Crisis at the pharmacy

There’s a connection between high drug prices, high company profits and poor health outcomes. A better regulatory system could sever it.
March 1, 2018

Pill spiliing coins

Illustration by Katie Raso

There is a crisis in the pharmaceutical world, but it is not a crisis of profitability. In December 2015, Forbes magazine reported net profit margins of 25.5% for “major” pharmaceutical companies, 24.6% for biotechnology firms and 30% for generics. Comparable rates for tobacco companies, internet software and services, information technology and large banks were 27.2%, 25%, 23% and 22.9% respectively.

No, the crisis in the pharma sector is in the escalation of prices for individual drugs, especially but not exclusively in the United States, and the low number of new products that offer major therapeutic gains over existing medicines. The industry’s lavish profits make these deficiencies all that much harder to tolerate.

For example, the cystic fibrosis treatment Kalydeco was initially priced in Canada at $300,000 a year. Until recently, Soliris, a medication for a rare disease involving blood cells and the kidneys, sold for a staggering $700,000 a year. There are now 19 drugs on the Canadian market that cost more than $50,000 a year, and an additional 55 that come in at $20,000 to $50,000 annually. It might be fine if we could say we were getting what we’re paying for, but the facts often tell a different story.

Among all cancer drugs for solid tumors introduced in the U.S. between 2002 and 2014, the median gain in overall survival was a modest 2.1 months. For breast cancer the best increase in survival was 4.2 months (using ado-trastuzumab emtansine for HER2-positive metastatic disease) and comparable data were not known for three of the 10 new drugs. According to the French drug bulletin Prescrire, of 1,032 new drugs and new uses for old drugs introduced into the French market between 2004 and 2015 only 66 offered a significant advantage whereas more than half were rated as “nothing new,” and 177 were judged “unacceptable” because they came with serious safety issues and no benefits.

Various experts have advanced ideas about how to resolve this crisis. In his recent book, Rigor Mortis: How Sloppy Science Creates Worthless Cures, Crushes Hope, and Wastes Billions (Basic Books, 2017), Richard Harris explores the crisis in research that stems from the inability of one lab to reproduce the results of another. Mislabelled cell lines, mishandled ingredients and “the economic imperative for researchers to get and keep jobs and funding encourages dubious behavior, from poor experimental design to sloppy statistics and shoddy analysis,” he writes.

In a 2017 working paper, the economist William Lazonick and his colleagues document how pharmaceutical companies are not plowing their profits back into research and development (R&D) on newer and better drugs. More money is going into paying out dividends and buying back corporate stock—a recurring feature in our economy a decade after the Great Recession. Lazonick et al. note that between 2006 and 2015, the 18 U.S. pharma companies listed in the S&P 500 Index spent $465 billion on R&D, $261 billion on stock buybacks and $255 billion paying out dividends.

“Incentivizing these buybacks is stock-based compensation that rewards senior executives for stock-price ‘performance,’” the economists explain. Buybacks automatically increase earnings per share by reducing the number of shares available. That, in turn, leads to an increase in demand for shares and higher share prices, which rewards executives who receive most of their income through stock-based pay.

According to Lazonick, pharmaceutical companies should be developing new innovative products that can be sold at affordable prices, but instead the companies that dominate the U.S, industry restrict product development and raise prices.

Both Harris and Lazonick et al. provide a number of recommendations that would improve upon the current situation, which we can summarize as sky-high pharma profits alongside lackluster R&D and drug performances. However, both largely leave the current regulatory model intact and therefore do not get at the root of the problem. Taking my lead from Courtney Davis and John Abraham’s influential book, Unhealthy Pharmaceutical Regulation: Innovation, Politics and Promissory Science (Palgrave, 2013), I believe we should adopt an empirical (realistic) and interests-based approach to understanding and resolving this crisis.


What would realistic reform look like? Well, first, it would approach the industry as it is now constituted. We should not be under any illusions about why pharmaceutical companies exist and what they do. Like any other corporations, they have an obligation to make profits for shareholders and investors. They should therefore do whatever is legal to advance this objective. This is not a cynical statement but a realistic one, and it would be naïve to think otherwise.

