to translate our language into that version of itself
that does say what one might imagine could be said beyond our intersubjective constraints.
We may begin in this way to make a ridiculous statement that makes non-ridiculous sense, to
October 13-14, 2007
Rome, Italy
24
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
say “fair”, “equitable access” and “reasonable but not excessive return.” We must
appropriate our language to say that pharmaceutical claims are not sustained by these
empirical results: subjective and objective realities diverge.
To this end, we must take some care to avoid the experience of some earlier attempts
at health care reform, whose efforts at wresting health care language from its then and current
proprietors was met with explicit and intensive socially sanctioned ridicule.
This time, we may begin by making the language of free markets, research, and life
saving drugs more ambiguous and thus more open to, in Derrida’s (1977) words, polysemy:
a diversity of meanings, articulated words open to reappropriation by those who would
advance the greater public good.
We can carefully say that over 15 years, we find no empirical support for the claim
that large pharmaceutical profits are needed for, or even are used for, researching and
developing the next generation of life-saving drugs; research taxpayer-financed in any event
through the National Institutes of Health. We can carefully say that we did find support for
the notion that excessive pharmaceutical profits are justified not by research, but by
language, even while we are using that language to express these findings. We can carefully
appropriate our language to speak of objective realities changing subjective knowledge, and
thus open the field of what is socially possible. We can begin to disentangle “freedom” from
“free markets.”
Following Derrida’s suggestion that we take this language and allow it to say
something else, offers us possibility. Of the many options possible in addressing
pharmaceutical profit excess, although it would stretch our language, one alternative seems to
stand out from the rest: the language of law.
October 13-14, 2007
Rome, Italy
25
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
We have learned, as a people, to use the language of law to interface with, and
constrain, freedoms without usurping those freedoms too far. We use the language of law to
limit our individual enjoyment of driving, for example, as fast as we might wish to go, so that
other drivers and pedestrians might enjoy a safer transportation environment; still, we are
free to drive where we will at a variety of speeds. We use legal language to constrain our
freedom of action against taking others’ liberty, their property, or their lives. We use the
language of law to constrain “free markets” to not hire children, pay too low a wage, or force
employees into terribly unsafe working conditions.
While it would not be a simple task, it is possible to follow from this employment of
language and logic to, similarly, utilize the language of law to constrain free markets for
pharmaceutical products though limits on price, profitability, and the transfer of taxpayer
funded research into patents held by pharmaceutical firms. We might utilize the language of
law to require greater transparency in expenditures of pharmaceutical firms in marketing and
gifts.
The practical aspects of this proposal to limit pricing on pharmaceutical drugs are
significant but less so, perhaps, than the obstacles of language: pharmaceutical drug pricing
limits were suggested in 1993 by Rep. Ron Wyden, the response to which was Congressional
Resolution 79 warning of “the futility of price controls”, their tendency to
“inspire…disrespect for law among previously honest citizens”, and that “medical price
controls, far from benefiting the American people…cause much needless human suffering,
and in the end, degrade the finest health care system the world has ever known”. The
Resolution concludes, with 26 co-sponsors, “that any legislation enacted to reform the helath
care system of the United States should not include price controls” (Armey, 1993).
October 13-14, 2007
Rome, Italy
26
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
Today, glimmers of an alternative view are starting to emerge. Domestically, six
states have already required reporting of pharmaceuticals’ gift and marketing practices, and
those reporting requirements have already changed the way pharmaceuticals dispense gifts in
Vermont (Catellblanch, 2003); 23 other states have legislation regulating pharmaceutical
marketing pending (Wilkenfield and Braun-Davis, 2005). Maine has even, under certain
circumstances, legislated price, a law hotly contested by the pharmaceutical industry but
sustained in U. S. Supreme Court (PhRMA v. Walsh, 2003).
Internationally, rules established under the World Trade Organization allow countries
to override pharmaceutical patents and produce their own generic equivalents “in a health
emergency or if the pharmaceutical industry uses abusive pricing” (Sequera, 2007). These
regulations compose a small start.
Details and challenges of implementing such a strategy await us, and these are not
small. But first, we must begin to expand our identity beyond individual action alone to
include the value of shared community, benefits from which spread to each person.
