>Accompanying article explaining the process of the drug business.
>
>http://www.nytimes.com/library/national/science/health/072300hth-drug-primer.html
>
>July 23, 2000
>In a Drug's Journey to Market, Discovery Is Just the First of Many Steps
>By SHERYL GAY STOLBERG and JEFF GERTH
>
>Pharmaceuticals are a risky, but lucrative, business. Drug companies turn 
>scientific advances into life-saving medicines that can generate millions 
>of dollars in sales each day, but the process takes time -- an average of 
>12 to 15 years -- and money.
>Through a recent wave of mergers and acquisitions, the prescription drug 
>industry is increasingly global. But the companies earn most of their 
>profits, and do most of their basic research, in the United States, the 
>last drug market free of price restraints. The industry consistently ranks 
>as the most profitable among Fortune 500 companies.
>In this election year, with prescription drugs now the fastest-growing 
>component of the nation's health care bill, the political debate is 
>centered on how to help elderly people pay for their medications. So 
>politicians and consumers are taking a close look at the drug industry, a 
>business that closely guards its financial and scientific secrets.
>Drug Discovery
>Pharmaceutical companies spend more than $20 billion annually on research 
>and development, a figure that has nearly doubled every five years since 
>1970, according to industry data. The industry estimates that the average 
>cost of developing a successful drug is more than $500 million.
>The actual cost of developing a particular medicine -- the laboratory 
>equipment, the raw materials, the researchers' salaries, the clinical 
>trials -- is just a small percentage of the $500 million. The rest is the 
>cost of lost opportunity: years and dollars spent on scientific leads that 
>prove fruitless, and research money that could have generated interest had 
>it been invested elsewhere.
>The $500 million figure is extrapolated from a 1991 study by researchers 
>at Tufts University. Some experts say the estimate, drawn from 
>confidential industry data not subject to outside review, is inflated.
>Companies spend more on drug development -- the D in R & D -- than they do 
>on research. While clinical trials account for the biggest development 
>expense, experts say some development costs, like consulting fees paid to 
>doctors, are more appropriately categorized as marketing than research.
>Clinical Testing
>For every 5,000 to 10,000 compounds the industry screens as potential new 
>medicines, 250 make it to the stage of testing in animals. Of these, the 
>industry says, five enter testing in people, in clinical trials.
>The trials have three phases. First, the drug is given to a small number 
>of healthy volunteers to test its safety and establish the proper dose. 
>The second trial tests for effectiveness and looks for side effects in a 
>larger number of patients who have the condition the drug is meant to treat.
>The costliest clinical trial is the Phase 3 study, in which thousands of 
>patients may be tested, so that scientists can assess the drug in a 
>diverse population, over an extended period. Depending on the drug and the 
>amount of medical care involved, experts say, a Phase 3 clinical trial can 
>cost $10,000 to $20,000 a patient.
>The Regulators
>For years the drug makers complained that the Food and Drug 
>Administration, the federal agency that regulates medication, took too 
>long to approve new treatments, eating into the valuable life of a patent. 
>That changed in 1992 when Congress passed the Prescription Drug User Fee 
>Act, which enabled the agency to speed drug reviews with the help of 
>industry money.
>Between 1992 and 1997, the industry paid the agency $327 million to hire 
>600 new reviewers. Today, the average drug approval time has dropped to 12 
>months, from about 30 months before the law was passed. And the number of 
>new medicines the agency approves each year is rising.
>But critics say that in relying on drug companies to supplement its 
>budget, the F.D.A. has become too close to the industry. They point to a 
>rash of drugs withdrawn in recent years after serious side effects 
>surfaced once the drugs were in pharmacies.
>Patenting
>Patents, as much as science, are critical to the success of a new drug.
>A patent is a property right. It confers a government-authorized monopoly 
>for a set period -- in the United States, 20 years from the date the 
>application is filed. During this period of market exclusivity, the patent 
>owner can recover the costs of its original investment.
>Patents were not always of paramount importance in medical research; many 
>academic scientists once believed that knowledge should not be treated as 
>proprietary. After Jonas Salk invented a polio vaccine, the journalist 
>Edward R. Murrow asked him who owned the patent. "There is no patent," Dr. 
>Salk replied. "Could you patent the sun?"
>And when a Rutgers University professor, Selman Waksman, invented a 
>breakthrough antibiotic, streptomycin, in the 1940's, he patented the 
>drug, but gave away the rights. The result: many companies sold 
>streptomycin, keeping prices -- and profits -- low.
>The picture is far different today. Drug companies often derive the bulk 
>of their sales from a handful of top-selling medications, so the pressure 
>to invent the next blockbuster, and maximize its time under patent, is 
>intense. In the industry, this is known as "life-cycle protection"; one 
>way the drug makers protect their products is simply to file more patents.
