Demand, marketing bolster sky-high price of new biotech drugs

For three years, Davidson tried drugs that didn't work. Then her doctor suggested a new biotech drug that cost more than $1,000 a month. Her insurer would pay only half.

So to get Immunex's hit drug, Enbrel, Davidson, 52, a health-care administrator for a nonprofit agency, took a second job, didn't take vacations or go to movies and left herself with a shaky retirement.

To her, it was worth it. This spring, she was back in her groove, pain-free, prodding lawmakers to support low-income women and children.

"To feel that I now have control over my health, my life and my energy is priceless," Davidson said. "How do you put a price tag on that?"

Thousands of people can relate, which is partly why biotech drugs cost so much more than conventional drugs. Companies such as Immunex, Seattle's biggest biotech, have figured out they can command huge prices to treat diseases that had never been effectively treated.

But other forces also are driving up the price - expensive manufacturing, flashy marketing, years of research, scant competition and, in some instances, lucrative profit.

With 100 biotech drugs in advanced studies for diseases such as cancer, Alzheimer's and AIDS, insurers fear the costly new generation of drugs could have grave consequences for the health-care system.

The biotech industry is a little more than 20 years old, but it has created treatments for breast cancer, anemia and multiple sclerosis. Those breakthroughs have come at unprecedented prices. Enbrel, for example, costs 10 times more than Merck's Vioxx, an arthritis-pain reliever. But Enbrel can stop joint erosion while it relieves pain. Vioxx simply relieves pain.

Setting the price of a drug starts with patient demand. About 85,000 patients in the U.S. take Enbrel. Like Davidson, they are willing to pay dearly to stop their crippling disease.

Most patients who take Enbrel are insured and pay little out of pocket. That leaves insurers to force doctors and patients to try cheaper drugs first. If those fail, insurers usually cover the expensive drug, at least partially. That means higher premiums for employers and employees. And because drug companies know that breakthroughs ultimately will be covered, they can push insurers to pay high prices.

"The biotech companies look at the cost to make it; they look at what their competitors charge; and they look at the maximum amount they can get payers to pay," said Dr. Scott Ramsey, a health economist at the Fred Hutchinson Cancer Research Center in Seattle. "Amgen (the California-based biotech that is buying Immunex) has done calculations on how its patients get out of the hospital earlier and what that saves so they can justify their price. But ultimately, they'll charge as much as they can get away with."

Immunex Chief Executive Ed Fritzky said his company has paid for studies showing that rheumatoid arthritis costs $17,000 a year in doctor visits, hospitalizations, surgeries and missed work. Other Immunex-supported studies show that Enbrel reduces those factors, but Immunex can't say whether Enbrel saves more than it costs.

Still, Fritzky said it is worth $12,000 a year, maybe more.

"People say it's worth it because it's saving on surgeries . .. and giving people their lives back," he said. "If the product were not delivering that kind of value to the system, the system would not pay for it."

By nature, biotech drugs are more difficult, time-consuming and expensive to make than conventional drugs. Enbrel is a genetic copy of proteins that get rid of inflammation. The proteins are grown inside hamster cells - they are not made by mixing chemicals. Fewer than two dozen places in the world are capable of large-scale biotech manufacturing, and the expense and risk of failure have led to a worldwide factory shortage, which drives the cost higher.

U.S. Bancorp Piper Jaffray reported this year that the cost of materials for biotech manufacturing is 20 to 100 times that of conventional drugs.

Complex manufacturing, however, isn't the whole story. Last year, Immunex spent 21 percent of its sales on manufacturing; the industry as a whole spent only slightly less.

The Pharmaceutical Research and Manufacturers of America says expensive research and development is the driving force behind drug prices. The average biotech drug, the industry says, takes 12 to 15 years to develop and costs $500 million to $800 million. Four out of five fail in clinical trials.

Public Citizen, a watchdog group, says those figures ignore tax credits for research and development and are based heavily on "opportunity cost" - a theoretical calculation of how much time is wasted on drugs that fail. Public Citizen says development costs about $110 million.

"They commonly use that $800 million number to defend their prices, but the data it stands on is very shaky," Ramsey said. "The fact is, a company like Immunex is making a lot of money. Amgen didn't buy them for nothing."

Even so, drug companies point out, only three out of 10 drugs on the market crack $200 million in sales and recoup investment.

Biotech startups spend most of their money on research until they get a product, when they begin to spend more on marketing. In the 1980s, Immunex routinely spent 60 percent to 80 percent of its money on research and development. That has shrunk to about 20 percent. Immunex has spent more than $1 billion on research in its history but expects to earn that much in Enbrel sales this year.