We need to be able to engage in thoughtful discourse, without reprimand or ridicule,
about free market abuse in terms of a class of firms who utilize their oligopolistic power
opportunistically: to set prices that yield for them four and five times the profit normally
enjoyed by other firms, year after year. We need to develop language, and insist on its
legitimacy as American language, that can begin to discuss collusive behavior as pirate
capitalism, and distinguish that free market abuse from reasonable legislative boundaries on
not always competitive free markets. We may use this language to state that such pirate
capitalism is more characteristic of lawless societies than of the society we would choose,
perhaps, to be. We must take our language and make it mean what only we can make it say:
October 13-14, 2007
Rome, Italy
27
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
that pharmaceutical price constraints might mean better life expectancies for all of us, and
that is freedom, too.
October 13-14, 2007
Rome, Italy
28
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
BIBLIOGRAPHY
Agovino, T. (2004) “Medicine price hike highlights controversy of government funding
drug research” Medical Letter on the CDC and FDA, June 20, NewsRx.com and
NewsRx.net.
American Medical Student Association. (2005) “Marketing Versus Research and
Development” http://www.amsa.org/hp/RanD.cfm, March 31.
Anderson, M. R., L. Smith and V. W. Sidel. (2005) “What is Social Medicine?” Monthly
Review, 56(8): 27-34.
Angell, M. (2005) The Truth About the Drug Compaies. NY: Random House.
Armey, Rep. R. K. (1993) “Expressing the sense of the Congress that any Federal health
care legislation should not include price controls.” H. Congressional Resolution #
79, introduced 4/2/1993. Accessed at http://www.congress.gov/cgibin/bdquery/D?d103:10:./temp/~bdppvj:: .
Arnold, T. W. (1935) The Symbols of Government. New Haven, CT: Yale Univ. Press.
Avorn, J, M. Chen, and R. Hartley. (1982) “Scientific versus commercial sources of
influence on the prescribing behavior of physicians.” American Journal of
Medicine, 73(1): 4-8.
Banks, J. M. Marmot, Z. Oldfield, J. P. Smith. (2006) “Disease and Disadvantage in the
United States and in England” Journal of the American Medical Association
295(17), May 3.
Berndt, E. R., L. Bui, D. R. Reiley, and G. L. Urban. (1995) “Information, Marketing and
Pricing in the U. S. Antiulcer Drug Market” The American Economic Review,
Papers and Proceedings of the Hundredth and Seventh Annual Meeting of the
American Economic Association Washington DC, January 6-8, 1995. vol.85(2):
100-105.
Berger, P. L. and T. Luckmann. (1967) The Social Construction of Reality (first pub
1966). NY: Anchor Books Doubleday.
Bioresearch Online. (2006) “Joseph A DiMasi, PhD to Present at IIR’s Cost Management
for Clinical Trials Conference”http://www.bioresearchonline.com/content/news/
article.asp?DocID={ADBFFD12-F48A-4637-8D23-CB75C5CD1947}&Bucket
=Current+Headlines&VNETCOOKIE=NO , accessed 4/24.
Birn, A. E. and N. Molina. (2005) “In the Name of Public Health” American Journal of
Public Health, 95(7): 1095-1097.
Borger, C., Smith, S., Truffer, C., Keehan, S., Sisko, A., Poisal, J., Clemens, M. K.,
(2006)“Health Spending Projections Through 2015” Health Affairs published
online Feb. 22.
Broder, J. M. (2005) “California Accuses Drug Companies of Fraud” New York Times
Aug 25.
Bush, G. W. (2001) “State of the Union” speech, Address of the President to the joint
session of Congress. Transcript from http://www.cspan.org/executive/transcript.asp. September 20.
Butler, J. (1997) Excitable Speech: A Politics of the Performative. NY: Routledge.
Castellblanch, R. (2003) “Challenging Pharmaceutical Industry Political Power in Maine
and Vermont: A Report From the Field” Journal of Health Plitics, Policy and
October 13-14, 2007
Rome, Italy
29
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
Law, 28(1), Feb.
Coulter, S. L. (2003) “Rx for Pharmacy Costs in Tennessee” White Paper Update, August
http://www.bcbst.com/about/affordability/docs/papers/TN_drug_cost.pdf.
Cutler, D. M. (1994) Your Money or Your Life: Strong Medicine for America’s Health
Care System. NY: Oxford Univ. Press.
__________. (1995) “The Cost and Financing of Health Care” American Economic
Review. 85(2): 32-37.