>The F.D.A. keeps a registry of all drug patents. But the agency does not 
>evaluate whether the patents are valid; it simply takes the company's 
>word. So the listing creates a barrier to rivals, which often wind up 
>challenging patents in court.
>Drug companies have also fought hard to win patent extensions. In 1995, an 
>international trade agreement pushed back the expiration date of patents. 
>Several companies benefited handsomely from a loophole in that extension.
>While drug makers say they need longer patent protection to generate 
>profits for research, some experts say that patent expirations, not 
>extensions, spur innovation. Eli Lilly & Company, for instance, is 
>pursuing new antidepressants now that the patent on its best seller, 
>Prozac, is about to run out.
>"The Prozac patent expiration," the company's 1998 annual report said, "is 
>serving as a catalyst to bring greater intensity to everything we do."
>Generic Competition
>Prozac is not the only blockbuster drug threatened by the loss of its 
>patent. In the next five years patents are due to expire on some of the 
>most lucrative drugs in the history of medicine, among them Prilosec, the 
>ulcer medication; Claritin, for allergies; and Zocor, for high cholesterol.
>Generics can erode a brand drug's market share within months. A 1999 
>report by the Boston Consulting Group, which advises the industry, 
>predicted that the average top drug company would lose 30 percent of its 
>sales to generics by 2003.
>If the threat of generics creates angst on Wall Street about the 
>industry's profitability, it creates even more inside the companies, where 
>scientists, patent lawyers and business executives are taking a variety of 
>steps to beat back competition.
>When a drug produced by a joint venture of Dupont and Merck, the blood 
>thinner Coumadin, faced a generic challenge, the companies hired a battery 
>of lobbyists to press state legislators and pharmacy boards to adopt rules 
>that, in effect, restricted the ability of pharmacists to substitute the 
>generic for the brand drug.
>Claritin's maker, Schering-Plough, has taken its lobbying efforts to 
>Washington; it has asked Congress to insert a provision into a spending 
>bill that would extend the drug's patent.
>When generic makers tried to sell a version of Taxol, a leading breast 
>cancer drug, Taxol's maker, Bristol-Myers Squibb, sued for patent 
>infringement -- not on the drug, but on the method of delivery, which the 
>company had also patented. Courts in Britain and this country found for 
>the generics earlier this year, but the case is on appeal and there is 
>still no generic on the market.
>Fewer than 20 percent of all prescriptions were filled with generic drugs 
>in 1984. That year Congress passed a landmark law, the Hatch-Waxman Act, 
>intended to facilitate generic competition. By 1996 generics had captured 
>43 percent of the market and were saving consumers $8 billion to $10 
>billion annually, according to a study by the Congressional Budget Office.
>But because generics cost much less than brand drugs, they account for 
>only a small fraction of the industry's total sales. According to the 
>Kaiser Family Foundation, the combined prescription sales of the top 20 
>generic drug makers in 1998 totaled $7 billion, less than a tenth of those 
>of the top 20 brand companies.
>Coming to Market
>The United States is the last free market for pharmaceuticals: other 
>developed nations control drug prices, as in Japan, Canada, and France, or 
>drug company profits, as in England. So Americans typically pay higher 
>prices for new medications than people anywhere else in the developed world.
>How the drug companies set prices, though, remains something of a mystery; 
>they do not discuss their pricing strategies. The drug makers say price is 
>dictated by the high cost of research. But the calculus behind any single 
>pricing decision is complex, and largely shaped by market forces.
>Does the new drug offer therapeutic advantages over existing medicines? 
>How big is the patient population? Is there generic competition? 
>Paradoxically, the arrival of generic competition often results in raised 
>prices for their brand-name counterparts, as companies seek to maximize 
>revenue in a shrinking market.
>And despite the industry's emphasis on R & D costs, the top drug makers in 
>1998 spent, as a percentage of sales, three times as much on marketing and 
>general and administrative expenses as they did on research and 
>development, the Kaiser Family Foundation said.
>There is no set price for a single drug in the United States: health 
>plans, the government and individual patients all pay different rates, 
>depending on their power in the marketplace. More than three-quarters of 
>Americans younger than 65 have prescription drug coverage; their insurers 
>typically negotiate discounts. But the size of those discounts is kept secret.
>Among elderly Americans, who account for 13 percent of the population but 
>roughly one-third of all drug expenditures, it is a different story. 
>One-third of the nation's senior citizens lack drug insurance, and must 
>pay out of pocket for their pills. As a result, they typically pay the 
>highest prices.



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