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Unreasonable Profit
867
THE LANCET
Unreasonable Profit SOME
ten
years ago, at the time of merger
rumours
affecting two chemical giants, a young man applying for a job with the Patent Office was asked if he approved of the monopoly situations such a merger would create. Certainly not, came the assured reply. But, said the interviewer, granting monopolies is our business. Roche Products Ltd. has near monopolies on two benzodiazepine tranquillisers (and an absolute monopoly on a third) because of the protection conferred by patents granted to its Swiss parent. That is what patents are for-to give, for a restricted period, freedom to reap the rewards of innovation. They say nothing, however, about how big the harvest ought to be. With most products market forces might be expected to keep this under control, but for drugs supplied under the National Health Service these forces act atypically if at all. The consumer in a pharmacological sense (the patient) is protected from any direct burden of payment, and the individual who decides whether A or B is to be prescribed (the doctor) does not have to foot the bill. In this unusual situation different restraints have evolved, and it is the efficacy of these restraints that has been questioned in the Monopolies Commission’s scathing indictment of Roche Prices for chlordiazepoxide and diazepam. The minutiae of this report (summarised on p. 876) are difficult arithmetically and conceptually, and neither the U.K. company nor Hoffmann-La Roche AG in Basle helped their case by their refusal to cooperate fully with the Commission’s inquiries or, earlier, with the Department of Health. However, the main conclusion is disturbingly simple: in calculating the price that Roche Products should pay for chlordiazepoxide and diazepam imported from Switzerland the element of profit for the international group and other charges were grossly inflated. At its starkest the difference being talked about here is between prices per kilogramme in Italy (E9 for chlordiazepoxide and E20 for diazepam) and the Swiss prices of E370 and E922, respectively. And the Monopolies Commission calculates that between 1966 and 1972 the group made E24 million profit from U.K. sales of these two drugs. The largest (and most controversial) element in the huge differences between what the raw chemicals cost to make and the price
Roche Products had to pay is research. No-one is claiming that the E24 million was distributed to The company stated that research shareholders. charges that had to be recovered were twofoldmoney already spent on research on the two drugs, and provision for future developments-and that the U.K. share had to be artifically increased because U.K. drug prices were lower than elsewhere in the world. The Commission did not accept the use of world prices as a factor, but its report offers no general comment about how the research element in the price of a successful drug should fairly be calculated beyond implying that this is a factor of importance more in determining early prices.
If Roche abused its monopoly power as supplier, what of the Department of Health’s power as monopoly purchaser ? The Department’s power is not all that great. There is the Voluntary Price Regulation Scheme, which subjects prices to negotiation in the light of annual financial returns supplied by manufacturers. Roche did not participate in the V.P.R.S., and for two-thirds of the life of their patents prices were not reduced, the company preferring to make cash rebates totalling f:l,600,OOO. A further restraint is the granting of licences to other manufacturers either voluntarily or, as in this case, compulsorily under Section 41 of the Patents Act. But competing brands of chlordiazepoxide and diazepam account for only 1%or so of the sales of the two benzodiazepines, and the Department of Health has not done much to encourage doctors to prescribe the cheaper brands. Roche’s position was hardly affected by these developments. In reserve is Section 46 giving Departments the right to use patented inventions for the services of the Crown. The patents on these two drugs expire shortly, the brand names will still be protected; the Government has already ordered sweeping reductions in the prices of’Librium’ andValium’; and Roche Products, though under no compulsion to do so, would be most unwise in its own interests and in those of the pharmaceutical industry as a whole to refuse to make further cash rebates for past excesses. The problems relating to these two drugs may be resolvable, but the wider questions and the nagging suspicion that Roche’s pricing practices may not differ greatly from those of other companies may not clear so easily. A formula for calculating the research element in " reasonable profit " is urgently needed, especially where, as with most drug companies, international complexes are involved. Doctors for their part should cooperate more fully with the efforts that the Department already makes to keep the drug bill down, and they might ask themselves whether the high consumption of valium and librium reflects a catastrophic level of anxiety in the population or a too-ready recourse to the prescription of tran-
though
quillisers.