Cypher, J. M. (2004) “Pinochet meets Polanyi? The Curious Case of the Chilean
Embrace of “Free” Market Economics.” Journal of Economic Issues, v. 38 Issue
2, p. 527-535.
Derrida, J. (1977) Limited Inc. Evanston, IL: Northwestern University Press.
________. (1998) Monolingualism of the Other. 1996; Palo Alto CA: Stanford Univ.
Press, P. Mensah, translation.
DiMasi, J. A., R. W. Hansen and H. G. Grabowski. (2003) “The Price of Innovation:
New Estimates of Drug Development Costs” Journal of Health Economics
22:151-185.
Elzinga, K. G., and D. E. Mills. (1997) “The Distribution and Pricing of Prescription
Drugs” International Journal of the Economics of Business, 4(3): 287-298.
Facchinetti, N. J. and W. M. Dickson. (1982) “Access to Generic Drugs in the 1950s:
The Politics of a Social Problem” AJPH 72(5):468-475, May.
Federal Trade Commission (FTC). (2002) “Generic Drug Entry” July.
Freking, K. (2006) “A grim prognosis: Staggering costs of health care await U. S.” The
Albany Times Union, p. A1, February 22.
Friedman, M. and R. D. Friedman. (1962) Capitalism and Freedom. Chicago: University
of Chicago Press.
Flyvbjerg, B. (1988) Rationality and Power: Democracy in Practice. Chicago:
University of Chicago Press.
Gerth, J. and S. G. Stolberg. (2000) “Medicine Merchants: Drug Companies Profit From
Research Supported by Taxpayers” The NY Times, April 23.
Goozner, M. (2004) The $800 Million Pill: The Truth Behind the Cost of New Drugs.
Berkeley: Univ. of California Press.
Gorman, J. (2004) “The Medicated Life is the American Way” New York Times 4/6.
Harris, S. E. (1951) “The British Health Experiment: The First Two Years of the
National Health Service” The Economics of Merical Care: II. Alternative.
American Economic Association.
Hayakawa, S. I. (1941) Language in Action. NY: Harcourt, Brace and Co.
Hayward, C. R. (2000) De-facing Power. Cambridge: Cambridge Univ. Press.
Hevesi, A. G. (2005) “Budget Review, Erie County June 2005” Office of the NYS
Comptroller, Division of Local Government Services & Economic Development,
Albany NY, June.
Hollon, M. F. (2005) “Direct-to-Consumer Advertising: A Haphazard Approach to
Health Promotion” Journal of the American Medical Association, vol. 293, no 16,
April 27.
Hunt, T. (2006) “Bush Says Don’t Expect Oil Price Breaks” AP White House
Correspondent, Feb 1. Retrieved 6/15/2007 from http://www.comcast.net/includes
/article /print.jsp?fn=/data/news/html//2006/02/01/317255.html.
October 13-14, 2007
Rome, Italy
30
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
Hutcheson, R. (2006) “Budget extends tax cuts” Knight-Ridder, p. A1, Albany Times
Union Feb 7.
Ismail, M. A. (2005) “Drug Lobby Second to None” The Center for Public Integrity.
http://www.publicintegrity.org/rx/report.aspx?aid, July 7.
Johnson, C. K. and M. Stobbe. (2006) “Nation’s Wealth Fails to Cure Ills” Associated
Press in Albany Times Union, 5/3.
Kaiser Family Foundation. (2006) “Total Retail Sales for Prescription Drugs Filled at
Pharmacies, 2004” http://statehealthfacts.kff.org.
Katz, M. L. and C. Shapiro. (1987) “R and D Rivalry with Licensing or Imitation” The
American Economic Review 77(3):402-420, June.
Kotzian, P. (2004) “Pharmaceutical R&D in the Setting of Incomplete European
Integration” Int. J. of the Economics of Business, 11(2): 175-195, July.
Krueger, L. (2005) “NY State Senate Introducer’s Memorandum in Support of S3510”
http://www.lizkrueger.com/capitol/S3510.htm.
Kusserow, R. P. (2002) “Promotion of Prescription Drugs Through Payments and Gifts”
Dept of Health and Human Services, Office of Inspector General,
http://oig.hhs.gov/oei/reports/oei-01-90-00480.pdf.
