[Congressional Record Volume 141, Number 63 (Wednesday, April 5, 1995)]
[Senate]
[Pages S5180-S5182]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




              COMPETITION AND THE PHARMACEUTICAL INDUSTRY

  Mr. PRYOR. Mr. President, a year ago we were in the midst of a 
momentous debate in this institution over the reform of our Nation's 
health care system. At that time, one of my concerns was that dramatic 
changes were taking place in the prescription drug marketplace. A 
number of prescription drug manufacturers had begun to experience 
competitive pressures arising from the growth of generic drugs and 
managed care. But disturbingly, one of their strategies was to coopt 
or, if possible, eliminate the sources of that competitive pressure.
  In the days that have followed, we have seen some extraordinary 
changes in the drug marketplace. There has been a wave of multibillion 
dollar mergers and acquisitions which, according to a recent issue in 
the Wall Street Journal, ``promises to create industry giants.'' This 
remarkable consolidation has profound consequences for American 
consumers.
  A few days ago, in fact it was April fool's day to be exact, the 
Associated Press reported that corporate merger activity broke all 
records last year and extended its frenetic pace into the first quarter 
of 1995--with the drug industry leading the way.
  Mr. President, in the past 3 months alone, the drug industry by 
itself has carried out some $23 billion in mergers and buying out their 
competition worldwide.
  We read just the other day, for example, about Glaxo's $14 billion 
hostile takeover of Burroughs Wellcome, both major drug giants. This 
deal will create the world's largest pharmaceutical company, in the 
wake of other giant deals like Hoechst's anticipated $7.1 billion 
purchase of Marion Merrill Dow, American Home Products' $9.7 billion 
buyout of American Cyanamid and Hoffmann-La Roche's $5.3 billion 
acquisition of Syntex.
  Brand name companies have also been investing heavily in 
biotechnology, generic and over-the-counter drug companies. Ciba 
purchased a $2 billion stake in Chiron, and SmithKline Beecham recently 
just bought Sterling for $3 billion. Hoechst spent a paltry half a 
billion dollars on a generic company called Copley.
  These are remarkable figures, Mr. President. And if we simply add up 
the cost of just a sampling of some of these recent mergers and 
acquisitions, we will find that they total $54 billion.
  In the last 15 months, $54 billion has been spent by giant 
pharmaceutical companies buying up and acquiring their competition. 
That is an interesting figure when we compare it to the research and 
development that is planned by the entire prescription drug industry 
for the year 1995: $14.9 billion 
[[Page S5181]]  spent on research compared to $54 billion spent by the 
major pharmaceutical companies in acquiring their competition since the 
beginning of last year.
  That is three and a half times what the entire industry is going to 
spend in research in 1995. This is an extraordinary difference. One 
would think that such large deals would leave these companies either in 
debt or strapped for cash. Mr. President, that is not so. These 
companies are so profitable and their pockets are so deep, Wall 
Street's Standard & Poor's concluded just a few days ago that the 
industry's ability to ``generate cash in excess of ongoing needs is 
likely to continue.'' And their generating that cash is going to 
continue because the consumer in the United States is going to continue 
paying the highest drug prices of any major country in the world today.
  This is a far cry from the recent past. We may recall that just a 
year ago the industry was sounding the alarm about declining profits 
and research cutbacks. These companies claimed that they were under 
siege and out of favor with investors. A year and a half ago, these 
same companies warned that research would be choked off by health 
reform.
  This is a statement by Merck in 1993: ``R&D will fall at least $2 to 
$3 billion over the next 5 years.''
  Well, today, Mr. President, we are hearing a different story. This 
year, Bear Stearns says earnings growth will be ``the best we have seen 
in years'' for the drug industry. They are out spending $54 billion on 
mergers and we have to wonder how serious the threat to research ever 
was.
  Well, Mr. President, why are they spending all of this money to buy 
their competition? Why are these mergers taking place? Let us look a 
little deeper.
  Last month, the CEO of Glaxo put it quite simply. His company is 
trying to do ``nothing more than to wrench market power back from the 
administrators and the distributors who now hold the health care purse-
strings.'' His company is responding to competitive pressures by 
focusing on its research portfolio.
  But what if the brand name companies owned those administrators? What 
if the brand name companies owned those distributors? What if they not 
only wrench that market power back--they buy it outright? Who will hold 
the health care purse-strings at that time?
