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NEWS
Lifting the Curtain on the Real Costs of Making AIDS Drugs
April 24, 2001 By MELODY PETERSEN.
About a dozen foreign drug manufacturers, working in the shadows to make copycat versions of patented AIDS medicines, are shedding new light on how little these medicines cost to make. These drug makers sell their products to countries like Brazil, India and Argentina, which have largely ignored the patents that the world's largest makers depend on for a monopoly and for wide latitude in setting prices. The small companies are expected to sell even more in developing countries around the world after 39 big drug makers bowed to public pressure last week and dropped their legal effort to keep South Africa from importing cheaper drugs. In the shadow market for AIDS drugs, small manufacturers in places like India, South Korea and China use the Internet, faxes and phones to find buyers for their medicines. They produce either the active ingredients in AIDS drugs or package the ingredients into finished drugs themselves and sell lifesaving medicines like Combivir and Zerit for a fraction of the brand-name price. For example, while GlaxoSmithKline, the world's largest manufacturer of AIDS medicines, sells Combivir for about $7,000 a year in the United States, the active ingredients in the drug can be bought for about $240 on this international generic market. Cipla Ltd., a manufacturer in Bombay, India, says it is offering a finished generic version of Combivir for just $275. The small foreign manufacturers have been quietly making copycat medicines to treat cancer, high cholesterol and other ailments for years, but as the AIDS crisis in Africa has intensified, some of them have trumpeted their presence by announcing their rock bottom AIDS drug prices to the world. For instance, Cipla has publicly promised to sell a three-drug cocktail to health care organizations working in Africa for just $350 a year. The brand-name companies have responded by cutting prices in Africa and other poor nations. But even many of these discounted prices are still higher than the going price on the shadow generic market. Bristol-Myers Squibb, another large maker of brand-name AIDS drugs, makes the AIDS drug stavudine, which it sells under the brand name Zerit in the United States for about $3,400 a year. Last month, Bristol-Myers said it would reduce the price of Zerit in Africa to $55, which it said was below its cost. But one can buy the active ingredients for those pills on the shadow market for about $23. And Cipla is offering a year's supply of finished generic stavudine to health organizations for $40 a year. GlaxoSmithKline offered to cut its price for Combivir in Africa to $730 a year - about a tenth of its price in the United States and a price that it says is equal to its manufacturing cost. But $730 is close to three times Cipla's offer. The big drug companies are reluctant to discuss their prices or the costs of their drugs. But in interviews they said they must charge more than the foreign generic makers because they have many costs the copycat manufacturers do not have, including the cost of finding and developing new medicines. For instance, GlaxoSmithKline spent $4 billion on research last year, and since 1995, has introduced five drugs for people with H.I.V. "We can't meet a generic company on price," said Gunther Faber, the director of GlaxoSmithKline's operations in Africa. But while all brand-name companies spend heavily on research, their financial reports show that many of them spend far more to market and advertise their drugs, while still having enough left over for profits that made them one of the most profitable industries in the United States. GlaxoSmithKline said in a recent report to investors that it spent 37.2 percent of its revenue on marketing and administrative costs last year, while it spent little more than a third of that amount - 13.9 percent - on research. After manufacturing, raw materials and other costs, the company still had 27.8 percent of its revenue left as profit. And, according to Bristol-Myers Squibb, it spent 30.4 percent of its revenue last year on advertising, marketing and administration, while spending 10.6 percent on research. After other costs, the company had 25.9 percent of revenue left as net income. "The price the brand-name companies charge has nothing to do with the cost of making the product," said Luciano Calenti, the top executive at ACIC Pharmaceuticals, one of the foreign manufacturers of the generic AIDS drugs. ACIC, which is based in Brantford, Ontario, is typical of the companies saying they can produce AIDS drugs and sell them for much less than the brand-name manufacturers. The company has been making AZT and three other AIDS medicines for more than a decade, producing big batches and selling them to countries like Brazil, Argentina, Peru and Mexico. ACIC sells the medicines in bulk and does not make the finished pills. Mr. Calenti said the company's chemists learned how to make AZT by studying the scientific literature. "You interpret and experiment," he said. At first, making AZT was expensive, he