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New Report Debunks Drug Industry Claims About the Cost of New Drug Research and Development

Second Report Documents Industry's Intense Lobby and Political Contribution Campaign to Keep Prices and Profits High

WASHINGTON, D.C. - The pharmaceutical industry spends about one-fifth of what it says it spends on the research and development (R&D) of new drugs, destroying the chief argument it uses against making prescription drugs affordable to middle and low-income seniors, a Public Citizen investigation has found.

The findings are contained in a Public Citizen report, Rx R&D Myths: The Case Against the Drug Industry's R&D Scare Card.

The report reveals how major U.S. drug companies and their Washington lobby group, the Pharmaceutical Research and Manufacturers of America (PhRMA), have carried out a misleading campaign to scare policymakers and the public. PhRMA's central claim is that the industry needs extraordinary profits to fund "risky" and innovative research and development to discover new drugs. In fact, taxpayers are footing a significant portion of the R&D bill, which is much lower than the companies claim.

"This R&D scare card is built on myths and falsehoods that are maintained by the drug industry to block Medicare drug coverage and measures that would rein in skyrocketing drug costs," said Frank Clemente, director of Public Citizen's Congress Watch.

Public Citizen based the study on an extensive review of government and industry data and a report obtained through the Freedom of Information Act from the National Institutes of Health (NIH). Among the report's key findings:

¤ The actual after-tax cash outlay - what drug companies really spend on R&D for each new drug (including failures) - is approximately $110 million (in year 2000 dollars.) This is in marked contrast with the $500 million figure PhRMA frequently touts.

¤ The NIH document shows how crucial taxpayer-funded research is to the development of top-selling drugs. According to the NIH, U.S. taxpayer-funded scientists conducted at least 55 percent of the research projects that led to the discovery and development of the five top-selling drugs in 1995.

¤ Public Citizen found that, at most, about 22 percent of the new drugs brought to market in the past two decades were innovative drugs that represented important therapeutic advances. Most new drugs were "me-too" or copycat drugs that have little or no therapeutic gain over existing drugs, undercutting the industry's claim that R&D expenses are used to discover new treatments for serious and life-threatening illnesses.

A second report issued today by Public Citizen, The Other Drug War: Big Pharma's 625 Washington Lobbyists, examines how the U.S. drug industry spent an unprecedented $262 million on political influence in the 1999-2000 election cycle. That includes $177 million on lobbying, $65 million on issue ads and $20 million on campaign contributions. The report shows that:

á The drug industry hired 625 different lobbyists last year - or more than one lobbyist for every member of Congress - to coax, cajole and coerce lawmakers. The one-year bill for this team of lobbyists was $92.3 million, a $7.2 million increase over what the industry spent for lobbyists in 1999.

á Drug companies took advantage of the revolving door between Congress, the executive branch and the industry itself. Of the 625 lobbyists employed in 2000, more than half were either former members of Congress (21) or worked in Congress or other federal agencies (295).

á The industry's $20 million in campaign contributions and millions more in issue ads attacking candidates opposed by the industry aided its army of lobbyists in gaining access to congressional representatives.

"The drug industry is stealing from us twice," Clemente said. "First it claims that it needs huge profits to develop new drugs, even while drug companies get hefty taxpayer subsidies. Second, the companies gouge taxpayers while spending millions from their profits to buy access to lawmakers and defeat pro-consumer prescription drug legislation."

Rep. Pete Stark (D-Calif.), the ranking Democrat on the House Ways and Means Health Subcommittee, added, "Not surprisingly, pharmaceutical companies have been deceiving Congress and the American public for years. I commend Public Citizen for exposing the industry's long-standing attempt to hide the truth about R&D spending."

Sen. Paul Wellstone (D-Minn.), said, "This well-documented Public Citizen report shows just how much the pharmaceutical industry exaggerates its commitment to research and development and focuses instead on the bottom line."

Added Rep. Tom Allen (D-Maine), "Millions of our seniors have paid taxes for decades and contributed to the development of new drugs. Now in their retirement, they pay the highest prices in the world for these drugs. . . . The public deserves better."

Local healthcare, labor and senior citizen groups released both of these reports today in 15 states. Many thanks to those coalition partners in: CA, CT, MA, MN, NJ, NM, NY, NC, ND, RI, SD, TX, UT, VT and WA.

