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USA: The Pharmaceutical Industry Stalks the Corridors of Power

by Julian BorgerThe Guardian Unlimited
February 13th, 2001

Washington teems with a thousand industrial lobbyists. They cluster around the band of luxury offices and expensive restaurants which stretches from the White House to the Capitol building - a two-mile axis along which money and power are constantly traded.

In this pantheon of corporate muscle, no industry wields as much power as the Pharmaceutical Research and Manufacturers Association (PhRMA), a pressure group breathtaking for its deep pockets and aggression, even by the standards of US politics.

There was a time not long ago when the corporate giants that PhRMA represents were merely the size of nations. Now, after a frenzied two-year period of pharmaceutical mega-mergers, they are behemoths which outweigh entire continents.

The combined worth of the world's top five drug companies is twice the combined GDP of all sub-Saharan Africa and their influence on the rules of world trade is many times stronger because they can bring their wealth to bear directly on the levers of western power.

In the struggle between western patent rights and the rest of the world's need for affordable medicine, the few concessions handed to the developing nations in the last year of the Clinton administration are likely to be reversed under Bush. The US government is expected to return to its customary role as a battering ram for the interests of the pharmaceutical industry and the principle of intellectual property.

Until recently, the industry hedged its political bets, backing the Democrats and Republicans more or less evenly at election time. But at the last election, it gambled. With billions at stake in a heated debate over prescription drug prices at home and a growing number of patent disputes abroad, the drugmakers stacked their chips disproportionately behind George Bush. The industry spent nearly 70% of its unprecedented $24.4m campaign war chest on the Republicans.

The wager paid off - just - and PhRMA has emerged at the apotheosis of its political clout, with grateful Republicans running the White House, Senate and House of Representatives. Politicians it has supported are now in key positions and it deploys 297 lobbyists - one for every two members of Congress.


'Super profits'

The pharmaceutical industry is therefore well-placed to defend profits which have soared in recent years to 36% (measured as a return on equity). That rate of return on investment is more than twice the US average. It is far and away the most profitable major industry in the country.

These "super-profits" have been generated by the proliferation of new pharmaceutical discoveries and the parallel spread of worldwide patents. They are also a measure of PhRMA's success in using its influence in government to fight off the threat of domestic price caps and competition from generic manufacturers producing cheap copies of its drugs.

The industry played a significant role in the drafting of Trips (trade related intellectual property rights) - that section of the World Trade Organisation's trade rules which relate to respect for patents. PhRMA has also made it a priority to ensure that the US government has enforced the Trips rules in a manner beneficial to its neighbours.

In 1998, for example, it was revealed that Al Gore had bullied the South African government with threats of sanctions if it bought cheaper generic alternatives to brand-name Aids drugs, even though South Africa had the right to do so under Trips.

The outcry over the vice-president's role, particularly among black Americans, led to one of the few setbacks the lobby has faced. In December 1999, Bill Clinton announced that the US trade representative (USTR), the country's chief negotiator and enforcer in trade disputes, would consult with the health department on the impact of intellectual property laws on access to essential medicines in the developing world.

This may have been little more than lip service. The USTR continued to put pressure on Latin American countries to agree to patent laws. Its criticisms of Argentina and Brazil, on its "watch list" of patent miscreants, closely echo briefing documents supplied by PhRMA.

The industry defends its hard-nosed approach by pointing to the cost of research and development (R&D) and by the high risks involved in such a pioneering field. Jeff Trewitt, PhRMA's spokesman, said: "Patents are the lifeblood to innovation. It costs about $500m to develop each pill and the arbitrary abrogation of patents is going to kill that off."

While the past decade has undeniably been a period of extraordinary and vigorous innovation, the link between the development of new drugs and the industry's breathtaking profit margins is not necessarily as straightforward as PhRMA maintains.


Creative accounting

Drug prices in Europe are about 60% of US prices, yet European firms spend a larger share of their revenues on R&D than their American counterparts. The US companies spent more on marketing than on R&D in 1999 (the last full year figures are available) and set aside more for profits.

