In this excerpt from the new book Crony Capitalism in America 2008-2012, Hunter Lewis exposes the incestuous relationship between government and the drug industry.



Lewis, who serves as president of ANH-USA’s board of directors, has written nine books on moral philosophy, psychology, and economics, including the widely acclaimed Are the Rich Necessary? (which the New York Times called “highly provocative and highly pleasurable”). He has contributed to the New York Times, the Times of London, the Washington Post, and the Atlantic Monthly, as well as numerous websites such as Forbes.com and RealClearMarkets.com.



In his new book, Lewis shows how private interests and politicians rely upon one another—political favors in exchange for money—a system known as crony capitalism. Where do private interests such as those on Wall Street or in the drug industry stop and Washington begins? It’s impossible to say anymore.



Chapter 15 is all about the FDA, and we thought our readers would enjoy this searing behind-the-scenes look at just how deeply the US Food and Drug Administration has enmeshed itself with the pharmaceutical industry:



Big Pharma and FDA:

A Marriage Not Made in Heaven



The drug industry at one time was called the patent medicine industry. This is still the more revealing name. Drug companies devote themselves to inventing non-natural molecules for use in medicine. Why non-natural? Because molecules previously occurring in nature cannot, as a rule, be patented. It is essential to develop a patentable medicine; only a medicine protected by a government patent can hope to recoup the enormous cost of taking a new drug through the government’s approval process.



Getting a new drug through the US Food and Drug Administration (FDA) is not just expensive ($1 billion on average). It also requires having the right people on your side. Drug companies know that they must hire former FDA employees to assist with the process. They also hire leading experts as consultants, some of the same experts who may be called on by the FDA to serve on its screening panels. Direct payments must also be made to support the FDA’s budget.



All these financial ties encourage a “wink and a nod” relationship between researchers working for drug companies and regulators, who are often the same people, thanks to the revolving door. As the Economist magazine writes:



Pharmaceutical companies bury clinical trials which show bad results for a drug and publish only those that show a benefit. The trials are often run on small numbers of unrepresentative patients, and the statistical analyses are massaged to give as rosy a picture as possible. Entire clinical trials are run not as trials at all, but as under-the-counter advertising campaigns designed to persuade doctors to prescribe a company’s drug.

The bad behavior extends far beyond the industry itself. Drug regulators, who do get access to some of the hidden results, often guard them jealously, even from academic researchers, seeming to serve the interests of the firms whose products they are supposed to police. The French journal Prescrire applied to Europe’s drug regulator for information on the diet drug rimonabant. The regulator sent back 68 pages in which virtually every sentence was blacked out. . . .

Medical journals frequently fail to perform basic checks on the papers they print, so all sorts of sharp practice goes uncorrected. Many published studies are not written by the academics whose names they bear, but by commercial ghostwriters paid by drug firms. Doctors are bombarded with advertising encouraging them to prescribe certain drugs. . . .



What the Economist calls “bad behavior” also spills over from the medical world to the financial world. Just since 2008, 75 people have been charged with trying to profit from inside information about drug approvals or company mergers related to patentable drugs. One of them, an FDA chemist named Cheng Yi Liang with access to the Agency’s approval database, pleaded guilty to insider trading on 25 companies for a total gain of $3.78 million over five years. Others with larger resources to invest have made much larger sums. Rod Rothstein, the US Attorney for Maryland who helped prosecute the FDA case, has noted that “healthcare is particularly attractive to criminals because so much turns on government regulatory approval.”



Dr. Ben Goldacre, author of Bad Pharma, summarizes the entire drug approval process as follows: “[It] is broken. . . . The people you should have been able to trust to fix [the] problems have failed you.”



Although the costs of drug approval keep growing, along with the related corruption, the financial payoff for those ultimately winning approval can be astronomical, because approval also brings with it a government-protected monopoly. Only FDA-approved drugs can be prescribed within government programs such as Medicare. Doctors may prescribe unapproved substances outside of Medicare, Medicaid, or the Veteran’s Administration, but by doing so risk losing their license to practice. Some approved drugs may be priced as high as $500,000 per year per patient.



The FDA will also discourage, and often ban, substances that might compete with approved drugs. When anti-depression drugs (based on extending the life of a hormone, serotonin, inside the body) were approved, the Agency promptly banned a natural substance, L-Tryptophan, that increased serotonin, even though the natural substance was much cheaper and had long been available. Many years later, after the anti-depression drugs were well established, Tryptophan was finally allowed back, but under restrictions that made it more expensive.



In general, the FDA maintains a resolutely hostile stance toward supplements. It will not allow any treatment claims to be made for them, no matter how much science there is to support it, unless they are brought through the FDA approval process and thus become drugs. The Agency understands that this is a classic “Catch-22.” Who can afford to spend up to a billion dollars to win FDA approval of a non-patented substance? The answer is obvious: no one. So the real FDA intent is simply to eliminate any competition for patented drugs, since these drugs pay the Agency’s bills.