It would be just as naïve to think that in pursuing this profit-focused objective the companies will behave in all instances above board. “Economic theory predicts that firms will invest in corruption of the evidence base wherever its benefits exceed its costs,” explains the British economist Alan Maynard in an unpublished report (shared with me). “If detection is costly for regulators, corruption of the evidence base can be expected to be extensive.

“Investment in biasing the evidence base, both clinical and economic, in pharmaceuticals is likely to be detailed and comprehensive, covering all aspects of the appraisal process,” he continues. “Such investment is likely to be extensive, as the scientific and policy discourses are technical and esoteric, making detection difficult and expensive.” Therefore, it should not come as any surprise that companies’ economic aims seem to conflict with their declared goal of improving health.

The point that Davis and Abraham make in their 2013 book is that society has a dual expectation from the pharmaceutical industry: companies should make profits for shareholders and investors, but those products should also provide a health benefit. From the viewpoint of the industry that is exactly what has been happening, as reflected in the economic outcomes. Governments and their drug regulatory agencies are less trusting and therefore act as a check on industry assertions of effectiveness and health benefits.

“Yet there is a paradox at the heart of pharmaceutical regulation in the neo-liberal era,” write Davis and Abraham. “On the one hand, state regulation has been introduced and maintained on the assumption that the interests of the pharmaceutical industry and public health do not always converge. On the other hand, the last 30 years has seen a raft of deregulatory reforms, ostensibly to promote pharmaceutical innovation deemed to be simultaneously in the commercial interests of industry and the health interests of patients.”

In my recent book, Private Profits vs. Public Policy: The Pharmaceutical Industry and the Canadian State (Lorimer, 2017), I use the insights from Davis and Abraham to show how the federal government has sought to co-operate with the pharmaceutical industry, to the point of sometimes actively promoting the its interests through legislation and policies even when those interests conflicted with the public interest. In some areas Canada has voluntarily turned over de facto regulatory power to industry.

These were not isolated moves but represent a global phenomenon. Neoliberal reforms enacted by Western governments like Canada over the past two or three decades have prioritized intellectual property rights over things like affordable access to medicines (here or in the Global South), and they have altered drug-pricing and R&D policies to the benefit of the industry.

These reforms were not simply an incarnation of laissez faire capitalism. In true neoliberal fashion they were acts of the state to facilitate markets, i.e., to adopt a regulatory regime that encourages capital accumulation as its main raison d’etre. It would be a mistake to see the Canadian government as a passive victim of external pressure; rather, it actively co-operated in the normalization of a pro-pharma regulatory environment and the relinquishing of national authority over intellectual property rights.

In the mid-1990s, Health Canada’s introduction of pharmaceutical company user fees (to help fund part of the drug approvals process) established the industry as a client of the government—as a contracting agent whose needs should be met by the regulatory system. One of those needs was speed. Each day of delay in getting a drug onto the market could mean the loss of millions of dollars in sales for pharma companies.

Not only were speedier drug reviews made a priority, but Health Canada devised two mechanisms to get drugs through the system even faster: priority approvals, and a policy of granting conditional approval to medications based on preliminary evidence, called Notice of Compliance with conditions (NOC/c). Both of these mechanisms were much more valuable for industry than for the health of the public. Drugs with marginal value were marketed more rapidly; those that went through the priority review and NOC/c processes were much more likely to receive serious safety warnings or be pulled off the market, further damaging the health of patients who took them.

Focusing on the needs of the industry client also meant that Health Canada was not willing to devote the necessary resources to monitoring the safety of products once they were approved. Even if safety problems were identified, warnings about them could be subject to prolonged negotiations with companies. The value of communications that Health Canada issued to health care professionals and the public regarding safety issues was never evaluated. Innovation, as defined by Health Canada, was tailored to meet the needs of industry, emphasizing new drug molecules rather than better drug therapy.

