Last Friday, when President Trump announced his plan to do something about skyrocketing prescription drug prices, it only took a few minutes for Wall Street to figure out that the biggest winners would be none other than the companies setting those prices.
Sanford C. Bernstein analyst Ronny Gal called it “very, very positive” for the pharmaceutical industry. Other analysts expressed similar sentiments. Investors rushed to buy drug company stocks.
It is not just because Donald Trump is in the White House that the pharmaceutical industry got its way. The industry also won big when Barack Obama was president, as Tarbell reported last week. And George W. Bush before him. In fact, Big Pharma comes out on top just about every time a policy change is proposed that might affect company profits. Not only has the industry avoided harm, it has managed to keep those profits growing.
Thanks in large part to that nearly unbroken string of wins, few industries have profit margins that even come close to those of big drug companies. Take, for example, Novartis, the company that secretly paid Trump lawyer Michael Cohen $1.2 million to gain insights into the president’s thinking on health care, money the company seems not to have felt needed to be reported as a lobbying expense.
Novartis is already a very successful company financially, as indicated by its profit margin, and, of course, it wants to be sure to always keep its shareholders happy.
A good measure of a company’s profitability is its operating margin, which indicates how much revenue a company has left after paying for the cost of producing its goods or services and covering overhead expenses. The average operating margin of S&P 500 companies is currently a solid 11.9%. Novartis beats that handily. It’s current operating margin is a shareholder-pleasing 19.42%.
As impressive as that is, Novartis is not as profitable as many of its peers. This is an industry that knows how to make money, especially in this country. The operating margin at Eli Lilly, where Trump’s HHS Secretary, Alex Azar, was a top executive, is currently 21.56%. Johnson & Johnson’s is 25.78%. Amgen’s is 45.6%. Gilead, the maker of Hepatitis C drugs that cost over $1,000 a pill, has one of the highest margins in any industry: 51.83%. Other for-profit health care companies look at those margins with considerable envy. UnitedHealth Group, the country’s biggest and by many measures the most profitable health insurer, has an operating profit margin of 7.56%.
To protect those big profits and keep politicians in check, drug companies hire hundreds of lobbyists, and they pay them exceedingly well. Most of their lobbyists make far more than members of Congress and their staffers. But when you consider that since 2014, drug companies have been taking in more than a trillion dollars in revenue annually—yes, trillion—thanks largely to their ability to jack up prices whenever they want here in the U.S., the money they spend to get what they want in Washington is hardly more than pocket change to them.
To get such an industry-friendly plan from the Trump administration, the drug companies pulled out all the stops and in so doing broke a Washington influence-peddling record that they themselves had set nine years ago.
Drug makers consistently outspend just about every other industry when it comes to lobbying. But in 2009, Big Pharma spent more than any industry had ever spent on lobbying in a single year. That was the year, you may recall, that Congress began debate on what would become the Affordable Care Act. Drug companies and their big trade association, Pharmaceutical Research and Manufacturers of America (PhRMA), spent more than $271 million that year to make sure the law would not cause them any financial pain. It didn’t.
As a testament to its outsized influence in Washington, the first deal Obama cut to get the bill through Congress was with drug makers. It quickly became clear to the Obama team that if they didn’t acquiesce to the industry’s demands, it would spend whatever it took, on negative advertising, lobbying and campaign contributions, to stop health care reform dead in its tracks.
Six years earlier, during the Bush administration, the drug companies proved equally adept at shaping legislation to their liking. They worked hand-in-glove with the health insurance industry lobbyists to make sure legislation to create a Medicare prescription drug benefit would also create big profits for both drug companies and insurers. One way of assuring that was to get a friendly lawmaker to insert language into the bill making it unlawful for Medicare to negotiate directly with drug companies to get better deals for beneficiaries and taxpayers.
Drug makers and insurance companies have beaten back every attempt since then to give Medicare that authority.
Fast forward to last year. As recently as October, Trump was still vilifying drug companies, just as he did on the campaign trail. He said drug companies were “getting away with murder.” Concerned that Trump would try to make good on one of his biggest campaign promises—you guessed it, to give Medicare the ability to negotiate for lower drug prices—the pharmaceutical industry ramped up its political spending to unprecedented levels. By the end of 2017, it had spent a whopping $280 million on lobbying in Washington, smashing that record it had set in 2009, according to the Center for Responsive Politics. That was far more than any other industry spent last year. The insurance industry, not surprisingly, was in second place.
(Here’s another not-so-fun fact: Over the past 20 years, the pharmaceutical and health products industry has spent almost $3.9 billion on lobbying in Washington, again far more than any other industry. And once again, the insurance industry is in second place, spending $2.7 billion. And you wonder why it’s so hard to get a bill passed that would benefit consumers and patients more than corporations and their shareholders.)
Among the companies also breaking its own record for lobbying expenses last year was Novartis, which retained the services of 12 lobbying firms to do its bidding, supplementing the cash it gave Michael Cohen. All in all, the pharmaceutical industry deployed an army of 1,195 lobbyists to Capitol Hill and the White House last year. More than 60 percent of them were what the Center for Responsive Politics calls “revolvers,” meaning the lobbyists had either been a member of Congress or a Congressional or executive branch staffer.
For drug company executives and shareholders, it was money well invested. The plan Trump unveiled Friday not only does not allow Medicare to negotiate with drug companies, it doesn’t do much else to bring down prescription drug prices. If the plan goes forward, some people will get some relief, but there isn’t much in the plan that would have any significant effect on the list prices of drugs. Or hinder profits.
Yes, there are some proposals that the industry will resist, like requiring companies to provide prices for drugs they advertise on TV, but also some the industry would love to see. Trump said other countries with lower drug prices, which he called “foreign freeloaders” (a focus-group tested term if ever I’ve seen one) should be forced to pay more. The industry obviously would love that. And if anyone thinks drug companies would lower prices here if they go up in Europe or Asia, I’ve got a bridge in Brooklyn I’d like to sell you.
You can be certain that as soon as the administration’s plan was made public, drug company execs and their lobbyists did high fives and happy dances. Drug company share prices soared. By the time the New York Stock Exchange closed on Friday afternoon, Amgen’s share price was up $3.12; Johnson & Johnson’s was up $1.89; Merck, $1.63; Novartis, $.61. Most of the companies’ shares were still going up during early trading Monday. As were the shares of the big for-profit insurance companies, which also make big profits on their Medicare prescription drug business.
Until we as citizens get serious about doing something about all the money that drug companies and insurers and other industries spend to shape public policy to their liking, it will always be thus.