  This is exactly what we are facing today in the United States. The 
drug industry's acquisitions have not been restricted to brand name or 
biotechnology companies. They have also included the country's largest 
pharmacy benefits management companies. We call these companies, PBM's. 
We are going to hear a lot in the future about PBM's.
  What is a PBM? A PBM is hired by HMO's, by health plans, by major 
corporations, and by self-insured companies to administer their 
prescription drug programs. PBM's act as a buying agent in negotiating 
with the drug manufacturers, seeking deep discounts for their clients 
and in developing cost-saving formulas for their covered patients. They 
may also deliver medicine to patients through selected pharmacies or 
through mail-order.
  In rapid succession, these PBM's have been snapped up by some of the 
biggest drug companies in the world. Only 2 years ago, April 1993, the 
PBM market was completely independent of the pharmaceutical 
manufacturers. Only 24 months later, in April 1995, SmithKline Beecham-
Diversified, Merck-Medco, and now Eli Lilly-PCS would dominate 80 
percent of the PBM market.
  This is vertical integration, as clear a case as I have ever seen. 
Merck paid $6 billion for Medco Containment Services, one of the 
largest PBM's and distributors of drugs. SmithKline Beecham bought 
Diversified Pharmaceutical Services for $2.3 billion. Today, Eli Lilly 
is, as we speak, ready to close on acquiring a company called PCS, the 
Nation's largest PBM company, for $4.1 billion.
  The prescription drug marketplace is being revolutionized. Before too 
long, there may only be a handful of major drug companies left. The 
major manufacturers of prescription drugs in this country are soon, Mr. 
President, going to have a lot less competition.
  This kind of vertical integration between large manufacturers and 
distributors, however, is unprecedented. We can see what has happened 
in the last 24 months. It has had very different implications for 
consumers than the horizontal mergers and acquisitions so prevalent in 
today's headlines.
  If Lilly is permitted to purchase PCS, the three largest PBM 
companies will belong to brand name drug companies that research, 
manufacture, and distribute drugs. These three PBM companies serve 94 
million covered lives--80 percent of the total PBM market. A handful of 
drug companies will wield tremendous influence over which drugs are 
used by millions of American citizens. They will have the raw power--
and they will use that power--to restrict access to needed medicines. 
They will possess a large share of the mail order drug business. They 
will exercise decisive leverage over their competitors' access to the 
marketplace.
  This is why, Mr. President, these PBM's are being bought by the major 
manufacturing firms. They provide market power to a select few 
companies, precisely when the market has shifted beneath their feet.
  Owning a PBM can switch sales to your own drugs. Owning a PBM can 
counteract the bargaining power of managed care. Owning a PBM can 
determine which generics you sell: your own or your competitors'. Mr. 
President, in short, ownership of PBMs by brandname manufacturers 
destroys all competition.
  The brand name companies now admit it. In 1993, Merck said it 
expected to sell more drugs to Medco after it bought out the PBM.
 Merck's CEO at that particular time felt the company had to be in a 
position where ``We can be sure that we control the flow of our own 
drugs.'' In fact, at one point last year, Lilly and PCS had agreed to 
make PCS's previous owner, McKesson, the sole distributor of Lilly 
drugs.

  This is growing evidence that these manufacturer-owned PBM's are 
doing what one would expect. They may no longer act as honest brokers. 
They may now be acting in the interests of their parent companies, not 
their clients. They may be favoring their parent companies by switching 
patients from one drug to another without explicit regard to their 
health.
  Mr. President, these charges have been filed with the Federal Trade 
Commission. The FTC has heard from a wide spectrum of citizens, 
consumer groups, trade associations, manufacturers, distributors, 
Federal agencies, and Congress on this issue. The FTC has even heard 
these concerns from the brand-name companies who do not own PBM's or 
who are not about to own PBM's. As a result, the Federal Trade 
Commission is still reviewing the Lilly-PCS proposed acquisition and 
has reopened its investigation of the Merck-Medco and SmithKline-
Diversified deals.
  I have written on two occasions to the Federal Trade Commission about 
these concerns. On the first occasion, I was joined by my former 
colleague, the distinguished Senator from Ohio, Senator Howard 
Metzenbaum, who then chaired the Antitrust Subcommittee of the Senate 
Judiciary Committee. Our feeling at that time was that the Lilly-PCS 
merger would lay the capstone of an uncompetitive marketplace. There 
were already indications that the other two deals had eroded 
competition.
