“America’s Pharmaceutical Companies: New Medicines. New Hope.” This was the tag line of full-page ads appearing in national magazines last year as part of a campaign by drug-industry trade group Pharmaceutical Research and Manufacturers of America (PhRMA) to gussy up its increasingly negative image. The ads featured handsome, smiling people in lab coats–just some of the “50,000 researchers at America’s pharmaceutical companies [who are] dedicating their lives to making all our lives better.” Perusing its promotional materials, you might get the idea the pharmaceutical industry is a nonprofit research operation out to save the human race by putting every disease that afflicts us “on the path to extinction,” as one industry spokesperson put it.

But this message of hope has a dark side. Faced with a proposal to limit drug prices, industry representatives invariably respond by insisting the measure will put an end to research into terrifying diseases like Alzheimer’s and cancer, hitting us where we live. “I can guarantee,” PhRMA’s Richard Smith warned reporters last year, “if you aren’t already today, at some point in your lives every one in this room will be a patient in need of medical care. The question is: Will a medicine be there for you?”

Here is the industry driving home its point: “‘If you touch our profits, the laboratories will close and you’ll all die,'” says Alan Sager, a professor of health services at Boston University School of Public Health who has studied the drug industry. “It’s a terror tactic.”

Certainly pharmaceutical companies take on risk by spending very large sums in their laboratories. Comparing numbers from PhRMA’s annual member survey with government appropriations, the Federation of American Societies for Experimental Biology estimates that big pharmaceutical companies sponsored 47 percent of all biomedical R&D in 2000. This represented a huge increase in R&D spending by Big Pharma in the latter half of the 1990s, with the government’s share of total R&D declining to 39 percent despite substantial increases in the National Institutes of Health (NIH) budget.

But some frankly doubt PhRMA’s figures, derived from confidential reports by member companies. Though pharma execs hold up R&D spending as a justification for just about everything they do, they hold the details of this spending very close to the chest. Examinations by various advocacy groups of drugmakers’ financial reports have yielded much lower estimates of their R&D budgets. For example, while manufacturers reported spending over $20 billion on R&D in 1999, Sager and colleague Deborah Socolar arrive at “a more skeptical estimate,” based on financial filings, of about $10 billion.

Perhaps more important than the question of how much companies spend on R&D–assume it’s a large and increasing amount–is what those drug-development dollars are yielding. After all, in asserting the need to charge high prices for drugs, industry spokespeople implicitly suggest their R&D has enormous social value–that it proffers “new hope” to the sick and dying. And indeed few would deny that the history of the pharmaceutical industry is, in part, the history of human progress: from vaccines to antibiotics and, more recently, an array of AIDS drugs, some medicines have produced benefits beyond measure. But brush aside the industry platitudes about new cures for a close look at products coming through R&D pipelines, and one finds that too often their value is more commercial than social.

Well over half the drugs approved in the United States between 1989 and 2000 were “product-line extensions” using old active ingredients, according to a study released in May 2002 by the National Institute for Health Care Management. As the pace of new drug approvals accelerated sharply over the past decade, “standard-rated” product-line extensions–those deemed by the US Food and Drug Administration (FDA) to add no significant benefit over already available drugs–accounted for 62 percent of this growth. These standard-rated product-line extensions also contributed most to increased consumer spending on new drugs in the five years leading up to 2000. With true breakthroughs few and far between, drug companies are flooding the market with new dosages, new combinations and otherwise rejiggered forms of their older medicines.

Generally speaking the drug industry does not expend resources to develop medicines that might be an enormous boon for public health but offer little prospect for commercial gain. For example, a tiny percentage of new drugs brought to market are to treat diseases like malaria that kill huge numbers of poor people around the world. If this seems natural enough–these are businesspeople after all, not public-health activists–then perhaps it will seem more surprising that American taxpayers support a portion of the research to develop drugs over which drug companies claim sole proprietorship. Proprietorship and, of course, the right to charge whatever they please.

“If you call up and ask the company did the government help in the development of this drug, they will say no,” says James Love, an economist and head of the Consumer Project on Technology, founded by Ralph Nader. The Feds aren’t keeping score either. But it’s clear that public support is critical, especially to the development of truly innovative drugs for serious illnesses. In the early 1990s Love and his colleagues did an in-depth study tracking the history of thirty innovative and important drugs approved between 1987 and 1991. They found that half these drugs had been developed with help from the federal government. For eleven of them, the government had been involved at every stage of development, from discovery to human trials. Of particular interest: The government-funded drugs were priced significantly higher than other medicines. In 1993 Senate testimony, Love and Nader reported that the National Cancer Institute supported human trials on 92 percent of cancer drugs developed since 1955. And in 1998 the Boston Globe took a close look at thirty-five important–and top-selling–drugs the FDA had approved over the previous five years. All but two had been brought through the R&D pipeline with the help of NIH or FDA funds.