Landry, R. S. (1945) “The Federal Trade Commission and ‘Unfair Competition’ in
Foreign Trade” The American Economic Review, 35(4):575-584.
Lexchin, J. and Mintzes, B. (2002) “Direct-to-consumer advertising of prescription drugs:
The evidence says no” Journal of Public Policy and Marketing, 21(2): 194–202.
Lukes, S. (2005) Power: A Radical View, 2nd Ed. (1st Ed 1974). London: Palgrave.
MacLeod, W. B., G. Norman, and J. F. Thisse. (1987) “Competition, Tacit Collusion and
Free Entry” The Economic Journal 97(March): 189-198.
Mansfield, P. R., B. Mintzes, D. Richards and L. Toop. (2005) “Editorial: Direct to
consumer advertising is at the crossroads of competing pressures from industry
and health needs.” BMJ 330:5-6, January 1.
http://bmj.bmjjournals.com/cgi/content/full/330/7481/5.
Marshall, A. (1890) Principles of Economics. Great Britain: Macmillan, 1946 reprint..
Masson, R. T. and J. Shaanan. (1984) “Social Costs of Oligopoly and the Value of
Competition” The Economic Journal, 94: 520-535, September.
Matthews, M. Jr. (2001) “Who’s Afraid of Pharmaceutical Advertising? A Response to a
Changing Health Care System”, Lewiston, TX: The IPI Center for Technology
Freedom Policy Report #155.
Murphy, K. M. and R. Topel. (2001) “The Economic Value of Medical Knowledge.”
University of Chicago, http://gsbwww.uchicago.edu/fac/kevin.murphy
/research/murphy&topel.pdf March 1998, Revised September.
Newhouse, J. P. (1992) “Medical Care Costs: How Much Welfare Loss?” Journal of
Economic Perspectives. V. 6, no. 3, p 3-21.
Nordhaus, W. D. (2002) “The Health of Nations: The Contribution of Improved Health
to Living Standards.” Cowles Foundation Discussion Paper No. 1355, Yale
University, http://cowles.econ.yale.eu, February.
Odato, J. M. (2006) “Treating Health Costs” Albany Times Union Capital Bureau,
January 14.
Olson, M. K. (1995) “The Effects of U. K. Pharmaceutical Policy on Government Drug
Expenditures: Cost Control and Incentives for R&D” International Journal of the
October 13-14, 2007
Rome, Italy
31
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
Economics of Business, 2(1), 1995.
Pemberton, C. A. (2002) “Influencing the Influencer” Canadian Pharmaceutical
Marketing, Fall.
Pharmaceutical Research and Manufacturers of America, (2004) “Pharmaceutical
Industry Profile 2004”. Washington DC: PhRMA.
Pharmaceutical Research and Manufacturers of America v. Walsh, Acting
Commissioner, Maine Department of Human Services, et al., certiorari to the
united states court of appeals for the first circuit. (2003) No. 01-188. Argued
January 22, 2003--Decided May 19.http://caselaw.lp.findlaw.com/scripts/getcase
.pl?court=US&vol=000&invol=01-188.
Public Citizen, (2003) “2002 Drug Industry Profits: Hefty Pharmaceutical Company
Margins Dwarf Other Industries”
http://www.citizen.org/documents/Pharma_Report.pdf.
Rosenberg, M. (2006) “Life Expectancy” About, Inc. A part of The New York Times
Company, accessed 6/13
http://geography.about.com/od/populationgeography/a/lifeexpectancy.htm.
Robinson, A. R.; K. B. Hohmann, J. I. Rifkin, D. Topp, C. M. Gilroy, J. A. Pickard, R. J.
Anderson. (2004) “Direct-to-Consumer Pharmaceutical Advertising” Archives of
Internal Medicine. V. 164(4), Feb. 23.
Saul, S. (2005) “Drug Lobby Got a Victory in Trade Pact Vote” The NY Times, July 2.
Scherer, F. M. (1983) “R&D and Declining Productivity Growth” The American
Economic Review, 73(2):215-218, Papers and Proceedings of the 95th Annual
Meeting of the American Economic Association, May.
Sequera, V. (2007) “Brazil Bypasses Patent on U. S. AIDS Drug.” Retrieved 5/4
from Associated Press news at
http://news.yahoo.com/s/ap/20070504/ap_on_he_me/brazil_aids_drug_6.
