Management

BACKROUND

The pharmaceutical industry's claim that high and increasing drug prices are needed to sustain research and development is a lie to the American public. Drug companies are spending more than twice as much on marketing, advertising, and administration than they do on research and development; that drug company profits, which are higher than all other industries, exceed research and development expenditures; and that drug companies provide lavish compensation packages for their top executives.

Recent prices rose more than twice the rate of inflation last year and among the top nine pharmaceutical companies (Merck, Pfizer, Bristol-Myers Squibb, Pharmacia, Abbott Laboratories, American Home Products, Eli Lilly, Schering-Plough, and Allergan), all but one (Eli Lilly) spent more than twice as much on marketing, advertising, and administration than they did on research and development, and Lilly spent more than one and one-half times as much. Six out of the nine companies made more money in net profits than they spent on research and development last year.

The executive with the highest compensation package in the year 2004, exclusive of unexercised stock options, was William C. Steere, Jr., Pfizer's Chairman, who made $40.2 million. The executive with the highest amount of unexercised stock options was C.A. Heimbold, Jr., Bristol-Myers Squibb's Chairman and CEO, who held $227.9 million in unexercised stock options.

"Pharmaceutical companies charging skyrocketing drug prices like to sugar coat the pain by saying those prices are needed for research and development," said Ron Pollack, Families USA's executive director. "The truth is high prices are much more associated with record-breaking profits and enormous compensation for top drug company executives."

Pollack added, "Drug companies' commitments to research and development are dwarfed by those companies' expenditures for marketing, advertising, and administration."

In 2005, the pharmaceutical industry was, once again, the most profitable U.S. industry, and profit margins in the industry were nearly four times the average of Fortune 500 companies. Three companies (Merck, Bristol-Myers Squibb, and Abbott Laboratories) received twice as much in net profits than they spent on research and development. Three other companies (Eli Lilly, Schering-Plough, and Allergan) received more money in net profits than they spent on research and development.

"The pharmaceutical industry's repetitious cry that research and development would be curtailed if drug prices are moderated is extraordinarily misleading," said Pollack. "If meaningful steps are taken to ameliorate fast-growing drug prices, it is corporate profits, expenditures on marketing, and high executive compensation that are more likely to be affected, not research and development."

ETHICAL CHECKLIST

1. What is the Ethical issue?

2. What do your ethical beliefs tell you to do?

3. Is there a different ethical approach?

4. What is the best ethical option?

ETHICAL ISSUE

Should American pharmaceutical companies be able to charge the American public grossly inflated drug prices?

STAKEHOLDERS

In researching the following ethical issues of inflated drug prices the following stakeholders have been identified: American population including seniors, children, terminally ill and all healthcare recipients.

ETHICAL OPTIONS

The following discusses ethical options based on general approaches to ethics:

Utilitarian

Utilitarian approach is the theory that the rightness of an act or decision is determined by the outcome of that act or decision. In the EU, drug price differentials between member states have survived despite the removal of tariff barriers. Because health care remains a policy prerogative of member states under the subsidiary principle, individual governments have established different regulatory systems for drugs. These different regulatory systems and other factors have led to price differences of 70% or more for leading drugs (Towse, 1997). However, these traditional price differences between EU member states have recently been undermined by parallel trade and by regulation based on foreign prices--policies whereby governments in traditionally high price countries `import' lower prices from other EU countries. Parallel trade occurs when a manufacturer supplies a product at a lower price in one country, says Spain, than in another country, says the UK, and this price differential is arbitraged by an intermediary who transships the product from Spain to the UK, thereby undermining the manufacturer's ability to sell at the higher price in the UK. The European Court of Justice has repeatedly upheld parallel trade as consistent with the principle of free movement of goods. Regulation based on foreign prices uses the lower foreign price to limit domestic price. This is equivalent to 100% parallel trade. Both of these practices break down the market segmentation necessary for price discrimination.

Parallel trade has recently become a much more significant threat to pharmaceutical revenues with the accession to the EU of traditionally low price countries, including Spain and Greece. The planned accession of low price countries such as Poland, Hungary, the Czech Republic and Bulgaria poses an even greater threat. At the same time, since 1995, the European Medicines Evaluation Agency (EMEA) has harmonized regulatory requirements for drug approval, packaging and labeling. This reduces the parallel importer's costs of repackaging to meet country-specific regulatory requirements. Solutions to this conflict between the principles of national autonomy in pricing,

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