Asymmetrical Information

How exactly would the bill kill pharma research?

Inevitably, it's going to lead to price controls. Since seniors are something like 40% of the market, that's going to cut into the profits that spur research.

Any policy that has Ted Kennedy and the Wall Street Journal arrayed against it can't be all good.

What exactly do you mean by price controls? If seniors join an HMO (or similar type of insurance program) that is able to make agreements to buy drugs in bulk (at a discount, of course) from the pharma companies is this really an example of 'price controls'? Yes it will cut into pharma profits but there's a big difference between being told you *must* sell a product to a customer at a certain price and a large customer demanding a discount from you based on their purchasing power.

"Death of pharma research" is a bold, untestable prediction.

Besides, if the volunteers can do it with software, they can do it with drugs. Expect to see the first open source AIDS vaccine within the decade.

-Brad

Brad,

That was a joke, right?

Medicare was developed at a time when, if you were sick, you went to the hospital. So, in most cases, to trigger a benefit under Medicare, you still have to go to the hospital. I was hoping that adding a drug benefit would allow patients to control their illnesses using medication, which is a heck of a lot cheaper than the ER.

IMHO, this is like putting a band aid on cancer, as I believe Medicare is not viable in the long term, but I was trying to think realistically.

I'm not a Medicare expert by any means, so any differing opinions would be welcome.

On my way to work this morning, the talk radio show had tons of folks calling in who didn't understand the concept of amortizing R&D into the price of a product. The term "greedy" was a recurring theme, and the callers were never questioned when they made the claim that pharma companies are enormously profitable.

My wife has owned some pharma stocks for years, and while they've done well, they aren't standouts. So I don't think stock price supports the "too profitable" (or we should dump all our other stocks and invest purely in the pharma industry). So how can I determine objectively whether pharma companies are "too profitable" (whatever that means)?

I guess salaries could be soaking up a good bit of the income - is there any way to tell if the gross pay is way out of whack? Chem E's didn't get paid that much more then EE's when I was in school in the 80's - I felt that the pay difference was easily explained by the difficulty of the major. How else might they be spending their income in a way that hides profits?

And don't tell me they hide income with R&D - unless you don't think we need another new or better medicine...

I'm not for price controls but pharm companies do make excess profits. Living in NJ I can tell you that a position at a pharma company is a nice way to make a good living without worrying about layoffs. I think we are going to have to eventually see some massive downsizing in the pharma companies.

I've also seen reports about how many pharma companies do not have many more new drugs in their pipelines. This despite the fact that massive amounts of investment have been thrown into R&D in the last few years plus technology advances have allowed them to screen compounds hundreds or thousands of times faster. Perhaps we have overcapacity in Pharma companies just like we had overcapacity in telecoms a year or two ago?

I think they spend large amounts of money marketing their drugs to doctors and patients. Doctors go to all expenses paid "conferences" in January in Vail to discuss the benefits of new drugs. Patients see commercials where they learn that new drugs can help them throw a football through a tire and presumably get laid (can anyone tell me what that drug is actually for). They then go to their doctor and insist that this drug be prescribed. Cost is no issue because the insurance or now the governent will pay. Doctors are all to happy to prescribe the drugs. For one thing, they may actually work. Loop forever.

Don't get me wrong, I don't have any simple solutions for this problem. However, I do believe the answer lies in putting costs directly on those who actually benefit from the drugs. Adding an additional subsidy (sp?) will not likely fix anything.

By the way, my son was sick today. That's why I seem to be stalking the blog. Back to work tomorrow.

Jim English

"Inevitably, it's going to lead to price controls. Since seniors are something like 40% of the market, that's going to cut into the profits that spur research."

Problem is, that most of the 20-40 new drugs/therapeutics approved each year are mimetics for existing therapeutics, developed to steal each other's market share. When you look at the quality adjusted life-years for the mimetic, the gain in public health isn't that great (e.g. taxotere over taxol, or the different flavors of COX-2 inhibitors for arthritis).

(For reference, there's a great paper by Myers & Howe of MIT discussing a real-options assessment of go/no-go decisions in the Pharma industry).

So, my call is that you'd see less mimetics introduced, and less marketing $$$ with price controls similar to Canada or the UK, but about the same level of fundamentally new therapeutics.

