Fantasy accounting boosts drug company profits

What do you want from the drugs you’re prescribed by your GP? A reasonable, top-of-the-head list might include: that they’d been properly tested to show they were safe and effective, that new ones were better than what was already available and maybe, in austerity UK, that you the tax-payer weren’t paying a wildly inflated price.  Unfortunately, according to an article in the current issue of the British Medical Journal (BMJ), not even one of such modest expectations is being met by the current system.

Instead the way evidence based medicine is organised at the moment ensures we get a steady stream of drugs that may well come with side-effects you don’t actually need to risk suffering, that new drugs don’t have to be any better than what’s already available – only no worse – and that the amount the NHS is being charged for them bears no relationship at all to the amount they actually cost to research and develop.

At first sight these claims appear ridiculous – credible research showing supermarkets or car firms were doing this would spark a major investigation. No sign of that so what’s going on? The lead author of the BMJ article is American academic Donald Light who has been producing impressively detailed and careful research about how the pharmaceutical industry actually works for several years.

 A market for lemons

I reviewed his book “The Risk of Prescription Drugs” last year where he first set out some of these criticisms. He describes the current system as a “market for lemons”. In other words the incentives at work guarantee that many of the products that come to market will be of poor quality and poor value for money.

This is the way it works. To get a license all drugs need two randomised trials showing that they are more effective than a placebo or “not inferior” to what is already available. With the bar that low, the sensible corporate strategy is to produce “me-too” drugs – similar to what is already widely prescribed but with their molecules tweaked so they are just different enough to get a patent. That way research costs can be kept to a minimum.

This is what happens. The evidence comes from the research carried out by the FDA (American drugs watchdog) which shows that of the 218 drugs approved between 1978 and 1989, only 15 per cent “provided superior therapeutic benefit”, in other words, were any better than what was already available. Since the mid-nineties 85% to 90% have provided no clinical advantage. But the little or no extra benefit may well come with a new range of side-effects that may take years to show up.

Fantasy accounting boosts profits

The fact that our evidenced based medical system – the one that is going to be looking after you as you age and get increasingly frail – is producing such poor results is bad enough. What makes it even worse is that it is costing you/us far more than it should. We never think about the cost of drugs here in the UK thanks to the NHS, but as austerity continues to bite that may change.

Light’s paper suggests where to start looking for major savings. The high cost of patented drugs is regularly justified by the huge cost of research – the companies’ own figure is a billion dollars plus to bring a new drug to market. But the BMJ article shows this is a wild over-estimate. Their most breath-taking tactic for inflating the true figure is an accounting trick that artificially boosts expenditure by counting as a cost the profit they could have earned if they had used the money in a different way.

Let me explain. If you are a business costing a new venture, it makes sense to calculate what return you might have got by investing the money in something else. It’s a purely hypothetical exercise. What the drug companies do, says Light, is something remarkable. First they calculate what they could have earned by putting the cost of developing the new drug into a fund that yields 11% a year compound interest – a figure that is pure fantasy these days  anyway. Then they pretend that they have actually spent that money on research and add it into the cost of the drug.

 Possibility of massive savings

Stripping out this fake accounting halves cost of a new drug to about 600 million. Making some other realistic adjustments, such as removing research costs actually paid for by tax breaks or by publically funded organisation lowers the cost still further. Light estimates that the true cost – and so the amount that needs to be recouped by the price of a new drug – could be as little as 60 million!

The NHS spends around 10 billion on drugs annually – how much of that could be saved by paying a realistic cost for them? How much money would that release to run trials on promising forms of treatment that are now ignored because they don’t offer the kind of profits guaranteed by fantasy accounting?


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