Drug Makers Reap Profits On Tax-Backed Research

JEFF GERTH and SHERYL GAY STOLBERG. New York Times (Late Edition (east

Column Name: MEDICINE MERCHANTS: Birth of a Blockbuster

Section: 1

Publication title: New York Times. (Late Edition (East Coast)). New York,

N.Y.: Apr 23, 2000. pg. 1.1

On Jan. 7, 1982, in a laboratory at Columbia University, a little-known science professor, Laszlo Z. Bito, finished a nine-month experiment on the eyes of cats. In his handwritten data, carefully charted in gray hardcover notebooks, lay the origins of what every pharmaceutical company longs for: a blockbuster drug.

The drug is Xalatan, a best-selling eyedrop for glaucoma. With $507 million in sales last year -- and the potential for billions more, most of it pure profit -- the four-year-old medicine is the equivalent of liquid gold for its manufacturer, the Pharmacia Corporation. The eyedrop earned Columbia University about $20 million in royalties last year, and it has made a millionaire of Dr. Bito as well.

Yet there are other, unseen, partners in the creation of Xalatan: the American taxpayers, who backed Dr. Bito's work with $4 million from the National Institutes of Health. The taxpayers have reaped no financial return on their investment; their reward, government officials say, is the eyedrop itself.

Xalatan costs patients $45 to $50 for a tiny bottle that lasts six weeks That price -- about $1 a day for a drug that staves off blindness – may not seem excessive. But the key ingredient in that daily dose costs Pharmacia only pennies to make, and Americans, who live in the only industrialized nation that lacks government restraints on drug prices, pay more than twice what European patients pay for the drug.

That puts Xalatan out of reach for patients like Albert Russell, a retired optician and part-time blues singer from Prince George's County, Md. Mr. Russell, whose glaucoma has left him nearly blind, lives on an $832-a-month Social Security check. He is among the one-third of elderly Americans who lack prescription drug coverage, and when he talks about Xalatan, he uses the word ''outrageous'' to describe its price.

To officials at Pharmacia, the price is fair. ''We are bringing forth innovation,'' said Dr. Anders Harfstrand, the company's vice president for ophthalmology, ''and innovation always brings a premium.''

In this election year, the cost of prescription medicines is at the center of the political debate. With the biomedical revolution yielding a flood of new therapies, drugs are now the fastest-growing component of the nation's trillion-dollar-a-year medical bill. As Congress contemplates expanding Medicare to include prescription drug coverage, and some states move to bring drug prices more in line with those in foreign countries, the industry is struggling to fend off federal regulation that might limit its ability to set prices.

At the heart of the fight is Dr. Harfstrand's contention that the price of medication is justified by the extreme risk of failure and high cost of drug discovery -- an average of $500 million per drug, by the industry's estimate. It is an argument that the pharmaceutical industry, one of the world's most lucrative and secretive businesses, has relied on for more than 40 years. But it has rarely been put under a microscope, because the industry will not divulge the costs of researching and developing a particular drug.

To shed light on the subject, The New York Times examined Xalatan, from its genesis in Dr. Bito's laboratory to its arrival in the medicine cabinets of patients in 57 countries. Pharmacia declined to disclose specific financial information about the making of the drug. But through interviews with key participants and an analysis of publicly available documents, the examination found, among other things, that Pharmacia spent no more than $150,000 to buy the rights to Dr. Bito's invention from Columbia. Though it later spent tens of millions of its own money to develop the drug, the company acknowledges that Dr. Bito, with the taxpayers' support, provided it an ''uncut diamond'' that later became Xalatan.

The industry's reliance on taxpayer-supported research – characterized as ''a subsidy'' by the very same economists whose work the industry relies on -- is commonplace, the examination also found. So commonplace, in fact, that one industry expert is now raising questions about the companies' arguments.

The expert, Dr. Nelson Levy, a former head of research and development at Abbott Laboratories, who now works as a consultant for industry and the federal government on drug development, bluntly challenged the industry's oft-repeated cost of developing a drug. ''That it costs $500 million to develop a drug,'' Dr. Levy said in a recent interview, ''is a lot of bull.''

Finally, the examination found, federal officials have abandoned or ignored policies that could have led to lower prices for medicines developed with taxpayer dollars. That is partly because the government has lost track of what drugs are invented with its money, and partly, officials say, because the industry resisted government efforts to get involved in pricing.

