With the State AGs

The National Association of Attorneys General met in Chicago this week to discuss issues behind the litigation pitting many states against the pharmaceutical industry. I was invited to participate on a panel discussing industry research and development issues. Here are my prepared remarks:

I want to address my remarks this morning primarily to the question of the use and accounting for drug industry R&D expenditures, which account for about 20 cents of every consumer dollar spent on prescription drugs. I want to focus here because if, as I will argue, a large portion of this R&D is wasted, and if this waste is a major driver of the marketing expenditures by drug companies, then taking steps to curb wasteful R&D is critical to any long-term solution to the drug pricing crisis.

Drug industry R&D is a classic glass half full-glass half empty story. When drug companies are on their best behavior, they play a critical role in bringing new drugs and therapies to market; they have extraordinary skills in the design, formulation and manufacturing of chemicals and proteins that can do extraordinary things for human health. They also play a large role in financing important clinical trials.

But that describes less than half of what the pharmaceutical industry does with its research and development budgets. Industry R&D departments are subservient to the companies’ marketing arms and the marketing imperative dictated by what it takes to remain the nation’s most profitable industry. Most new drugs emerging from industry’s labs today add almost nothing to physicians’ armamentarium for fighting disease.

Here’s just one example. Amgen is the largest and most profitable biotech company in the world. It developed recombinant human erythropoietin, sold as Epogen or EPO, in the 1980s based on a university’s scientist’s two-decade-long search for this naturally occurring molecule, which stimulates red blood cell production. It was a godsend to patients on dialysis, who no longer need blood transfusions, and cancer chemotherapy and AIDS patients, who have their red blood cell production suppressed by other drugs. Three years ago, Amgen introduced Aranesp for the very same condition. Is Aranesp a radical new treatment for these problems? No, it does precisely the same thing. But by modifying the protein slightly, they came up with a version that stays in the body three times longer than a comparable amount of the original molecule. Does this help dialysis patients, who are hooked up to machines three days a week and get their EPO through that process? No. But it did enable Amgen to go after J&J’s cancer and AIDS market, which Amgen had sold away in the 1980s. And what did J&J do to fight back? They sponsored a clinical trial that proved that giving a triple shot of the original molecule gave the same long lasting effect as Aranesp. Bottom line: tens of millions of dollars was spent on developing a drug that added nothing to patient welfare.

When university economists funded by the drug industry came up with the total of $800 million to develop a new drug, since raised to more than $1 billion, they never considered the true medical value of new drugs. The list of drugs coming out of industries labs that are like Aranesp is quite long: Nexium for Prilosec; Clarinex for Claritin; the fourth or fifth ACE inhibitor, the sixth or seventh statin. The Blue Cross-funded National Institute of Health Care Management looked at all drugs approved by the FDA between 1989 and 2000. It found just 24 percent of the 1,035 new drug applications were deemed a priority by the agency, the designation given to significant new drugs. If one looked at just new molecular entities – the new drugs that are most likely to be innovative – just 42 percent got the priority designation and if one looks at the latter half of that time period, the figure dropped to 38 percent. If there is any inflation in the FDA distinction, it is in the drug industry’s direction. The priority drugs included best sellers like Viagra, Vioxx and Celebrex.

The second great inflator of industry claims about R&D is its capitalization of that cost. R&D is an annual expense and paid out of current revenue, which comes from consumers. It other words, it is a deductible cost, not an investment. Capitalizing expenses like R&D is precisely why Bernie Ebbers is on trial right now. Now, it is a perfectly legitimate internal exercise for industry officials to construct a net present value of total projected expenditures for a drug development program in order to compare it against anticipated revenue to determine if that project is worth pursuing. But this planning exercise has nothing to do with actual costs incurred, which are deducted from present revenue year by year and even subsidized by the government with the R&D tax credit.

By discounting the industry’s claims by these two factors – the waste and the fraudulent capitalization – you come up with a total for the cost of developing a new drug, even after taking failures into account, that’s about one-fourth of industry’s claim.

