A Home in the Digital World
October 24, 2017
BY JASON PRAMAS @JASONPRAMAS
Vertex Pharmaceuticals made a big PR splash last week with an announcement of a significant donation to Boston and other cities where it does business. The Boston-based company, best known for its cystic fibrosis meds, has pledged to “spend $500 million on charitable efforts, including workforce training, over the next 10 years,” according to the Boston Globe, and “much of the money will go toward boosting education in science and math fields as well as the arts.” The company “also wants to set aside money for grants to help young scientists and researchers.”
Well isn’t that nice. Over 10 years, $500 million works out to about $50 million a year. Sounds quite generous, yes? John Barros, Mayor Marty Walsh’s chief of economic development, certainly thinks so: “The establishment of a Vertex foundation is a long-term investment in the people of Boston and the neighborhoods of Boston … That’s ultimately what we hope for when corporations move their headquarters to the city.”
But sharp-eyed locals would disagree. We’ve seen this gambit many times before in the Bay State—most recently when General Electric played it last year: A big business that has gotten bad press for various kinds of questionable behavior and/or outright malfeasance decides it needs to improve its image. And it does so by the simple device of expanding its advertising budget in the form of “charity.”
The important thing to remember with such “donations” is that the corporations in question often get far more money from government at all levels than they ever give back to society. So it’s not really charity at all. It’s just public relations by other means. Aimed at being able to continue to dip from the great public money river largely unnoticed by everyone but the few investigative reporters managing to ply their trade in this age of corporate clickbait.
To that point, let’s look at four ways that Vertex has benefitted from public support. Then reconsider its most excellent announcement in that light.
1) Tax breaks and direct aid
Readers might remember Vertex as the company that got $10 million in state life science tax incentives between 2010 and 2014 and $12 million in tax breaks from the city of Boston—both in exchange for adding 500 local jobs to their existing staff of 1,350 by 2015 and, quixotically, for moving their headquarters from Cambridge to Boston. According to the Globe, the Commonwealth also took out a $50 million loan to pay for “new roads and other improvements” to the new HQ’s Fan Pier site.
Why? As is often the case in the wonderful world of corporate finance, Vertex told then-Gov. Patrick that it might leave the state if it didn’t get the appropriate… um… “incentives.” So that apparently played a role in getting state and local government in gear. The deal was based on the expected performance of Vertex’s blockbuster new hepatitis C drug, Incivek. But things didn’t go as planned. According to MassLive, when the company pulled the plug on Incivek in 2013 after being outgunned by another company’s hep C med, it agreed to pay back $4.4 million of the state money. In 2015, according to the Boston Business Journal, after Vertex failed to meet its job creation target, the city reduced its tax breaks to $9 million—but didn’t ask the company to pay anything back and will keep its deal in place until 2018. Leaving Vertex reaping a windfall of almost $17 million in state and local tax breaks. Oh, and that sweet loan, too.
2) Gouging public health programs
With the release of two major successful cystic fibrosis meds and more new related meds set to breeze through the FDA drug approval process, the company is starting to expand. And how could it not? In July 2017 it raised the price of its newer med, Orkambi, by 5 percent to $273,000 per patient per year, according to the Boston Business Journal. A product that did $980 million in sales in 2016 before the price increase. In 2013, the company had already raised the price of its first major med, Kalydeco, from $294,000 to $307,000 per patient per year. With some patients paying as much as $373,000 per year, according to an October 2013 Milwaukee Journal Sentinel/MedPage Today article. Cystic fibrosis doctors and researchers have strongly protested, but to no avail.
It’s true that most patients don’t pay anywhere near that amount of money for the meds—because public and private insurance eat the lion’s share of the still-outrageous cost. But the final sticker price remains tremendously high. And the company doesn’t say much about who does pay a big chunk of the bill: the government, and therefore the public at large. Stick a pin in that. Vertex, like virtually every other drug company, has a business model based on gouging the public with ridiculously high prices that various government insurance programs are mandated to pay.
