Buying the Pharma

I want a new drug
One that does what it should
One that won’t make me feel too bad
One that won’t make me feel too good…

— Huey Lewis and the News, “I Want a New Drug”

LET ME GET this out of the way right now: At the end of this essay, a lot of you are going to have the urge to fire me off an e-mail about what miracles today’s wonder drugs are. You’re going to tell me how they cured your vertigo, how they lowered your Uncle Pete’s cholesterol, how they helped your Aunt Mildred’s arthritis…

Do me a favor: Skip it. I already know that prescription drugs save millions of lives — on the balance, many more lives than they take, I have to believe (I solemnly hope, anyway). But even if this is true and provable, does that mean we should look the other way for the greater good when, clearly, Big Pharma isn’t telling us all there is to tell about some of these “cures”?

Let me put it to you another way: What if you or someone you love were one of the casualties in this “greater good” equation? Might that change the way you think about it?

And speaking of folks who aren’t telling us everything, consider the FDA — an ostensibly impartial “watchdog” agency that’s supposed to be making sure the pills we pop are safe, or as close as they can be to it. The evidence, both the coins and the corpses, suggests otherwise. That’s what this essay’s mostly about…

Whether or not the FDA is doing its best to keep us safe, or whether it really even can.

Conflicts of Conscience — and Interest

Regulatory relationships between government and business are inescapable, of course. Ostensibly, this symbiosis exists to keep us safe, and also to protect us from unfair business practices (entities like the FAA and OSHA are good examples). This is an oversimplified synopsis, but you get the drift…

However, what happens when the business that’s being regulated is also a huge cash cow for the federal government? This is a relative rarity, I’m almost certain. I know I’ve read somewhere before that it costs the government more to regulate most industries than they recoup in taxes or fees from them. Undoubtedly, the most significant contrasting example would be the pharmaceuticals industry — which just happens to be the world’s most profitable industry, from a return-on-investment standpoint, and one of the biggest in terms of total profit (some industries rake in more sheer dollars — but not ROI). Consider:

· In 2002 alone (the last full year I could find data on), Big Pharma banked almost $36 billion in pure profits. This followed an even larger figure in 2001 — a year in which almost every U.S. business under the sun took a horrendous beating profits-wise

· The annual sales growth rate of the pharmaceutical industry has broken into the double digits for a decade or more (some years as high as 17%) and is expected to do so for the foreseeable future, analysts quoted in The Wall Street Journal predict. This blows away the median sales growth rate of the Fortune 500

· In the ’70s and ’80s, Big Pharma doubled the Fortune 500 median industry profit percentage. In the ’90s, drug makers nearly quadrupled it. By 2002, the drug biz was besting this median by more than 5 times over, making 17% on every dollar, compared with the 500’s 3.3%!

Here’s what I’m getting at with all these numbers: More so than with most other industry/regulator relationships, the easier the FDA makes life for Big Pharma, the more money the government makes — both in terms of corporate taxes on drug companies’ profits and in terms of fees collected for the approval of drugs…

Beyond all this, there’s the very real depressive effect on the U.S. economy if Big Pharma takes it in the shorts profits-wise. It would make no fiscal sense for the FDA to derail the money train by blowing the whistle about some drugs’ dangers — even if it costs a few hundred thousand American lives each year to look the other way here and there (keep reading for the sobering numbers).

Now, I know we all would like to think that the lure of filthy lucre could be kept at arm’s length by our selfless, duly diligent federal authorities and regulators as they decide about drugs’ safety and efficacy — but is this the reality?

Put a different way: Can the Food and Drug Administration really be impartial and objective in its analysis of prescription medications when drug revenue is its very lifeblood?

It doesn’t seem so to me…

From Regulators to Revenuers

The FDA crossed over to the dark side and became a revenue-generating agency, instead of just a regulatory one, in 1992. That’s when Congress passed the Prescription Drug User Fee Act (PDUFA). This allowed the FDA to charge drug companies hefty fees in exchange for “fast-tracking” drug approvals.