As Dr. Bernadine Healy, a former director of the National Institutes of Health, said in a recent interview, ''We sold away government research so cheap.''

Going Against the Standard

Like many scientific discoveries, the invention of Xalatan began with a hunch. It was the mid-1970's, and Dr. Bito, a hard-driving researcher who bucked the eye-research establishment with his unconventional ideas about glaucoma treatment, had been named an assistant professor of ophthalmology at Columbia University.

Born in Budapest, he was conscripted into a forced labor coal mining camp at 18. In 1956, the year the Communists quashed a rebellion in his homeland, he escaped, eventually fleeing for the United States. His passion was writing, but he abandoned it for a career in science, particularly the study of the eye.

Dr. Bito was interested in a family of chemicals produced by the body, prostaglandins, and how they might affect the eye, particularly the fluid, known as aqueous humor, that nourishes the cornea and the lens. In glaucoma, the aqueous humor does not drain quickly enough, causing an increase in intraocular pressure inside the eye. This pressure can damage the optic nerve, causing vision loss and ultimately blindness.

An estimated two million Americans have glaucoma, and every year, 120,000 Americans go blind from the disease. The elderly, African-Americans, and people with family histories of the disease are at greatest risk. Glaucoma is often called ''the sneak thief of sight.'' Often, by the time the patient notices vision loss, glaucoma can only be halted, not reversed.

When Dr. Bito began his research, ophthalmologists had already concluded that prostaglandins raised intraocular pressure, and were therefore dangerous. But Dr. Bito, along with a student at Columbia Medical School, Carl Camras, suspected otherwise; they thought that if prostaglandins were given in extremely small doses, they could actually reduce the pressure.

In 1977, after a series of studies on the eyes of rabbits, they published a paper showing just that. ''It was blasphemy,'' Dr. Camras said.

Dr. Bito continued the work with monkeys, cats, and even himself, squirting the chemical in his own eye to gauge how much redness and irritation it caused. The studies were paid for by the National Eye Institute, a branch of the health institutes.

Within weeks of the cat experiment's conclusion in 1982, administrators at Columbia University had steered Dr. Bito to a patent lawyer; in May of that year, he applied for a patent.

It felt strange, he said, but it signified the changing culture of the ivory tower. As a professor, Dr. Bito was accustomed to publishing his work in journals and talking about it at scientific meetings. Patenting, to him, represented secrecy, the culture of industry, not academia. ''It was looked down on,'' Dr. Bito said. ''It was too commercial.''

Law Behind the Companies

Commerce, however, was exactly what Congress had in mind when, in late 1980, it passed legislation that directed federally financed researchers like Dr. Bito to patent their inventions, or risk losing control of them to the government.

Ronald Reagan had just won election on a platform to make America strong again. Japan's electronic industry was out-competing the United States in its own backyard. Determined not to lose, Congress passed Public Law 96-517, known as the Bayh-Dole Act after Senators Birch Bayh of Indiana and Bob Dole of Kansas.

The law was designed to push federally financed research from the university laboratory into the marketplace. Scientists who made discoveries using taxpayer money were required to file invention reports with the government. Universities were directed to license patented inventions to companies that would commercialize them.

The law was originally passed to aid small businesses, but later it was modified so that even big companies like Pharmacia could benefit. If a company did not develop a product quickly enough, the government could revoke the company's license and hand the job over to a competitor. It could also take control of an invention to alleviate ''health or safety needs,'' the law said.

Once an invention is on the market, the law grants the government the right to buy it without paying customary royalties. At the same time, say patent experts in the Clinton administration and at the National Science Foundation, other laws enable federal agencies to put taxpayer-financed inventions out to competitive bidding. For example, the government, which buys Xalatan, could give companies other than Pharmacia the opportunity to manufacture the eyedrop and sell it at a lower price -- but only to the government.

So, these experts say, the Bayh-Dole law, in conjunction with other provisions, could result in lower drug prices for the Department of Veterans Affairs and the National Institutes of Health, two major purchasers of medicines.

But in the 20 years since the Bayh-Dole bill became law, the government has not taken advantage of these provisions, say officials at the health institutes. One reason, said Dr. Wendy Baldwin, a deputy director at the agency, is that the government already buys drugs cheaply by purchasing them in bulk. But even if federal officials wanted to use the Bayh-Dole Act to get medicines at still cheaper prices, they could not because they do not keep track of products, including drugs, that are invented with taxpayer money.

