Pfizer CEO earned $16 milion-72% Increase / V-P Tells Congress How to Save $37.8 billion in cost of drugs

Thu, 10 Mar 2005

In his February 16 testimony before the Senate Committee on Health, Education, Labor and Pensions, Dr. Peter Rost, Pfizer V-P for Marketing, said:

“Every day Americans die because they can’t afford life-saving drugs, because we want to protect the profits of foreign corporations. I believe we have to speak out for the people who can’t afford drugs, in favor of free trade and against a closed market. Stopping good reimportation bills has a high cost. Not just in money, but in American lives.”

Dr. Rost is a whistleblower whose concern is that 67 million Americans are without insurance for drugs. And many of them don’t get the drugs they need because they can’t afford them, because drugs cost twice as much in the US as in other countries.

By contrast, while the American taxpayers are being bled with high cost drugs, the Associated Press reports (below) how drug companies spend their ill-begotten profits: According to Pfizer’s proxy statement, filed Wednesday with the Securities and Exchange Commission, “Pfizer CEO Henry McKinnell last year received a 72 percent pay increase to $16.6 million thanks to a large restricted stock award.”

Dr. Rost offered the Senate HELP committee concrete solutions for cutting costs:

“Legalized reimportation of drugs,” he calculated, “can help these people.” “The biggest argument against reimportation is safety. FDA Commissioner Lester Crawford has said that his main concern about drug reimportation is that al Qaeda might attack the supply of Canadian drugs.”

“But the FDA has forgotten that we have thousands of secondary wholesalers that trade drugs. States license them, not the FDA. “All it takes for a terrorist to become a drug wholesaler is a $1,000 and a driver’s license,” according to Aaron Graham, head of security for Purdue Pharma.”

Dr. Rost has calculated that taxpayers could save $37.8 billion by legalizing drug reimportation. He also debunked the arguments of the big pharmaceutical companies-half of who are foreign companies who, in their own country, abide by their government’s “reference pricing” (best price) at which drugs are sold in Europe. These swame companies are price gouging the American taxpayer: “They take out big ads in American newspapers (e.g., Glaxo) and tell us that reimportation is not safe, while they know full well that it’s been done safely and cost-effectively in their own home markets, in Europe, for over twenty years.”

He cited a study reported in The journal Diabetes Care in February, 2004: 28% of older adults with diabetes said they went without food or other necessities to pay for drugs. And another study by the Kaiser Foundation (2001) reported that 15% of uninsured children and 28% of uninsured adults had gone without prescription medication because of cost.

Dr. Rost’s Feb 16 Congressional testimony is at : http://help.senate.gov/testimony/t194_tes.html

After his testimony, Dr. Rost responded in writing to follow-up questions posed by the Committee Chair, Senator Michael Enzi (see below)

Contact: Vera Hassner Sharav
212-595-8974

Associated Press
Pfizer CEO Sees Compensation Jump in 2004
March 09, 2005 7:44 PM ET
By THERESA AGOVINO

NEW YORK (AP) – Pfizer Inc. CEO Henry McKinnell last year received a 72 percent pay increase to $16.6 million thanks to a large restricted stock award.

McKinnell earned a base salary of $2.2 million and a bonus of $3.9 million. He also received a restricted stock award of $4.3 million that he hadn’t been granted in the two previous years. His salary also included $5.81 million in common stock as part of an incentive program, and $307,454 in retirement savings.

McKinnell also received 525,000 stock options last year, down from 1 million in 2003.

In 2003, he earned $9.7 million, including a salary of $2 million and a bonus of $4.6 million.

According to the company’s proxy statement, filed Wednesday with the Securities and Exchange Commission, the company also decided that for safety reasons McKinnell will have to use company aircraft for personal travel. That policy reflects a move adopted by many corporations in recent years.

The filing also said Pfizer’s senior managers would not receive salary increases this year because of the need to control costs. Next month, New York-based Pfizer will hold an analysts meeting where it is expected to announce how it will reduce costs by $2 billion. Several of the company’s major drugs are losing patent protection over the next few years. Analyst predict earnings will be flat this year and lackluster for the next few. Last year, Pfizer reported net income nearly tripled to $11.36 billion, or $1.49 a share, from $3.91 billion, or 54 cents a share, a year ago. Excluding various items, the company’s adjusted income grew 31 percent to $16.17 billion, or $2.12 a share.

For the year, revenues rose 17 percent to $52.52 billion from $44.74 billion.

Pfizer shares fell 2 cents to close at $26.74 Wednesday on the New York Stock Exchange. They’ve traded between $21.99 and $37.97 during the past 52 weeks.

C 2005 AP

—-Original Message Follows—- Subject: questions for the record

QUESTION: 1) Dr. Rost, you wrote in a January 2005 commentary published in the Star-Ledger that Americans would save $37.8 billion annually from legalized importation. Your findings contradict modeling done by the HHS Task Force, as well as calculations by the Congressional Budget Office, both of whom found savings of about 1-2% of total drug spending. As you state in the editorial, your calculations were based on the assumption that legislation to permit importation would also make it illegal to limit supply. What basis do you have to believe that the Congress would support those provisions and that they would pass Constitutional muster?

RESPONSE: The house already passed the Pharmaceutical Market Access Act once, (the “Gutknecht bill”), which allow for drug importation to begin without first requiring certification by the Health and Human Services Secretary.

