Friday, July 01, 2005

Pharmaceutical Follies, Part II

Over 2,000 years ago, an individual was born who would become famous as a lawyer, philosopher, statesman, Senator, the last free Consul of Rome, and one of the finest orators who ever lived. His name – Marcus Tullius Cicero. An historian wrote of him: “It is no exaggeration to say that the most brilliant era of Roman public life was ushered in by Cicero and closed by his death—he stood at its cradle and he followed its hearse.” He is better known than most of his contemporaries by virtue of written records consisting of some 60 speeches and over 900 letters. He was so revered that 100 years after his death, Plutarch, the famous biographer of the ancient world, wrote a biography titled, The Life of Cicero.

Having served in a number of high government positions, as well as in the Roman Senate, as a politician himself, Cicero gained a rather cynical opinion of that breed. He observed that, “Never was [there] a government that was not composed of liars, malefactors and thieves.” He was right since he was subsequently assassinated by political opponents.

Cicero was hardly the only historical figure who held a disparaging view of politicians. Thomas Jefferson wrote, “[Political] offices are as acceptable here as elsewhere, and whenever a man casts a longing eye on them, rottenness begins in his conduct.” Napoleon Bonaparte once said, “In politics, absurdity is not a handicap.” Rutherford B. Hayes, our 19th president stated, “Nothing brings out the lower traits of human nature like office seeking.” And more recently, Ronald Regan’s unforgettable remark: “Politics is supposed to be the second oldest profession. I have come to realize that it bears a very close resemblance to the first.” Mark Twain made several comments: “There is no distinctly native criminal class except Congress.” Another gem was, “Also reader, suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself.” Will Rogers was just as acerbic when he said, “A politician is just like a pickpocket; It’s almost impossible to get him to reform.” However, his classic comment, made over 70 years ago lives on, more relevant and applicable today than ever before, “We have the best Congress money can buy.”

If you don’t believe the immediate relevancy and implications of Will Roger’s observation, here is Senator John McCain’s view on the subject: “I don’t think its bribery: I think its extortion. Bribery, you know, is when the person that’s giving the money does it voluntarily. What it is in Washington is extortion because they all ask for the money.”

Certainly, a good part of the current corrupt environment that exists in our nation’s capital can be summed up by an old adage that describes a custom originating in Ireland. During joyous religious celebrations, the events included singing, dancing, and music, often jigs and hornpipes. An individual designated as the leader would hold a tin plate in his hand and with it he would auction off the choice of music. Each man would bid for his favorite hoping to please his partner. The one who placed the highest bid, put his money (that went to the musicians) on the plate, and thus designated the tune. Thus the truism, “He who pays the piper calls the tune.”

It would not be inconsistent to apply that aphorism to the indisputable intrigue and maneuvering that occurs daily (at least when Congress is in session) amongst K Street lobbyists and members of Congress. If you require a scorecard to sort out the players, “He who pays the piper and calls the tune” refers to the legion of some 14,000 Washington lobbyists. The pipers of course, are the members of Congress who play the “tunes” requested by the lobbyists in the form of legislation that benefits their clients. Although the use of this type of political influence has been an integral part of the process, perhaps from the beginning of our nation’s history, it has recently been fine tuned to an efficacy level never previously imagined.

In order to better comprehend the full nature of the pharmaceutical industry’s ability to maintain its number one position in the annals of corporate profit history, an understanding of the inner workings of the new and revised structure of the lobbying system is essential. The best review of the dramatic changes that have taken place recently are to be found in the June 6th edition of the New Republic. Here is a portion of the article’s opening paragraph: “When Tom DeLay became majority whip in January 1995, he and [none other than] Grover Norquist, the founder of Americans for Tax Reform, initiated the K Street Project, a plan to force lobbyists to hire only Republicans and raise money only for Republican candidates. It was based on the assumption that monopolizing political contributions from business, Republicans could preserve the congressional majority they had just won. But DeLay had his own stake in the project. By controlling the flow of these contributions, he could enhance his own power within the party.”

If this was indeed the plan, it has probably succeeded well beyond DeLay’s wildest dreams. However, the article then describes how more recently DeLay took the K Street Project one step further. “He didn’t just get lobbying firms to hire Republicans; he got them to hire his former staff. Through these staffers, DeLay created a network of lobbyists, political consultants and conservative activists who did his bidding. When DeLay staffers left his office for K Street, they continued to represent his interests as well as their clients.” The article maintains, “the result was the rise of a political machine reminiscent of New York’s Boss Tweed, or Mississippi’s Theodore Bilbo.”

Incidentally, it is not only DeLay’s former employees who have turned lobbyists, but his peers as well. It is estimated that 240 former members of Congress and federal agency heads, as well as 2000 other senior officials are now lobbyists, using considerable influence with former friends and associates, and garnering salaries they could only fantasize about in their former positions.

Of those numbers, 29 are DeLay alumni, representing 350 firms and institutions including (according to New Republic) “the bulk of the country’s leading energy firms, the giants of the finance and technology industry, the airlines, the auto manufacturers, the tobacco companies, and—Oh yes!—the largest health care and pharmaceutical companies plus the Pharmaceutical Research and Manufacturers of America (PhARMA).”