That failure has drawn criticism from the General Accounting Office, the investigative arm of Congress, which last year conducted a review of the government's invention reporting system. ''Inaccurate, incomplete and inconsistent,'' the accounting office concluded.

Also, last year, a preliminary report by the inspector general's office of the Department of Health and Human Services found that as many as 22 percent of discoveries financed by the health institutes were not reported by universities, as is required. More than 2,000 inventions developed with government money were reported to the health institutes last year, but Dr. Baldwin and other agency officials said in interviews that they had no idea which, if any, companies had licensed those inventions, or how they were being used.

As for the issue of what consumers pay for drugs, the health institutes has concluded it should stay out of it. When Dr. Healy was director of the agency in the early 1990's, she insisted that companies interested in developing drugs that had been invented by government scientists sign contracts agreeing to ''reasonable pricing'' for those medicines.

The companies balked at the reasonable-pricing clause. ''I was persona non grata for it,'' said Dr. Healy, who now heads the American Red Cross. The provision was dropped in 1995 by Dr. Harold Varmus, her successor; at the time, he said the policy was discouraging collaboration by driving industry away.

In the end, said Dr. Baldwin, the official designated by the N.I.H. to answer questions for this article, taxpayers may not get lower drug prices. Still, she said: ''The current policies are actually bringing drugs to market. It's a huge advance, a wonderful accomplishment.''

Going Abroad for Help

If the federal government leaves it to companies to decide how much consumers pay for taxpayer-backed inventions, universities are even less concerned about the prices. The Bayh-Dole Act has meant a windfall in revenues from licensing and royalties for them, none more than Columbia.

Last year, Columbia earned $96 million in licensing fees and royalties under the Bayh-Dole law, ranking it first among universities in royalties from inventions, said Jack Granowitz, who runs Columbia's program to commercialize university inventions. Roughly $20 million of that money was from Xalatan; one-fifth goes to Dr. Bito and the university keeps the rest.

When Dr. Bito first filed his patent application in 1982, no drug company in the United States would touch it; most glaucoma experts remembered well the studies showing prostaglandins could only hurt people with the disease. Dr. Bito recalled: ''They said, 'It's crazy. You can't put prostaglandins in the eye.' ''

So Dr. Bito approached another Hungarian eye researcher who knew people at Pharmacia, at the time one of Sweden's largest drug companies. (The company, now of Peapack, N.J., has since undergone two mergers, one with Upjohn in 1995, and another this year, with Monsanto.) Within a year, Dr. Bito said, Pharmacia had bought exclusive rights to his idea, paying Columbia between $100,000 and $150,000. The government received no fees; the law did not require it.

For Pharmacia, which was already marketing a cataract therapy developed by Dr. Bito's Hungarian friend, it was a nice fit. It was also a way for the company to hedge the risky bets it made on drug development.

The industry's own studies show that drug research is riskiest in the early stages, when a company has no way to tell if a given compound is a blockbuster or a dud. The companies often build on basic scientific findings that emerge from taxpayer-financed studies, underwriting the applied science themselves. But in some cases, as with Xalatan, those studies actually produce a practical discovery that can be licensed, allowing companies to step in when profits seem more assured.

No one knows precisely how many medicines result from such licensing arrangements, but they are not unusual. For example, Trusopt, a glaucoma eyedrop by Merck, was taken to the market in similar fashion, after researchers at the University of Florida, with backing from the National Eye Institute, discovered how to convert a related drug from pill to drop form. As Dr. Carl Kupfer, the institute's director, said, ''A pharmaceutical company wouldn't take over the drug unless the animal testing looked very feasible.''

Still, Pharmacia was hardly getting a finished product. ''An uncut diamond'' is how Dr. Harfstrand described Dr. Bito's work. Using the natural prostaglandins Dr. Bito had identified, Pharmacia had the task of developing a synthetic molecule that could be given safely to people.

It was a tall order. As Dr. Bito well knew from squirting the chemicals into his own eyes, the prostaglandins caused redness and irritation. One of Sweden's leading eye experts, Dr. Anders Bill, remembered informing the company that Dr. Bito's idea was ''next to ridiculous,'' and giving it only a 5 percent chance of success. The drug industry's trade association says for every 250 compounds that emerge from a laboratory to enter this kind of pre-clinical testing, only one makes it to market.

