Was Senator Sanders at the Hearing to Hear – or to Be Heard?

The U.S. Senate Committee on Health, Education, Labor and Pensions (HELP) held a hearing last Wednesday on the price of prescription drugs. For the opening panel, Senator Sanders invited CEOs from three pharmaceutical manufacturers and three subject matter experts: Joaquin Duato, CEO, Johnson & Johnson; Robert Davis, CEO, Merck; Chris Boerner, CEO Bristol Myers Squibb; Peter Maybarduk, J.D., Access to Medicines Director, Public Citizen; Tahir Amin, LL.B., CEO, Initiative for Medicines, Access & Knowledge; and Darius Lakdawalla, Ph.D., Director, Research, University of Southern California Schaeffer Center.

Congressional hearings are supposed to be a way for Congress to gain information toward legislation which they do through questions posed by members of the Committee. However, this hearing was determined by many to be just a political maneuver to brow beat the drug manufacturers. Senator Sanders, the Committee chair, an Independent who caucuses with the Democrats, called this hearing and determined who would appear on the panels (something he can do due to the Democrat’s majority in the Senate). Senator Sanders’ opening remarks contained charts and graphs that framed the manufacturers as greedy capitalists who cared little about America’s patients. It certainly looked like a brow beating to me.

Senator Cassidy, a Republican, the Ranking Member (the title given to the committee leader of the minority party) voiced his opinion in his opening remarks that this was in fact a political maneuver. Senator Cassidy said he wanted to be clear that this was NOT a hearing to find legislative solutions, it followed a formula that, among other things, punished corporations for being successful under capitalism and was just a chance to call in CEOs for a public verbal “stoning”, pick out sound bites and proceed on. Senator Cassidy was rightfully concerned that they were there, not to obtain meaningful solutions, but to score political points. He went on point out that Senator Sanders did not seek his input on who would be best to testify at the hearing, an indication of its true purpose.

So, what happened at the hearing? It lasted 3 hours and 40 minutes and I watched every minute of it. Click here, and you too can be minimally entertained. The Democrats worked their best to beat up the CEO’s, who pretty much stuck to their guns that Americans get quick access to new drugs without the barriers to access of other countries and that their companies are at risk for the large cost of research and development coupled with the high risk of failure in the discovery of new drugs. The CEOs also pointed out the billions of dollars they spent on direct to patient programs that helped people who couldn’t afford their medicine. The back and forth continued in that frame, and I’m not going to attempt to detail the back and forth. There were, however, two issues that I do want to talk about.

First, Senator Sanders used the word “monopoly” in referring to the manufacturer’s business operation. These words were echoed more strongly when Peter Maybarduk testified. He indicated that the patent exclusivity granted by the Hatch-Waxman Act gave the drug manufacturers a monopoly that went against the very capitalistic principles that Senators like Romney and Paul had discussed during the hearing. He railed on about how the manufacturers used subsequent patent approvals that lengthened the exclusivity period for their drug. It didn’t seem like Mr. Maybarduk really understood how important the Hatch-Waxman Act has been for our healthcare. First, one of the most important parts of the Hatch-Waxman Act (if not THE most important part) was the regulations that encouraged and streamlined the approval of generic drugs, the biggest single contributor to lower drug prices. Before Hatch-Waxman only 35% of the brand name drugs had a generic competition, in 2012, 84% had a generic counterpart. The Act also granted a patent exclusivity period that opened the flood gates to investment in the innovation of new life enhancing and life saving drugs. This “monopoly” was the driving force behind these miracle drugs. Hatch-Waxman also encouraged the granting of follow-on patents, recognizing the fact that many new uses of a drug are discovered by continuing to do research after the drug is approved. If follow-on patents were granted, whose only purpose was to extend the exclusivity period of the manufacturer, then fix the broken patent agency, don’t throw the baby out with the bath water.

The other issue that stuck in my craw (I don’t know where that saying originated but it just seemed to fit here) was the oft mentioned, seemingly evil practice of stock buybacks and paying stock dividends. It seemed that Senator Sanders would have the CEOs on the panel, rather than give their stockholders dividends and enhancing their stock price through buybacks, should instead use the money to lower the cost of prescription drugs. This is an obvious attempt to create a sound bite with a statement that ignores the basic economic realities of a public owned company. If the CEO ignores their stockholders, who are the public, essentially you and me, no one will invest in them, and the money needed for investing in the next lifesaving discovery will dry up. Rather than greedy corporate thieves, as portrayed by Senator Sanders, the CEOs are rewarding investors so they will continue to risk their money on future medical innovation. The fact of the matter is, even if the CEOs would lower the list price there is no guarantee that the money would ever get back to the patient.

One more thing to add, according to MarketWatch:

“Stock-market data show that over the past one, three, five or 10 years, you were much, much better off in a simple S&P 500 index fund than you were in these stocks. Over the past decade, these three “Big Pharma” stocks have, on average, produced just three-fifths of the total returns of the S&P 500.”

It seems to me that a business that has a monopoly and can demand any price for their products ought to be a raging success. Something doesn’t add up here.

It’s my hope that you can wade through all the posturing and sound bites and recognize that more government control and price fixing is not the answer. Well thought out guidelines that reduces the perverse incentives and encourages fair competition is what will reduce the burden to those who are really at the center of our healthcare, the patient.

Best, Thair