This FDA policy prevents millions of Americans from hearing about food or supplement remedies that are safer and cheaper than drugs. It hurts the poor and the middle class. But, ironically, it also hurts the rich, even the crony capitalist rich. A national magazine ran a profile of a Wall Street billionaire sitting in his gigantic Connecticut mansion, popping acid blockers for a stomach problem that tormented him. He was totally unaware of research suggesting that most such ailments stemmed from too little acid, not too much, and that a few simple tablets containing hydrochloric acid, one of the cheapest supplements, would probably end his pain.



Why did the billionaire not know this? The answer could not be simpler: crony capitalist drug companies earn huge profits from acid blockers, and along with their friends in government at the FDA, succeed in keeping this information hidden. So there the billionaire sits in his great mansion, unable to enjoy it because of intense stomach pain.



Drug companies and the FDA are not alone in wishing to suppress supplement alternatives to hyper-expensive patented prescription drugs. They have allies among both politicians and doctors. For example, the Archives of Internal Medicine, run by the American Medical Association, and supported financially by drug companies, often publishes flimsy studies attacking supplements, and generally ignores the considerable scientific evidence in their favor.



One such study, published October 10, 2011, by University of Michigan researchers, purported to show that taking supplements could shorten your life. It caused a media feeding frenzy, with headlines everywhere. The problem was that this study, like its predecessors, was junk science. The women in the study were asked every six years what they had taken. They were supposed to remember what they had taken for the six-year period. The reports did not have to be specific: the word “multivitamin” could mean anything. Who knows what was taken or even it if was taken? It could also be synthetic or natural.



Those who reported taking “multivitamins” were found over time to be healthier on average than others and to live longer. But the authors of the study, who clearly had an anti-supplement agenda, made numerous “adjustments” attributing the good health to other factors. Once these arbitrary “adjustments” were made, they then concluded that supplements actually made these healthier than average and longer living people unhealthier. Even after the “adjustment,” the statistical evidence was weak to nonexistent, but that did not prevent media from all over the world reporting that supplements may hasten your death.



What was behind this? The AMA seems worried about competition for its brand of medicine, which focuses almost exclusively on conventional drugs and surgery. It is especially worried about competition from “integrative” doctors who include advice about food, supplements, and exercise in their practice. The AMA and its affiliates also have a tight relationship with drug companies, and depend on them for financial support in many forms, not just journal advertising. Both the AMA and drug companies thus seem determined to trash supplements and those giving advice on supplements.



How does the media fit into this? Since prescription drug advertising was made legal, the major media have come to depend on it for survival. Without it, most of the companies, already financially hard pressed by internet competition, would face potential bankruptcy. So it was not surprising that the major media would pick up something like the misleading Archives of Internal Medicine study and make even more misleading headlines of it.



Are all supplements safe? Of course not. The World Health Organization recently recommended that governments put extra calcium in the public water supply. This is a very bad idea. Genuine medical research suggests that calcium should only be taken with important co-factors such as vitamin D and K2. These help get the calcium into the bones, where it is needed, and keep it out of the heart and circulatory system. As with anything else, good information and common sense are needed to make the best use of supplements. But neither can be expected from the FDA, AMA, or drug company-sponsored media.



The FDA also helps patent drug companies fight off competition from generic (post-patent) drug sellers. Craig R. Smith describes the process:



Generic drugs are generally much cheaper than patent-protected brand name drugs. But they are still quite expensive, especially given that the active ingredients often cost the manufacturer only a few pennies. And in many cases, there are no generic versions available even after the patent on the brand name drug has expired.

Here is how the FDA prevents generic drugs from appearing and also keeps the prices of those that do appear high.

Bioequivalence

A major element driving up the cost of generic drugs is bioequivalence testing. If a company wants to manufacture a generic drug, be it a prescription drug like finasteride or an over-the-counter drug like ibuprofen, it must file an Abbreviated New Drug Application (ANDA) with the FDA, even if it is manufactured by others already. The company doesn’t have to perform clinical trials for an ANDA, but it does have to show that it’s biologically similar, or “bioequivalent,” to the original drug. For drugs that are difficult to synthesize, this requirement is important. For most drugs, however, the raw material can be purchased, often from the identical supplier that provides it for the branded drug. To show bioequivalence, the company typically needs to perform human studies that take nearly two years. This can be waived, but it’s up to the FDA.

Other Obstacles

Foot dragging: The FDA’s Office of Generic Drugs currently has an estimated 1,900 different generic medications awaiting action—and the approval time for generic applications has slowed until it averages more than 26 months.