By 1985, two years into the Pharmacia's contract with Columbia, the company's research was progressing slowly. Dr. Bito persuaded Mr. Granowitz to write a letter to the company reminding it that, under the Bayh-Dole law, the government could step in and take control of the invention. The next year, Pharmacia hired a new manager for the project, a Swedish pharmacologist, Johan Stjernschantz.

By 1988, Dr. Stjernschantz had found what Pharmacia was looking for: a family of chemical cousins to Dr. Bito's prostaglandins that also lowered pressure but without the troubling irritation. From this family, Dr. Stjernschantz said, he selected latanaprost, the key ingredient for the compound that would later take the trade name Xalatan.

The uncut diamond was now a sparkling gem.

Government's Silent Role

How much was Dr. Bito's government-supported work worth to Pharmacia? Only company officials know, and they won't say.

That kind of secrecy is typical, making it difficult for outsiders to examine drug pricing issues. Nonetheless, experts characterize work like Dr. Bito's as an extremely valuable subsidy for a business that is already receiving government help in other areas, such as tax credits for research and development.

Dr. Levy, the former Abbott Laboratories executive, says preclinical research could account for as much as 20 to 25 percent of a company's research and development budget for a particular drug.

''N.I.H.-supported research represents a subsidy to pharmaceutical development,'' said Dr. Louis Lasagna, an expert in drug development at Tufts University whose studies are widely cited by the industry. ''But you need a midwife, the companies, to bring it to market.''

The word subsidy, not surprisingly, rankles drug industry officials, who say other businesses, including the medical device industry, also benefit from public science.

Yet it is clear that the government plays an important, and an increasing, role in drug development, both through inventions like Dr.Bito's and more basic scientific research on which the companies can build. A 1995 study by the Massachusetts Institute of Technology found that, of the 14 new drugs the industry identified as the most medically significant in the preceding 25 years, 11 had their roots in studies paid for by the government.

''The general pattern is that industry is building enormously heavily on basic research supported by N.I.H.,'' said Dr. Francis Narin, president of C.H.I. Research, a consulting firm that has analyzed patents as a way of measuring the role public science plays in industry.

In a 1997 study commissioned by the National Science Foundation, C.H.I. looked at the most significant scientific research papers cited in medicine patents. It found that half the cited studies were paid for with United States public funds, primarily from government and academia; only medicine patents. It found that half the cited studies were paid for with United States public funds, primarily from government and academia; only 17 percent were paid for by industry. (The rest came from public and private foreign sources.)

And in a study with the National Eye Institute, published in 1996, C.H.I. found that 41 percent of patented eye-care technology was linked to research financed by the health institutes, including Dr. Bito's studies, which have been cited in 15 patents, including Xalatan's.

''I think that is very typical,'' Dr. Narin said of Dr. Bito's work. ''If you find any good advanced biomedical patent, and you look at its science references, most of them are going to be public,'' meaning from publicly financed research.

The industry's estimate for the average cost of developing a drug -- $500 million -- is drawn from a study published in 1991 by Dr. Lasagna and Dr. Joseph DiMasi, an economist at Tufts, and adjusted to reflect inflation and the additional testing drug companies have begun doing to obtain F.D.A. approval for their medicines. Only a small percentage of the $500 million represents the actual cost of developing a particular medicine, Dr. DiMasi said. The rest is the cost is attributed to lost opportunities: years spent going down scientific ''dry holes'' and research money that could have generated interest had it been invested instead.

Dr. Levy, the drug development expert, says the Bayh-Dole law has altered that equation. In the past, Dr. Levy said, ''academia was coming up with concepts, not molecules'' for drug development. Today, university scientists are more commercially oriented; many are spinning off their own biotech companies to develop their ideas. That, in turn, has enabled companies like Pharmacia to shift resources away from in-house research and development and toward outside collaborations, a strategy known as ''external innovation.''

For instance, Pharmacia shut down Dr. Stjernschantz' prostaglandin lab after Xalatan went on the market in 1996, instead giving Dr. Stjernschantz a grant to continue his research at a nearby university. And last year, Pharmacia spent $650 million to buy Sugen, a biotech concern in San Francisco that is collaborating with the National Cancer Institute on clinical trials of its two leading drugs. The company's co-founder, Dr. Joseph Schlessinger, is a New York University scientist whose initial financing included a nine-year grant from the cancer institute, N.I.H. records show.

So the pharmaceutical companies have become more efficient, in part because university researchers are more efficient. As Dr. Levy put it, the companies are ''not having to dig as many dry holes.''