You could even argue the situation would improve, as pharma companies would devote fewer $$ and top-line researchers chasing mimetics, and more effort in developing therapeutics for as-yet-untreated or inadequately treated conditions, and more effort in finding new indications for existing therapeutics.

In another post:

"Chem E's didn't get paid that much more then EE's when I was in school in the 80's - I felt that the pay difference was easily explained by the difficulty of the major."

Don't think ChemE's are paid more than EE's these days. Appreciate that you recognise the ChemE major was tougher.

However, ChemE's are not top dawg in Pharma and Biotech - ChemE's are the "dumb jocks with big tanks" who make what the medicinal chemists, molecular biologists, oncologists, immunologists (who are the top dawgs) tell 'em to.

"I've also seen reports about how many pharma companies do not have many more new drugs in their pipelines. This despite the fact that massive amounts of investment have been thrown into R&D in the last few years plus technology advances have allowed them to screen compounds hundreds or thousands of times faster.
Understand the difference between drug discovery & drug development.

Screening a library of 100,000+ chemicals against a target protein speeds drug discovery (finding a chemical/therapeutic protein that might work), but it doesn't speed drug *development* (preclinical in animal models, Phase I testing in healthy humans, Phase II & Phase III testing in symptomatic humans). Drug development is still expensive & slow, and if you have bad luck and the compounds crap out in Phase II, you end up with a thin pipeline.

"Perhaps we have overcapacity in Pharma companies just like we had overcapacity in telecoms a year or two ago?"

Difference is that more of the R&D is being done my smaller start-up companies, which get VCs to kick in money to fund the discovery phase, preclinical and maybe Phase I clinical; Big Pharma then partners or buys up the small company to acquire its compounds.

Tom:

Three problems with that argument.

The first is that genuine mimetics are probably somewhat cheaper to produce, and often more successful, than brand new drugs. If you cut the potential ROI on pharma research, it therefore seems likely to me that it's the new lines of research, rather than the mimetics, that are likely to suffer most.

The second is that mimetics, by introducing competition into the market, actually appear to lower the prices of other drugs in their category somewhat.

And the third is that companies don't always know that they're producing mimetics. Such drugs often come out within a couple of years of each other. Since the pharma development process is more than ten years long, it's hard to blame these "brothers and sisters" on mimickry; rather, companies were racing to build off a new idea that was made possible by scientific advancement. One hears arguments that this is why the government should do the research, in order to eliminate "wasteful duplication" -- but I'd point out that these are exactly the same arguments for why socialism was going to be better than capitalism. Contrary to popular belief, socialists were well versed in the incentive problems inherent in socialism -- they just thought that they could overcome any deadweight losses through the superior efficiency of scientific central planning. This turns out not to work well in practice, for a number of reasons I'm sure I needn't go into here.

I'd also point out that while drugs like Nexium offer little added benefit, many of those "me-too" drugs do offer tangible differences to many users. For example, I could take Flovent and a bronchiodilator on a timed schedule -- but Advair is easier to use, harder to forget, requires fewer doses, and has measurably improved my care, even though all it is is a "me-too" steroid and a "me-too" bronchiodilator. Under the standards of those complaining about mimetics, we wouldn't have them because it would be wasteful duplication. Or take anti-depressents -- different ones work for different people, and no one really knows why. If mimetics really offer no added benefit, we've already got a perfectly good mechanism for taking care of this; the patent system, which is only supposed to cover new, non-obvious work.

There's only one sure way to lower costs of new drugs: lower the regulatory barriers to approval. Drugs are expensive because 1) finding one that works is HARD, and 2) even if it works, getting it approved takes years and years of effort by 1000's of people.

No-one has so far figured out how to crack problem #1. (If & when someone does, they will be wildly, wildly rich.)

Problem #2 can be easily solved, in theory, by requiring less proof that drugs work, are safe, and are properly manufactured. But if anything, I'd guess the "average" American thinks Rx drugs aren't safe enough. (Look what happens every time there's a hint that some relatively new drug may have unexpected bad side effect at a rate of 1/100,000. Lawsuits out the wazoo, even though it often turns out that the bad effects weren't really caused by the drug after all.)