Programs like, in this case, federal Children’s Health Insurance Program (CHIP). As an Oct 4 letter from the Cystic Fibrosis Foundation (whose eminently questionable role in the funding and development of Vertex’s cystic fibrosis meds will likely be the subject of a future column) to the Senate Finance Committee explained, about half of all cystic fibrosis patients—who used to die young before the new treatments came online—are under 18 years old. So they’re generally covered by CHIP. That program, sadly, was defunded on Sept 27 by our psychotic Congress as part of the Republican Party’s crusade against Obamacare. Most states will run out of their 2017 CHIP money early next year, and unless they find money in their own budget to replace it or Congress manages to do the right thing, over 4 million kids—including thousands of cystic fibrosis patients—are in danger of losing their health coverage.
Vertex is not directly to blame for that crisis, but the situation does make its promise that some of its $500 million donation “will be spent helping cystic fibrosis patients get access to Vertex drugs that help them breathe easier and live a more normal life” look even more ridiculous than it otherwise would. Because Vertex and other pharmas certainly have no plans to lower the outrageous prices of their top meds for any reason. They’ll give some destitute patients “access” to their drugs. But everyone else pays—primarily through government insurance, often in tandem with private insurance. After what the pharma industry terms “discounts”… that still result in usurious prices. So even if one takes whatever portion of the donation actually goes to helping patients get cheaper meds as an inadvertent giveback of some of the lucre they’ve leeched off the government, it’s going to be even less helpful than it otherwise would have been if half the patients on those meds lose their insurance next year.
But Vertex isn’t content with just draining funds out of the US federal and state governments. According to Forbes, it’s pioneering ways to suck public funds out of countries with national health services. “Vertex seems to have finally cracked a long-festering problem: selling its expensive drugs in European markets, which are tougher at negotiating prices. Ireland recently agreed to give Vertex a flat, undisclosed annual payment; in return, all patients who need the drug will get access … other countries outside the U.S. will make similar deals … new CF drugs, including discounts, will cost $164,000 per patient in the U.S., where a fragmented health care system allows for less tough negotiation, and $133,000 in other countries. With almost all of the 75,000 CF patients in those countries treated, that would be an $8.5 billion market.”
3) Government-backed monopolies
Moving on, there’s another key way that Vertex makes bucketloads of money with government help: gaming the Orphan Drug Act. Passed in 1983, it was meant to create a strong incentive for pharmas to research drugs that treated conditions suffered by less than 200,000 patients. In practice, it’s become a standard way for pharmas to get a seven-year monopoly on many of their meds. And while it’s certainly true that cystic fibrosis afflicts about 30,000 people in the US—well below the 200,000 patient threshold—it’s also true that it’s no accident that Vertex chose to focus on the disease. Because, according to its 2016 10-K annual report filing to the Securities and Exchange Commission, the company has won orphan drug status for both Kalydeco and Orkambi. Guaranteeing it seven years of monopoly production and distribution of both of the desperately needed and wildly overpriced meds. And 10 years in the European Union, under similar laws.
As Johns Hopkins University School of Medicine researchers commented in the American Journal of Clinical Oncology in November 2015, such monopolies make “it’s hardly surprising that the median cost for orphan drugs is more than $98,000 per patient per year, compared with a median cost of just over $5,000 per patient per year for non-orphan status drugs.” The same study demonstrated that “44 percent of drugs approved by the FDA [in 2012] qualified as orphan drugs.” So winning orphan drug status is one structural mechanism that makes it possible for pharmas like Vertex to charge crazy high prices for many meds.
A recent article by Harvard Business Review adds that pharmas enjoy monopolies on many other meds thanks to the 1984 Drug Price Competition and Patent Term Restoration Act—which allows them to enjoy “patent protection to effectively monopolize the market” for new meds. Once that protection expires, the field is then supposed to be open to other pharmas to produce far cheaper generic versions. Which is doubtless what Vertex CEO Jeffrey Leiden was referring to in a June Globe piece when he defended the company’s sky-high drug prices, saying “‘This is a system that actually works. It rewards innovation and stimulates it. And then after the period of [market] exclusivity is over, it actually makes these innovations free’ for future patients.”