Public Citizen calls on Congress to pass a Medicare-run prescription drug benefit program with strong cost containment that guarantees affordable prices for middle and low-income seniors. Copies of the reports can be found at http://www.citizen.org/congress/drugs/R&Dscarecard.html and http://www.citizen.org/congress/drugs/pharmadrugwar.html

Public Citizen is a nonprofit consumer advocacy organization based in Washington, D.C. For more information, visit www.citizen.org

Guillermo Nicacio, Field Organizer Public Citizen's Congress Watch (202) 454-5136 (202) 547-7392 Fax www.citizen.org/congress

Executive Summary

This new Public Citizen report reveals how major U.S. drug companies and their Washington, D.C. lobby group, the Pharmaceutical Research and Manufacturers of America (PhRMA), have carried out a misleading campaign to scare policy makers and the public. PhRMA's central claim is that the industry needs extraordinary profits to fund risky and innovative research and development (R&D) for new drugs. But this R&D scare card - or canard - is built on myths, falsehoods and misunderstandings - all of which are made possible by the drug industry's staunch refusal to open its R&D records to congressional investigators or other independent auditors.

Using government studies, company filings with the U.S. Securities and Exchange Commission and documents obtained via the Freedom of Information Act, Public Citizen's report exposes the industry's R&D canard:

¤ The drug industry's claim that R&D costs total $500 million for each new drug (including failures) is highly misleading. Extrapolated from an often-misunderstood 1991 study by Joseph DiMasi, the $500 million figure includes significant expenses that are tax deductible and unrealistic scenarios of risks.

¤ The actual after-tax cash outlay - or what drug companies really spend on R&D - for each new drug (including failures) according to the DiMasi study is approximately $108 million. (That's in year 2000 dollars, based on data provided by drug companies.) [See Section I]

¤ A simpler measure - also derived from data provided by the industry - suggests that after-tax R&D costs ranged from $69 million to $87 million for each new drug created in the 1990s, including failures. [See Section II]

¤ Industry R&D costs are reduced by taxpayer-funded research, which has helped launch the most medically important drugs in recent years and many of the best-selling drugs, including all of the top five sellers in one recent year.

¤ An internal National Institutes of Health (NIH) document, obtained by Public Citizen through the Freedom of Information Act, shows how crucial taxpayer-funded research is to top-selling drugs. According to the NIH, taxpayer-funded scientists or foreign universities conducted 85 percent of the research projects that led to the discovery and development of the top five selling drugs in 1995. [See Section III]

¤ The industry fought, and won, a nine-year legal battle to keep congressional investigators from the General Accounting Office from seeing the industry's complete R&D records. Congress can subpoena the records but has failed to do so. That might owe to the fact that in 1999-2000 the drug industry spent $258 million on federal lobbying, campaign contributions and ads for candidates thinly disguised as "issue" ads. [See Section IV]

¤ Drug industry R&D does not appear to be as risky as companies claim. In every year since 1982, the drug industry has been the most profitable in the United States, according to Fortune magazine's rankings. During this time, the drug industry's returns on revenue (profit as a percent of sales) have averaged about three times the average for all other industries represented in the Fortune 500. It defies logic that R&D investments are highly risky if the industry is consistently so profitable and returns on investments are so high. [See Section V]

¤ Drug industry R&D is made less risky by the fact that only about 21 percent of the new drugs brought to market in the last two decades were innovative drugs that represented important therapeutic gains over existing drugs. Most were "me-too" drugs, which often represent slight variations of existing drugs. [See Section VI]

¤ In addition to receiving research subsidies, the drug industry is lightly taxed, thanks to tax credits. The drug industry's effective tax rate is about 40 percent less than the average for all other industries. [See Section VII]

¤ Drug companies also receive a huge financial incentive for testing the effects of drugs on children. This incentive, which Congress may reauthorize this year, amounts to $600 million in additional profits per year for the drug industry - and that's just to get companies to test the safety of several hundred drugs for children. [See Section VIII]

¤ The drug industry's real priority is advertising and marketing, more than R&D. Increases in drug industry advertising have averaged almost 40 percent a year since the government relaxed rules on direct-to-consumer advertising in 1997. Moreover, the Fortune 500 drug companies dedicated 30 percent of their revenues to marketing and administration in the year 2000, and just 12 percent to R&D. [See Section X]