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Read Making a Killing

home / healthcare / in the media

Los Angeles Times
Sep 02, 2004

by Michael Hiltzik

A Show of Weakness in Drug Import Debate

Fresh from his star turn at the Republican convention, Gov. Arnold Schwarzenegger could scarcely find a better way to certify his role as a political action hero than to take on perhaps the most powerful corporate force in America: the drug industry.

Yet at this writing, that doesn't seem likely. The governor has made clear his plan to veto a legislative package designed to help Californians purchase pharmaceuticals from Canada, where the price can be half of that in the U.S. or less.

Schwarzenegger's position makes California look like a pipsqueak next to Vermont, which has sued the federal government for blocking its plan to import Canadian drugs for its workers. Several other governors, none mustering Schwarzenegger's brawn, have established their own Canadian import programs without asking the feds for permission.

What's driving this trend is the gap between drug prices in the U.S. and the rest of the world. The mismatch means it's now worthwhile for customers to buy some drugs from Canada that were originally exported from the U.S.

Drug companies say they have no choice but to charge Americans high prices because that's how they finance all their lifesaving research and development efforts. They say Canadian drugs cost less only because of price controls north of the border; surely, we wouldn't want to impose those restraints here in the free-market U.S.

But these arguments are largely, to be polite, tommyrot.

To test the thesis that high prices are necessary to fund R&D, let's examine Merck & Co., typical of the big drug makers. In 2003, Merck recorded revenue of $22.5 billion. Of this, it spent $3.2 billion on R&D. That's not quite as much as it paid in dividends ($3.3 billion), and a lot less than its "marketing and administrative" costs ($6.4 billion). After other charges and taxes, the company still recorded profit of $6.8 billion, for a margin of 30%.

A sharp drop in revenue plainly would threaten not Merck's R&D, without which the company wouldn't have anything to sell, but its marketing. Cut U.S. prices, and we'll still see plenty of research but fewer TV ads showing people cavorting about in pastel-colored chiffons, urging us to bug our doctors for some new wonder drug.

Speaking of Merck's 30% profit margin, it's stupendous but not unusual. The drug industry boasts the second-best margin in business, after the oil-drilling sector -- and that's after subtracting R&D costs.

Another industry argument is that importation is unsafe. The Pharmaceutical Research and Manufacturers Assn. cites "the probability that many such drugs will be unapproved, adulterated, contaminated or counterfeit."

This is seconded by the federal government, which long ago became a wholly owned subsidiary of Big Pharma. The Food and Drug Administration is so eager to spread this canard that it openly courts public ridicule. Last week, acting FDA Commissioner Lester Crawford said that his main concern about importation was that Al Qaeda might attack the supply of drugs coming from Canada -- a statement that I believe has retired the trophy for the most fatuous exploitation of the terror threat by a government official.

In fact, the likeliest import drugs are manufactured here or in Canada by the same companies sounding the counterfeiting alarm. Marcia Angell, a former editor in chief of the New England Journal of Medicine and author of the book "The Truth About the Drug Companies," notes that this supply is overseen by the FDA as well as its Canadian cousin. "If anything, drugs obtained from Canada are likely to be safer, since they must meet the standards of both countries," she told me.

Gov. Schwarzenegger's reasons for buying into the industry's quackery have nothing to do, we can be sure, with the $100,000 political contribution he pocketed this year from Pfizer Inc., the largest pharmaceutical company in the world. His spokesmen say he's mostly concerned about federal opposition to importation, as well as the risk that the state might get sued if it assists a patient to ingest an adulterated Canadian pill.

Apparently itching to show that the administration is on top of the drug issue, Schwarzenegger's health and human services secretary, Kim Belshe, unveiled her own proposal Aug. 19 -- on almost the very last day of the legislative session and after it was clear that the existing bills would pass.

Belshe's idea is for the state to go to the drug companies and beg them for a voluntary price break for the poor. She calls this visionary program "California Rx," as though giving it a brand name will make it sound less like a fantasy. She also labels the legislative package that ultimately passed "at best a symbolic gesture."

In a way, she has a point: Importation from Canada won't bring long-term relief to U.S. consumers. Canadian pharmacies can't handle a much larger volume of orders from America, especially if drug companies continue to choke off shipments to cross-border distributors.

But the value of a symbolic gesture shouldn't be underestimated. By throwing its weight into the re-importation fight, California could highlight the fleecing of American customers as no other entity could -- possibly shaming the federal government into unshackling itself from the drug industry.

Will Gov. Schwarzenegger hear that message over the adoring clamor in New York? Before he left town for the GOP convention, his office disclosed that Pfizer helped cover the $350,000 expense of his trip and observed, deadpan, that at least California residents weren't footing the bill. Sure, not for his New York party. For the prescription drugs they buy, they're paying plenty.

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