Why We Need to Support "Free Market" Principles for the Pharmaceutical Industry

Having spent over 15 years in the Pharmaceutical industry I thought I'd weigh in on some thoughts about why we need to keep a "free market" approach in the Pharmaceutical sector.

A few quick facts about the industry (some of these points may be a bit dated i.e. costs may now be understated).

I would hope that most people would recognize that pharmaceutical organizations are "research based discovery organizations" that can only grow and thrive based upon their ability to develop new drugs. Developing new drugs is an extremely costly, high risk endeavor. The average cost of developing a new drug (approved and to market) is estimated to be $1.3 billion. When you add in the cost of failures -- and the majority of new chemical entities fail -- the cost is even higher. So a pharmaceutical company must generate a lot of cash to fund the discovery engine.

For the past 25 years, a number of complications have steadily eroded the pharmaceutical industry's ability to enjoy a "free market". As a result it becomes increasingly difficult to satisfy Wall Street. Anyone who owns pharmaceutical stocks clearly understands the impact, as pharma stocks have been "underwater" for some time now. In 1984, Congress passed the Hatch-Waxman Act known as the "Drug Price Competition and Patent Term Restoration" which was designed to promote generics and allowed generics to win FDA marketing approval by submitting bio-equivalence studies (as opposed to clinical data); this significantly reduced the cost of generic drugs being brought to market. The congressional assault continued with the 2001 "Greater Access to Affordable Pharmaceuticals Act of 2001," a bill introduced by Senators John McCain and Charles Schumer to streamline and improve the federal government's process for approving generic drugs. These two pieces of legislation are significant because they shorten the average time the original patent holder can hold their patents. When you consider the average length of development is about 12 years and that patent protection in the best scenario lasts 20 years from date of registration, anything, such as improving the ability of generics companies to qualify copy products sooner has a devastating effect on the patent holders revenue generation. As a matter of fact, it is not uncommon for the patent holder organization to lose 60 - 70% of the annual revenue of a "blockbuster drug" -- greater than $1 billion sales per year -- in the first 6 months after a generic company comes to market.

Big pharma spends 12 - 16% of gross revenues per year for research and development. It's one of the biggest "spends" of the company. Generic companies spend a much smaller percentage on R&D, saving their money for the legal costs associated with the numerous court cases filed that are designed to take the discovering company's patent rights as early as possible. Big pharma are going through a particularly bad time with products coming off patent and many of the former "Blockbusters" are prematurely being taken over by the generic companies. Their investment in legal actions has paid off -- potentially at the expense of traditional big pharma R&D. If you do the simple math, you can start to understand why big pharma is beginning to spend a smaller percentage of gross revenue on internally based traditional research and development. Instead they are now doing more deals with small companies that have a promising drug or discovery methodology. This might improve the chances of big pharma having more "hits", but you have to wonder if reducing the amount of traditional R&D is a good thing.

Big pharma has also been attacked in other ways including a much more difficult process to obtain FDA approvals. My former company, GlaxoSmithKline (GSK), has had an HPV vaccine, that is already approved in Europe and other countries, ready for a couple of years ... still waiting FDA approval (although GSK did decide to do extra clinicals to prove efficacy against additional HPV strains). Or what about the questionable "meta analysis" done on GSK's "Blockbuster" type 2 diabetes drug Avandia in 2007. The study was done by Dr. Steven Nissen of the Cleveland Clinic. His study showed an increase in cardiac events. This potentially flawed study caused the sales of Avandia to plunge by 70% in 2007. Additional studies have now been completed which show the drug to be safe when prescribed as indicated.

Then there is the issue of government pricing controls in many countries. Additionally, the issue of "parallel imports" (e.g. Canada buying and selling drugs at a lower price than drugs are available in the U.S.). And now the probability of some type of government sponsored healthcare. The pharma industry has already pledged to President Obama to cut $80 billion in costs over the next ten years. While this pre-emptive move by big pharma may protect further cuts, it still reduces the amount of potential revenue generated during the ten year term.

By now I'm sure everyone reading would agree big Pharma has to work a lot harder to generate revenues than it has in the past. I think you'd also agree that in this industry the "free market" is being constrained. Now I believe everyone should have "access to medicines" and big Pharma works hard to do this. I know that GSK gives approximately $1 million in free drugs away per day in the U.S. GSK takes Corporate Responsibility very seriously. They are the only pharma doing research on three top third world country diseases; Tuberculosis, Malaria and HIV. They spend a huge amount of money and forgo huge revenues each year in the philanthropic work done around the world. This work was always something I was very proud of when working for the company.

So as we slowly destroy the "free market" associated with this industry, it's hard to predict the outcome. Several things we know for sure include; people are living much longer and healthier lives because of pharmaceutical drugs and their quality of life is vastly improved, we are also on the cusp of solving many medical mysteries that will result in either curing or stabilizing many of today's debilitating diseases. But to continue these discoveries takes significant funding. If we allow the pharma industry to become a victim of the current trend of government interference (e.g. banks, automotive), will the industry maintain a financial model that attracts investors, sustains profit levels and has the money to continue the significant investments in R&D that are made today? One thing we can be certain of ... If pharma is allowed to flourish and continue to make major investments in discovery, we will continue to experience breakthroughs that make a real difference in our lives and the lives of our family and friends. If government destroys the model we will see continued loss of jobs, but more importantly premature loss of lives that could be prevented.

Gregg Brandyberry

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