Skinner, J. and W. Zhou. (2005) “The Measurement and Evolution of Health Inequality:
Evidence from the U. S. Medicare Population” NBER Working Paper 10842.
Sorrell, W. H. (2005) “Pharmaceutical Marketing Disclosures: Report of Vermont
Attorney General William H. Sorrell” May 10.
http://www.atg.state.vt.us/upload/1115733046_Pharmaceutical_Marketing_Disclosur
es_-_Report_of_Vermont_Attorney_General_William_H_Sorrell.pdf
Spitz, J. (1998) “Human Nature and Judicial Interpretation of Equal Employment Law”
Managerial and Decision Economics 19: 521-535.
Stiglitz, J. (2003) Globalization and Its Discontents. NY: Norton.
Strunk, B. C. and P. B. Ginsburg. (2004) “Tracking Health Care Costs: Spending Growth
Slowdown Stalls in First Half of 2004” Center for Studying Health System
Change Issue Brief No. 91.
Watkins, C., L. Moore, I. Harvey, P. Carthy, E. Robinson, R. Brawn. (2003)
“Characteristics of general practitioners who frequently see drug industry
representatives: national cross sectional study.” BMJ 326:1178-1179, 31 May.
Waxer, B. M. and M. L. Baum. (2006) Internet Surf and Turf Revealed: The Essential
Guide to Copyright, Fair Use, and Finding Media. Boston: Thomson Course
Technology.
Wallack, L. and R. Lawrence. (2005) “Talking About Public Health: Developing
October 13-14, 2007
Rome, Italy
32
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
America’s ‘Second Language’” American Journal of Public Health, 95(4):567570, April.
Wickham, M. (2006) Personal Observation 1998-2003, in private communication 8/22.
Wilkenfeld, J. and J. Braun-Davis. (2005) “50 5 2005: Five things you can do to prepare
for compliance in all 50 states—starting today” Pharmaceutical Executive, Sept. 1
http://www.pharmexec.com/pharmexec/article/articleDetail.jsp?id=177963&&pa
geID=2.
Williamson, O. (1975) Markets and Hierarchies. NY: Free Press.
October 13-14, 2007
Rome, Italy
33
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
Table 1: Means of selected variables, pharmaceutical profit FY 1989-2003.
Variable
mean
s. d.
min
max
c.v.
n
-5.3951
-.1787
-5.3951
-5.3951
-2.4095
-.5544
.9666
.5473
.9666
.4846
.9666
.4418
5.2639
.7052
9.1336
12.0952
5.4293
3.3433
2439
366
2073
1417
656
195
Full Sample: n=202 firms
Net Profit Margin
Pharma Profit
non-Pharma Profit
non-Ph. Prod’n Profit
non-Ph. Svc. Profit
Health Svc. Profit
.0432
.1391
.0262
.0210
.0374
.0266
.2275
.0981
.2393
.2540
.2036
.0890
R&D exp (%Assets)
Pharma R&D %
Non-Pharma R&D %
non-Ph. Prod’n R&D %
non-Ph. Svc. R&D %
.0608
.0878
.0560
.0678
.0307
.0746
.0579
.0762
.0786
.0638
0
0
0
0
0
1.2595
.4400
1.2600
1.2595
.3591
1.2279 2439
.6594 366
1.3607 2073
1.1593 1417
2.0782 656
R&D Dollars in millions
R&D $ Pharma (mil)
R&D $ non-Pharma (mil)
Asset Dollars in millions
Assets Pharma (mil)
Assets non-Pharma (mil)
672.62
1009.79
613.09
17021.39
11865.19
17931.75
1774.89
1157.59
1856.61
44290.74
14037.86
47622.91
0
24732
0
7131
0
24732
5.17 647483
12.27 116775
5.17 647483
2439
366
2073
2439
366
2073
Pharmaceutical (y/n)
.1501
non-Pharma Prod’n (y/n) .5810
Service Co. (y/n)
.2690
0
0
0
1
1
1
2439
2439
2439
High R&D Sub-Sample: n=106 firms
Net Profit Margin
Pharma Profit
non-Pharma Profit
non-Ph. Prod’n Profit
non-Ph. Svc. Profit
.0582
.1373
.0287
.0090
.1191
.2742
.0913
.3114
.3338
.1452
-5.3951
-.1787
-5.3951
-5.3951
-.9082
.6216
.5473
.6216
.3728
.6216
4.7113
.6650
10.8502
37.0889
1.2191
967
263
704
578
126
R&D exp (%Assets)
Pharma R&D %
Non-Pharma R&D %
non-Ph. Prod’n R&D%
