60 Minutes report allowed surgeon general to attribute high U.S. prescription drug prices to R&D costs

In a lengthy segment on the high cost of prescription drugs in the United States, CBS 60 Minutes correspondent Bob Simon asked, “Americans pay more for brand name prescriptions than anyone else in the world. Why?” But instead of presenting information on the various factors that contribute to high prescription drug prices, Simon offered the Bush administration and pharmaceutical industry line: “Well, the drug companies and the government say we have to so the companies can keep developing new drugs.” During the segment, Surgeon General Richard H. Carmona claimed that high U.S. prescription drug prices fund “the research and development of drugs.”

But large profit margins and marketing budgets indicate that drug companies could reduce prices without cutting into research and development money. In fact, pharmaceutical companies devote nearly as much money to marketing as to research and development. In its story, 60 Minutes mentioned neither the pharmaceutical industry's profit margins nor the vast sums they spend on marketing.

Moreover, in presenting only Carmona's and the administration's response to why drugs are cheaper abroad, the 60 Minutes segment omitted a key factor: Prescription drugs are cheaper in Canada and many European countries because those governments negotiate lower prices, as The New York Times reported on November 16, 2003. “The American manufacturers submit to these discounts because pills are cheap to make, so even sales at significantly reduced prices are profitable,” the Times continued. But in the U.S., consumers “pay high prices because nobody is negotiating on their behalf on a national scale.”

President Bush and congressional Republicans moved the United States further from government-negotiated lower prices with 2003 Medicare legislation that made it illegal for Medicare to negotiate with drug companies for lower prices, even though the Department of Veterans Affairs saved nearly $100 million over two years as a result of negotiating lower drug costs, according to a 2000 National Academy of Sciences report.

Since 1982, “Fortune magazine has consistently ranked the drug industry at or near the top of its charts with respect to revenue and return on equity,” as the San Francisco Chronicle has noted. According to the magazine's Fortune 500 rankings published in April 2002, the pharmaceuticals industry was by far the most profitable in 2001, topping the other 47 listed industries -- whether profit is measured as a percentage of revenues, assets or of shareholders' equity. As a percentage of revenues, for example, the pharmaceutical industry's profit was 18.5 percent of revenues, about six times the Fortune 500 median of 3.3 percent. Commercial banks came in second with profits measuring 13.5 percent of revenues. In 2002 and 2003, the pharmaceuticals industry continued to rank in the top four in each category, with profits well above that of the Fortune 500 median. In 2002, profits were 17.0 percent of revenues; the median was 3.1 percent. In 2003, profits were 14.3 percent of revenues, compared with a median of 4.6 percent.

While drug companies spent $33.2 billion on research and development in 2003, they spent three-fourths of that amount -- $25.3 billion -- on advertising ["Prescription Drug Trends," Kaiser Family Foundation, October 2004]. Further, according to another Kaiser study: “Over the decade between 1989 and 1998, the 10 largest pharmaceutical manufacturers spent about 11% of their total sales on research and development. ... At the same time, net profits before taxes amounted to about 23% of total sales” [Milwaukee Journal Sentinel, 4/1/01]. In 2003, R&D totaled 17.7 percent of sales while profits were 14.3 percent of sales.

From the June 5 edition of CBS's 60 Minutes:

SIMON: If you think you're paying a lot for prescription drugs, you're right. Drug prices have been rising faster than inflation, and Americans pay more for brand name prescription drugs than anyone else in the world. Why? Well, the drug companies and the government say we have to so the companies can keep developing new drugs. But that's no consolation to the tens of millions of elderly an uninsured who can't afford to pay for the drugs they need. You're about to meet a man who thinks he has a solution to the problem. His name is Dr. Peter Rost, and he's a critic of the way drugs are priced and sold in the United States. He also happens to be a vice president of marketing for the pharmaceutical giant Pfizer. He's taken a risky and possibly career-shattering step of opposing his own employer and the rest of the drug industry by saying America can have cheaper drugs if we set up a system like they have in Europe.


SIMON: Why are drugs so much more expensive in the United States than they are in almost any other country?

CARMONA: The United States does the lion's share of the research in the world, the research and development of drugs. So it's why the Canadian government sells it cheaper, they don't have the overhead.

SIMON: The surgeon general's task force report agrees with the pharmaceutical companies that, if they lower their prices, they'll spend less on creating new drugs on R&D. Peter Rost doesn't buy that argument; he says drug companies won't cut back on research and development because it's their bread and butter; they have to develop new drugs or they won't have anything to sell when the patents on their existing drugs expire. He recently testified before a Senate committee urging Congress to pass a bill legalizing the importation of cheaper drugs from overseas, even though his own employer is against it.