|Vaccines are often priced 40 - 100 times more than the cost of production, and drug companies cite research expenses as the culprit [EPA]
This is the second of a two-part series examining the methods by which multinational drug corporations inflate their expenses and justify their pricing strategies. The first part revealed how, far from costing the reported (and widely accepted) $1bn to bring a drug to market, actual costs may be less than a fifth of that, thanks to accounting tactics and corporate tax breaks.
Of course, the US government is very conscious of moves designed to "avoid" taxation. But little effective action has been taken to tighten the tax net. In 2005, Congress extended a"tax holiday" to pharmaceutical corporations, allowing companies to repatriate hidden profits at just 5.2 per cent of the corporate tax rate. At the time, Pfizer had untaxed profits at $38bn; Merck $18bn; Johnson & Johnson $14.8bn - at least, those were the profits they were willing to declare.
Generally, a considerable portion (upwards of 12 per cent) of big pharma's research and development (R&D) costs is Phase IV or "post-marketing" trials of drugs already commercially sold to consumers, in an attempt to expand sales. The figure was estimated at 75 per cent of R&D costs by the Tufts Center, said Harvard Medical School's Marcia Angell.
"Since the majority of Phase IV studies will never be submitted to the FDA, they may be totally unregulated. Few of them are published. In fact, like all industry-sponsored trials, they are not likely to be published at all unless they show something favourable to the sponsor's drug. If they are published, it is often in marginal journals, because the quality of the research is so poor," she said.
Innovations and free-rides
Ironically, the Tufts Center study by Joe DiMasi et al, which estimated the price of bringing a new drug to market to be more than $800m, drastically skewed R&D costs by basing analysis not on the general state of approved drugs but instead on "self-originating NCEs" or "New Molecular Entities (NMEs)" which comprise only a small portion of drugs approved annually by the FDA - estimated at 35 per cent (1990-2000) - a figure that has since decreased in the past decade.
Pharmaceutical "innovation" is determined by two crucial factors: a) the creation of a "new molecular entity"(NME) - which in itself may or may not be useful for treatment but which signifies the introduction of a new, distinct molecular form, and b) an NME that constitutes a"priority drug": ie: a drug that offers, in the words of the FDA,"a major advance in treatment or which provides treatment where no adequate therapy exists" - in short, a therapeutic advance for serious illnesses.
Under the 1992 Prescription Drug User Act, the FDA operates via a two-tiered system of review: Standard Review (S) applied to drugs that offer only minor improvements over existing marketed drugs, and Priority Review (P), a fast-track - a six month process since 2003 - pretty speedy for any company who wants to drive through "innovation".
Though the two comprise separate categories, by blurring the definitions, pharmaceutical companies are often able to misrepresent NMEs, with"innovations" justifying the high costs of patents ie: exclusive government-approved marketing rights.
From 2006- 2009, just 48 drug innovations (P+ NME) were approved by the FDA, while an average of 84 per cent of research funding comes from US taxpayer sources, such as the National Institutes of Health (NIH). Light and Warburton conclude that "the net corporate investment in research to discover important new drugs is about 1.2 per cent of sales, not 17-19 per cent".
So, while drug companies claim that the EU has suffered from a lack of innovation, trailing behind US R&D expenditure by 15 per cent in 2004, little of this figure corresponds to reality.
Easy "free-riding" of the US public funds and R&D is the primary reason why drug companies have flocked to the US. Just a quarter of NMEs are estimated by specialists as being actually developed by drug companies, instead, most are licensed from government/public-financed labs such as the NIH and universities - as well as smaller companies.
Acts and licensing
In 2002, then-CEO of GSK Bob Ingram spoke to the Wall Street Journal on the subject of licensing: "We're not going to put our money in-house if there's a better investment vehicle outside." Ingram pointed out that GSK was eager to reach the levels of other companies, such as Merck, which received 35 per cent of its revenue from licensing.