In the 10 years following the passage of this legislation, the FDA collected $825 million in fees (about three times its $290 million yearly budget for drug approvals, labeling, and monitoring). But revenues weren’t the only thing that increased during that time period…

According to multiple sources (including Knight-Ridder, The Journal of the American Medical Association, The Christian Science Monitor, and others), the reporting of adverse drug reactions (ADRs) has also soared since PDUFA’s passage. Here’s the pudding:

· Drug recalls increased 2.43 times — Recalls jumped from 1.56% of new drugs released during the 1993-1996 period (when mostly pre-PDUFA drugs were in the approval pipeline) to 5.35% in the 1997-2001 period

· ADRs outpaced prescriptions 2.46 times — From 1994-2004, the number of new prescriptions filled in the U.S. increased 59%. But the number of adverse drug reactions recorded over this same period jumped by 145%

· ADRs multiplied 4.44 times since pre-PDUFA levels — In 1990, there were around 80,000 ADRs reported. By 2003 (the last full year I found data for), that number ballooned to 355,000.

Keep this in mind: NONE of the above recalls or ADR statistics include those related to the Vioxx COX-2 inhibitor debacle. This one drug alone is credited by the FDA itself as having caused nearly 28,000 deaths in the United States. But according to Dr. David Graham, the FDA scientist turned COX 2 whistle-blower, the number of Americans killed or injured by Vioxx could be as high as 139,000.

Now, for those of you who are reading this right now and shaking your heads because you think these statistics are misleading (you’re probably thinking that because of increased advertising by personal injury lawyers, people just became more aware of and vocal about reporting ADRs, which leads to recalls), here’s a little tidbit to give you some pause…

The FDA Brings in the Ringers

Half a year after the Vioxx scandal made the headlines (September 2004), the FDA convened a 32-member special advisory panel of supposedly impartial “experts” to determine whether or not three specific drugs in the COX-2 inhibitor class of painkillers should continue to be sold on the open market. Those drugs were Merck’s Vioxx and Pfizer’s Celebrex and Bextra.

Shocking many in the media and medical community, the members of that committee voted to allow all of these drugs to stay on the market…

But the panel’s finding isn’t so shocking when you factor in that 10 of the 32 members of this committee had financial ties to either Pfizer or Merck — or both. The “impartial” votes of these 10 panelists broke down like this:

  • 10-0 in support of the continued sale of Vioxx
  • 10-0 in support of the continued sale of Celebrex
  • 9-1 in support of the continued sale of Bextra.

Here’s the real kicker: Without the supporting votes of these “experts,” the panel’s votes would have decisively banned Vioxx sales officially, and forced the withdrawal of Bextra from the market. Instead, Big Pharma’s ringers — chosen for their unbiased expertise by the FDA, remember — prevailed, and the killer COX-2s remained legal for domestic sale.

Just two months after this panel found it to be safe, Pfizer was forced to recall Bextra in the United States. Now, if all this doesn’t add up to a smoking gun in the FDA’s hands, I don’t know what would.

Beyond the backroom cloak-and-dagger stuff, the current process for drug approvals is tilted shamelessly in favor of Big Pharma. It’s well reported in alternative media circles that drug makers don’t have to report ALL their research, just the studies that support the efficacy of their drugs. And as far as postrelease safety oversight of drugs goes, it’s virtually nonexistent — or largely voluntary on the part of drug makers and individual doctors…

Basically, people have to start dying in large quantities (and the mainstream media have to take notice of it) before Big Pharma will do anything about deadly drugs that are already on the market. That was the case with Merck and Vioxx — they knew Dr. Graham was about to blow the whistle big-time about COX-2 risks, so they instituted a “voluntary” recall of Vioxx as PR damage control.

Where was the FDA in all this? They were down at the bank, cashing their “fast-track” approval checks and playing “see no evil, hear no evil.”

So how big are the risks, you’re asking? Hope you’re sitting down…

Like World War II — Every Year

According to statistics compiled in 2003 by Gary Null, Ph.D., and associates, as many as 305,000 Americans die every year from adverse drug reactions. That’s more than were killed in combat during all of World War II! Now, admittedly, Dr. Null and friends are well known as outspoken critics of the medical establishment and proponents of naturopathic medicine. But this doesn’t mean they’re wrong…

Reportedly, sources for this incredible estimate of drug-related mortality (outlined in Null’s treatise Death by Medicine, Part II) include only the government’s own numbers and those published in peer-reviewed medical journals. Pretty ironclad.

Let’s do the math on this for a minute. There are around 296 million people in the United States right now. If 305,000 are killed every year by their prescription drugs, this means the odds of any one of them dying in any given year of an ADR are less than 1 in 1,000.

Doesn’t sound like a lot, does it?

It does when you consider it this way: According to the National Safety Council, the odds of any given American dying this year from ANY of the following: accidents, injuries, falls, bites, shocks, poisonings, gunshots, lightning, crimes, choking, vehicle collisions, falling debris, plane crashes, drowning, suicide, woodworking, sports, lawn-cutting, hunting with the V.P., or about a jillion other occurrences — is around 1 in 1,750.

