Ouch!

By John Greenwald

NO WONDER JO HARRIS, 79, IS FURIOUS about the price of prescription drugs. In the past two years the Montana widow has seen the cost of her medications soar, including a 50% jump in the price of the Voltaren tablets she takes for arthritis pain, which rose to $89.95 for a month's supply of 60 pills. "I feel like they rob me without a gun," Harris says. "When I paid the drugstore clerk, I told him, 'You know Bill Clinton's watching you, don't you?' I believe the guy will try to do something about this. I sure hope he can."

The new team of Clinton & Clinton sure seems to be trying. With concerns about medical costs reaching feverish heights, prescription prices have become the first major target of health-care reformers' wrath. The President last month blasted the price of prescription drugs as "shocking" and blamed vaccinemakers for pursuing "profits at the expense of our children." His remarks came a day after Hillary Rodham Clinton denounced the cost of childhood vaccines -- which have risen 1,000% in a decade -- and suggested that drugmakers would oppose the Administration's forthcoming health-care reforms. The industry's earnings also came under attack; Democratic Congressman Henry Waxman of California last week unveiled a 354-page Office of Technology Assessment report that charged that drug firms raked in $2 billion of "excess profits" a year and lavished vast sums on "wasteful" campaigns to encourage doctors to prescribe pricey medications.

The attacks stunned the $75 billion U.S. pharmaceutical industry, long the country's most profitable manufacturing sector and one of its last world leaders in developing new products. On Wall Street, fear of possible government price controls has helped whack 15% from the collective value of pharmaceutical stocks this year. Frightened drug firms have responded with a spirited defense, including full-page newspaper and magazine ads proclaiming the benefits of their products.

The industry's arguments often boil down to a simple concept: developing wonder drugs takes lots of money. "It costs upwards of $200 million just to get a product to market," says a spokesman for Johnson & Johnson. "And for every one that gets there, there are several that fail because of unfavorable side effects, no demonstrable increase in benefits, or a variety of other reasons." Moreover, experts say, costly marketing programs are a vital extension of the companies' research efforts. Declares Boston University economist Laurence Kotlikoff: "What good does it do to discover a health- improving drug and not have anyone know about it?"

For smaller companies, the price of failure can indeed be catastrophic. Shares of the biotech firm Synergen plummeted 68% in a single day last week after the company disclosed that tests of its most promising new drug had been disappointing. Synergen stock closed last Friday at 15 1/4, down 26 7/8 for the week. The debacle followed the January collapse of shares of Centocor, which fell more than 60% when the firm suspended U.S. testing of its bacterial-shock treatment Centoxin.

At stake in the latest attacks on drugmakers, their defenders say, is nothing less than the industry's ability to lead the race to discover new treatments for disease. "If you take away the profits that these companies are able to earn," warns James Fenger, who watches pharmaceutical stocks for Kemper Financial Services in Chicago, "the incentive to do research will diminish, and our competitive position in the world will decline."

But how much profit do drug firms really need? Thanks to sky-high pricing, as much as 16% of the industry's sales flow straight to the bottom line, or about three times the average for FORTUNE 500 companies. Fueling those profits, wholesale drug prices rose nearly six times as fast as inflation between 1980 and 1992, according to a recent report for the Senate Special Committee on Aging. Moreover, a single successful drug can deliver a bonanza. Merck's Mevacor, the first drug to lower cholesterol levels, arrived in 1987 and now rings up sales of $1 billion a year. And Merck's patent doesn't expire until 1999.

Prices can swell even more at the retail level as pharmacies and drugstore chains take their cut of profit. For example, Voltaren maker Ciba-Geigy said it raised the wholesale price of its arthritis drug just 5% in the past year. "What happens after that is really out of our control," a corporate spokesman says.

Much of the rest of the world puts strict controls on pharmaceutical prices. So American firms have been recouping research-and-development costs at home that they could not recover abroad. "We're paying a premium because other countries are regulating prices and profits," says Stephen Schondelmeyer, a University of Minnesota health-care economist. "If you squeeze a balloon everywhere but one place, imagine what's going to happen."

