San Jose Mercury News Monday March 1st 1993 PRESCRIPTION FOR CONFLICT Besieged drug makers say president's attacks stem from politics, not economics By Tom Schmitz Ask Paul Freiman how it feels to be chairman of the Pharmaceutical Manufacturers Association these days, and he'll tell you it's a lot like piloting the Hindenburg. "To paraphrase the captain, 'Is it hot in here, or is it just me?'" quipped Freiman, who's also chief executive of Palo Alto-based Syntex Corp. "We are feeling the heat. And it's causing a great deal of consternation." That heat is coming from Washington, where President Clinton recently denounced drug companies for "shocking" prices and excessive profits. Two weeks ago, he added more fuel to the fire by proposing a sharp cutback in a federal tax break drug makers receive for making their products in Puerto Rico. Drug company stocks- once considered among the safest buys on Wall Street- have plummeted. And the industry fears its profits may be next. Clinton is already pressuring manufacturers to limit price increases on prescription drugs, and some expect him to call for government controls as part of his health care reform package. While the president's broadside has resonated with the public, pharmaceutical companies are crying foul. They say the White House has unfairly singled them out from the rest of the medical system as a way to create popular support for Clinton's programs. Instead, they argue their products should be regarded as part of a solution to the nation's health care woes, not the cause. As chairman of the drug makers' association, Freiman has become the head salesman for the drug industry's point of view. But he complains he hasn't been able to get his most important customer to even answer the door. "What we've seen is the demonization of our industry and the inability to speak to the president, which is very frustrating," said Freiman. "There is a political equation here we have been caught up in. It may play well on the hustings, but I don't think it will help solve our problems." Still, while drug makers are annoyed at being cast as villains, they have no desire to escalate conflict. "Getting into a fight with the president of the United States means we are the clear loser," Freiman said. "What we would like to do is educate, not fight." So, like Clinton, pharmaceutical companies are taking their case directly to the people. P. Roy Vagelos, chairman and chief executive of Merck & Co., has taken out big ads in major newspapers to rebut accusations that his firm broke a pledge to control prices, and endangered children by overcharging for vaccines. "We need a search for truth, not scapegoats," Vagelos wrote. As the pharmaceutical industry sees it, the truth is this: The price of drugs reflects not corporate greed but high costs of research and development. And while a bottle of pills may appear expensive, it is a bargain compared to surgery and hospital care it can replace. If the industry's profits seem height, it is because each successful drug must pay for dozens of others that die in the lab. Regulating prices would make it harder for companies to recover what they spend, giving them less incentive to search for new medicines. What's more, pharmaceuticals now account for only 7 percent of total health care costs, down from 13 percent in 1965. Meanwhile, U.S. drug makers have become some of the nation's most competitive manufacturers, posting positive trade balances and employing thousands of skilled workers. Critics dispute this, however, saying the companies spend more on promotion than research, avoid risk by acquiring compounds developed by others and too often create "me-too" copies of existing drugs instead of exploring new treatments. But Freiman and his fellow drug executives aren't budging. Rather than a long-overdue come-uppance for an industry run amok, Freiman sees the attacks as the result of poor public relations. "I think we haven't sold what we do very well," he said. The pharmaceutical industry has weathered similar political storms in the past. In the late 1950s, Sen. Estes Kefauver held hearings on drug prices. And while several bills to control them have been proposed to Congress, none has ever come to a vote. There are signs this time may be different. The pharmaceutical industry now ranks as the most profitable legal business in America, measured by return on equity. And rapid price rises in the 1980s, when the cost of drugs climbed at a rate three times faster than inflation, have proven hard to defend. New hearings, led by Sen. David Pryor, who represents Clinton's home state of Arkansas, have demonstrated that American drug makers consistently charge more for their products in the United States than they do overseas, where prices are often regulated. And some political backers have grown skeptical of company claims that high domestic prices are indispensable to the industry's health. As a result, drug companies are scrambling to offer their own policy medicine- before Washington comes up with something they can't stomach. Fearful of price controls, eight of the largest manufacturers have already agreed to limit their prices increases to the rate of inflation. Freiman says he would favor going a step further by making those promises enforceable. If a company raised its average price beyond the Consumer Price Index, the government could either roll the prices back or demand a rebate. "I would much rather have that than some foolish price control system that's arbitrary," he said. The drug makers' association has also endorsed the idea of "managed competition" for health care- a system intended to bring down costs by forcing health care companies to compete for patients on the basis of price. Drug companies want the cost of medicine to be included in a uniform benefit package, where they can be covered at the same rate as other medical services. In the meantime, Freiman is taking the lead in urging his fellow chief executives to devote more energy to countering the image of drug companies as robber-barons. "We have to get out and talk to more people," he said. "I believe we are the hope of the future. People have to understand that pharmaceuticals are a value, as well as a cost."