Who's Really Raising Drug Prices?

In his youth, Billy Grantham worked on rigs in the East Texas oil patch. But ever since a car crash left him blind and disabled, Grantham, 52, has survived on a government payment of less than $1,000 a month. To cope with post-accident trauma, he has relied on a tranquilizer called lorazepam, sold under the brand name Ativan.

One day last May came Grantham's prescription for poverty. He was making his monthly phone call to Heartland, an Omaha, Neb., mail-order pharmacy, when a salesman informed him that the price of lorazepam had jumped from $11 to $85 for a month's supply of 100 pills. "I can't live without this medication," he says in an East Texas drawl. "I eventually had to get the money from a loan company to pay for it."

Grantham isn't sure why lorazepam suddenly got so expensive, and neither are many of the patients whose doctors write more than 18 million prescriptions for the drug each year. But the Federal Trade Commission in Washington thinks it has a pretty good idea. The agency, joined by more than 30 states, recently accused Mylan Laboratories of Pittsburgh, Pa., and its suppliers of illegally tying up chemical feed-stocks used to make the drug. With control of the ingredients in hand, the FTC charged, Mylan could demand whatever price it wanted for the finished product. The FTC is now trying to force Mylan to "disgorge" $120 million in allegedly "ill-gotten gains" from the scheme. As FTC chairman Robert Pitofsky told TIME, "Mylan's illegal conduct deprived some consumers of access to these important drugs and put their health at risk."

Mylan CEO Milan Puskar not only rejects those allegations--"radical, rushed and wrong," he says--but thinks his company should get a medal for lowering overall drug costs to consumers during the past 15 years and for taking on brand-name drug companies that are resorting to every dilatory tactic at their disposal to keep their precious compounds from falling into the hands of generic manufacturers.

Indeed, the price of drugs has been both rising and falling. Spending on all prescriptions amounted to $100 billion last year and is growing 11% to 14% annually. Competition among generic drugmakers has depressed prices nearly 40% since 1995, saving consumers between $8 billion and $10 billion annually. As generics have got cheaper, their share of all drugs prescribed has risen to nearly 45%, almost tripling since 1984. On the other hand, since 1995 consumers have paid nearly 20% more for brand-name medications.

Mylan's pricing strategy was designed to get the company out of a double whammy. At the pharmacy counter, brutal price competition for drugs such as captopril, a hypertension remedy, and naproxen, an antiarthritis drug, has hurt margins. At the factory, the company is facing an escalating legal and regulatory campaign waged by brand-name pharmaceutical companies such as American Home Products and Merck to extend patents on their drugs or prevent others from manufacturing them. "Generics are caught in a squeeze, which is why only half the 24 publicly traded companies in the industry are profitable," says Jerry Treppel, an analyst at Warburg Dillon Read. Mylan is in the potent half, having earned $100 million on revenues of $550 million last year. Its stock price closed last week at $27.31, down from a recent high of $36.

Mylan appears to think the solution to its pricing problem is classic economics: reduce the supply and hence increase the demand and the price. But the FTC has charged that the tactic is more robber baron, an illegal manipulation of the market. In some cases, Mylan hiked the price of the drug as much as 2,600%. The company's rationale--that other supplies of the drug were still available and it is merely trying to make up for losses incurred on nearly half the 97-odd drugs it sells--doesn't fly with the Feds.

Besides its battle with the government, Mylan is fighting companies such as Lilly and Merck over the right to make generic versions of drugs that are coming off patent. Pharmaceutical companies enjoy 20 years of protection to recover the costs of their investment and earn a reasonable rate of return, although many drugs don't actually come to market until several years after a patent is approved. Over the next five years, according to David Saks, an analyst with Gruntal, a stream of brand-name drugs due to be made available to generics have the potential to double industry revenues to some $12 billion. The list includes blockbusters like the anti-depression drug Prozac.

To keep that from happening and to protect profit margins that reach 30%, companies will do almost anything to preserve their patents. Last year, for example, Schering-Plough enlisted a bevy of lobbyists and then got Senator Frank Lautenberg of New Jersey, home to Schering and many of the nation's biggest pharmaceutical companies, to try to amend the 1999 federal-spending bill by popping in what would have amounted to a three-year patent extension for its hot-selling Claritin-brand antihistamine. The measure failed, although Lautenberg has indicated he may reintroduce it this year.