Drawback in Development

Once Dr. Stjernschantz had identified the latanaprost molecule, Pharmacia needed a place to produce it in large amounts for testing in people. It takes 110 raw materials, 32 separate chemical reactions and three months to make a batch of latanaprost, and few companies had the technical know-how.

Among those that did was the Chinoin Pharmaceutical and Chemical Works, in Dr. Bito's hometown, Budapest. The 88-year-old company, owned until recently by the Hungarian Communist government, sits hard by the railroad tracks in a drab corner of the city, a vast array of 100 low-slung buildings connected by a maze of steel pipes.

Dr. Bito knew Chinoin's chemists well. He introduced them to officials at Pharmacia, and after some testy east-west negotiations, clinical trials were under way by the early 1990's in three countries, with Chinoin producing the key ingredient.

Dr. Camras, the young medical student who worked with Dr. Bito at Columbia, was brought in to run the United States arm of the final study; by this time he had become an ophthalmologist, with an academic appointment at the University of Nebraska.

Human testing is typically the most expensive part of the drug development process. Clinical trials usually consist of three phases; the first study tests safety and looks for the proper dose; if the drug is safe, it moves to the second phase to test effectiveness in a limited number of patients. The costliest clinical trial is the last one, the large Phase 3 study to prove the drug is safe and effective, proof that is necessary for the Food and Drug Administration approval. Depending on the drug and the amount of medical care involved, experts say the cost of a Phase 3 trial can range from $10,000 to $20,000 per patient.

The Phase 3 study of Xalatan was relatively small, just 829 people. The company will not say what it spent on that study, or any other. But Dr. Stjernschantz, the project manager, said the total costs for all trials was significantly less than $30 million, an estimate that, a Columbia researcher said, Pharmacia provided to the university before the testing had begun.

The trials gave the company precisely what it was looking for: proof that Xalatan, given once a day, lowered intraocular pressure as much as the gold standard of glaucoma treatment, timolol.

But the studies turned up a worrisome, and unique, side effect: Xalatan caused 7.2 percent of patients' eyes to darken, changing from blue or green to brown. The company nearly pulled the plug on the project. ''That was a very terrible crisis,'' Dr. Stjernschantz said.

In the end, the pigmentation issue led to less-than-wholehearted backing from the F.D.A., which approved the drug on June 6, 1996, with a caveat: Xalatan, it said, should be used only as backup therapy when all other drugs have failed, and not as a ''first-line'' treatment. It was a setback, but hardly a fatal one. drugs have failed, and not as a ''first-line'' treatment. It was a setback, but hardly a fatal one.

Today, Xalatan is approved for sale around the world, from the United States to Japan, Australia and all across Europe. The key ingredient is still being manufactured at Chinoin in Budapest, although the Hungarian company has since become a subsidiary of Sanofi, the French pharmaceutical giant.

The Chinoin-Pharmacia partnership has been a profitable one. Chinoin is making a 50 percent return on its prostaglandin investment, company officials said. And Pharmacia pays Chinoin slightly more than $5 million a year for the manufacturing of latanaprost, said Tibor Szabo, who directs the prostaglandin business unit at Chinoin.

That amounts to roughly one one-hundredth of Xalatan's $507 million in annual sales last year. Or, to put it another way, the cost of making the key ingredient is just 1 percent of the revenue Xalatan generates.

Pricing Around the World

Between Dr. Bito, the National Institutes of Health and Pharmacia, 20 years and many millions of dollars were spent getting Xalatan to a point where it could be sold to the public. But those costs bear little relationship to the price of the drug.

Nor is the price based on what the company spends to make and sell Xalatan, which includes not only the $5 million paid to Chinoin but also the cost of diluting, bottling and shipping the drug, the royalties paid to Columbia, and other costs, such as marketing.

Globally, there can be scores of prices for the same drug, as Xalatan shows.

In the United States, where there are no government restrictions, the basic price set by the company is determined by what the market will bear, taking into consideration the competition, the drug's side effects, and the patient population.

Xalatan is the first and only prostaglandin-based glaucoma drug, which gives it a competitive edge. It is taken only once a day; other drops must be taken more often. And aside from the eye pigmentation, it has fewer side effects. In the United States, the company sells the drug for about $36 a bottle wholesale, far more expensive than the cheapest generic, but roughly in line with other brand-name glaucoma medications, according to industry data and experts.