Obviously, the lesson learned here is that you can’t hire just any lobbyist to advance your agenda, That’s why, according to the New Republic, “In 2003, when the pharmaceutical companies wanted a prescription drug bill that would not force them to bargain with the government over prices, or to compete with import drugs, they worked through a broad coalition organized by Hirshman [a former DeLay staffer]. The Pharmas also hired five other former DeLay staffers to lobby, including three from Buchan’s [DeLay’s former chief of staff] Alexander Strategy Group. As further insurance, pharmaceutical companies also contributed $106,000 to DeLay’s reelection campaign.

There you have it folks! A lesson in how the American Congressional democratic process really works. There’s much more, but you get the idea. Of course, that’s not quite the guiding principles we are holding up as a panacea to the rest of the world, but hey, think back to what Cicero and others said about politicians.

A more recent lobbying effort resulted in a piece of legislation that few are even aware of and even if you did read about it, the ramifications, especially as it affect the pharmaceutical companies, is virtually unknown. With a most appealing title, certain to resonate with every logically minded citizen, the underlying impact of the legislation is totally hidden. How can anyone argue against the “American Job Creation Act,” signed into law by President Bush in October 2004? The more appropriate and realistic title should have read, “The Foreign Tax Giveaway to Big Pharma Act.”

In the past, the tax law required that all profits from foreign subsidiaries be taxed at a 35 percent rate when these profits were returned to the U.S. Most companies have avoided this tax by merely keeping those profits overseas. The new act encourages the repatriation of profits by reducing the tax rate from that 35 percent to the astonishingly low rate of 5.25 percent. Assumedly the differential would be invested in operations and facilities that would create new jobs. The major beneficiaries of this law will be—ta dah!—the pharmaceutical companies, since, as you will soon see, they derive more of their profits from overseas operations than any other industry. Yet, despite its intent to repatriate at least $28 billion, thus saving over $8 billion as a result of the act, in April, Pfizer announced it would cut its annual costs by $4 billion over the next three years, undoubtedly cutting, not creating jobs in the process.

The pharmaceutical companies generate the bulk of their profits (or so they maintain), from their foreign operations. These are spread from Ireland (throughout Europe and the Orient) to Singapore. The publicity from this new legislation has focused a spotlight on a not so surprising element that reveals the obsession with profits that dominates the pharmaceutical industry. An article in the New York Times compared the domestic and overseas sales revenue to the profits declared in 2004 by six of the larger drug companies. See if these numbers sound credible to you.

Combined U.S. sales revenues for the six companies (Pfizer, Johnson & Johnson, Merck, Bristol Myers, Wyeth, and Eli Lilly) were 98.7 billion. Overseas revenues were a bit more than half that figure at $51.9 billion. Yet, combined U.S. profits were a mere $9.9 billion compared to a whopping $28.8 billion for the overseas operations. Is it credible to believe that a profit margin of some 56 percent can be produced from (lower) foreign sales, but only 10 percent on (higher) domestic sales? These metrics are especially problematic when viewed from the perspective of the significantly higher prices (the highest in the world) charged for drugs in the U.S. compared to prices in foreign countries.

If you remove Johnson & Johnson from the picture (since a large part of their revenues are derived from non-pharmaceuticals), the numbers become even more incredulous. Domestic profits drop to $2 billion on $70.9 billion in revenue or a mere 3 percent, while foreign profits at $23.9 billion on $32.3 billion of revenue, generate a mind boggling 74 percent. In any event the tax ploys resulting in these implausible statistics enabled the six pharmaceutical companies to pay a mere $6 billion in federal and state taxes in 2004, a fraction of their worldwide profits of $43 billion. (This number differs from the above because Wyeth claims to have lost $3 billion on its domestic operations.)

Why does the IRS allow such blatantly obvious favoritism? According to H. David Rosenbloom, director for the international tax program at NYU Law School, “The law is complicated, but what’s going on is less complicated. They’re doing everything they can to maximize their profits in Ireland [and elsewhere overseas] and minimize the profit in countries where the sales occur. While it is possible for the government to challenge the way the companies allocate their profits internally, Rosenbloom says the companies have usually been able to defeat the IRS. “There’s a limit to what they [IRS] can do because these cases are huge. They’re very expensive.”

Of course Congress could quickly end this iniquitous example of how the industry maintains its number one profit position. But that would not only upset the relationship between the members of Congress and the K Street lobbyists, it would also invalidate Cicero’s opinion of politicians. We wouldn’t want to negate beliefs that have survived so fittingly for over 2,000 years—or would we?

Next month, Part III, the last of this series, will cover three books that were recently reviewed online by American Scientist. It said in part, “In [these] books, the sort of moral opprobrium once directed against Big Tobacco is aimed squarely at the pharmaceutical industry, along with its legions of lobbyists, the politicians awash in its campaign contributions and the doctors it has bought, free meal by free meal, junket by junket, free sample by free sample, and trinket by trinket.” Is that the same political process we were brought up to think of as “The American Way?”