Before you flame me, I am NOT actually suggesting we should return to the days when you didn't have to prove safety or efficacy to sell a drug in the US. The real point is that drugs are expensive largely because we choose to impose a very high assurance of safety and efficacy. As long as we do, drugs will remain expensive (at least until the Bill Gates of drug discovery comes along).

I'm realising how difficult it is to argue this; we're arguing about the impact of a hypothetical event with no idea of the implementation.

"Since the pharma development process is more than ten years long, it's hard to blame these "brothers and sisters" on mimickry;"

Note I said "developed to steal each other's market share". Maybe I should have said "with the intent to take market share" to make it clearer.

Portfolio planners for the pharma/biotech industry know, from epidemiology, where the unmet needs are and where the large markets are, and where prices are elastic and where they are inelastic. And, with the molecular biologists, they can evaluate what commercial potential exploitation the discovery of a new pathway/drug target has (e.g. arthritis = big bucks).

If potential profits were more limited in the larger markets, we'd see more effort given to smaller, non-price capped markets. Frex, Genentech explicitly *is not interested* in anything outside of oncology or cardiovascular care - anything else is an orphan in their company, and gets licensed out or dropped. Great strategic focus for them, but surely their technology would be useful for infectious diseases also?).

"rather, companies were racing to build off a new idea that was made possible by scientific advancement."

Yup, like discovering cyclooxygenase-2's role in arthritis pain. Hence Vioxx, Celebrex, Bextra & Prexige.

In turn, the problem with your argument is that decisions on pharma development are made using a real options analysis, not a static RoI; you have multiple decision points along the way, at the end of discovery, at the end of preclinical, and at the end of Phase I, II, III of Clinical trials, with the big research spending coming at the end at Phase III, which is as expensive as the other stages put together.

As I view it, a price control mechanism would reduce the following:

1) Less marketing of drugs (less cute sales reps calling on the doctors)

2) Less pushing of marginal drug candidates into Phase III.

3) Less development of mimetics.

I'm arguing that the gain in public welfare from the loss of the above is less than that gained from moderating the ability to set monopoly prices that pharma/biotech are granted through patents.

Obviously, there are bad ways to set price controls in this sector; I am arguing that there is a way to do so that would increase public welfare, given that the above 3 phenomena above suggest that pharma's overhead dollars are not being used optimally.

Remember, the UK, despite having a sole purchaser of drugs, developed a strong pharma sector (in fact, pharma/biotech is one of the few industries where there still are strong companies based in the UK).

"One hears arguments that this is why the government should do the research, in order to eliminate "wasteful duplication"

Err, government does fund much of the basic research, through the NIH. And thanks to Bayh-Dole, the universities that conduct the basic research can license the technology out, and (lucky) inventors can romp off into the clover with the common stock of their startup. Hence Genentech (spawned from Stanford/UCSF research), Chiron, Geron (U. Wisconsin), etc.

"If mimetics really offer no added benefit, we've already got a perfectly good mechanism for taking care of this; the patent system, which is only supposed to cover new, non-obvious work."

The patent for a therapeutic is typically a composition-of-matter patent, not a process or use patent. The patent is filed *at the start* of discovery/development, not after the clinical utility has been shown.

I think both of these bills are signs of the breakdown of republican party leadership.

> Am I sad or am I glad?

Surely those aren't the only choices, are they? Personally, I'd opt for mad.

As I view it, a price control mechanism would reduce the following:

1) Less marketing of drugs (less cute sales reps calling on the doctors)

2) Less pushing of marginal drug candidates into Phase III.

3) Less development of mimetics.

Huh? True mimetics (those that weren't just researched in parallel) are EASIER to produce than truly novel drugs. If you aren't making much money you tend to research the EASIER path. Hence more mimetics.

2) "Less pushing of marginal drug candidates into Phase III." Well yeah, but why do you think this a good thing? This just means that fewer drugs will be completely tested and fewer drugs will make it to the market. All the drug candidates that seem marginal in Phase II but in actuality would be prove to be great boons will remain unused. Why is this good? Do you have some idea that drug companies are purposely wasting billions on unpromising Phase III trials? Companies that do that very often wouldn't exist.