That price changes from customer to customer. Large health maintenance organizations, as well as the government, can often wring discounts out of manufacturers, while people with no prescription drug coverage must pay the full price. The Department of Veterans Affairs, for instance, pays $25 a bottle for Xalatan, about half what uninsured patients like Mr. Russell pay. And there are even different prices within the pays $25 a bottle for Xalatan, about half what uninsured patients like Mr. Russell pay. And there are even different prices within the government; smaller federal agencies pay $29 a bottle for Xalatan.

Overseas, price controls make for a different story.

In Dr. Bito's home country, Hungary, where the government pays for approved medications, Pharmacia receives a negotiated price of $17.50 a bottle for Xalatan, said Katalin Szutrely, who runs Pharmacia's Hungarian branch. Because the drug is so costly, she said, obtaining government approval to market it was difficult. One selling point was Dr. Bito himself. ''We were proud of him being the inventor,'' she said, ''and we used his name.''

That does not mean the drug is reaching a lot of patients in Hungary. A panel of Hungarian eye doctors recommended Xalatan as a first-line treatment, Ms. Szutrely said, but the government pays for it only when doctors can prove all other eyedrops have failed. As Ms. Szutrely said, ''If you don't have the reimbursement, you cannot sell the drug.''

Back in Washington, the debate revolves around dueling sets of statistics about why Americans often pay more. Some say the price of new medicines is driving up health care costs. Kaiser Permanente, the health maintenance organization, says it spent $4.7 million on glaucoma drugs in 1995, the year before Xalatan was introduced. Last year, Kaiser's expenditures for glaucoma reached $20.4 million, $9 million of it on Xalatan.

To counter such numbers, industry officials argue that Xalatan and other new medicines may be saving money as well, by reducing the need for doctors' visits and also for surgery. At the same time, they say the American free market provides the companies with the profits they need to plow back into research, so that patients can benefit from the next generation of drugs like Xalatan.

''I'm worried about low prices in Europe,'' Dr. Harfstrand said. ''It discourages innovation.''

And because more prescription drugs are made and sold in the United States than any other country, the thought of regulation is especially troubling to the companies. In the case of Xalatan, for instance, more than half the drug's sales are in the United States.

''The U.S. has been the only major free market for pharmaceuticals,'' Fred Hassan, Pharmacia's chief executive, said in a company newsletter last fall, ''and that has benefited patients as well as our industry.''

Science vs. Selling

As Xalatan's inventor, Dr. Bito likes to think of the drug as a triumph of science. But at Pharmacia, they speak proudly of Xalatan as a triumph of marketing.

The F.D.A.'s recommendation of Xalatan as only a backup therapy presented a considerable challenge to the company: How to persuade doctors to turn to their drug before other glaucoma medications. The company pursued an aggressive strategy, according to the drug agency's records and interviews with eye doctors, leaving the impression but not stating explicitly that Xalatan should be considered as a first-line therapy. The drug's growing sales suggest the strategy has worked; in an advertisement announcing its merger with Monsanto, Pharmacia proudly called Xalatan ''the new gold standard for treatment of glaucoma.''

Company documents show Pharmacia spent 40 percent of its overall revenue on marketing and administrative expenses last year, more than twice what it spent on research. In the last year alone, it increased its global sales force by 30 percent to 6,500 people, including scores of ''detail men'' who make door-to-door visits to doctors. Last year, company officials say, those detail men gave away more than a million free samples of Xalatan to doctors.

Companies gauge a product's success by its gross-profit margin – the money left from sales after expenses, but before taxes. The Pharmaceutical Research and Manufacturers Association says only three out of 10 medicines recover their research and development costs. But those that do, like Xalatan, can be hugely profitable.

A reconstruction of Xalatan's profitability, based on outside experts and company documents, suggests its profit margin is likely higher than the company's average of 76 percent, perhaps as high as 90 percent. The company, however, will not talk about Xalatan's earnings.

As Dr. Harfstrand said, ''We never comment on gross margins on individual products.''

Easy and Effective

To spend a day in the examining room with Dr. Harry Quigley, director of the glaucoma service at the Wilmer Eye Institute at Johns Hopkins University, is to see why Xalatan is popular with both doctors and patients. As one of the nation's best-known eye specialists, Dr. Quigley sees as many as 40 patients on any given day, and these days, it seems, he is prescribing Xalatan to most.

