Introduction

Mr. Chairman and members of the Committee, thank you for the opportunity to testify today on the topic of prescription drug benefits and the Clinton health care plan. President Clinton proposes to insure that all Americans enjoy health care insurance that includes benefits for pharmaceutical drugs. If this new legislation is enacted, it will result in a substantial increase in the demand for pharmaceutical drugs. The United States, however, has no mechanism for reducing the prices of drugs when the prices are excessive. It is essential that this be remedied in the health legislation that you are considering today.

My testimony will address two issues. First, how important is the federal government's role in funding the development of important new drugs? Second, how can the federal government control prices of drugs which are priced excessively.

The Government's Role in Funding New Drug Inventions

Over the past three years, the Center for Study of Responsive Law's Taxpayer Assets Project (TAP) has undertaken a study of the transfer of government funded pharmaceutical inventions to the private sector.(1) We have provided a number of testimonies and written comments on these issues to various congressional committees, which I will incorporate by reference today.(2)

As a result of our investigations, we believe that the government's role in the development of new drugs is more important than is generally recognized, and that the government has not found a way to insure that prices for government funded pharmaceutical inventions are fairly priced.

Of course the private sector also plays an important role in the development of new drugs, but industry public relations efforts have vastly overstated the industry's contributions.

Expenditures on Clinical Trials

The government does not collect data on private sector investments in drug development, so the public must rely upon the surveys published by the Pharmaceutical Manufacturer Association (PMA), a trade group with an interest in exaggerating the size and importance of its members investments. According to the PMA's most recent survey of industry R&D efforts, the PMA member companies spent $7.9 billion in domestic R&D efforts in 1991, more than three times their 1981 outlays.(3)

The federal government has also dramatically increased its outlays on health care R&D, including research directed at the development of new drugs. While the federal government does not publish statistics show the portion of its health care R&D expenditures going toward the development of pharmaceutical inventions, it is possible to look at some comparable figures. The National Institutes of Health (NIH) Budget Formulation Office publishes data on NIH expenditures on human use clinical trials, an important and relatively advanced stage of drug development. The PMA also publishes data on its members expenditures on Food and Drug Administration (FDA) Phase I, II, III and IV clinical trials.(4) These figures are reported in Table 1.

NIH expenditures on clinical trials increased from $495.5 million in fy 1989 to more than $1 billion in fy 1993, an increase of more than 100 percent in just four years. According to NIH officials, these figures include both expenditures on Phase I, II and III trials, which occur before FDA marketing approval, and Phase IV trials, which occur after FDA approval.

The PMA reports that its members spent $2.1 billion on Phase I,II and III clinical trials in calendar year 1991, and another $269.4 million in Phase IV clinical trials. In 1991, the most recent year for which data are available, the NIH expenditures on clinical trials were equal to 24.1 percent of the total of NIH and PMA expenditures combined on clinical trials.

1987-1991 Priority Drugs

NIH outlays represent a significant portion of the total expenditures on clinical trials, but the significance of the government's role is even more important when one examines where the government spends its money. We wanted to test the hypothesis that the government targets its research dollars for more innovative treatments, or for drugs used to treat the most serious illnesses.

The pharmaceutical industry often claims that private investment is responsible for the vast majority of new drugs developed in the United States. This claim, however, is based upon the widest possible definition of new drugs.

From 1987-1991 the FDA gave marketing approval to 2,270 new and generic prescription drugs, approximately 454 per year. Of this total, the majority were for generic forms of existing compounds. Annually only 20 to 30 of the approvals were for what most people would consider a new drug (a total of 117 over five years). Called New Molecular Entities (NMEs), these drugs are distinctly different in structure from anything already on the market.(5)

Moreover, most of the NMEs do not offer any gain in therapy over existing drugs already on the market. Until 1992, the FDA rated drugs on the basis of efficacy, in order to help determine the priorities for the review of applications. An FDA classification of A was reserved for drugs which offered significant gains in therapy. A Class B drug offered modest gains in therapy, and a Class C drug offered little or no advance in therapy. The FDA also gives an E rating to drugs that were used to treat particularly serious illnesses, and a Class AA rating to drugs used to treat AIDS.