The new, bipartisan Pharmaceutical Market Access and Drug Safety Act introduced by Senator Byron L. Dorgan and others in February 2005 includes a number of provisions intended to ensure that the drug industry cannot thwart the law and prevent consumers from reaping the benefits of drug importation:

– Allows drug importation to begin without first requiring certification by the HHS Secretary.

– Includes an Anon-discrimination provision that would make it an unfair and discriminatory act for drug manufacturers to get around the law by shutting down the supply of prescription drugs they make available to pharmacists and wholesalers, as they are currently doing in Canada. However, these provisions do not “force” drug companies to sell an unlimited quantity of their products in any given country, nor would drug companies be selling their products for a loss in those countries where they do choose to continue selling their products. Therefore, there is no unconstitutional “takings.”

– Also includes features to prevent a drug company from blocking importation by making subtle changes to a drug, such as changing the color or the place of manufacture, so that it is no longer FDA approved.

The Senate bill already has more than 30 cosponsors. Senator Frist blocked the vote of a similar bill in 2004, because he feared it would be approved. This may be the strongest indication that the bill would pass.

QUESTION: What are your calculated savings if these forced sales provisions are NOT included in legislation?

RESPONSE: The Congressional Budget Office, when calculating savings of 1-2% assumed that pharmaceutical companies would limit supply. The HHS report also states “The foreign supply of patented brand-name drugs may be limited relative to the total volume of such drugs consumed in the U.S. market. Imported drugs may be around 12 percent of total use of such drugs in the U.S., depending on the scope of any importation program, because drug companies have incentives to impede exports.” This is one key factor resulting in low savings in the HHS report. I agree with the Congressional Budget Office and HHS report that if provisions to guarantee free supply are NOT included in a bill, savings would amount to 1-2% of total drug bill, although I believe the HHS report has come to that conclusion using incorrect assumptions.

Average drug prices are 50% lower in Europe than in the U.S. (HHS report, figure 7.2). HHS also assumes that manufacurers will restrict supply, and that “imported drugs may be around 12 percent of total use of such drugs in the U.S.” I think the number 12 percent is far too high in a scenario in which manufacturers limit supply. More realistic may be around 4-6 percent. The HHS report also makes the fundamental mistake of assuming that “U.S. drug buyers may get discounts of only 20 percent or less, with the rest of the difference between U.S. and foreign prices going to commercial importers.” In my experience, in Europe, parallel trade starts with price differences as low as 8-10% and I think it is more realistic to assume that U.S. drug buyers will get discounts of about 40-45 percent. 40 percent discount on 4 percent of total use would result in savings of 1.6% annually.

Please also note that the CBO and HHS numbers do not quantify indirect savings that might accrue as a result of drug companies limiting price increases or lowering their U.S. prices domestically in order to make importation less necessary.

QUESTION: 2) As you know, the Canadian market is very small relative to the U.S. market. If importation became a widespread practice, how do you envision the Canadian government responding if shortages in their market develop? Do you foresee any problems for Canadian or U.S. patients if that were to occur? Have you considered that even if Congress passes legislation to legalize importation, countries may act to prohibit the export of medicines from their own countries?

RESPONSE: Canada alone is not a large enough market and therefore any real drug importation bill does need to allow parallel trade not just with Canada but with other major industrialized nations, particularly the EU. If Congress passes a law that makes limitation of supply illegal, with appropriate penalties, shortages would be avoided. The example to use is Europe, in which the Rome treaty guarantees free trade. Individual countries have laws or trade agreements that ensure that the local market is fully supplied and that only excess drugs are exported. This has created an effective distribution system without supply problems for over twenty years.

Clearly, if drug companies have the opportunity to limit supply, they will. In any such instance local governments are likely to ensure that local supply is not jeopardized. Restricting supply within Europe is illegal, while clearly an increased demand can result in supply restrictions until manufacturing can be increased, which may take 12-24 months. Drug companies already today use this excuse to try to limit supply within EU. A strong US law with appropriate financial penalties could actually alleviate this situation, since it would make it even more difficult for companies to limit production or take a chance on being sued by the European Union.

QUESTION: 3) You indicate in your testimony that many Americans cannot afford prescription drugs, and you suggest importation as a solution. However, generics are usually less expensive than brand drugs. In addition, the new Medicare prescription drug benefit will come into full effect shortly, benefiting millions of seniors. There are also a number of national and state programs to provide assistance with drug costs to low-income Americans. Why should Americans look to Europe for imported drugs, when there are often less expensive options here at home?

RESPONSE: Generics are an excellent solution, when available. In reality that is only an option for older drugs. It is reasonable for a wealthy country, such as the U.S., to provide a system in which all citizens have access to most recent medical advances. The Medicare drug benefit will provide $1,000 for someone with a $4,000 drug bill. That person is still better off importing drugs. Reality is that national and state programs don’t work, otherwise the Kaiser Family Foundation couldn’t have reported in a 2001 study that 15% of uninsured children and 28% of uninsured adults had gone without prescription medication because of cost. The journal Diabetes Care reported in February, 2004 on a study of older adults with diabetes. 28% said they went without food or other necessities to pay for drugs. Legalized and regulated reimportation would provide cheaper drugs right at the pharmacy, without forcing patients to make phone calls, write lengthy applications to drug companies, or go on the internet in search of rebates or less costly drugs.