Name-brand preference: Pharmacy chains get money from drug manufacturers to push their name brands instead of generics. A bill in an earlier Congress (HR 5234) would have made transparent exactly how much money the pharmacies are receiving from pharmaceutical companies to promote drugs still under patent, but it died in committee.

Pay-to-delay: Bayer AG paid rival drug makers nearly $400 million to stay out of the generic Cipro market. By paying competitors to delay their challenges to the patent, they are ensuring an exclusive market for themselves—and the ability to charge whatever they wish.

What We Can Do

We can’t really fix this without new legislation, as proposed in 2009 by Bill Faloon of the Life Extension Foundation. Such a bill should allow supplement companies to produce and sell generic drugs. It should also eliminate the red tape (including human trials) that is needlessly preventing generic competition and thus artificially preserving patent drug profits.

Sometimes the FDA or other branches of the federal government deliver opportunities to drug companies, not just protect them from potential competition. For example, federal researchers may develop a chemical which is then licensed to a friendly drug company. Or federal agencies will pay for drug research, or hire drug companies to conduct research. For example, laboratories at the National Cancer Institute are operated by SAIC Inc., a Defense Department contractor which is not a drug producer, but which is a major player in the drug industry, with funding from the US Department of Health and Human Services. The same company operates the government’s vaccine production facilities.

Medical marijuana represents another example of how federal agencies assist major drug companies. So long as this was mainly supplied by small time growers and protected by state law, the Drug Enforcement Agency and FDA were unremittedly hostile. But when major drug companies became interested, federal agencies shifted to helping carve out a new monopoly for them.

In effect, then, drug companies are not really private companies competing in an open market. They are government-sponsored enterprises (GSEs) not unlike Fannie Mae or Freddie Mac and the big Wall Street banks and firms. It should not be surprising, therefore, that drug companies spend millions on political lobbying and campaign contributions. Many politicians rely on these campaign contributions and thus have a vested interest in maintaining the drug cartel, even though needlessly high drug costs contribute to soaring medical costs.



Sometimes the relationships are hard to follow. For example, a powerful senator like Majority Leader Harry Reid (D-Nevada) may seem to be at odds with Pharma, but then collect plentiful campaign contributions from drug companies when facing a close race. The drug companies are not only interested in rewarding friends; they also want to keep critics from converting rhetoric into action.



The same principle applies to President Obama. His rhetoric is often populist, as when he condemns those who “gutted regulations and put industry insiders in charge of oversight.” But he still expects and accepts drug company and other special interest support.



A more typical case is former Senator Chris Dodd of Connecticut. He sat on the Senate committee overseeing health and for a time was expected to be its next chairman. This enabled him to collect $550,000 from drug companies over the years. In addition, his wife, Jackie Clegg, was paid well, both in cash and stock, to serve on two drug company boards. As noted in an earlier chapter, Dodd and his wife also benefited from a preferential mortgage rate provided by a company, Countrywide Financial, at the heart of the sub-prime home lending scandal that contributed to the Crash of 2008



The result of all this is that drug companies, ostensibly regulated by the government, have come to rely on the regulators and politicians to feather their mutual nest. Even when today’s regulators seem to be cracking down on the drug industry, it is usually not quite what it appears. Merck reached a $650 million settlement with the government to escape charges that it had deliberately overbilled Medicare, Medicaid, and the Veteran’s Administration for medicines. This sounded impressive, but it was just a slap on the wrist for the giant drug company. It continued without pause to supply the government with drugs and sold almost a billion dollars’ worth in 2010 alone.



The federal government is very careful to avoid charging any leading pharmaceutical company with criminal misconduct, because conviction under current federal law would terminate purchases from that source, and the government is too closely integrated with the drug/vaccine industry to allow that to happen. Thus, when Merck was found to have misled about its painkiller Vioxx, alleged to have caused at least 55,000 deaths (some estimates are much higher), the settlement with plaintiffs reached $4.9 billion. But Merck continued partnering with and selling to government without any interruption or even question.



As government takes over more and more of medicine, through Medicare, Medicaid, Obamacare, and regulatory agencies such as the FDA, it must itself bear more and more monopoly inflated drug costs. Much of this is financed by borrowing from China and other countries, or more recently, by printing money. Not surprisingly, the Chinese have shown themselves to be apt pupils of the crony capitalist US medical system. Among other devices, they have taken to issuing indiscriminate domestic drug patents, so that US firms find it increasingly difficult to enforce their own US patents in China.



Although government now borrows or prints money to pay for healthcare, businesses still pay for a good deal of it, at least for now. Consequently, monopoly-driven high drug prices also reduce business profits, which in turn leads to fewer raises for existing employees, less hiring, and ultimately to higher unemployment. Higher business costs also lead to fewer export sales, which increases the US trade deficit, and so on it goes, with one undesirable and unintended consequence after another.