why pharma is sick

by Robert Kirby

The recent outbreak of “Swine Flu” in Mexico has focused the minds of governments worldwide on sourcing the drugs and vaccines that might be needed to combat a potential global pandemic. The UK government has already ordered nearly 15 million doses of antiviral drug Tamiflu from the pharmaceutical company Roche, and has touted diverting resources from the seasonal vaccines designed to protect the elderly from “ordinary” flu, to the search for a vaccine against the new strain (1). The question of who produces our drugs and how is once again climbing up the news agenda.

Some see the malignant hand of the “big pharma” lobby behind the panicky government and media responses to the epidemic; a perception which worries some of those involved in the industry (2). The belief that the pharmaceutical industry is uniquely powerful and evil is one that is widely shared amongst many radicals; their neglect of the third world comes under criticism from many NGOs and campaigners, their involvement in vaccine production scared many during the (entirely erroneous) MMR panic, and they and their scientists have come under political and sometimes physical attack from anti-vivisectionists (3).

But are these “unethical” activities really the problem? Many criticisms of the drug companies range from the wrongheaded (animal testing has saved many thousands of lives, and in a world that eats meat, it is frankly weird to fetishise medical research) to the simply paranoid (such as the generalised suspicion of modern science exemplified by the alternative medicine movement). It is the contention of this article that the real problem with the drug companies is not their machiavellian wickedness or their “scientific arrogance”, but that their need to make a profit is increasingly impeding their ability to continue to make the many advances in medical science that have characterised their history in the 20th century – the development of insulin, antibiotics and chemotherapies being just a few examples.

Superficially, the pharma industry seems one of the most dynamic at present; its heavy R&D spend accounts for nearly 30% of the UK total, and it remains one of the few sectors in which the moribund UK is a world beater, with British GlaxoSmithKline (GSK) and AstraZeneca amongst the top 10 enterprises globally. But whilst the travails of the car industry and others have been making headlines, a quieter set of convulsions have been shaking the drug companies. A new round of mergers and acquisitions have been sweeping the pharmaceutical industry, with the world’s largest drugs company, Pfizer, gobbling up its rival Wyeth for $60 billion, Merck buying Schering Plough for $41 billion, and Roche buying the large biotech company Genentech for $47 billion. Like other employers, all the main players have been laying off staff, with Pfizer and AstraZeneca sacking 8000 apeiece and GSK sacking 6000 globally in recent months, and with more than 10% of the UK pharma workforce having been laid off in the last 2 years (4,5).

But the problems facing “big pharma” aren’t identical to those of all capitalists in the recession. In fact, as people get sick in all economic circumstances, and with a market largely guaranteed by government, they should be more insulated than most. But despite this seeming security, they have been facing a protracted slow motion crisis, since long before the credit crunch. The return on investment in the pharmaceutical industry has become catastrophically bad in recent years; a 2007 US government report documented how between 1993 and 2004, a 150% increase in R&D spending by the pharma industry managed only to produce a 38% increase in new drugs being approved for sale by regulators. More revealingly, the rate of completely new drugs, or “new molecular entities” (as opposed to so called “me-too” mimics of existing drugs that are just different enough to circumvent patents) fell by 40% between 1995 and 2004, making only 32% of drugs registered over that period (6). Added to this, the 20 year patents of many of the pharma companies most profitable “blockbuster” drugs will end in the next couple of years, opening them up to competition from “generic” manufacturers – without a broad portfolio of drugs to replace them.

So what is behind the lack of dynamism? Whilst risk averse regulators, overly expensive clinical trials, or the fact that the “low hanging fruit” of simple molecules have been picked are blamed by pharma executives, this industry wide systematic malaise suggests that deeper issues may be responsible. Marx’s analysis of the capitalist economy might give us some pointers to understanding their problems. Marx showed that as capital accumulates, and money is invested in new technology and plant, the ratio of constant capital (plant and machinery) relative to variable capital (workers employed) shifts in favour of the former. Whilst this increases productivity, it simultaneously dilutes the source of profits – the unpaid labour exploited from the workers. As capital moves from industry to industry, seeking more profitable outlets, the process is obscured, but the effect is the same – decades of investment in high throughput analysers, informatics systems as PCR machines has gradually squeezed the life out of the drug companies (7).

