Who's Really Raising Drug Prices?

By Adam Zagorin/Washington

In his youth, Billy Grantham worked on rigs in the East Texas oil patch. But ever since a car crash left him blind and disabled, Grantham, 52, has survived on a government payment of less than $1,000 a month. To cope with post-accident trauma, he has relied on a tranquilizer called lorazepam, sold under the brand name Ativan.

One day last May came Grantham's prescription for poverty. He was making his monthly phone call to Heartland, an Omaha, Neb., mail-order pharmacy, when a salesman informed him that the price of lorazepam had jumped from $11 to $85 for a month's supply of 100 pills. "I can't live without this medication," he says in an East Texas drawl. "I eventually had to get the money from a loan company to pay for it."

Grantham isn't sure why lorazepam suddenly got so expensive, and neither are many of the patients whose doctors write more than 18 million prescriptions for the drug each year. But the Federal Trade Commission in Washington thinks it has a pretty good idea. The agency, joined by more than 30 states, recently accused Mylan Laboratories of Pittsburgh, Pa., and its suppliers of illegally tying up chemical feed-stocks used to make the drug. With control of the ingredients in hand, the FTC charged, Mylan could demand whatever price it wanted for the finished product. The FTC is now trying to force Mylan to "disgorge" $120 million in allegedly "ill-gotten gains" from the scheme. As FTC chairman Robert Pitofsky told TIME, "Mylan's illegal conduct deprived some consumers of access to these important drugs and put their health at risk."

Mylan CEO Milan Puskar not only rejects those allegations--"radical, rushed and wrong," he says--but thinks his company should get a medal for lowering overall drug costs to consumers during the past 15 years and for taking on brand-name drug companies that are resorting to every dilatory tactic at their disposal to keep their precious compounds from falling into the hands of generic manufacturers.

Indeed, the price of drugs has been both rising and falling. Spending on all prescriptions amounted to $100 billion last year and is growing 11% to 14% annually. Competition among generic drugmakers has depressed prices nearly 40% since 1995, saving consumers between $8 billion and $10 billion annually. As generics have got cheaper, their share of all drugs prescribed has risen to nearly 45%, almost tripling since 1984. On the other hand, since 1995 consumers have paid nearly 20% more for brand-name medications.

Mylan's pricing strategy was designed to get the company out of a double whammy. At the pharmacy counter, brutal price competition for drugs such as captopril, a hypertension remedy, and naproxen, an antiarthritis drug, has hurt margins. At the factory, the company is facing an escalating legal and regulatory campaign waged by brand-name pharmaceutical companies such as American Home Products and Merck to extend patents on their drugs or prevent others from manufacturing them. "Generics are caught in a squeeze, which is why only half the 24 publicly traded companies in the industry are profitable," says Jerry Treppel, an analyst at Warburg Dillon Read. Mylan is in the potent half, having earned $100 million on revenues of $550 million last year. Its stock price closed last week at $27.31, down from a recent high of $36.

Mylan appears to think the solution to its pricing problem is classic economics: reduce the supply and hence increase the demand and the price. But the FTC has charged that the tactic is more robber baron, an illegal manipulation of the market. In some cases, Mylan hiked the price of the drug as much as 2,600%. The company's rationale--that other supplies of the drug were still available and it is merely trying to make up for losses incurred on nearly half the 97-odd drugs it sells--doesn't fly with the Feds.

Besides its battle with the government, Mylan is fighting companies such as Lilly and Merck over the right to make generic versions of drugs that are coming off patent. Pharmaceutical companies enjoy 20 years of protection to recover the costs of their investment and earn a reasonable rate of return, although many drugs don't actually come to market until several years after a patent is approved. Over the next five years, according to David Saks, an analyst with Gruntal, a stream of brand-name drugs due to be made available to generics have the potential to double industry revenues to some $12 billion. The list includes blockbusters like the anti-depression drug Prozac.

To keep that from happening and to protect profit margins that reach 30%, companies will do almost anything to preserve their patents. Last year, for example, Schering-Plough enlisted a bevy of lobbyists and then got Senator Frank Lautenberg of New Jersey, home to Schering and many of the nation's biggest pharmaceutical companies, to try to amend the 1999 federal-spending bill by popping in what would have amounted to a three-year patent extension for its hot-selling Claritin-brand antihistamine. The measure failed, although Lautenberg has indicated he may reintroduce it this year.

In another case, the FTC is investigating Hoechst AG's effort to prevent Cardizem CD, its well-known chest-pain and hypertension drug, from going generic. Alleging an infringement on its patent, Hoechst sued a small producer called Andryx, which had intended to bring out a generic. Then, last year, Hoechst agreed to pay Andryx $40 million annually in return for the company's pledge to withhold manufacturing of the generic pending resolution of the legal case. That pact triggered at least five consumer lawsuits, and one litigant labeled the payment to Andryx "an outright bribe" to protect Hoechst's roughly $700 million in annual revenues from Cardizem.

For the pharmaceutical companies, such battles are worth fighting. More than 30 years ago, Wyeth-Ayerst lost patent protection for Premarin, which at least 8 million women take to fight osteoporosis and the impact of menopause. Yet the company has fended off repeated attempts, most recently by Barr Laboratories and Duramed Pharmaceuticals Corp., to introduce a generic. Wyeth argues that Premarin, derived from the urine of pregnant mares, contains vital organic ingredients that are not reproduced in the synthetic compounds made by the generic manufacturers. While the debate has dragged on, the Food and Drug Administration has denied Duramed or any other company the right to produce a generic equivalent.

The struggle over patent extension is where Mylan has assumed the role of crusader for lower-cost drugs. Last year the company helped found a lobbying group called the Campaign for Fair Pharmaceutical Competition. The group is currently pushing to eliminate sections of the Waxman-Hatch Act, a landmark 1984 law designed to promote drug competition. One target: a provision that prevents the FDA from reviewing generic-drug applications for 30 months if the patent holder sues.

The opposing lobbyists have a slightly different spin. Proprietary medications can work better and sometimes protect consumers from potentially unsafe or ineffective generic compounds, according to Alan Holmer, president of PhRMA, a lobby for the brand holders. He derides Mylan's lobbying as "nothing more than a brazen attempt to deflect attention from the generic industry's embarrassment at its recent dramatic price increase and calls for antitrust investigations of their practices."

The rise in drug spending is beginning to have political repercussions. A movement is under way at the federal and state levels to bring about cheaper prescription drugs, an effort that could help the lower-cost generics. Bills are pending in several states, including California, to force drug companies to discount products for seniors. In Congress, a bipartisan commission will probably attempt to get Medicare to reverse its policy against paying for prescriptions, which could also favor the generics.

Whatever happens to Mylan, America's generic-drug industry is likely to emerge much stronger from the current turmoil. Even with delays, brand-name drugs that now account for sales of more than $40 billion a year could become available in generic form by 2008. Based on current pricing, consumers might save an additional $16 billion. And that's not too hard to swallow.