No joke Chris. The Free Pharma Foundation recently started a project to create all useful pharamaceuticals from scratch and ensure that there are no IP issues associated with them. Compounds and processes are being offered under the General Pharmaceutical License, which ensures that people are free to try them. For example, the GPL requires that if you mix something up, you have to share with anyone who asks. So, if you synthesize a cure for sleep, allowing people to stay awake and in a greatly heightened state of alertness and awareness for days at a time, if someone wants to try it out, you are free to give them as much as they demand. This is a freedom the GPL gives you. If you fail to fulfill the demand, then you can only make enough for personal use, but are no longer free to distribute.

Open Souce Pharma is inherintly better to Proprietary Phara because a thousand volunteer screwballs trying your recipe is a lot better than a few paid screwballs in a clinical trial. Who could possibly disagree with that?

-Brad

Tom, you seem to be arguing that pharma companies are going to be doing their budgeting the way you would if you were God trying to maximize social welfare. I still see no evidence that mimetics, rather than riskier new lines of research, will be cut, other than your wish that it will be so. And given the quick-and-easy payoff to marketing, rather than the risky slog of research, I really see no evidence for the oft-stated assertion that pharmaceutical companies will, when push comes to shove, eliminate their marketing budgets rather than their research.

Furthermore, as I'm sure you know, over half a pharma company's marketing budget is free samples. To the extent that they reduce the transaction cost of trying a potentially helpful new drug, this is a lose-lose for both pharma and patients. And to the extent that they're a replacement for medicines patients can't afford, this is a loser for the patients. The illusion that we can make drugs cheap by eliminating consumer advertising and physician dinners is one of the most enduring, yet least proven, tropes of the pharma-bashers.

I'm certainly aware that the government does basic research, but it doesn't spend the $800m it takes to bring a new drug candidate to market. Nor do I think it would do a good job if it did -- we'd have eight zillion drugs for breast cancer and AIDS, none of which worked very well, and little else.

Yes, Britian has a thriving pharma industry. And what's their primary market? Not Britain, where drugs are priced at marginal cost.

I simply see no reason to think that we can design price controls that push research in the direction you want. If you have a blockbuster new drug, think the government is going to pay you eight times as much as the guy who came out with Lipitor-3? Nope. All Lipitor-type drugs will be on the same schedule -- teh mimetic will be paid neither less nor more. And the blockbuster new drug will be paid near marginal cost, because Medicare will have a budget to meet.

"Open Souce Pharma is inherintly better to Proprietary Phara because a thousand volunteer screwballs trying your recipe is a lot better than a few paid screwballs in a clinical trial. Who could possibly disagree with that?"

You mean, aside from the FDA?

Well, speaking as someone who does pharma research for a living, I can tell you that I think price controls are (a) going to hurt research and (b) have a good chance of happening eventually, anyway. As the baby-boom generation ages, the political pressure for nice-n'-cheap drugs will intensify. And the effects on research won't really show up for ten or fifteen years (the time it takes things to make it through the pipeline,) so people won't even know it's been crippled - for a while.

We're having a tough time over here in the drug industry, because we've already done a lot of the easy drug targets. Good new ones are mighty hard to find, and all our new technology (which didn't come cheap) isn't helping out as much as we'd like. Cut the money, and we'll likely work only on the surest of sure things. Keep that up for a development cycle or two, and there won't even be much for us to rip off from each other.

I've been doing this since 1989, and I'll go ahead and say that I think I'm pretty good at my job. But I've never once worked on anything that has ever come close to being marketed. I've worked on schizophrenia, Alzheimer's, diabetes, osteoporosis, and cancer. No drugs, not one. I can't even imagine how many scores of millions of dollars I've personally helped make disappear.

Here are some more thoughts on what might be done, many of which bear on the suggestions made by others in previous comments.

"As the baby-boom generation ages, the political pressure for nice-n'-cheap drugs will intensify. And the effects on research won't really show up for ten or fifteen years (the time it takes things to make it through the pipeline,) so people won't even know it's been crippled - for a while."

We've got an opportunity here to change the political pressure. The simple fact is that if you're an older person, your life depends on continued research; it's the only thing that has any chance in hell of saving you from death by old age. If we play our cards right, we can build up enormous political pressure among older people against anything that might delay or prevent the stay of execution that continued medical research might provide.

