Saturday, December 7, 2013

The Truth About the Drug Companies - Book Review

The  Truth About the Drug Companies: How They Decieve Us and What to Do About it is a controversial book from Dr. Marcia Angell. The book tries to expose the big pharmaceutical companies by showing the reader how they generate massive profits.

Summary

During her two decades at The New England Journal of Medicine, Dr. Marcia Angell had a front-row seat on the appalling spectacle of the pharmaceutical industry. She watched drug companies stray from their original mission of discovering and manufacturing useful drugs and instead become vast marketing machines with unprecedented control over their own fortunes. She saw them gain nearly limitless influence over medical research, education, and how doctors do their jobs. She sympathized as the American public, particularly the elderly, struggled and increasingly failed to meet spiraling prescription drug prices. Now, in this bold, hard-hitting new book, Dr. Angell exposes the shocking truth of what the pharmaceutical industry has become–and argues for essential, long-overdue change.



Why Read This book?

Healthcare sector is one of the hottest sectors in the market and I am bullish on the sector going forward. The pharmaceutical subsector is one of the most, if not the most, profitable industry of the economy. The aging populations in the western world, increase in diseases in the populations across the world coupled with rise of newer diseases discovered provide this sector with a bright future. I picked up this book to get a better understanding of how Big Pharma works and generates its profits. This turned into a great read, albeit a bit repetitive where the author goes on case after case to illustrate the industry's operations. Nevertheless, the book provides a rich resource with plenty of references to illustrate such points. 

Takeaways From the Book

  • Big Pharma has HUGE margins. The author shows how a drug that is shown to cost $800M for development really turns out to be approximately $100M.
  • The same drug costs more in the US than other parts of the world because the market can support it.
  • So, why do you think drugs are expensive? Did you say R&D? The pharmaceutical industry spends enormous amounts of its money on marketing and "educating" the public - which is just another way of covering marketing and propaganda costs as R&D.
  • Most diseases follow this path: (1) Understanding the disease; (2) Discover and develop a promising chemical composition to cure it; and (3) Commercial development and marketing.
    1. Understanding the disease: Most research is performed by National Institute of Health (NIH) and the leading universities across the world. NIH is an agency of US Dept of Health and Human Services and is completely funded by the US taxpayers. Big Pharma enters into the picture after a disease is well understood which can take anywhere between a few years to a few decades. 
    2. Discover/Develop a promising chemical composition: It is usually universities and small biotech firms that discover a chemical composition that sounds promising. 
    3. Commercial development and licensing: Big Pharma signs up as licensed manufacturers and distributors taking over from the universities and small biotech firms.
    4. It is at this point that the Big Pharma patents the drug, runs clinical trials in multiple stages and pushes for FDA approval, commercial development and sale to the public.
  • Patents are a big part of the Big Pharma's expense and source of revenue protection. It is an expenses because drugs usually have to be patented before running trials. Its difficult to keep the recipe a secret once its out in the public domain. Once a drug is successfully trialed, the companies push for fast approval from FDA as they have time limits for the exclusivity due to patents, after which generic drug companies can start releasing copy-cat drugs.
  • The me-too or copy-cat drugs need to only show that its effective against placebo not older drugs once patent has expired. Drugs coming off patents usually just remove or tweak the inactive ingredient and get a new patent. Then its just a matter of "educating" doctors and patients of the better drug.
  • Changing a disease condition can create or expand the market for drug manufacturers. The author lists how a new market was created by defining a pre-hypertension for people just under the threshold for the hypertension drugs. Similarly, the cut off for cholesterol has been lowered over the years to expand the market for cholesterol drugs.
  • The book also discloses extremely controversial and shocking testing conditions where the drug companies take up on the US governments offer of extending patents by 6 months when the study includes children. The drug companies have been reported to test drugs to combat conditions such as heartburn, premenstrual conditions etc which do not affect children in any way.

Recommendation

From an investor's perspective, this book does not really provide any direct correlation for how or what drug companies to invest in, but provides a fantastic internal view of how the drug companies markup their products and have grown their influence. If you invest in the healthcare sector, this book is a must read. Even if you do not, it is a great read for a part of the economy and industry that directly affects our livelihood in one way or another. Granted that the book is written to be controversial to generate a buzz and increase sales, and most arguments presented are one-sided, I think its still worth the readers time and money.


4 comments:

  1. Understanding how drug manufacturers work is a good tool to put in my tool bag as an investor. I just listened to the audio sample on Amazon, will have to see if my library carries it. I'm glad you covered the key points so that I can learn a few things even if I can't get my hands on a copy.

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    1. You are welcome, Compounding Income.
      It is an amazing world - the healthcare sector. My portfolio has the largest sector allocation in healthcare and I am trying to learn as much as I can about it.

      Thanks for stopping by. Best wishes.
      R2R

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  2. Does it cover about the FDA as well? They are not exactly kosher. Ever noticed how every top level employee at the FDA ends up in pharma industries?

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    1. No, thats one thing that the author seemed to miss out on. Although I am quite familiar with that aspect of the FDA. I watched a couple of food documentaries recently where the focus was on the food standards and how the FDA authorities are somehow tied to the big corps either in the food industry or the pharma industry. I guess living in a free market and capitalistic society has its cons on certain things in life.

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