What do taxpayers get in exchange? Well, they get a new medicine. The question is whether they can afford to use it. According to a report by Representative Bernie Sanders’s office, the breast-cancer drug tamoxifen, which costs Canadians about $34 per treatment, sets back an uninsured American more than $240–and was the product of 140 clinical trials sponsored by our government. Uncle Sam more or less encourages university researchers and drug companies to take the money and run. Twenty years ago the government owned the rights to research conducted under its grants, but 1980s legislation aimed at commercializing scientific research changed all that, giving government grantees the right to patent and sell their work.

At the end of the day, industry poor-mouthing about the burdens of drug R&D is unconvincing for a simple reason: For decades, pharmaceuticals has been one of the most profitable businesses in America. While the average Fortune 500 company saw declining profits in a difficult environment in 2001, drug companies on the list actually boosted their profits by 33 percent, according to an analysis of Fortune 500 data by Public Citizen. These titan drugmakers took 18.5 percent of revenues as profit–eight times the median for all other Fortune 500 companies. In other words, whatever the unique exigencies of pharmaceutical R&D, the big drug companies have managed to develop drugs and sell them at higher profit margins than are enjoyed by the biggest oil companies, entertainment companies, auto makers and commercial banks.

During the year 2002, drug-industry leaders and stockwatchers complained of declining fortunes due to patent expirations, regulatory action, manufacturing glitches, lower earnings and disappointing research pipelines–as if Big Pharma were staggering, ever so slightly, under its own weight. But it remains to be seen where this trend is going. Recently released drug-sales figures for 2002 show a 12 percent increase in North America over the previous year, a slump most business leaders would consider nothing to cry about. And industry folks were considerably cheered by the outcome of November’s midterm elections, which seemed to insure they’d receive plenty of TLC on key issues like a Medicare drug benefit.

In the meantime, the weight of Big Pharma is one that Americans have borne and continue to bear disproportionately. Our “free pricing,” vast population and sky’s-the-limit demand are what drive drug profits worldwide. Of course, even this basic fact creates occasion for dispute. While many consumer groups and politicians say it’s our prices that are out of whack, industry supporters insist other wealthy consumers–the Europeans and the Japanese, for example–should pay more for drugs, and that their refusal to do so, unfair as it is, leaves the responsibility for R&D in American hands. There it is again: Do anything to curtail costs in the United States, and you can forget about a cure for Alzheimer’s.

Perhaps there’s another way to look at it. The drug industry’s higher-than-average profits–the pot of gold at the end of the rainbow–has fueled increasing investments in R&D. This means that, as in other businesses, the consumer not only pays the cost of making the product but subsidizes the growth of the industry itself. That the drug industry has managed to elevate its development effort to the status of sacred cow–touch it and lives will be lost–obscures a slew of important questions. Have all these R&D dollars been efficiently deployed from a business standpoint, much less from the public’s point of view? Does the industry really need to grow at a double-digit clip in order to produce medicines and make money? In the past ten years R&D spending grew at about 13 percent per year, says Princeton economist Uwe Reinhardt. This rate of increase, he calculates, gets you to $595 billion by the year 2025. “The question I raise is, Well, who’s to say that’s the right number? And then the pharmaceutical industry says, Well, the market.” But when buyers try to limit drug spending–when state governments establish methods for bargaining down prices under Medicaid, for example–drugmakers tend not to accept these efforts as reflecting the wisdom of a free market. As Reinhardt observes, “When the market responds, they scream.”

If the outcome of the industry’s profit-driven R&D is especially stark in poorer nations, nothing guarantees that it reflects the public-health priorities even of wealthy Americans. Do we really want to pay for the invention of baldness remedies instead of getting more important drugs at lower cost so they could help more people? If we were in charge, would we order Pfizer’s rivals to get cracking on something to compete with Viagra (as a number have done) or with cholesterol-reducing Lipitor (already in a crowded class)? Obviously we don’t get to make these calls; we don’t even have access to information that would let us lay it all on the table and see where R&D resources are being spent. All we do is sign the checks. Have American consumers, disgruntled about costs but confident our dollars were going to Project Banish Disease, in fact been drafted into Operation Grow Big Pharma? Are we really to believe they’re one and the same?

Industry reps imply that restraints on drug spending would cut straight into the muscle of research on breakthrough drugs. But others point to drug-company budget items where there seems to be plenty of fat: profits yes, but also, and more important, marketing. Consumer advocate Families USA found that in 2000 and 2001, the nine companies selling the most drugs to American seniors spent more money–in most cases more than twice as much–on marketing and administration than on R&D. Indeed, whether their increasing R&D investments pan out or disappoint, drugmakers will work assiduously–because they’re businesses and not public-health advocates–to recoup those investments and sustain high earnings growth by selling lots of product to American consumers. And friends, they have ways of doing that.