The decline in profitability means that these companies are forced to look for ways out of their fix – and as research becomes less attractive, scrapping over the spoils already to be had becomes a more central concern. Besides the “me-too” drugs mentioned above, which attempt to hive off part of an already established market for less risk than doing something innovative, there is a constant churn of rent-seeking squabbles in the courts over patents with generics companies. Perhaps the strangest part of the worldwide drug industry is the pseudo-mercantilist “parallel traders”, who buy cheap in one country and sell dear in another, mainly within the EU. They repackage the drugs in line with local languages and regulations, and naturally enrage the drugs companies for appropriating part of their surplus value. Responding to pressure from the drugs companies, the European Commission is looking to ban drug repackaging, essentially outlawing parallel trade; capitalists 1 – free trade 0!

This increasing reliance on the state, which to hysterical observers looks like a corporate takeover (8), is in fact a symptom of weakness. Pharmaceuticals is possibly the most heavily regulated industry in the world, with complex systems and approvals needed for manufacturing, animal testing, clinical trials, transportation packaging and even advertising of drugs. This is partly a sensible precaution to take for potentially lethal products, but also functions as a barrier to entry for smaller competitors. Outside of the US, prices are generally set by the state through regular haggling over “reimbursment”, through agencies like NICE; a far cry from the traditional Darwinism of the free market of old. Most state healthcare systems essentially function as a permanent Keynesian “pump primer”, keeping the drug companies afloat.

There is a marked tendency towards monopolism too; many drugs in the “pipelines” of the big players weren’t researched by their own scientists, but were bought (often along with the entire company) from small biotechs and universities – Pfizer is a particular specialist in this tactic. Besides the mergers activity mentioned above, many collaboration deals divide up geographical areas between competitors. Additionally, the patent system, so central to the drug companies’ business model, is a state enforced restriction on free competition. The perennial favourite of capitalists in trouble – the export of capital to less developed regions – is as strong in the drug companies as anywhere else (9).

So what does the future hold for the drugs companies? The restructuring options open to them are more limited than in many other industries. Unlike other manufacturers, there are limits on the extent to which they can pursue outsourcing to the third world; tight restrictions on manufacturing standards, and scares like the Chinese contaminated milk scandal mean that there are technical and political barriers to this strategy. Likewise, the higher level of training of their workers (many at PhD level) means that there are limits on the cuts they can impose, although the largely deunionised workforce is more vulnerable than some others.

But the question is still begged, is this the most rational way to do things? At a time when scientific advance is opening up great new possibilities – particularly developments in genomics and related areas – we are facing the biggest crisis in decades, limiting our potential to exploit them. More profoundly, the capitalist accumulation process itself limits its own development. What should be progressive – increased investment in new technology and labour saving machinery – becomes a limitation on development by the obstacles it places in the way of profit making. We need to strip away the capitalist structures of value relations and property ownership from the drugs industry – and the rest of the economy – and push forward its progressive potential for the good of humanity as a whole.

(1) http://www.timesonline.co.uk/tol/news/world/article582550.ece

(2) http://social.eyeforpharma.com/blogs/jonathan-richman/why-pharma-marketers-should-own-swine-flu

(3) for example http://www.guardian.co.uk/commentisfree/2009/may/04/animal-testing-europe-vote

(4) http://www.fiercepharma.com/story/astrazeneca-adds-7-400-layoff-toll/2009-01-29-0

(5) http://www.pharmafocus.com/cda/focusH/1,2109,21-0-0-MAR_2009-focus_news_detail-0-492561,00.html

(6) http://www.ashp.org/import/news/HealthSystemPharmacyNews/newsarticle.aspx?id=2416

(7) see The Law of Accumulation by Henryk Grossmann, 1992, Pluto Press for a fuller exposition of the phenomenon

(8) see for instance George Monbiot’s slightly paranoid turn in the middle of an unusually reasonable article http://www.guardian.co.uk/commentisfree/2009/may/11/science-research-business

(9) http://www.fdimagazine.com/news/fullstory.php/aid/2824/Big_pharma_gets_bigger.html?current_page=1

One thought on “why pharma is sick

  1. Excellent piece – although I am still not sure whether the declining rate of profit or some external limit to R&D results is to blame for the retrenchment.

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