Moreover, with a little creative accounting, all manner of expenditures have been lodged under the R&D title, partly in the pursuit of tax rebates.

In fact, much of the R&D work on new drugs is government-funded. A study by the Boston Globe newspaper in 1998 found the National Institutes of Health (NIH) laboratories spent $1bn on drug and vaccine development in the 1996 tax year, but only took in $27m in royalties.

In September 1999, it was pointed out to the director of the NIH, Harold Varmus, that six HIV/Aids drugs, as well as anti-malarial treatments and other medicines of vital interest to developing countries, had been invented with public funds. The government therefore had the right under US law to use the drugs in public health initiatives.

Dr Varmus dismissed the suggestion, echoing the industry line that: "Undermining licensed intellectual property rights would, I believe, unnecessarily jeopardise the development of important therapeutic drugs."

James Love, who runs a Washington-based group called the Consumer Project on Technology, sees the response as nonsensical because it was the NIH which did the hard work of discovering and synthesising the drugs in question. "The rest of the world will have to go however many years more of paying an astronomical sum for something invented by the United States government," he said. "How can we expect Glaxo to share its intellectual property if the United States government won't share its intellectual property to save millions of people. What does that say about the moral character of the American public. We are responsible."

However, the real debate has arguably not been put before the American public with any clarity, because the extent to which the pharmaceutical industry in the US has been able to set the policy-making agenda remains invisible to the average voter. Ten years ago, its modest campaign contributions of $2.9m were evenly shared between the two parties and all in the form of "hard money" - federally regulated donations for use in a specific election campaign.

In the 2000 election cycle, 60% of the drugmakers' $24.4m contributions were in the form of "soft money" - legal unregulated cash paid to the parties' national committees for supposedly general use.

One of the biggest players in the soft money game is a group with the public-spirited title of Citizens for Better Medicare. For an organisation which commissioned an estimated $35m in advertising in the last election, Citizens for Better Medicare, maintains a remarkably small office in downtown Washington.

"We are a broad-based coalition of patients, doctors and the industry, which stands for a system based on competition, consumer empowerment and senior's choice," Tim Ryan, its executive director said. In terms of funding, however, he concedes the base is considerably narrower.

"We may have some contributions from individuals, but yes, we are largely funded by the industry. We haven't talked about figures, so I can't tell you the percentage," he said.

The percentage is close to 100. Citizens for Better Medicare (CBM) was founded and is funded by PhRMA and the drug industry. When it registered itself for non-profit status, CBM declared itself as a PhRMA affiliate. Before taking up his executive director position, Mr Ryan was PhRMA's marketing director.

CBM does not need a big staff or extensive premises because 98% of the money coming in from the industry is funnelled straight out to a single advertising producer, Alex Castellanos. Mr Castellanos's other main clients last year were the George Bush election campaign and the Republican National Committee. He was responsible for the most notorious advertisement of the 2000 election, in which the word Rats flashed subliminally on the screen during a discussion of Al Gore's healthcare proposals.


Key positions

There are other examples of how the distinction between the interests of the pharmaceutical industry and the Bush presidency have blurred. There is a fast-spinning revolving door between government and the pharmaceutical industry. Mitch Daniels, the new director of the office of management and budget in the White House, was formerly the vice-president for strategy and policy at the pharmaceutical giant, Eli Lilly. Two members of the Bush transition team, Anne Marie Lynch and Bill Walters, are PhRMA members. Three others were seconded from big pharmaceutical firms.

"The PhRMA doesn't need to lobby," Democratic congressman Sherrod Brown said in a memo to staff last month. "The industry is in the White House already."

The industry has sympathetic politicians in key positions in Congress. Behind George Bush, the biggest recipient of pharmaceutical funding in the last election was Orrin Hatch, a conservative Republican from Utah, who chairs the Senate judiciary committee and is therefore well-placed to influence patent disputes.

The industry backed Senator Hatch to the tune of $340,000 and provided a plane for him to travel about the country in his quixotic bid for the Republican presidential nomination last year.





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