The cost differential between a licensed NME and one developed in-house is vast: a licensed NME costs just 10 per cent of actual R&D expenditure (2000) in contrast to an in-house developed NME at 74 per cent. In 2000, just 13 per cent of approved NMEs were developed in-house - a figure that has not drastically changed.
The system of licensing came about via the Bayh-Dole Act - named after Senators Birch Bayh (D-Ind) and Robert Dole (R-Kans) - designed to enable universities and small businesses to patent discoveries that came about from NIH-financed research (the primary distributors of taxpayer funds for medical research) - thereafter granting the patents to pharmaceutical corporations in exchange for royalties.
The Act did articulate taxpayer protection rights concerning non-exclusive licences - if the action "is necessary to alleviate health or safety needs which are not reasonably satisfied", or the action "is necessary to meet public uses".
But Ronald Reagan's 1983 Executive Memo changed tack, liberalising access to include coverage for large corporations. Prior to this, publicly financed discoveries were considered knowledge in the public domain. One further piece of legislation - the Stevenson-Wydler Act - removed the barriers between"publicly funded" systems (mainly the government but also universities) and the private sector.
Weighing the costs
In short, depending on whether or not the NMEs were developed in-house, estimates by Light and Warburton - in addition to other specialists, such as Angell - reveal the costs of R&D as more along the lines of $50m - $200m.
So much for the $1bn pill - but what of the costs of development for the Rotavirus vaccine?
Vaccines are often priced 40 - 100 times more than the cost of production. Drug companies claim that pharmaceutical research is very expensive and that R&D costs are extremely high.
Unfortunately for GSK, the usual 5,000 or 6,000 clinical trial "subjects" - people involved in Phase III trials - drastically escalated to around 63,000 to 68,000 people - in order to rule out a perceived fatal side effect (intussusception) that forced Rotashield off the market some years earlier.
Prior to the massive Phase III trial, the costs of GSK's trials ranged from $1.8 million to $2.4 million, stated Light et al. Unlike Merck, GSK conducted many trials in developing countries, drastically lowering the potential costs. But even estimating at the higher range, the total costs for GSK's Phase I - Phase III trials reached between $128m and $192m - for all 63,000-plus people.
Few of the clinical trials conducted in developing nations are investigated by the FDA. A 2008 Pfizer presentation [PDF]showed just 45 of 6,485 (0.7 per cent) of foreign trials were scrutinised. In 2008, more than 76 per cent of the people used for clinical drug trials were foreign "subjects" - some 232,532 people.
The cheapened value of poorer peoples - including better "value for physician" must not be underestimated.
One report, dated 2000, by the inspector general of the US Department of Health and Human Services, disclosed that physicians in the US were paid $10,000 per patient enrolled for a drug trial - plus a further $30,000 on enrolment of the sixth patient. Costs, no doubt, included as "research and development".
Aside from"cheapness", in developing countries there exists far less regulation, oversight and awareness; and the poor are unlikely to litigate if and when damage/deaths occur as a consequence of the drug. This is particularly lethal when it comes to experimentation on children. More than 78 per cent of children-focused clinical trials were conducted outside of the US.
Vaccines and identification
The Rotarix vaccine was not developed in-house but was licensed in: In 1988, Richard Ward PhD isolated the human rotavirus strain and developed a live, orally deliverable vaccine candidate under a licensing agreement with the Virus Research Institute, which later merged with another company, to become Avant Immunotherapeutics, a small firm that has often received grants from the NIH.
As Donald Light, a professor of comparative health policy, and economist Rebecca Warburton revealed in their paper analysing the development cost of the rotavirus vaccine, Avant funded a Phase II trial of Rotarix in 1997-1998 which found the drug gave protection in 89 per cent of cases. Light et al go on to write that, in 1997, GlaxoWellcome (later GSK) negotiated global rights and agreed, in exchange, to finance development costs, paid Avant $5.5 million and agreed royalties of 10 per cent on net sales.