What he doesn’t mention, however, is that pharmas routinely lobby and litigate to extend their monopolies on meds, and actually pay off potential generic producers to not manufacture generics. Delaying the cheaper meds’ arrival on the market and costing public insurance programs like Medicare, Medicaid, the VA system, and CHIP huge amounts of extra money. Which then flows into corporate coffers. All the more so because the Affordable Care Act (“Obamacare”) did not finally give the government the power to negotiate with pharmas to rein in drug prices, according to Morning Consult. The HBR story also notes that generic companies themselves often obtain exclusive monopolies for shorter periods of time and that their products are sometimes substandard—resulting in recalls. All these delays can keep cheaper meds off the market for years.
4) Public science, private profit
Finally, there’s the fact that much of the basic research that allows pharmas to exist is done by the federal government through the National Institutes of Health. In the case of Vertex, a direct connection has already been demonstrated. A May 2013 article by Milwaukee Journal Sentinel/MedPage Today explains that the company’s first cystic fibrosis med, Kalydeco, was only possible thanks to “a hefty investment from taxpayers through grants from the National Institutes of Health, which underwrote the cost of early research, which identified the gene that the drug targets.”
If one were to put a price tag on all the basic science Vertex uses to develop its cystic fibrosis meds—and other meds—that comes straight from the NIH, what would it be worth? Tens of millions? Hundreds of millions? It would be a great research project to estimate the total, but suffice to say that it would be a great deal of money. Money that Vertex could never have leveraged on its own back in 1989 when it was a startup.
Conclusion: the racket and the damage done
Add it all up: tax breaks, direct aid, profits from price gouging CHIP and other public insurance programs, profits from orphan drug status, and profits based on research directly attributable to NIH research. How much money will Vertex ultimately get from government at all levels? A hell of a lot more than that $500 million it proposes to give back to communities like Boston—mostly in ways that either benefit the company directly by providing it with a new generation of trained researchers or indirectly by gilding its public image. Assuming that it ever actually gives that much money away. Which the public has no way of knowing at this juncture.
Any more than we can know how much Vertex spends on lobbying annually to guarantee a constant flow of fat stacks of public cash. Since its shareholders at its most recent annual meeting in June thoughtfully shot down an initiative by a small number of religious shareholders to force the company to report its actual lobbying budget going forward, according to the Boston Business Journal. Not long after Vertex successfully colluded with 10 other pharmas to get the SEC to allow them to quash shareholder resolutions from the same religious groups that would have made the company’s drug pricing formula public, according to the Wall Street Journal.
Then, taking all the above into consideration, check out Vertex’s annual advertising and promotions budget for the last three years: $16.2 million in 2014, $24.5 million in 2015, and $31.4 million in 2016, according to its latest annual report. Going up, right? So tack $50 million a year onto that last figure and we get an $80+ million ad budget. Totally doable for a company with cash, cash equivalents, and marketable securities worth $1.67 billion on hand on June 30, 2017. A company that’s now becoming profitable after years of running in debt—all of which has only been possible with massive public support.
Now come back to Vertex’s “donation.” Doesn’t look so generous anymore, does it?
Reforming the twisted wreckage of our drug research and distribution systems in this country will take a massive grassroots effort lasting years. But there’s one way that local advocates can get going on that project fast: demand that municipal and state officials stop giving public money to pharmas like Vertex, or participating in pharma PR stunts like promising to recycle some of that money to educate local kids—more of whom would have a fine education already if our elected officials stopped throwing money at giant corporations that should be going to social goods like public schools.
Apparent Horizon is syndicated by the Boston Institute for Nonprofit Journalism. Jason Pramas is BINJ’s network director, and executive editor and associate publisher of DigBoston. Copyright 2017 Jason Pramas. Licensed for use by the Boston Institute for Nonprofit Journalism and media outlets in its network.