There is no shortage of examples of huge increases in prescription prices. According to a 1991 Senate report, Wyeth-Ayerst raised the price of Premarin, an estrogen replacement used during menopause, 131% between 1985 and 1990, and boosted the cost of its Inderal heart medication 112%. (The Consumer Price Index went up 21% during that period.) Another federal study found that the cost of Upjohn's Halcion sleep-inducing medication rose 110% between 1985 and 1991, while the price of McNeil's Tylenol with Codeine jumped 160% during the same period. McNeil said it had held the price of the drug steady from 1980 to 1985.

Johnson & Johnson stirred outrage last year by charging about $1,300 for a dose of its colon-cancer treatment Ergamisol, even though another firm sells a veterinary drug with the same active ingredient, levamisole, for just $14. In its defense, Johnson & Johnson points out that it reformulated its version for human use and the price of its drug is comparable to that of other cancer treatments. But the president of another pharmaceutical company gave the magazine Business for Central New Jersey a blunt assessment of the price Johnson & Johnson set for the drug. Said he: "Why in the hell did they do something dumb like that?"

Small wonder that many Americans, who typically must pay 75% of the cost of prescriptions out of their own pockets, have been flocking to Mexico for pharmaceutical bargains. "When you're retired and faced with these humongous medical bills, it about kills you," says Turner Ashby, 64, a former trucker who figures he and his wife saved about $4,000 last year by driving 1,000 miles from their Idaho home to stock up on medicine in Mexico. "It's a terrible rip-off," Ashby adds. "The government has to go in there and say to these guys, 'The party's over.' "

Such concerns have opened the door to political grandstanding by critics of the industry. In attacking childhood-vaccine prices as "unconscionable," for example, Clinton pointed out that the overall cost of a full series of immunizations has jumped from about $23 a decade ago to more than $200 today. But 80% of the increase reflected the addition of two costly vaccines plus an excise tax that Washington began collecting in 1988 to pay for liability insurance for the companies. "The new costs," Schondelmeyer says, "are not driven primarily by the industry's desire to enhance the bottom line." (Cheap vaccines can wind up being costly: Defense Secretary Les Aspin spent four days in the hospital last week after military doctors gave him a 35 cents typhoid shot that aggravated a heart condition instead of using a $1.90 oral dose with fewer side effects.)

Drug companies argue that the 17-year patents on their drugs force them to try to recoup their investments quickly. Since it can take an average of 12 years for companies to develop new drugs and get federal approval to sell them, firms may have just five years to wring profit from their inventions before generic-drug makers rush in with their own versions. Companies also say profits from successful drugs are often plowed back into new products. Wyeth- Ayerst, for example, insists that the large profits it has made from Premarin and Inderal helped finance the revolutionary Norplant implantable ; contraceptive that it introduced in 1990.

Faced with a growing political backlash and the looming prospect of price controls, many drug companies have been taking steps to slash their costs and moderate their prices. Bristol-Myers Squibb last year said it was cutting 2,000 of 53,000 jobs; Warner-Lambert expects to eliminate 2,700 of its 35,000 positions.

At the same time, health-maintenance organizations have been driving down prices by buying in bulk and demanding the most cost-effective medications. Thanks to such methods, the level of pharmaceutical prices rose less than 6% in 1992, says Fenger, compared with traditional increases of as much as 10% a year. Adds he: "Companies want to limit their price increases so there is less incentive for the government to put price controls on the industry."

Experts also say drug prices could be better controlled if doctors paid more heed to drug costs and patients had the information they need for comparison shopping. The facts could be readily available through a national computerized data bank for patients and physicians. "Government should not be saying what prices are right or wrong and requiring certain behavior," says M.I.T. medical economist Jonathan Gruber. "Rather, it should be helping to make information available to people. Right now, we know more about the apples we eat than the drugs we use." And the public is paying the price of its ignorance.

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CREDIT: NO CREDIT

CAPTION: DRUG PRICES: OUT OF CONTROL

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CREDIT: TIME Graphic by Steve Hart

[TMFONT 1 d #666666 d {Source: Prime Institute, University of Minnesota}]CAPTION: HOW U.S. PRICES OF SOME BEST-SELLING DRUGS COMPARE WITH CANADA'S

FIVE-YEAR PRICE HIKE IN THE U.S.

With reporting by Ketanji O. Brown and Jane Van Tassel/New York and Dick Thompson/Washington