Industry officials argue that high prices in the U.S. are necessary to support this inflated R&D budget. They also claim that Europe and the rest of the advanced industrial world , which negotiate lower prices for drugs, are free riding on U.S. R&D. In a sense they are right, but not the way the drug industry would explain it. The U.S. accounts for 51 percent of total global drug expenditures, but 58 percent of all R&D expenditures. But that includes all government, non-profit and industry funding combined. But it is important to remember this is a global industry. Many of those companies spending here are European or Japanese. Why do they want to be here? Because no country on earth spends more on basic and applied biomedical research than the U.S., primarily though not exclusively through the National Institutes of Health. The insights and breakthroughs generated by this vast public enterprise, mostly conducted at our leading universities, are the primary source of major medical innovation. But because of the workings of laws like Bayh-Dole, a company must be present here to gain access to that innovation. That’s why they locate here. Yet when you look at the output, as measured by significant new molecular entities, what you find is that U.S.-based firms discovered just 43 percent of significant new drugs. To quote Donald Light, a bioethicist at Princeton University who has studied this issue, “other countries are helping to pay for the large, inefficient U.S. R&D enterprise,” not the other way around.

Do the me-too drugs that are the products of these inefficiencies improve public health? No doubt some do. But the vast majority are like Nexium, Aranesp and Clarinex, chemical manipulations to avoid patent extinction. Or they are like the Cox-2s, a non-solution to a minor problem that in the end caused more problems than they solved.

Significant new drugs can indeed reduce other medical system costs. But the argument put forward by some drug-industry funded economists that all newer drugs have that effect does not hold water on closer inspection. A more likely explanation is that cost-conscious hospitals with formularies treat much sicker patients with older drugs while detailer influenced physicians treat much healthier people in their offices by prescribing the latest, pricier medicine.

Why don’t drug companies devote their substantial resources to legitimate breakthroughs? The answer cannot be found in an economist’s arguments or an accounting spread sheet. The fact is that medical innovation is rare, and depends on scientific understanding the biological causes of disease and developing validated biochemical approaches to affecting their natural histories. That doesn’t happen every day. It doesn’t even happen every year.

But when it does happen, the work is almost always done in the public sector – by scientists working on public payrolls or at universities on government grants. The evolution of understanding that leads to medical innovation almost always takes decades, and is usually the product of dedicated scientists who very often are not just close to the laboratory bench, but have intimate involvement with patients at the bedside. Industry almost never funds those kinds of careers. Its scientists move from project to project depending on what holds the most promise for the bottom line in the short run.

The issue of R&D remains pertinent because it is the justification for high drug prices. Like the soup Nazi on Seinfeld, drug industry officials and their lobbyists tell us that without high prices, no new drugs for you. Yet what we’ve seen in recent years that over a prolonged period of steadily rising prices and profits, innovation slowed down. Throughout the 1990s until today, the number of new applications to the FDA for new molecular entities and new biologics steadily declined (there was a short blip after passage of user fees in 1997 which cleared up a backlog).

Why has innovation slowed? Numerous people who honestly appraise this field – including many industry scientists – use the same phrase to sum up the situation. The low-hanging fruit has been picked. We’re now up against the tough nuts. Just one example: The government has spent over $50 billion since President Richard Nixon declared war on cancer in 1971 (and more if you go back to the formation of the National Cancer Institute, the first institute at what later became NIH, in 1937). Yet our progress against many forms of that disease remains marginally incremental, the improvement in life expectancy measured in months, not years. And this includes many of the new targeted drugs that received so much hype like Iressa and Erbitux.

My message to the states this morning is that you should feel free to negotiate lower prices in your Medicaid programs without fear of jeopardizing innovation. The answer to the medical mysteries of life will be found where they have always been found: in science, in humanitarian concern, in the work of dedicated scientists and clinicians, and in the unpredictable serendipities of basic and applied research. Industry plays a role, but it is subservient to these larger realities. The idea that we can gain more innovation by pouring more money into industry’s coffers simply makes no sense.

Posted by gooznews at January 26, 2005 03:01 PM