Pharma’s Cutting Edge

Interesting to read of Mr. Taurel’s lament of the tough environment faced by Lilly (and others) for the benefit of its shareholders. I’m not sure I see the value to the company in this type of honesty, but there’s no doubt that Mr. Taurel’s is a relatively loud voice in a chorus of large pharma CEOs singing the same song. But if the chorus is now in the mood to sing sorrowfully to its shareholders, why not lay it all on the line? Things are bad now for innovator drug companies, but they’re no where near as bad as they’re going to be in the not-too-distant future.

Consider just a few of the portents:

• Widespread government-funded drug programs covering large proportions of those who use medicines, each with upwardly mobile costs due to developed-economy expansions in elderly populations and rising costs of drugs that outpace price inflation;
• Governments almost universally under pressure to reign in healthcare spending, because it consumes a large and growing portion of government spending;
• Very large and increasing numbers of people in the U.S., the largest drug purchaser, without any type of health insurance or drug coverage;
• Successful efforts by powerful groups (elderly, third-party payors, healthcare providers, etc) and populist opinion-makers in the developed world to destroy the once-favorable (or at least tolerable) public image of the pharmaceutical industry, hampering the industry’s ability to influence public policy and healthcare practice, to collaborate with non-industry scientists and clinicians and to recruit and retain top talent;
• The rise of a “biogenerics” industry, first in Europe and coming soon to the U.S.

So, things are tough and they’re going to get tougher. Why then do I believe that there are good answers to these problems for the industry as a whole? Why do I believe that the industry’s best days lie in front of it? I believe it because I am convinced that sick people really don’t like being sick, that healthy people want to stay healthy (if it’s not too much trouble), and that it is sound policy for governments to promote health for all their citizens through the appropriate use of medications. A most important premise is that I also believe the pharmaceutical industry to be in the best position to deliver on these fundamental desires. The answers to the industry’s woes, then, are not likely to come from focusing on a bleak future but instead by looking backwards, to the reasons underlying the growth of the industry. Because oftentimes the best path forward first requires a step back and a broad view of the landscape.

The King Medicaid rebate scandal is enough to make even the most idealistic among us turn towards the cynical dark side. Here are some recent press “highlights,” that present views from all sides. So, which involved party is most loathsome and self-serving? Vote with your comments.

The official line from King: King Press Release

Whistleblower: They sent me to work in a moldy office:” The Corporate Crime Reporter

Tennessee Dems say King founder has given “blood money” to Republicans: The Chattanoogan

It’s good for King, so it must be good for Tennessee, right?: Tricities.com

“Hey, here’s a thought, let’s merge with another company under investigation for the same crimes to–you know–take the spotlight off of us (King perspective)” Pittsburgh Post-Gazette

“Hey, here’s a thought, let’s merge with another company under investigation for the same crimes to–you know–take the spotlight off of us (Mylan perspective)” Pittsburghlive.com

“Hey, here’s an idea, let’s link our opponent for the senate race directly to King….” The Unofficial Harold Ford Jr.’s blog

Ariad is next in line to benefit from King’s marketing savvy (I guess they were impressed with the way King “unintentionally” shorted Medicaid):
Ariad Press Release

I’m a staunch supporter of the industry, but I’ll be the first to condemn bad behavior by an industry member. Time is too precious to be wasted cleaning the mess left by those with bad intentions.

See the thoughtful editorial by James Love of the Consumer Project on technology. You’ll need a subscription to read the entire thing, but this is the gist of Love’s argument: The need for emergency stockpiles can be anticipated. Limited resources of governments precludes full stockpiling for relatively low-risk events. Therefore, permit governments to to acquire medicines freely from generic suppliers (By freely, he means pay for the drug only not royalties to the patent holder) for the purpose of stockpiling. If the drugs are later used, then pay the patent holders a generous royalty. This approach increases the value of patents on the stockpiled drugs, which otherwise might not be realized due to limited stockpiling.

There are two major limitations to this approach. The first is that it won’t work when the drug has only the emergency use. Love recognizes this limitation and mentions the need for parallel approaches to create incentives for these drugs to be developed. The second, related limitation is a killer. It’s the lack of incentive to innovators to develop drugs they know might later be stockpiled via the “patent-borrowing” procedures. If the drugs aren’t developed, the idea can’t be implemented. A company is not going to spend hundreds of millions to develop a drug if governments can later allow a generic manufacturer to sell it to government(s) at a profit for stockpiling, while they get nothing unless the stockpiles are used. But there is perhaps a way around this limitation too. Instead of allowing patents to be “broken” and giving the rights of manufacture and sale to generic makers, a rule would require the innovator to sell stockpiles to governments at a fixed margin above cost of manufacture and distribution to governments only. These costs would have to be subject to government audit and kept highly guarded. In addition, governments involved would have to provide the additional manufacturing capacity (above the capacity required for a drug’s other commercial uses) needed to meet stockpiling demand. This would require that stockpiling agreements be reached well before a drug is approved for marketing by FDA, with the risk that excess capacity created would be wasted. Easy to implement? No, it would be very difficult and there would be strong resistance from industry, but it would overcome some of the objections to Love’s approach, which I think wouldn’t fly in the U.S. or Europe.

Below read my (unpublished) response to the editorial by the NEJM’s Dr. Jerry Avorn. Funny how my recent non-controversial letter on the FDA was accepted for publication, whereas two critical letters were not.

Dr. Avorn proposes that public funds be used to study medications to liberate us from “the industry-driven approach to defining the nation’s drug-research agenda.” He cites Pfizer’s development of a fixed combination of torcetrapib-atorvastatin as the archetype of this ostensibly flawed approach. However, publicly funded clinical trials would not alleviate these concerns. A fixed combination tablet cannot be ‘unfixed’ to allow for alternative therapy combinations. Furthermore, there is no regulatory or legal mechanism that provides for publicly funded clinical trials of an experimental therapy without the manufacturer’s cooperation. The market-driven pharmaceutical industry is best equipped to research and develop experimental therapies. Pharmaceutical manufacturers will formulate and study new therapies in ways that they believe will maximize their investment returns. Potential consumers of new medicines that are not satisfied with how new drugs have been formulated or studied will not buy them, and the desired investment returns will not materialize—a self-correcting mechanism. The U.S. government will exert substantial influence over this market mechanism as it collectively becomes the world’s largest drug consumer next year.

This article in yesterday’s NY Times isn’t really news, but it’s part of a trend of quasi-editorial stories in the lay press that describe the growing expense of certain new therapies, particularly oncology therapies.

I report on this to prepare you early for the impact of the announcement to occur some time within the next 3 years that US and state governments will begin to consider cost-effectiveness in their equations for government-sponsored formulary and reimbursement coverage determinations for drugs and devices. We’ve seen CMS take some baby steps in this direction already (see my June Note on CMS’ draft guidance on drug coverage determination using health outcome measures), and it seems inevitable that much bolder steps will be taken, as government drug spending spirals out of control beginning with next year’s Part D rollout.

Neither pharma nor the big biopharms seems particularly prepared for the coming policy changes (are they in denial or just poor planners?). But because investors currently value biopharma at a substantial premium to pharma, and because biopharma is relatively more exposed to price-control policies (especially those focused initially on the most costly therapies), long-term investors in the former should be particularly concerned about a selective and fairly rapid de-valuation of the biopharma sector once cost-effectiveness supplants drug re-importation as the focus of drug-cost discussions in the legislature. I have little idea specifically when that will happen, but I’ll be sure to keep an eye on the signs of its imminent approach.