non-Ph. Svc. R&D%
.1247
.1085
.1307
.1285
.1407
.0816
.0545
.0890
.0919
.0735
.0608
.0610
.0608
.0608
.0616
1.2595
.4351
1.2595
1.2595
.3591
.6544
.5023
.6809
.7152
.5224
967
263
704
578
126
2.1162
.9797
2.4604
1.5776
1.0792
1.8178
967
263
704
967
263
704
R&D Dollars in millions 1158.04
R&D $ Pharma (mil)
1238.87
R&D $ non-Pharma (mil) 1127.84
Asset Dollars in millions 10374.19
Assets Pharma (mil)
13043.65
Assets non-Pharma (mil) 9376.93
Pharmaceutical (y/n)
.2720
non-Pharma Prod’n (y/n) .5977
Service Co. (y/n)
.1303
October 13-14, 2007
Rome, Italy
2450.68
.82 24732
1213.68 2.07
7131
2774.95
.82 24732
16366.21 5.17 116775
14076.09 12.27 116775
17045.66 5.17 104457
0
0
0
34
1
1
1
967
967
967
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
Table 2a: Correlations of selected variables, pharmaceutical profit FY 1989-2003.
Full Sample: n=202 firms, 2439 cases
Pharmaceutical(y/n)
Net Profit Margin
.177**
(p=.000)
Pharmaceutical Co.
R&D % assets
Service Co.
-.080**
(p=.000)
-.015
(p=.454)
.152**
(p=.000)
-.255**
(p=.000)
R&D % assets
-.245**
(p=.000)
Table 2b: Correlations of selected variables, pharmaceutical profit FY 1989-2003.
High R&D Sub-Sample: n=106 firms, 967 cases
Pharmaceutical(y/n)
Net Profit Margin
Pharmaceutical Co.
.176**
(p=.000)
R&D % assets
Service Co.
-.260**
(p=.000)
.086**
(p=.007)
-.121**
(p=.000)
-.237**
(p=.000)
R&D % assets
.076*
(p=.018)
______
* p<.05
** p<.01
October 13-14, 2007
Rome, Italy
35
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
Table 3: Ordinary least squares regression results, pharmaceutical profit data FY 19892003.
Dependent Variable: Net Profit Margin
Full Sample: n=202 firms, 2439 cases
(1)
OLS coefficients
(std. error)
High R&D Sub-Sample: n=106 firms, 967 cases
(2)
Beta
values
(3)
OLS coefficients
(std. error)
Pharmaceutical Co.
.125**
(.013)
.196
.112**
(.019)
R&D % assets
-.328**
(.063)
Service Co.
.004
(.011)
Constant
.043
.117
R-square
F-statistic
.043
36.63**
.110
39.47**
-.108
-.838**
(.013)
.008
.120**
(.026)
*p<.05
**p<.01
October 13-14, 2007
Rome, Italy
36
(4)
Beta
values
.181
-.249
.148
7th Global Conference on Business & Economics
ISBN : 978-0-9742114-9-7
ENDNOTES
Language justifying high pharmaceutical prices tends to employ “development”
considerably more than “research”. This reflects one piece of undeniably objective reality:
that the American government, through the National Institutes of Health, with taxpayer
dollars funds the lion’s share of basic pharmaceutical research conducted in the U. S. today.
1
A full discussion of this last point is beyond the scope of this paper. It is sufficient to note
regarding the concerns expressed about the R&D dollars invested into researching cures for
currently uncurable diseases, versus the proportion of R&D dollars invested into repackaging existing pharmaceuticals whose patents are about to expire, that in 2002, some 71
of the 78 drugs gaining FDA approval (91%) were variations of existing drugs containing no
new pharmacoleogical ingredients (Angell, 2005).
2
Additional runs conducted on alternative versions of the model verified that the positive
pharmaceutical effect on profits was robust in both the full and R&D sample. This result did
not waver – controlling for investment in R&D, pharmaceuticals enjoyed statistically
significantly higher net profit margins than did other sampled firms over the 1988-2003, 15
year period. The model shown is the most parsimonious.
3
October 13-14, 2007
Rome, Italy
37