Out of the 117 NME's approved between 1987-1991, thirty were Class A,AA and/or E, indicating that they were either the most innovative,(Class A) and/or were used in the treatment of the most serious diseases (Class E or AA). We used this set of drugs to test our hypothesis that the government expenditures on new drug development are targeted toward the most important new drugs.(6)

For each drug in the sample, we investigated the government's role in the discovery of the drug, as well as the pre-clinical and clinical research.(7) We also calculated the wholesale patient cost of the drug, based upon a completed treatment or one year of treatment, whichever was less.(8) Summary information about each drug is presented in Table 3.

Among the findings of our study are the following points:(9)

• Half of the 30 drugs studied had federal involvement at some stage of their research. These 15 drugs had varying amounts of their R&D performed with federal money. Eleven of the drugs had federally funded research in every stage. This means that the federal government played a role in their discovery, preclinical research and clinical research.

• Drugs developed with federal funding were substantially more expensive than drugs developed without federally funded research. The median cost of drugs developed with government funds was $4,854, nearly three times the median cost of $1,626 for drugs developed without government funds.(10)

• Eleven drugs were discovered by the federal government or with money from a federal agency. This includes drugs discovered "in-house" - at NIH or one of the Cooperative Research Groups that work under the auspices of the Department of Health and Human Services, or discovered at Universities or non-profit research centers while working under federal grants or contracts, or discovered by a drug company while working under contract from the NIH.

• Seventy one percent (12 of 17) of the drugs discovered in the United States were developed with federal funds.

• Half of the priority drugs (15 of 30) qualified as Orphan Drugs. Two thirds of the government funded drugs (10 of 15) qualified as Orphans. Eleven of the 17 drugs which were discovered in the United States qualified as Orphans.

• All drugs discovered by universities with federal funding were licensed on an exclusive basis.

Today the pharmaceutical industry enjoys immense benefits from the federal government. The U.S. subsidizes drug R&D, grants Orphan Drug protections to drugs not protected under patents, and provides a number of special tax benefits and other subsidies. If the Clinton Administration extends prescription drug benefits to all persons, there will be a dramatic increase in the demand for pharmaceutical drugs. It is essential that Congress take this opportunity to create the mechanisms needed to protect consumers and taxpayers against excessive prices for prescription drugs.

Despite early suggestions that the Clinton Administration would create mechanisms for controlling drug prices, there is little in the Administration's proposal to do so. The section of the legislation which creates an Advisory Council on breakthrough drug prices is about the least which could be done. Apparently all this body will be allowed to do is jawbone the drug companies on drug prices. This Advisory Council should have the authority to reduce prices, require compulsory licensing of technology, or revoke Orphan Drug marketing exclusivity, when prices are found to be excessive.

The proposed legislation does allow the Advisory Council to review cost data supplied by the manufacturers of a drug, but is ambiguous as to the board's authority to compel companies to provide that data.

The issue of what information is collected by the government is an extremely important one. Today the drug industry has extremely detailed information on drug prices and revenues, based upon private industry surveys. There is no reason why this information should not be provided directly to the government, where it can be disseminated to policy makers, scholars and citizens who are concerned about a wide variety of public policy issues.

The PMA also sponsors its own survey of industry R&D expenditures. This is currently the only source of data on this important topic. We believe that it is essential for the federal government to collect information on pharmaceutical R&D efforts, organized in such a way as to allow policy makers to better understand the process of innovation in this important field.

It is particularly important that the government take a more pro- active role in deciding what information it needs and what will be made public. Our recent experiences with the National Cancer Institute (NCI) on the fair pricing of Taxol and other drugs were instructive. The government's role in the development of Taxol was extensive -- the government was responsible for the discovery of the drug, for extensive pre-clinical and clinical testing, and had even developed the techniques for manufacturing the drug. When Taxol was approved for sale by the FDA, publicly available data from Bristol-Myers Squibb's supplier indicated that the company would be selling more than 200 kilos of Taxol per year. At the announced price of $4.87 per milligram, the taxol product had a wholesale value of $974 million per year (before discounts). Under a CRADA with NCI, Bristol-Myers Squibb is marketing the drug and has exclusive rights to use all federal research on Taxol in return for, among other considerations, a fair pricing clause. However, NCI did not ask Bristol-Myers Squibb for any of its costs data, and NCI officials indicated that they would not have known what to do with the data if they had received it. The fair-pricing clause was really an empty promise to protect consumers, because NCI never took the steps to become informed in order to make a responsible decision.