The rotavirus vaccine signified a radical turning point in the introduction of vaccines: usually, poorer nations wait out a 15 or 20 year period. GSK's rotavirus vaccination instead proceeded via regulatory approval not in the country of manufacture, but instead, the country of first intended use - Mexico.
Why not Africa or Asia?
Mexico proved the perfect site for introduction: since the 1990s, the government created, expanded and strengthened a "national surveillance system" for diarrhoeal disease, noted Walsh and Situ. Hospitals and clinics had well-equipped laboratories to identify infectious diseases; the Ministry of Health regularly monitored and reported cases, as did the clinics and hospitals, as part of the Mexican Social Security Institute (MSSI) system.
Since 2004, the Pan-American Health Organisation (PAHO), comprising more than forty nations of the Americas, supported - along with other organisations - the development of rotavirus surveillance systems in countries including Argentina, El Salvador, Guyana, Uruguay, Suriname, Trinidad and Tobago and Honduras. Monitoring was engineered to"characterise the proportion of diarrhoeal hospitalisations attributable to a rotavirus infection, serotypes of circulating rotaviruses, and the seasonality of rotavirus infections", writes Julia Walsh MD in The critical path for vaccine introduction[PDF]. This information is fed into economic analyses, a critical element in the countries' decision on whether to introduce a vaccine.
The good news, for GSK, about Mexico and Brazil, is that the percentage of population targeted to be vaccinated is more than 98 per cent. In 2006, Duncan Steele from the Initiative for Vaccine Research (WHO) stated that the Rotarix vaccine was being introduced to Brazil, Panama, Venezuela and other countries - at a cost of $7 per dose for public health use. In 2004, Brazil purchased eight million doses (two doses per child), at the full $7 per dose. Ward would later say that rotavirus hospitalisations were estimated to be down by 59 per cent.
Presently, unless Merck makes an entry into the international marketplace, there exists no competition for GSK which already describes itself as,"the main supplier of vaccines to UNICEF and GAVI". According to GSK, PAHO and other aid agencies intend to purchase enough Rotarix to ensure immunisation for 80 per cent of the world's children. Avant estimates that the global market for the drug will generate as much as $1.8bn annually. Neither GSK nor Merck have published a summary of their costs.
Light and Warburton estimate that the cost of Rotarix - due to the incredibly large expense of the almost 70,000-person trial is as high $466 million, excluding capitalised costs - and that out-of-pocket costs could be recovered with a single year's profit. From 2008 onward, sales totalled more than $1bn.
At "efficient" manufacturing costs of $1.50-$2 per dose, GSK will make a jolly profit from the "full price" in developed nations, and the 98 per cent successful vaccination target rate in countries such as Brazil. Once the five-year period is up, GSK - holding the global monopoly, will be embedded as part of the national health budget in 40 or more countries.
GSK's home country - the UK - donated the largest chunk of taxpayer funds to the AMC pot - at $1.34bn, while IP king Bill Gates offered a further $1bn. Gates claimed that he felt "great about the prices" GAVI received but acknowledged that Indian and Chinese manufacturers could bring the price down"somewhat" if they ramped up vaccine output.
No matter that drug companies like GSK actually sat on the GAVI board at the time such decisions were made.
Developed nations banging the trade-related intellectual property drum, and intellectual property captains such as Bill Gates, will not bypass the anti-competitive grip of patents - for which there exists no free market, and where all patent value is opaquely imputed by the company in question.
This is the flipside of "charity", this is a calculated attempt to sustain the status quo - a world structured on inequality, where the gap between those with access to medicine, and those without, is not only undeserved and systemically unjust - but also lethal.
To paraphrase brilliant comedian Chris Rock, drug companies - or drug dealers, as he put it, don't want to cure you (or kill you). The money comes from making you live in need.
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 editorial policy.