"As the baby-boom generation ages, the political pressure for nice-n'-cheap drugs will intensify. And the effects on research won't really show up for ten or fifteen years (the time it takes things to make it through the pipeline,) so people won't even know it's been crippled - for a while."

We've got an opportunity here to change the political pressure. The simple fact is that if you're an older person, your life depends on continued research; it's the only thing that has any chance in hell of saving you from death by old age. If we play our cards right, we can build up enormous political pressure among older people against anything that might delay or prevent the stay of execution that continued medical research might provide.

"As the baby-boom generation ages, the political pressure for nice-n'-cheap drugs will intensify. And the effects on research won't really show up for ten or fifteen years (the time it takes things to make it through the pipeline,) so people won't even know it's been crippled - for a while."

We've got an opportunity here to change the political pressure. The simple fact is that if you're an older person, your life depends on continued research; it's the only thing that has any chance in hell of saving you from death by old age. If we play our cards right, we can build up enormous political pressure among older people against anything that might delay or prevent the stay of execution that continued medical research might provide.

Sebastian wrote:

"Huh? True mimetics (those that weren't just researched in parallel) are EASIER to produce than truly novel drugs. If you aren't making much money you tend to research the EASIER path."

Think you're confusing generics with mimetics here, Sebastian. A mimetic (a drug that acts along the same pathway) involves just as much preclinical & clinical effort as any other drug. But it is a safer option. That's my point. Wouldn't we rather see drug researchers & R&D $$$ sunk into treating indications for which there currently are unmet needs, rather than a "me-too" drug with marginal benefits at best?

"Hence more mimetics."

Which is my point.

"2) "Less pushing of marginal drug candidates into Phase III." Well yeah, but why do you think this a good thing?"

Because it is a waste of money and effort. As is building a brand for a drug under patent.

"This just means that fewer drugs will be completely tested and fewer drugs will make it to the market. All the drug candidates that seem marginal in Phase II but in actuality would be prove to be great boons will remain unused. Why is this good? Do you have some idea that drug companies are purposely wasting billions on unpromising Phase III trials?"

Yup. Around 50% of Phase II compounds fail, and 25-30% of Phase III compounds, and 15-20% of compounds after Phase III.

" Companies that do that very often wouldn't exist. "

They do so because the potential profits from a blockbuster drug make the option of continuing research, even with ambiguous animal model & Phase II data, an in-the-money option. Remember, you're dealing with monopoly pricing on goods with a high inelasticity of demand (for individual purchasers). No frictionless planes here.

It's also the reason why more clinical trials are conducted through CRO's rather than universities; one can control the publication of results in the academic literature that way.

Jane wrote:

"Tom, you seem to be arguing that pharma companies are going to be doing their budgeting the way you would if you were God trying to maximize social welfare."

Which is my point. What other basis than maximizing social welfare would you have me use to decide between public policies? We don't grant patents based on their ability to funnel dollars to the assignees. We grant 'em because doing so creates an incentive to invent. My point is the drug development that would be primarily affected by the price controls that we are most likely to see (on blockbuster drugs) would primarily affect research on drugs that have the most marginal affect on public health - mimetics and drugs with crappy data in preclinical and early clinical studies.

"I still see no evidence that mimetics, rather than riskier new lines of research, will be cut, other than your wish that it will be so."

Remembering dimly from the Myers & Howe paper, the potential revenue from a blockbuster drug is $1 bn, of which 10% of drugs fall into.

There is essentially, not much difference between Vioxx and Celebrex in their mechanism. So one differentiates between 'em based on brand. If you limit the potential revenues from a blockbuster, then (1) you'll see less development of mimetics to a blockbuster (2) you'll see more development of non-mimetics based on a different mechanism or for a different indication.

Tonight, I'll crack open my copy of an Office of Technology Assessment report on Pharma R&D costs & benefits and flesh out the argument more.

"And given the quick-and-easy payoff to marketing, rather than the risky slog of research,"

No, my point is branding is only important if you're dealing with mimetics.

I can't see a (public welfare) reason to sink beaucoup dollars into branding for a drug under patent protection, because it should be able to sell based on its functionality. (I can see a reason for branding for drug just about to go off-patent, though, because generic manufacturers don't have to prove stability in formulation as the original developer has to).