THE LANCET
Unreasonable Profit SOME
ten
years ago, at the time of merger
rumours
affecting two chemical giants, a young man applying for a job with the Patent Office was asked if he approved of the monopoly situations such a merger would create. Certainly not, came the assured reply. But, said the interviewer, granting monopolies is our business. Roche Products Ltd. has near monopolies on two benzodiazepine tranquillisers (and an absolute monopoly on a third) because of the protection conferred by patents granted to its Swiss parent. That is what patents are for-to give, for a restricted period, freedom to reap the rewards of innovation. They say nothing, however, about how big the harvest ought to be. With most products market forces might be expected to keep this under control, but for drugs supplied under the National Health Service these forces act atypically if at all. The consumer in a pharmacological sense (the patient) is protected from any direct burden of payment, and the individual who decides whether A or B is to be prescribed (the doctor) does not have to foot the bill. In this unusual situation different restraints have evolved, and it is the efficacy of these restraints that has been questioned in the Monopolies Commission’s scathing indictment of Roche Prices for chlordiazepoxide and diazepam. The minutiae of this report (summarised on p. 876) are difficult arithmetically and conceptually, and neither the U.K. company nor Hoffmann-La Roche AG in Basle helped their case by their refusal to cooperate fully with the Commission’s inquiries or, earlier, with the Department of Health. However, the main conclusion is disturbingly simple: in calculating the price that Roche Products should pay for chlordiazepoxide and diazepam imported from Switzerland the element of profit for the international group and other charges were grossly inflated. At its starkest the difference being talked about here is between prices per kilogramme in Italy (E9 for chlordiazepoxide and E20 for diazepam) and the Swiss prices of E370 and E922, respectively. And the Monopolies Commission calculates that between 1966 and 1972 the group made E24 million profit from U.K. sales of these two drugs. The largest (and most controversial) element in the huge differences between what the raw chemicals cost to make and the price
Roche Products had to pay is research. No-one is claiming that the E24 million was distributed to The company stated that research shareholders. charges that had to be recovered were twofoldmoney already spent on research on the two drugs, and provision for future developments-and that the U.K. share had to be artifically increased because U.K. drug prices were lower than elsewhere in the world. The Commission did not accept the use of world prices as a factor, but its report offers no general comment about how the research element in the price of a successful drug should fairly be calculated beyond implying that this is a factor of importance more in determining early prices.
If Roche abused its monopoly power as supplier, what of the Department of Health’s power as monopoly purchaser ? The Department’s power is not all that great. There is the Voluntary Price Regulation Scheme, which subjects prices to negotiation in the light of annual financial returns supplied by manufacturers. Roche did not participate in the V.P.R.S., and for two-thirds of the life of their patents prices were not reduced, the company preferring to make cash rebates totalling f:l,600,OOO. A further restraint is the granting of licences to other manufacturers either voluntarily or, as in this case, compulsorily under Section 41 of the Patents Act. But competing brands of chlordiazepoxide and diazepam account for only 1%or so of the sales of the two benzodiazepines, and the Department of Health has not done much to encourage doctors to prescribe the cheaper brands. Roche’s position was hardly affected by these developments. In reserve is Section 46 giving Departments the right to use patented inventions for the services of the Crown. The patents on these two drugs expire shortly, the brand names will still be protected; the Government has already ordered sweeping reductions in the prices of’Librium’ andValium’; and Roche Products, though under no compulsion to do so, would be most unwise in its own interests and in those of the pharmaceutical industry as a whole to refuse to make further cash rebates for past excesses. The problems relating to these two drugs may be resolvable, but the wider questions and the nagging suspicion that Roche’s pricing practices may not differ greatly from those of other companies may not clear so easily. A formula for calculating the research element in " reasonable profit " is urgently needed, especially where, as with most drug companies, international complexes are involved. Doctors for their part should cooperate more fully with the efforts that the Department already makes to keep the drug bill down, and they might ask themselves whether the high consumption of valium and librium reflects a catastrophic level of anxiety in the population or a too-ready recourse to the prescription of tran-
though
quillisers.