said. But over time, ACIC's chemists have become more efficient, he said, and it now takes about 1 kilogram of raw material to make 1 kilogram of drug, compared with 4 kilograms when ACIC began making the medicine. In the last few years, ACIC and the other makers of generic AIDS drugs have received their biggest lift from sales to Brazil. Since 1998, Brazil has been buying the active ingredients for AIDS drugs, and then making the pills in government-run factories and providing them free to its citizens. "Brazil's purchases have been so large that they have brought down the price in the global market," said James Love, director of the Consumer Project on Technology, a nonprofit group in Washington that has been monitoring the international market. For example, stavudine purchased as a bulk ingredient cost $6,000 to $10,000 a kilogram two years ago, according to Dr. Yusef K. Hamied, managing director of Cipla. Now, as the drug makers have competed and become more efficient, Brazil and other countries can buy stavudine for $800 to $1,000 a kilogram, he said. Based on the recommended dosage of stavudine, one kilogram would make enough pills to treat about 34 patients for one year. The brand-name companies say that the foreign manufacturers are unfairly copying medicines that took several years and tens of millions of dollars to develop. "It is easy to figure out how to make a clock if you can take it apart," said Nancy Pekerek, a spokeswoman for GlaxoSmithKline. "But it's very difficult to make a clock if you don't understand the concept of what a timepiece is." According to the Pharmaceutical Research and Manufacturers of America, the industry's trade group in Washington, it costs about $500 million to develop a drug, an estimate that includes the cost of research that fails before a useful drug is discovered. But some patient advocates say the $500 million estimate is too high, especially for the AIDS drugs, many of which were developed with the help of substantial financing from the federal government. The big drug makers say they must also pay royalties and licensing fees to other companies or universities that helped develop a drug. Adding to the cost of brand-name medicines are administrative expenses like executive salaries, office space, legal fees and lobbying expenses. The cost of such overhead is often much higher than at generic companies, industry experts say. And unlike the generic companies, the brand-name companies spend heavily on marketing their products, but these costs vary widely by drug. Companies may spend large sums on advertising campaigns aimed at making consumers interested in drugs that treat relatively minor problems like baldness, or on drugs for which there are several competing treatments. But marketing costs for AIDS drugs tend to be lower because of their high demand and because advocates for AIDS patients rapidly spread information on new drugs. The brand-name companies also spend millions of dollars making sure they comply with the standards of the Food and Drug Administration. And some industry officials question the quality of the drugs made by some foreign generic manufacturers. "Kids are dying of bad cough medicines in India because they just are not up to standards," said Mark Grayson, a spokesman for PhRMA, as the industry's trade group is known. But some of the biggest foreign manufacturers - including ACIC and Cipla - have factories that meet standards set by the F.D.A. because they sell their active drug ingredients to companies producing generic and even brand-name medicines for Americans. "I work with them and against them," Mr. Calenti said of his business dealings with America's brand- name companies. Wall Street analysts say the price cuts on AIDS drugs will not immediately hurt the brand-name drug companies' bottom lines. The big companies now earn little on the medicines in the poorest countries because so few people there can afford them. According to IMS Health, which tracks pharmaceutical sales, more than 90 percent of the $3.8 billion in worldwide sales of AIDS medicines last year were in just five countries: the United States, France, Italy, Germany and Britain. In fact, for many of the big companies, AIDS drugs represent only a small part of their total revenue. GlaxoSmithKline, which sells more AIDS drugs than any other company, generated just slightly more than 6 percent of its revenue from such drugs last year. The greater financial risk for the big drug companies is that the generic companies could find ways to sell other patented, brand-name medicines outside the United States, analysts say. Richard T. Evans, an analyst with Bernstein Investment Research and Management, said that the generic drug makers might now significantly expand their businesses and become a greater threat to the makers of branded drugs after these larger companies dropped their lawsuit last week against South Africa. "This will not just be limited to Africa," Mr. Evans said. If the global market for generic drugs grows, Mr. Calenti, for one, would be ready for the business. "Patents are there to reward the inventor," he said, "not give them a monopoly."