US politics can't kick drugs habit

Pharmaceutical firms are public enemy No 1 in the race for the White House

If you are planning to run a US presidential campaign, there are three things that you've absolutely got to have. Limitless cash, plenty of coloured balloons, and a huge, faceless force of evil to blame for all the nation's problems.

If you are planning to run a US presidential campaign, there are three things that you've absolutely got to have. Limitless cash, plenty of coloured balloons, and a huge, faceless force of evil to blame for all the nation's problems.

Since the demise of the cold war, both the Republicans and the Democrats have been desperately casting about for someone to fill that third category. The big pharmaceutical companies are nervously starting to realise that, as George W Bush and Al Gore face off in the 2000 White House race, they might be that scapegoat.

In fact, the political practice of "drugs-bashing" has already begun, with both parties jostling to convince the electorate that they can be the toughest with the pharmaceutical companies on the country's behalf. The effect so far has been confusing to most voters, but with October fast-approaching, the two main issues of the debate are now becoming clear.

The first of these centres on the future of the Medicare system, and how it can be reformed to provide drugs for those that need them. The other is about the absolute pricing of drugs in the US, and whether any government should step in and clip the drug-makers' wings.

As one Wall Street analyst explained: "For a while now, pharmaceutical companies have been staring down the barrel of a gun. This election was always going to see Medicare as a political battleground, and it's hard to see that any of it can be good news for the industry."

The Medicare question is already highly politicised, and has been since 1993. Back then, Bill Clinton's quasi-NHS model was America's first real glimpse of a system where the state would take responsibility for the healthcare of some of its members. To a rapidly ageing population faced with crippling bills for treatments and medicine, the idea looked attractive. To the drugs companies, it did not.

Not only is the US the world's biggest market for drugs, consuming 40 per cent of the world's output, but it is one of the very few that allows free pricing. At the time of the Medicare proposal, many investors assumed that this spelt the end of the golden era for pharmaceuticals, as Washington would almost certainly use its muscle to force drugs companies to lower their prices. The effect was an average 35 per cent slump in the values of all the big drug-makers.

As it turned out, the outcome was far less severe. Since 1993, Medicare has undergone a number of minor changes, but none has really had the expected bite. Now, both the Republicans and the Democrats are keen to peddle their new millennium versions of Medicare reform.

As analysts at HSBC put it: "The problem everyone wants to solve is a quirk in the system. Thirty-eight million Americans are retired, but even if an individual's healthcare is covered, the cost of drugs is not. This means that those who can least afford it end up meeting the costs of their ill-health from their own pockets."

The Democrats, who originally proposed Medicare, believe the answer lies in more intervention by the government. Al Gore will campaign on the basis that the state will bear an increased proportion of the drugs burden, and will ultimately achieve the goals set out under President Clinton.

The Bush camp, however, prefers that any reform should come via state promotion of the private sector. Effectively, Uncle Sam would help out with paying the premium on an individual's private medical insurance plan.

Although the Republican rhetoric is much closer to what they would like to see, the drugs companies do not find either proposal particularly attractive. Mr Gore has already expressed his distrust of the industry with a recent speech alluding to "excess returns".

Drug-makers see the Democrats' solution as an inevitable precursor to Federal pricing controls. Even if the state itself does not force prices down, the reform would hand clinics and hospitals the power to do so.

But the Republicans' offer is not much more appealing. If benefits for old people came in the form of payments to insurance companies, the biggest among them would eventually also achieve the weight to put serious pressure on the drugs companies.

Both parties, although thoroughly warmed to the popular appeal of hitting out at the pharmaceutical giants, realise that a degree of tact is required. Republicans and Democrats are swift to point out that any reforms to Medicare would boost the actual number of drugs bought by the US. What the companies would lose in price, they would make up in volumes.

But the Medicare debate is played out against the background of more fundamental worries for the pharmaceutical industry. It has got used to making more than half of its profits from sales in the US, and in the words of Marc Booty of ABN Amro, could now face a "doomsday scenario".

Not only do the various Medicare proposals suggest price pressure is around the corner, but legislation passed about a month ago could have paved the way for the US market to allow parallel importing.

If that became the norm, US companies could find themselves undercut by wholesalers bringing in their products sold at lower prices in countries with strict state controls on drugs prices. The effect both in terms of lost revenues and control of the market would be devastating for the drug-makers. The politicians are therefore expected to capitalise on the chaos by coming up with price control solutions that the industry will jump at, rather than accept the alternative.

Jeff Trewhitt, a spokesman for the US association of drugs companies, Pharma, sees political manoeuvring as short-sighted. "We all want to find a solution that ensures that drugs are getting to the people that need them. At the moment, though, there are just too many law-makers looking around for easy answers. This election campaign will be very tough for the industry because drugs pricing has suddenly become such a sensitive political fight."

But in spite of the debate, the pharmaceutical companies have not yet converted their worries into actions. The only practical response so far was seen earlier this year when the big-hitters like Pfizer, Glaxo Wellcome and Eli Lilly joined forces to pay for a run of television adverts. In them, the sinister face of "big government" kept popping up in medicine cabinets, underlining the problems that too much intervention would cause.

Over the past few weeks, however, the companies are realising that the election campaign may not be something they should suffer as mere spectators. Commenting on the political furore, Jean-Paul Garnier, the chief executive of SmithKline Beecham, agreed that although it was not a disaster scenario, the election would be particularly bad for the industry, adding that: "a pound of flesh will be extracted one way or another".

If things get really bad, the pharmaceutical companies will probably play their greatest trump card. Their argument is simple: if any reforms hit the earnings streams, they will not be able to keep up the flow of drugs.

The industry spends an average 18 per cent of its income on high-risk product development. Every new drug costs an average $500m (£350m) to generate, but after that only one in five makes it past clinical trials. If, they argue, there is less cash to invest in the pipeline, the general public will be the eventual losers as fewer new treatments will be invented.

Both halves of the US political machine are delighted to have found a bogeyman to channel the nation's wrath into. "It's just a shame for the pharmaceutical industry the Red Peril and the cigarette companies are spent forces these days," observed one industry expert.