Tom, you seem to have a very restrictive idea of what marketing does. Generating warm and fuzzy feelings about your product -- the traditional use of the word "branding" -- is only one thing that marketing does. Just as important is expanding your market size, which will certainly be just as important for solo drugs as mimetics, convincing consumers to try your products (that's where all those free samples come in), isolating your target market, and so on. Marketing won't go away even if we wave our magic wands and dictate "no more than one new drug per condition!"

As for the point about social welfare, you miss the point of my argument. I won't argue that companies maximize social welfare in the same way that God would if He were running our health care system. But I don't think the government will either. And I have considerable evidence to back up my belief that when the government starts trying to run an industry as if it were God, it mucks things up far worse than the private market. The reason I reject your public policy choice of price controls is that I don't think you can design price controls that only cut the bad spending you don't like without hurting innovation, and ultimately, social welfare. I also think you're seriously overestimating the amount of that "bad spending".

Information on the profits to be made on a blockbuster drug in a free market is not relevant to the profits to be made on a blockbuster drug in a monopsony. Blockbuster drugs benefit from a high degree of pricing power. Monopsonists buy at marginal cost. The potential profit from blockbuster drugs in a single-buyer environment isn't so hot. And when you're pricing at marginal cost, how do you make up revenue? Volume. And what does that mean? More marketing.

I'll also point out that this means anyone who doesn't have a condition that afflicts a lot of people can just kiss any hope of getting a pharmaceutical treatment for it good bye.

Geniune mimetics (those based on copying another company's drug with some minor difference, rather than concurrent research) actually (according to friends in pharma consulting) cost less to develop than whole new lines, contrary to your assertion.

"I won't argue that companies maximize social welfare in the same way that God would if He were running our health care system. But I don't think the government will either."

Sorry Jane, the government *already is involved*, in the form of patent protection and in the approval process (and in sponsoring research). Hence the high barriers to entry & monopoly pricing. A moment's reflection should make you see conditions for Pareto optimality are not met.

From the Congressional Office of Technology Assessment Report on Pharma R&D:

"The long run persistence of higher dollar returns in the industry as a whole than the amount needed to justify the cost & risk of R&D is evidence of unnecessary pricing power for ethical pharmaceuticals".

"If price competition among therapeutically similar compounds became more common, the directions of R&D and the total amount of R&D would probably decline. Whether a decrease in R&D would be good or bad for the public interest is hard to judege. It is impossible to know today whether today's level of pharmaceutical R&D is unquestionably worth its costs to society."

"Over a longer span of time, economic returns to the pharmaceutical industry as a whole exceeded returns to corporations in other industries by about 2-3 percentage points per year from 1976 to 1987, after adjusting for differences in risk among industries."

*(Unfortunately, written in 1993, so somewhat out-of-date; the OTA was abolished by the 104th Congress [thanks Newt]. But still the best overview of Pharma R&D I've found.)

"I'll also point out that this means anyone who doesn't have a condition that afflicts a lot of people can just kiss any hope of getting a pharmaceutical treatment for it good bye."

That's currently the case, Megan. Any drug with under 100,000 patients in the US is an "orphan drug", and the FDA grants concessions (and tax breaks and grants) to its development (http://www.fda.gov/orphan/). That still isn't enough, as in most cases, the compound in question gets dropped or, at best, licensed out (according to my sources in the Pharma industry). Part of my point is that orphan drugs would become more attractive if large-volume blockbuster drugs became less attractive to develop.

"Geniune mimetics (those based on copying another company's drug with some minor difference, rather than concurrent research) actually (according to friends in pharma consulting) cost less to develop than whole new lines, contrary to your assertion."

Are you sure your friends aren't pricing in the lower risk, or discounting the discovery stage? The developer would still have to show safety & efficacy, so they still have to conduct animal model, Phase I & Phase III-type studies. I guess they could skip the Phase II stage, as part of that is to demonstrate pharmacokinetics.

And do you think that pharma companies don't price in lower risk when they decide what to pursue? You're making my point for me.

I'm hardly unaware that the government is involved in our pharmaceutical market. That doesn't mean I think it would make a good allocator of research money, any more than I think that it would make a good allocator of my grocery money because it writes the property laws that allow A&P to profitably operate their store.