He likes the drug for the obvious reason: It reduces intraocular pressure. His patients like it, too; in interviews, several said it caused less redness and irritation than other glaucoma drops, and they preferred its once-a-day formula. Other drugs to combat glaucoma must be taken as often as four times a day. For Dr. Quigley, convenience is hardly a side issue; the once-a-day regimen, he said, means patients are more likely to take their eyedrops.

In October of 1996, a few months after Xalatan was on pharmacy shelves, Dr. Quigley prescribed it to Mr. Russell, the retired optician, who is blind in his right eye and nearly blind in the left. The drug worked to perfection, lowering Mr. Russell's intraocular pressure to well within normal range. ''It was fantastic,'' he said.

The only problem was the price. ''Forty-five bucks,'' Mr. Russell exclaimed, cradling a bottle of Xalatan in his hand. ''I flinch every time I think about it.''

Like many older people, Mr. Russell takes other medications that run up his monthly prescription drug bill. For a time, he said, he paid out of pocket for Xalatan. Then his wife, Millie, discovered that Pharmacia runs a prescription assistance program for patients with ''short-term financial hardship.'' Under the program, the company provides drugs, with patients typically making a $5 co-payment to the pharmacy, for six months, and then patients can reapply.

Mr. Russell was approved for the program. But last August, he received a letter from Pharmacia telling him his discounted supply of Xalatan would run out in November, and urging him to find another, more permanent, way to pay for the drug.

But Mr. Russell did not have another way to pay. So Dr. Quigley proposed an alternative that Medicare would pay for: surgery to lower the intraocular pressure. It was not the optimal solution, Dr. Quigley said, because Mr. Russell's glaucoma was well controlled with the drops and the operation meant a two to three percent risk that he would lose sight in his only good eye, plus a continuing risk of infection.

''The best way to take care of Mr. Russell would have been to continue his medications,'' the doctor said. ''That was not practical, so we did the next best thing.''

For Dr. Quigley, the situation was hardly extraordinary. Too many of his patients, he said, are ''being forced to choose between paying the rent, buying food and taking expensive medicine.'' And he is irritated that Pharmacia offers patients only short-term help. ''If somebody is going to start taking medication,'' he said, ''they are going to need it indefinitely, and they are unlikely to be poor for only 6 or 12 months.''

Also troubled is Dr. J. William Doyle, a University of Florida ophthalmologist who has studied company assistance programs and found them often inaccessible to patients. ''It's a hassle,'' he said, and many patients choose cheaper, less effective medicines rather than jumping through the bureaucratic hoops necessary to get drugs at reduced prices.

At Pharmacia, officials will not divulge information about how many patients receive help from the medication assistance program, or how much the company spends on in it.

Mr. Russell, for one, says he is quite familiar with the pharmaceutical industry's arguments about the cost of prescription drugs, and he does Mr. Russell, for one, says he is quite familiar with the pharmaceutical industry's arguments about the cost of prescription drugs, and he does not believe them.

''They say the extra price is for research,'' he said. ''That's hard to believe.''

Though it is not the most often-prescribed glaucoma drug, Xalatan brought in more revenue last year than any of its competitors, and was Pharmacia's best-selling product prior to the company's merger with Monsanto. Pharmacia, which had $7 billion in revenue last year, before the merger, forecasts $750 million in annual sales for Xalatan by 2002. But the patent is due to expire in 2011, according to the company, and competitors are busy developing rival products. Pharmacia is busy, too; it is already seeking F.D.A. approval of a new product, a combination of Xalatan and timolol, the leading generic competitor, that could extend the life of the patent.

As for Dr. Bito, he has closed down his lab at Columbia and is back in Budapest, living in a spacious apartment with high ceilings and wood floors and a large picture window that looks out on the Roman Catholic church he attended as a boy. Despite the millions he has earned from Xalatan, he lives relatively modestly, driving around hills above the Danube in an 18-year-old Russian car. He has finally achieved his dream of becoming a novelist; his latest book, ''Abraham & Isaac,'' has made the best-seller list in Hungary.

[Photograph]

Albert Russell is almost blind from glaucoma but he can not afford Xalatan, a best-selling eyedrop to fight the disease. (Marty Katz for The New York Times)(pg. 26); This drug to fight glaucoma, developed with government help, is not cheaper because of it. (pg. 1)

[Chart]

''From the Lab To the Pharmacy''

The process by which an idea moves from the lab to the drugstore shelf is long and complex. A look at the process for a particular drug, Xalatan, reveals that taxpayers can play a substantial financial role.