Layered on top of poor regulation of clinical trials, faster drug approvals and poor safety monitoring has been the refusal of Health Canada to do anything effective about the way that medications are promoted to doctors and the public. Control over promotion to consumers of both over-the-counter and prescription-only drugs was progressively weakened and handed over to private interests with little to no oversight by Health Canada. Complaints about regulatory violations in direct-to-consumer advertising of prescription drugs are ignored for months or longer and then dismissed.

Finally, Health Canada’s position vis-à-vis the interests of industry versus those of the public is encapsulated by its obsessiveness in keeping information secret on the grounds that it is commercial business information, although there are some hopeful signs that the organization is finally changing its position in this regard.

Without tackling these basic contradictions in the pharmaceutical world, all of the other problems—with intellectual property rights, corruption of the regulatory system, high drug prices, promotion to doctors, etc.—will only fester.


A working group from Physicians for a National Health Program (U.S.) and Canadian Doctors for Medicare has been developing a set of proposals for radically reforming drug policy, including the creation of new institutes for prescription drug development in both countries. The institutes would prioritize drugs for development based on their potential clinical utility, focusing on diseases that are neglected, commercially unprofitable, lacking in effective treatments or are of particular public health salience. Because the new agents would be unpatented, they could be produced or purchased at a low price by other nations, improving global population health.

To deal with the problems of companies controlling clinical trials and the data that comes out of them, Arthur Schafer, director of the Centre for Professional and Applied Ethics at the University of Manitoba, has proposed that the research and commercialization processes must be separated, which would include the complete isolation of industry from clinical trial data. There are better and worse ways to do this, as far as I’m concerned, or weaker and stronger models.

One relatively weak model for achieving separation was proposed by Stan Finkelstein and Peter Temin in their 2008 book, Reasonable Rx: Solving the Drug Price Crisis (FT Press). Although they are primarily concerned with drug prices, the authors, both MIT professors, suggest the creation of an independent, public nonprofit, the Drug Development Corporation (DDC), to acquire new drugs emerging from private sector R&D and then transfer the rights to sell the drugs to a different set of firms.

In addition to its role in helping to reduce drug prices, the DDC would be mandated to submit “the results of all basic scientific studies and clinical trials…for publication in peer-reviewed journals as soon as patent and other intellectual property considerations permit,” write Finkelstein and Temin. The DDC would also make all negative trials public. Although this last function would helpfully increase the availability of information, research design and the trials process would remain in the hands of the pharmaceutical industry.

A stronger version of Schafer’s separation model would see an institution such as the Canadian Institutes of Health Research organize and manage clinical trials and the data that comes out of them, with funding coming from taxes collected from the pharmaceutical industry and/or general tax revenue. As Tracy Lewis, Jerome Reichman and Anthony So argue in a 2007 article, drug companies under this model “would no longer directly compensate scientists for evaluating their own products; instead, scientists would work for the testing agency.”

However, the authors argue that the companies should continue to fund a significant portion of the research agenda, “in order to discourage the wholesale testing of marginal drugs with little therapeutic value, or candidate medicines with little chance of clinical adoption.” While companies would continue to develop and market their products, this would be separated from the process of generating and interpreting clinical data.

Dean Baker, co-founder of the Centre for Economic Policy Research, goes even further in a 2008 report, arguing for a system whereby all clinical trials would be publicly financed, with the cost of the trials in the U.S. being covered through lower drug prices under Medicare and other public health care programs. The benefits of publicly funded trials would include trial data staying in the public domain, the minimization of commercial conflicts of interest, and the ability to redirect research away from “me-too” drugs (with little additional benefit over existing products) and toward real innovations, including unprofitable but essential treatments.

At present, despite over a decade of talking about reforms, no country has yet had the political will to implement any meaningful changes. However, that does not mean that change is not possible. Tommy Douglas, who as premier of Saskatchewan first introduced universal first-dollar coverage for hospital and doctor services in Canada, famously said: “Courage, my friends; ’tis not too late to build a better world.” Taking inspiration from the public health care pioneer, there are plenty of good ideas out there for building a better pharmaceutical system. It’s a matter of finding the courage to implement them.

Joel Lexchin, MSc, MD, is Professor Emeritus at the School of Health Policy and Management, York University, an emergency physician with the University Health Network, and a CCPA research associate.