These days, Immunex's biggest expense is marketing and administration.

Pharmaceutical companies have been criticized for using advertising to whip up demand and pressure doctors to prescribe $100-a-month arthritis drugs like Vioxx that are only slightly more effective than cheaper ibuprofen. Companies spent $2.5 billion on such advertising in 2000, a report by the National Institute for Health Care Management said. Vioxx, which uses Olympic ice-skating champion Dorothy Hamill in ads, is more heavily promoted than Budweiser.

Biotech companies don't need massive ad campaigns because they often aim at smaller patient groups, but they are pitching their products indirectly. Amgen, which makes the anemia drug Epogen, supports a TV public-awareness campaign for anemia that features Danny Glover. Immunex has run TV spots to raise awareness of rheumatoid arthritis, which could drum up more demand for Enbrel.

Pharmaceutical companies spend more money on marketing than on anything else - about 30 percent of their budgets, said Stephen Schondelmeyer, a pharmaceutical economist at the University of Minnesota.

Most biotech marketing goes on behind the scenes. Instead of handing out free samples, companies pay for ads in medical journals, hold seminars to teach doctors how to use biotech drugs, support patient-advocacy groups such as the National Kidney Foundation, and sponsor physicians' conferences, where they tout their drugs. Small sales forces are aimed at medical specialists.

Biotech companies take exception to calling all that spending "marketing."

"What biotech companies do has less to do with marketing and more to do with educating physicians," said Sharon Cohen, a vice president with the Biotechnology Industry Organization.

Competition among brand-name biotech drugs is sparse. Strong patents have allowed Amgen's anemia drug, Epogen, to last more than 12 years without competition. Enbrel has only one competitor on the market, Johnson & Johnson's Remicade, which hasn't lowered the price of Enbrel.

Tight manufacturing rules from the U.S. Food and Drug Administration keep out generic drugs. Biotech companies say that's justified because living proteins aren't nearly as easy to copy as chemicals and should be protected.

Generic-drug companies are lobbying Congress and the FDA for permission to make them anyway. One benefit would be lower biotech prices, said Clay O'Dell, a spokesman for the Generic Pharmaceutical Association.

The group says its companies typically price drugs at 20 percent to 30 percent less than the price of brand-name drugs in the first year. By the third year of generic competition, prices are 60 percent to 70 percent lower as other competitors emerge.

Most biotech companies are losing money and struggling to get a hit product, but the industry leaders are highly profitable.

Regence BlueShield pays $2,680 a month per patient for anemia treatments from Amgen and Johnson & Johnson. Last year, Amgen had $4 billion in sales and made $1.1 billion profit - a 28 percent profit margin. That beats the 18.5 percent average of pharmaceutical companies, America's most profitable industry, Fortune magazine says.

Biotech chiefs such as Immunex's Fritzky and Bruce Carter of ZymoGenetics make no apologies for making money. They say investors would turn their backs on them if prices - and by extension, profits - were limited.

"Because of the risk and the failures, investors need to see that pot of gold at the end of the rainbow," Carter said.

Schondelmeyer, the University of Minnesota pharmaceutical economist, said he doesn't begrudge the drug industry profit, but he thinks it is excessive.

"I want them to innovate, and I want them to have an incentive to innovate, but they could be one-fourth less profitable and still be the most-profitable industry in America," Schondelmeyer said. "If you're an investor, why would that make you put your money somewhere else?"

The National Institute for Health Care Management says the nation's drug spending jumped 17 percent last year to $154 billion. Biotech products had $18 billion in sales last year, accounting for one-tenth of the nation's drug bill.

Pete Fullerton, an assistant vice president with Regence BlueShield, said some insurers have responded to the increased spending by requiring more prior approvals and by insisting that companies prove a drug's benefit over less-expensive therapies.

Still, if new drugs offer advantages, insurers pay. Fullerton worries that more drugs - and more $1,000-a-month biotech drugs - will add pressure to the health-care system.

"There isn't enough money to continue to pay higher drug costs and still keep health-insurance premiums down while we're trying to pay for more hospital costs and more doctor costs," Fullerton said. "Something's got to give."

Davidson, the health-care administrator, agrees. Rising drug costs will force more people to go uninsured, she said, causing patients to flood emergency rooms, bankrupting health care and forcing health-care reform.

But as biotech-industry leaders say, such a crisis hasn't occurred and biotech companies aren't expecting one.

Biotech companies are built on the idea that Americans will pay for breakthroughs, Corixa Chief Executive Steve Gillis said.

"The price of these therapies is worth it unless we want to be one of those countries that says, 'OK, you have one of these diseases. Go ahead and die,' " Gillis said. "We're not willing to do that."

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