That means you’re around 60% as likely to die this year from prescription drugs as from all external causes combined…

Think about this too: Not every American takes prescription drugs. These 305,000 are drawn from a pool of less than half the population (50% of Americans now take at least one prescription drug, according to a 2004 Department of Health and Human Services report — but this number has been less in years past, when Null’s data were collected). So right there, the “death by drug” odds are less than 1 in 500 yearly for the average American who takes prescription meds.

There’s this to ponder, as well: Far more people are damaged or injured by drug interactions than are killed outright. The odds that you’ll be somehow adversely affected by patented meds you’re taking this year are likely 1 in 200 or less (this is my own estimate, but I’m betting it’s close — if not on the low side)…

What’s my point with all this morbid talk?

That somebody’s gotta pay for all this negligence. And it isn’t going to be the FDA.

Tort: It Doesn’t Just Mean “Dessert” Anymore

In the American tort court climate today, the stars are properly aligned for a “wealth transference” of colossal proportions — one that could make the $400 billion 1990s’ settlement against Big Tobacco look like pocket change.

Here’s what I’m talking about: First, the “victim mentality” in this country right now is truly pervasive. People are suing fast-food joints for making them fat. Criminals are suing the owners of the houses they break into for unseen-in-the-dark hazards (oh yes, this has happened). And folks who just a few years ago might’ve chalked up an adverse drug reaction as just part of the risk of treatment for being sick now dial up their attorneys every time they get a hangnail while they’re on meds. Which brings us to…

Second, as the echo of “tort reform” fades as a platform political issue on the Hill, the number of personal injury attorneys has boomed like mice in the barn — and they’ve also increased their predatory marketing to anyone who’s ever experienced a prescription’s side effects. Because of this, everyone who can read (and most who can’t) now knows that the risks their drugs carry along with them — whether they’re listed on the label or not — could mean cash in their pocket…

And third, the Vioxx scandal has opened the floodgates of liability awards. The first of the 9,000-plus Vioxx trials currently on the dockets around the country was settled in Texas last fall — to the tune of more than a quarter-billion dollars awarded to one family! This is tempting every person or family out there that’s been even remotely harmed by a negative drug experience to roll the dice and sue somebody.

Hey, it’s better odds than the lottery — and a better payout, too.

If trends continue the way they’re headed, Big Pharma’s dual engines as both profit machine and medical lifesaver (again, on the balance) could grind nearly to a halt — killing even more people as new drugs get held up and stalling a good chunk of the U.S. economy in the process. Neither of these things can this nation afford, in my opinion.

What’s the solution? I don’t know, but I’m guessing it’s a combination of aggressive tort reform and more accountable oversight of the pharmaceuticals industry by a reformed FDA — one whose revenue is not tied in any way to the approval or sale of prescription drugs.

But until that happens, the best you can do is conduct your own oversight on drugs you may be taking. Oh, and you can profit a bit too, perhaps…

A Bright Side to Pharmageddon?

As I’m learning from my association with Agora’s various contrarian investment geniuses, in every chaotic upheaval, there’s opportunity.

For instance, for those who like to invest in large-cap or blue chip stocks, any of the major embattled drug makers might be a good pick right now (though I’d wait until the liability poop storm really starts costing Big Pharma billions, and then buy in the fire sale that follows). Most of them are trading at much more civilized P/E ratios that they were just a few years ago — I read something that said one of the sector’s major players was trading for 80 times earnings not all that long ago. Merck stock can be had for less than 17 times price to earnings today…

But a better plan might be to start looking into small-cap companies that have promising new drug-related technologies that could knock Big Pharma’s big boys off the top of the heap — or at least help them to make better and safer drugs! Of course, I’m not the resident expert on such things.

That would be Jonathan Kolber, editor of The Emerging Capital Report. I’ve had a few interesting chats with him recently about some unknown companies he’s recommending that can do things with drugs that boggle the mind. Seriously, it might not be too far in the future when drugs are designed, tested, and made a whole new way — one that’s a lot safer, cheaper, and more effective…

And if you ask me, that’s a good thing, for many reasons. Especially if the FDA could somehow be rendered obsolete — and Big Pharma could get their comeuppance not through liability settlements, but through a bit of honest innovation and competition for a change.

Dedicated, but not medicated,

Jim Amrhein
Contributing editor, Whiskey & Gunpowder
March 21, 2006

The Daily Reckoning