"Are you sure your friends aren't pricing in the lower risk, or discounting the discovery stage? "

OK, I think I've figured out what your friends might be referring to. A new salt or ester, or formulation of an existing active ingredient is treated differently under FDA rules than a different molecular structure in the active moiety. That's not what I meant above by mimetics (I meant there's a different but similar molecular structure of the active moiety, and which acts on the same drug target).

Different salts, esters or formulations of an active would be covered under the original composition-of-matter patent (unless the patent attorney was drunk at the time of writing the claims and forgot to put in the typical boilerplate).

"That doesn't mean I think it [the government] would make a good allocator of research money"

I'm not suggesting that. I'm suggesting that the current regulatory structure introduces distortions in the market that cause inefficiencies in the amount, allocation & direction of R&D.

(Also, the gubmint already allocates research money through the NIH, thank you very much).

I know it does, Tom. That doesn't mean it's doing a good job. ;-)

"If price competition among therapeutically similar compounds became more common, the directions of R&D and the total amount of R&D would probably decline. Whether a decrease in R&D would be good or bad for the public interest is hard to judege. It is impossible to know today whether today's level of pharmaceutical R&D is unquestionably worth its costs to society."

Hard to judge? Impossible to know?

Jesus Christ! Pharmaceutical R&D will eventually give us the friggin Fountain of Youth if we let it! A chance to finally vanquish the one implacable enemy that has plagued every single generation since the Dawn of Man!

How could throwing up roadblocks to that possibly be justifiable? I just don't get it.

"Sorry Jane, the government *already is involved*, in the form of patent protection and in the approval process (and in sponsoring research). Hence the high barriers to entry & monopoly pricing. A moment's reflection should make you see conditions for Pareto optimality are not met."

Patent protection was written into the Constitution, as a way to promote Progress in Science and the Useful Arts. The approval process is a deadweight loss that condemns thousands of people to death by denying them drugs, all in the name of keeping full-fledged adults from hurting themselves.

"I know it does, Tom. That doesn't mean it's doing a good job. ;-)"

Compared to the MRC in the UK, it does a spiffing good job. And Bayh-Dole is one of the most longsighted pieces of legislation ever. Ever.

BTW, the OTA report from 1993 can be found here:
http://www.wws.princeton.edu/cgi-bin/byteserv.prl/~ota/disk1/1993/9336_n.html

Eager young medical researchers seeking to make big bux from their NIH-funded research can be found here:
http://www.ucsf.edu/cbe/

Tufts also has a center that researches pharmcoeconomics of drug R&D.

You also said:

"Furthermore, as I'm sure you know, over half a pharma company's marketing budget is free samples."

I'm having a hard time believing this. For small-molecule drugs (not proteins) the COGS is ~10%. Marketing in pharma is typically 20-30% of sales. So, unless the Pharma companies are distributing a volume of drugs as samples equal to their sales, it's hard to believe their marketing cost is 10% of sales. I think the figure you give is based on costing the drugs given as samples at full retail price. That's not the cost to the pharma company (which is cost of manufacture).

You also said:
"I'm certainly aware that the government does basic research, but it doesn't spend the $800m it takes to bring a new drug candidate to market."

Just FYI, that $800M is the cost from Tufts (from DiMasi). The out-of-pocket cost for an individual drug is closer to $60M (not discounted).

The $800M cost is the future value of the expenditures on a particular drug, plus cost of failures, plus cost of discovery research (from 10-12 years in the past), discounted forward using the WACC for the pharma industry.

"Jesus Christ! Pharmaceutical R&D will eventually give us the friggin Fountain of Youth if we let it! A chance to finally vanquish the one implacable enemy that has plagued every single generation since the Dawn of Man!"

Maybe, But they won't come from the 53% of approved drugs that had "little or no clinical benefit" (figures from 1982-1991).

"The approval process is a deadweight loss that condemns thousands of people to death by denying them drugs,"

Nope. The FDA approval process is the method by which safety & efficacy of drugs is proven, so that you aren't taking (a) a harmful drug (b) a drug that is no better than a sugar pill. The reason you don't see folks in the US with one or two fingers where there should be forearms is because the FDA did its job on blocking approval of thalidomide, and the approval authorities in the UK and Germany didn't.

