Prescription for change | Economist.com

Prescription for change | Economist.com


The Economist of June 16th has published a survey on the pharmaceutical industry. (Subscription required.)

"Last year, health-care spending in America reached an estimated $1.8 trillion, more than 15% of GDP. Some $200 billion of that went on prescription drugs."

Thus, prescription drugs represent eleven percent of the total. You could cut drug costs in half, and only save about five percent of health costs. Indeed, a significant portion of prescription drug costs come from expenses that the industry makes to educate doctors in how to prescribe drugs, and patients in drug use.

"The global pharmaceutical industry consists of thousands of companies, including biotech firms, generic drugmakers, contract research organisations, wholesalers and retailers. On top of them all sits “Big Pharma”—a dozen or so multinational firms with headquarters in Europe or America (see table 1). Their sales account for roughly half of the world's $550 billion retail drug market. But the pharmaceutical industry is relatively fragmented, with the biggest company, Pfizer, holding less than 10% of the global market. "

But when you look at individual drugs, especially the blockbusters under patent protection, monopoly reigns.

"Although output has been falling, drug companies have been increasing their R&D spending by about 6% a year since 1995, according to the Centre for Medicines Research International (CMR), to a forecast total of $55 billion by the end of this year, three-fifths of which came from big drugmakers. Given that it takes an average of 12 years to develop a drug from start to finish—depending on the nature of the molecule and the disease it tackles—the drugs coming to market today reflect the investments, and the science, of a decade ago. The big question is whether today's investments will yield better returns in the future. To answer that, it is necessary to understand why the output of drug companies has been declining, and what can be done about it. "

"Striking it rich in drug R&D is a chancy business. Drugs fall by the wayside at every stage: for every 10,000 molecules screened, an average of 250 enter pre-clinical testing, ten make it through to clinical trials and only one is approved by the regulator."

Only a fraction of approved drugs make a profit for the company that developed, manufactures and distributes the drug. Only a small fraction reach the "blockbuster" ranks, but these tend to pay for the entire R&D process.

"The cost of drugmaking is also going up. A much-quoted figure for bringing a drug to market is $802m, calculated by Joseph DiMasi, an economist at the Tufts Centre for the Study of Drug Development. Mr DiMasi used confidential industry data from 1983 to 2000 for a selection of new drugs discovered and developed within big companies. The average out-of-pocket cost for these drugs was just over $400m; the rest represents the discounted opportunity cost of capital. Dr Paul at Eli Lilly says the cost of bringing a new drug to market has now risen to $1.5 billion; others put it even higher."

I don't know what this paragraph means. Do the numbers include amortized costs of the 10,000 molecules examined for every drug brought to market?

"ASK a big drug-company boss why he is in the business of making pharmaceuticals, and he will say he wants to “address unmet medical needs”. But not all medical needs are equally attractive. Most of the 7,500-plus medicines currently in development by biotech and pharmaceutical companies are for chronic diseases of the rich world. At the same time, some of humanity's nastiest afflictions get little attention. Tropical diseases, such as sleeping sickness or leishmaniasis, are a turn-off for drugmakers because they strike mainly in poor countries and offer little hope of an attractive return on investment. Of the 1,500 or so drugs launched over the past 30 years, fewer than 20 deal specifically with tropical disease."

Perhaps we need different public policies for the development of drugs needed for public health, versus that for drugs needed for treatment of individual patients. The lack of drugs for tropical diseases, and the lack of vaccine producers are scandals.

"it is not just poor countries that are missing out. For example, there is an urgent need for new antibiotics in industrialised countries as drug-resistant bacteria emerge. Yet antibiotic development—once the cornerstone of the drug industry—has fallen out of favour with Big Pharma firms because of scientific hurdles and regulatory requirements."

Again, maybe we need different policies for antibiotics and drugs that treat accute, infectious diseases, versus for drugs that treat chronic conditions and diseases.

"There are now about 20 such partnerships, focused on developing new drugs, vaccines or diagnostics for particular diseases of the developing world that will make them accessible to poor populations."

This is an important trend, and one hopes it will continue and expand. Indeed, new institutional mechanisms are required to develop, manufacture and distribute pharmaceuticals for developing nations. These partnerships are pathfinders for such institution building efforts. Read the article.

"The past decade has seen a massive rise in pharmaceutical marketing, to the point where a firm such as Novartis is spending around 33% of sales on promotion, compared with about 19% on R&D."

This seems to me to be a problem. Some such expense is appropriate, but marketing probably should not be nearly twice R&D! Again, maybe we need to institutionalize better ways to disseminate information on pharmaceuticals.

"Another sore point for the industry is direct-to-consumer advertising. Only America and New Zealand allow makers of prescription drugs to promote their wares directly to the public. In most other countries the practice is prohibited."

Same comment.

Given the high cost of drugs in the United States, "is the rest of the rich world free-riding on America? The answer depends on the type of drug and the particular supplier. Different Americans pay vastly different prices for their drugs. Some of the least well-off consumers, like the Falls, pay some of the highest prices because they do not come under the umbrella of a big employer or government agency that can negotiate discounts.

"On the whole, generic drugs are actually cheaper in America than in many parts of Europe........The price differentials that really agitate Americans are those on blockbuster patented medicines, for which they pay much more. But a recent survey conducted by Mr Kanavos of the top 50 branded drugs in ten industrial countries shows that the differentials between prices in America and other rich countries are narrowing. The ten oldest drugs, launched before 1988, are up to four times more expensive in America than elsewhere; the ten newest drugs, launched after 1997, are only twice the price."

So, yes, patients in the United States are paying more than their fare share of pharmaceutical development costs, and other rich countries should step up to the plate.

"India and China hold great pharmaceutical promise"

"Drugmakers might actually further their fortunes by teaching people when, and when not, to use their products. People who feel they are getting their money's worth tend to complain less about the bill. Other pharmaceutical companies have been working along similar lines."

Firms empowering patients with information is great. But you can't have it both ways. The education costs money, and it that money is considered "advertizing costs" you can't complain that advertizing costs are going up.