DRUG DISCOVERY

Basic research, which can last from 2 to 12 years, is conducted to gain knowledge about diseases. It is frequently financed by public agencies. Dr. Laszlo Bito, a Columbia University professor, receives grants from the N.I.H. to conduct research on a treatment for glaucoma.

TRANSLATIONAL RESEARCH

Transition from basic research to applied pharmaceutical research. Financed primarily by pharmaceutical companies, but public agencies may be involved.

XALATAN

After successful tests with animals, Dr. Bito applies for a patent, assigning the rights to Columbia University, which eventually licenses the rights to Pharmacia, a pharmaceutical company.

PRECLINICAL TESTING

Actual development and testing of medicines. Financed primarily by pharmaceutical companies.

pharmaceutical companies.

XALATAN

Dr. Johan Stjernschantz, a Pharmacia official, adapts Dr. Bito's invention so that it can be safely delivered to humans.

CLINICAL TRIALS: PHASE 1

Small trials (20-80 healthy volunteers) to evaluate drugs for safety.

CLINICAL TRIALS: PHASE 2

These trials (100-300 volunteer patients) focus on efficacy and side effects.

CLINICAL TRIALS: PHASE 3

These large trials (1,000 - 5,000) are typically the costliest. Tests for all adverse reactions to long-term use.

XALATAN

Xalatan's Phase 3 study includes 829 people and lasts six months. Pharmacia discovers that the drug can cause patient's eyes to change color.

F.D.A. REVIEW, APPROVAL

Submission for approval to manufacture, distribute and market a drug in the U.S.

XALATAN

Pharmacia submits Xalatan to the F.D.A., which approves it as a backup therapy one year later.

PHASE 4: ADDITIONAL POST-MARKET TESTING

Pharmaceutical companies report adverse reactions not present during trials. The FDA evaluates the reports for trends and implications.

XALATAN

Pharmacia continues to test Xalatan on patients while pursuing an aggressive marketing strategy. Xalatan becomes highly profitable.

(pg. 26)

[Chart]

''AT ISSUE: Going Without''

Medicare does not cover the cost of prescription drugs outside the hospital. But some beneficiaries have coverage under other plans, and those without coverage are less likely to fill prescriptions.

Medicare beneficiaries, 1996

NO DRUG COVERAGE: 31%

DRUG COVERAGE: 69%

Prescriptions filled

Average number per person, 1996

Beneficiaries in poor health

WITH DRUG COVERAGE: 38

NO DRUG COVERAGE: 27

Beneficiaries with incomes below the poverty level

WITH DRUG COVERAGE: 25

NO DRUG COVERAGE: 14

Total prescriptions filled per Medicare beneficiary (on average)

WITH DRUG COVERAGE: 21

NO DRUG COVERAGE: 16

(Source: Kaiser Family Foundation)(pg. 26)

[Chart]

''UP CLOSE: One Company''

A pharmaceutical giant and a top prescription drug.

Chart shows total profits for Pharmacia & Upjohn and annual sales of

Xalatan.

Who pays what for Xalatan

For a six-week supply

$17.50 -- Hungarian wholesaler (direct from manufacturer)

$18.78 -- French patient

$25.37 -- N.I.H., Veterans Admin. and other federal agencies (direct from

manufacturer in bulk)

$25.65 -- Japanese patient

$29.44 -- Canadian patient

$29.64 -- Other federal agencies (direct from manufacturer)

$36.02 -- American wholesaler (direct from manufacturer)

$38.44 -- Leesburg, Va., pharmacy (from wholesaler)

$42.10 -- American patient (online-Drugstore.com)

$44.85 -- American patient (Leesburg, Va., pharmacy)

$49.69 -- American patient (CVS Pharmacy)

(Sources: Pharmacia & Upjohn annual reports (Pharmacia & Upjohn expenses

and profits); IMS Health (Annual U.S. sales))(pg. 26)

[Graph]

''TRENDS: Drugs and Prices Rising''

Prescription drug prices are rising, and doctors are prescribing more

drugs.

Graph tracks U.S. prescription drug prices and average cost of filling a

prescription since 1990.

Pharmaceutical company sales and expenditures

Pharmaceutical sales are rising, but expenditures for research and

develoment are rising at a faster rate.

Graph tracks U.S. domestic sales and R&D since 1995.

(Sources: National Association of Chain Drug Stores, Pharmaceutical

Research and Manufacturers of America)(pg. 27)