The pharmaceutical manufacturing was the most profitable American industry from 1995 through 2002. While its profitability has since declined, in 2004 drug companies were still the third most profitable industry (ranking only beneath mining and crude-oil production) and three times more profitable than the median for all Fortune 500 companies.
….sometimes the profits come from outright fraud:
- Price inflation: Over the past 6 years, federal and state governments have recovered $3.9 billion in civil damages and criminal penalties related to 16 cases in which pharmaceutical companies overcharged the government for cancer, asthma, cholesterol, allergy and seizure medications.
- Off-label uses: Drug company Pfizer was fined $430 million in 2004 – an unprecedented figure at the time – for illegally marketing the drug Neurontin for several unapproved uses, thereby inflating Medicaid costs.
- Tax fraud: While you could argue about their original intentions, Pfizer is also under scrutiny for failing to make good on an agreement with New York City to increase total employment at its Manhattan headquarters and its Brooklyn plant from 5,735 to 8,659 in exchange for nearly $10 million in tax breaks. Instead, they seem to have cut NYC employees.
- Tax avoidance: GlaxoSmithKline agreed in 2006 to pay the IRS more than $3 billion towards the $7.8 billion in taxes it owed since 2003. GSK had been charged with shifting profits to different parts of its multinational conglomerate in order to avoid certain taxes. Merck may be facing $2 billion in back tax payments for a similar transfer-pricing dispute.
- Drug manufacturer Schering Plough paid a $500 million fine – the largest penalty at the time for this charge – in 2002 for manufacturing violations and $435 million in 2006 to settle a 5-year investigation for marketing of its drugs for unapproved uses and for giving kick-backs to an HMO to retain coverage of Claritin, an allergy drug more expensive than the competitor.
- The Department of Justice in 2007 joined a whistleblower lawsuit against an Ohio generic drug manufacturer for reporting fraudulent drug prices knowing this would inflate federal reimbursement rates. (A Federal law allows these reimbursement rates to be set solely based on drug companies’ reports on costs.)
….sometimes even doctors are pulled into the kickback schemes:
- Deceptive pricing: In October 2007, Bristol-Myers Squibb settled a federal case for $515 million. A federal judge had previously ruled in a nationwide class-action lawsuit that BMS, Schering-Plough and the UK company AstraZeneca would pay millions of dollars in damages for unethically encouraging doctors to use their products (when having to directly administer drugs) by notifying doctors that the drug’s purchase cost was well below the reimbursement rate. The doctors then pocketed “this spread” – in some cases a profit margin of over 1000%.
- Bribery and Deception: Merck will pay more than $650 million to resolve two whistle-blower lawsuits alleging the company illegally paid providers to use its products and gave hospitals volume discounts for Zocor, Vioxx and Pepcid while failing to extend the prices to Medicaid.
- Off-label uses: In 2004, Pfizer, Inc. and subsidiary Warner-Lambert settled a claim for $430 million to resolve state and federal allegations of deceptive marketing, Medicaid fraud and illegal kickbacks in Warner-Lambert’s promotion and sale of the epilepsy drug Neurontin for off-label uses.
Whatever the reason or method, drug profits boom at our expense.