"all in the name of keeping full-fledged adults from hurting themselves"

If you are the type of full-fledged adult who can work out from the chemical structure of a drug whether it is harmful and/or efficacious for a particular indication, more power to you. Call a biotech VC on Sand Hill Road immediately - your talents are highly valuable. There are hundreds of thousands of compounds waiting in Pharma company libraries for you to work your magic on. For us lesser mortals, we need the proof that a clinical trial gives.

"Maybe, But they won't come from the 53% of approved drugs that had "little or no clinical benefit" (figures from 1982-1991)."

It's a hit or miss game. Nothing we can do about that.

"If you are the type of full-fledged adult who can work out from the chemical structure of a drug whether it is harmful and/or efficacious for a particular indication, more power to you."

No, but I'm the type of full-fledged adult that knows when to try beta versions (when letting my condition run its course will probably get me killed anyway, and nothing else is available) and when to stick with drugs that have been through more rigorous testing. I also know where to find advice on which existing drugs are harmful and/or efficacious. And, unlike actual children, I can be trusted not to put strange things in my mouth just for the hell of it.

Some people are less risk averse than I am, and more power to them. Beta testers are our friends.

"No, but I'm the type of full-fledged adult that knows when to try beta versions"

Really? So could you tell which enantiomer of thalidomide was teratogenic, when it was released in the UK in the 1960s? Or which was good for leprosy? Or which was good for cancer treatment?

"(when letting my condition run its course will probably get me killed anyway, and nothing else is available)"

Then contact a teaching hospital, and get on a clinical trial, and cross your fingers.

"I also know where to find advice on which existing drugs are harmful and/or efficacious."

You can find such advice *because* there has to be clinical testing. Try finding a double-blind study on toxicity & efficacy of say, St. John's Wort or other such "supplements". Knowing how to access Medline* is useless if the data isn't in the medical literature. The double-blind test is the plank on which pharmaceutical advances are built. Unfortunately, they cost money to execute.

* Was pissed off when the NIH retired Grateful Med. Loved the name.

Why would this lead to price controls on drugs? Government funding of higher education hasn't led to price controls on tuition.

Thank you Joseph. When you spend other peoples money on something for yourself, price is no object (Thanks to PJ O'Rourke). I expect drug prices to increase as market forces are removed.

Jim English

"The $800M cost is the future value of the expenditures on a particular drug, plus cost of failures, plus cost of discovery research (from 10-12 years in the past), discounted forward using the WACC for the pharma industry."

Just to clarify further, using the WACC to discount forward means the $800MM given by DiMasi (and used by the PhRMA) is the *economic* cost, not the *accounting* cost (where you'd use the PPI or the GDP deflator for the discount factor). That is, using the WACC means the drug developer's expected return on investment is already factored in.

Jane, have you ever suggested a reform plan for the US health care system? I'm assuming you're not happy with the direction the current is heading; I'm curious how libertarians want to bridge the "innovation vs. lifespan for the poor" problem.

Innovation is precisely what will provide the lifespan to the poor, if we let it. First it will provide it to the rich.

That's the way it is with every new technological advance. The rich get to try it out first, until someone figures out how to make it cheap enough for the mass market. It happened with cars, refrigerators, televisions, computers, and air conditioners, among too many other things to name.

I don't see any way around it. Either you let the rich get it first, or you ensure that the poor never get it. I'd definitely prefer the former. Maybe it'll come down to my level in time to save me from the slow, lingering death that all of humanity has been subject to within their first century or so. I'd like to at least have a chance of that happening.

That explanation works for markets that aren't completely fucked like health care is, Ken.

Jason wrote:
"That explanation works for markets that aren't completely fucked like health care is, Ken"

Give it up, Jason. Explaining how there's at least three reasons why the pharma market isn't gonna be Pareto-optimal (pharmaceuticals largely an information good, patents creating a monopoly, large barriers to entry through distribution, high inelasticity of demand, and price discrimination against individual buyers versus those buying through their health coverage) ain't gonna cut it with Ken, who believes he can judge better than an FDA official with an MD/PhD in pharmacology & toxicology what medicines are safe & effective. It's a world of frictionless planes with him.

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