Once again the pharmaceutical industry has been battered overthe issue of drug costs. Return on investment is 2 percent to 3percent higher than for industries with similar risks, accordingto a report from the congressional Office of TechnologyAssessment, Pharmaceutical R&D: Costs, Risks and Rewards.

OTA is widely considered to be objective, and its findings willinfluence the congressional debate over drug prices. Moreover,the agency's former director , Jack Gibbons, is PresidentClinton's science adviser.

According to the report, the drug industry has overstated thecost of developing new drugs. The industry's oft-quoted figure,equivalent to $259 million in 1990 dollars, is $65 million toohigh, the report said.

Nor is research and development as risky as the industry likesto project, according to OTA. "The 'wildcatting' risks of drugR&D are diversifiable: the investor can invest in a large,diversified portfolio of R&D projects (or firms undertaking suchprojects) and obtain, on average, an expected dollar return thatis very predictable.

"The technical risks of project failure that weigh so heavily onthe minds of R&D managers and executives," the report said,"do not raise the opportunity cost of capital."

However, the early stages of R&D are more risky than later,raising the cost of capital up to 4 percent higher than theaverage cost of capital for the industry, according to the report.

Nor are today's profits needed to fund today's R&D, as thepharmaceutical industry insists, the report said, pointing to thebiotechnology industry's success in raising external capital --more than $2.6 billion from July 1990 to July 1991.

The drug companies' high revenues resulted from "expandinghealth insurance coverage for prescription drugs in the UnitedStates through most of the 1980s," and the fact that healthinsurers have had little power to influence drug costs -- asituation that is changing, according to a spokesman for thePharmaceutical Manufacturers Association.

"It's a nice report," solt Harsanyi, executive vice chairman ofPorton International plc, an international biopharmaceuticalcompany based in London, told BioWorld. "The question is,what will Congress do with the information? (Arkansas Sen.David) Pryor has already said that those 2 to 3 percentagepoints (of elevated return on investment) can be translatedinto a couple of billion dollars' savings."

But the biotechnology industry cannot diversify the riskbecause too many comapanies "have one gem product they aregoing after," he said. "One clinical trial with disappointingresults sent Synergen's stock plummeting."

Nor would it be practical to cap pharmaceutical prices withoutalso limiting biotechnology product prices, said Harsanyi."Today, you see a lot of mixing of new organic entities andbiotech products; that's why you see a lot ofbiopharmaceuticals."

And while it might be possible to cap prices of all but newchemical products, those are already the most expensive drugs,the ones that are squeezing senior citizens on Medicare.

-- David C. Holzman Washington Bureau

(c) 1997 American Health Consultants. All rights reserved.

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