  In November, the FTC confirmed our suspicions and proposed a consent 
order which established strict conditions over the Lilly-PCS deal. In 
the next several weeks, the FTC will either approve the consent order, 
revise the consent order, or seek an injunction blocking the 
acquisition.
  The FTC is not alone in its scrutiny of these manufacturer-PBM deals. 
It is the Food and Drug Administration's responsibility to ensure that 
prescription drug marketing is fair and accurate.
  When the Lilly-PCS deal was the subject of public comment, the Food 
and Drug Administration at that time expressed grave concerns over the 
potential for new forms of violative marketing and promotion. In fact, 
I recently read in the New York Times that the Food and Drug 
Administration has now had to warn Merck, SmithKline Beecham, and Eli 
Lilly ``not to put pressure on doctors to prescribe their drugs 
[[Page S5182]] for unauthorized treatment or to withhold sufficient 
disclosures regarding the risks of adverse side effects.''
  What does this mean? It means that if you are one of the millions of 
Americans covered by these PBM's, your doctor may no longer be 
receiving impartial advice about which drugs to prescribe to you.
  Let me raise another example of how improper marketing can degenerate 
into inappropriate care.
  Two months ago, Eli Lilly & Co. participated in a depression 
awareness program at a local high school. This story was published in 
February by the Washington Post. While sponsoring educational programs 
might be a laudable endeavor, the students in this particular school 
and the teachers were furious with the company for ``turning an 
educational program into an extended commercial.''
  What was the particular drug that the drug company was pushing on the 
students? Mr. President, 1,300 students listened to company 
representatives pitch their drug, and then they received pens, pads, 
and brochures embossed with the product name. The product that we speak 
of is, of course, Prozac.
  Afterward, the principal felt that Eli Lilly ``shouldn't be pushing 
their drug program, especially not to children.''
  One of the students explained, ``I was upset that I had to sit in an 
assembly for 45 minutes and listen to a plug for Prozac.''
  Her mother added, ``The message my daughter came away with was pop a 
pill and everything is going to be all right.''
  Let me say that Eli Lilly & Co. did apologize. They admitted their 
conduct was inappropriate. But imagine, if you can, the potential for 
such abuses when a manufacturer not only makes a drug, but they also 
market that drug, they advertise that drug, they influence HMO's to buy 
that drug, they collude with their PBM subsidiary to win contracts, 
and--if they have not gotten your business yet--they encourage the 
doctors with incomplete information to switch you, the patient, to 
their product.
  To add insult to injury, the consumer may also have to pay more for 
their prescription drugs. In our market economy, we all know that if 
there is no competition, we pay higher prices. Competition brings down 
prices. Competition is good for the consumer. Today, the major drug 
companies of America are buying up their competition and the consumer 
is going to foot the bill.
  If the PBM's have a vested interest in their owner's products, they 
will not necessarily be negotiating the best deal for their patients--
and this is taking place in the midst of the industry's best pricing 
environment in years. Look at what Wall Street is thinking. Analysts 
expect drug price increases to be ``faster in 1995 than in the 
preceding 4 years.''
  I am deeply concerned about the impact of these acquisitions. There 
is growing evidence that the PBM companies no longer act as independent 
or honest brokers for their clients. They are going to be acting as 
brokers for their parent companies who pay the bills. This can only 
lead to inappropriate health care and to higher prices for consumers, 
who are already paying some of the highest prescription drug prices in 
the world.
  The FTC has now demonstrated due diligence in investigating the 
Lilly-PCS deal. The FDA has also signaled its concern over these 
marketing abuses. Consumers will undoubtedly benefit from this 
vigilance.
  In a textbook-perfect market, competition prevails and the consumer 
benefits without such scrutiny. But in the real world's imperfect 
markets, we must sometimes intervene. That intervention is necessary 
now to guarantee that true competition takes place. It is my hope that 
we can prevent the anticompetitive practices which I have just 
described this afternoon.
  Mr. President, I hope that we realize what is happening in the drug 
marketplace in the spring of 1995, and I only hope that we are not 
going to act too late.
  Mr. President, I see another colleague seeking the floor. I thank the 
Chair for recognizing me. I thank the Senator from Pennsylvania for his 
patience. I yield the floor.
  The PRESIDING OFFICER. The Senator from Pennsylvania.
  Mr. SANTORUM. I ask unanimous consent to speak as in morning 
business.
  The PRESIDING OFFICER. Without objection, it is so ordered.

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