In the case of breakthrough drugs, the firm's investment in a particular technology is only part of a larger picture. Most of the cost of drug development is associated with unsuccessful products. The government needs to routinely collect data on R&D investments, organized around important benchmarks in the R&D process, such as the beginning of Phase I or Phase II trials. This data should be available to the public, at least in aggregate form, to help policy makers understand how investments in pre-clinical and clinical research contribute to the development of new therapies. Information about the federal government's role in funding pharmaceutical R&D should be routinely collected and analyzed, both to more fairly evaluate industry assertions about the importance of private investment in the development of new drugs, and to better understand the outputs from public investments. Indeed, one criteria missing from the Advisory Council on Breakthrough Drugs' list of factors that it should consider in determining the fairness of drug prices is the role of the government in funding the development of the technology.

It is worth noting that today the only economists who can obtain detailed data on the pharmaceutical R&D process are those who develop consulting relationships with the industry. This lack of independence from the industry is a serious problem that erodes the government's ability to obtain objective disinterested advice and experience on important questions of public policy.

The pharmaceutical industry in the U.S. has much to be proud of, but it must acknowledge the extent of special government subsidies and privileges that most U.S. industries do not enjoy. It is appropriate and responsible to take steps to ensure that government officials have the power to protect consumers from unreasonable drug prices, including prices for drugs developed with public funding.

1. The Taxpayer Assets Project (TAP) was started by Ralph Nader in 1988 to study the management of government owned property, including intellectual property rights from government funded inventions.

2. On July 29, 1991, TAP provided testimony to the House Subcommittee on Regulation, Business Opportunities and Energy on the National Cancer Institute's Cooperative Research and Development Agreement (CRADA) with Bristol-Myers Squibb for the development of Taxol. On January 21, 1992, TAP presented comments to the Senate Subcommittee on Antitrust, Monopolies, and Business Rights on the Orphan Drug Act and government sponsored monopolies for marketing pharmaceutical drugs. On March 3, 1992, TAP submitted comments on the proposed amendments to the Orphan Drug Act to the Senate Subcommittee on Labor and Human Resources. On January 25, 1993, the TAP presented Testimony to the House Subcommittee on Regulation, Business Opportunities and Energy on private sector pricing of Taxol and other pharmaceutical inventions developed with federal funds. On February 24, 1993, Ralph Nader and TAP presented testimony to the Senate Special Committee on the Aging on the topic of federally funded pharmaceutical inventions.

3. 1990-1993 PMA Annual Survey Report: Trends in U.S. Pharmaceutical Sales and R&D, Pharmaceutical Manufacturers Association, October 1993.

4. The NIH figures do not represent all federal expenditures on clinical trials, and the PMA data does not represent all industry expenditures.

5. Since 1980 the number of FDA NME approvals has ranged from 12 to 30 per year, with an average of 22.5 per year.

6. There has been criticism of the FDA's A, B and C efficacy ratings from inside and outside of the industry. While the FDA efficacy ratings, which were abandoned in 1992, are imperfect predictors of the ultimate judgements on the efficacy of new drugs, they are unbiased, and useful for the purposes of our study, which seeks to draw conclusions about the relative importance of government funded R&D efforts.

7. Preliminary results of this study, covering only the year 1991, were presented to the Senate Special Committee on the Aging on February 24, 1993.

8. Calculations for drug costs are based upon wholesale prices, as published in the 1993 Drug Topics, Red Book.

9. Michael Ward, a TAP Research Associate, carried out the individual cases studies. We will provide the committee with an appendix which gives more detailed information on each of the 30 FDA priority drugs.

10. If the cost of a drug was expressed as a range, the mid- point of the range was used for purposes of determining the median cost. These numbers differ slightly from those reported in James Love's, "The Other Drug War," The American Prospect, Summer 1993, due to the use of more recent price data.