Why the Pharmaceutical Companies are Failing

• In 2005, GM lost $4.8 billion on its North American auto operations in the first nine months during one of the best car markets in history. During 2005, GM shares fell almost 54 percent. The company's market cap now stands at 1/15th that of Toyota's and is dropping.
• During the early 1990s, major hub-and-spoke commercial airline carriers lost every penny they had ever made since Kitty Hawk. All of the legacy carriers either have filed for or are facing bankruptcy.
• Merck, as an example of the pharma industry, saw its profits shrink in each of the last three years. Over the past five years, the company's stock price has fallen 70%. The following graph demonstrates the five-year weekly stock Dow Jones stock value of the US Pharmaceuticals Index.

What is wrong with the Pharmaceutical Industry?
Perhaps the most salient criticism of the industry comes from within. According to Sidney Taurel, Eli Lilly's chief executive, "pharmaceutical manufacturers are failing in their core competency. They do an awful job of finding new medicines. They have been unable to get beyond reliance on billion-dollar blockbuster drugs that are both over marketed and over prescribed."

Now non-proprietary generic products are coming on the market to displace these blockbuster, billion dollar revenue producers that serve as the industry's foundation. In fact, generics have now reached critical mass in the market. It's possible to treat a broad range of common conditions without any brand-name drugs. Some 60% of prescriptions in the U.S. are filled with generics, compared with less than half in 2000.³

Replacing proprietary products with new blockbusters is a ubiquitous problem. Poor lab productivity is bedeviling almost every drug manufacturer.⁴ The reason for this non-productivity is not difficult to decipher. Based upon information provided in public filings with the Securities and Exchange Commission, U.S. drug companies spent almost two-and-one-half times as much on marketing, advertising, and administration as they spent on research and development over the past half decade.⁵

Furthermore, much of the industry-funded research is not innovative. The publicly filed data demonstrates that most of the industry's spending is directed toward development of "copycat" drugs.⁶ These drugs do not provide a qualitatively different treatment than existing drugs. Rather, their primary purpose is to allow companies to evade competitors' patents and game the system. According to the Food and Drug Administration, more than 70% of the drugs approved in the last decade fell into this category.

Extending the Blockbuster era through advertising, buying competitors and political contributions
Companies in mature industries that are having difficulty meeting the evolving demands of the market all attempt to extend their dominance through advertising, eliminating competition through acquisitions and by exploiting political relationships. The pharmaceutical industry demonstrates all of the above characteristics in its failing quest to extend the blockbuster market. Each of these activities is shortsighted and counterproductive in helping the pharmaceutical industry meet the evolving needs of the market.

For the past decade, the pharmaceutical industry has gradually shifted the core of its business away from the unpredictable and increasingly expensive task of creating drugs and toward the steadier business of marketing them. Pharmaceutical manufacturers have become the biggest advertiser in the world since the Food and Drug Administration first allowed branded drug ads for consumers in 1997.^7,8

Since 1994, there have been 38 major drug company mergers. Unfortunately, these mergers generally result in the new combined company loosing market share and shareholder value. ⁹

Finally, since 1998, drug companies have spent $758 million on lobbying the government - more than any other industry.¹⁰ The pharmaceutical industry has 1,274 lobbyists at the federal level - more than two for every member of Congress. ¹¹

The return on this investment has been rewarding. Drug companies won coverage for prescription drugs under Medicare in 2003.^12,13 In addition, this program now blocks the government from leveraging its purchasing power to negotiate prices downward. Drug companies have so far kept out imports of cheaper medicines from Canada and other countries. In addition, they have protected a Food and Drug Administration program that uses company fees to speed the drug-approval process for their products.

The following reality can no longer be ignored; no other corporate investment brings returns even close to political bribery.^14,15 The reality that there is a fine and sometimes indistinct line between bribery, which requires a specific quid pro quo, and legal mutually beneficial conduct gives the bribing party cover. Contributing to a governing politician's campaign costs relatively little and generates huge returns. Government policy makers determine which products drug companies can market and how they are labeled. The government buys massive quantities of drugs through Medicaid, the Veterans Administration and other programs. Once the new Medicare prescription drug benefit takes effect in 2006, the government will be paying 41% of Americans' drug bills, up from 24% now.

The predictable future if fundamental change does not occur in the pharmaceutical industry.
Any failing sector of the economy can inflict tremendous damage as it collapses. The pharmaceutical industry is no different. Unless new approaches to developing and delivering pharmaceutical products are in place, and soon, the following predictable catastrophic consequences will unfold for medicine and the economy in the immediate future.

The consumer of health care products and services is now in open rebellion and the entire pricing structure for pharmaceutical products is about to collapse.
In a recent poll by the Kaiser Family Foundation,¹⁶ consumers when asked about why they thought health-care costs were escalating cited excessive profiteering by drug companies most often. The consumer's interest in product cost coincides with their increasing exposure to pharmaceutical prices. Health insurance beneficiaries are now being required to pay larger amounts out of pocket for drugs--through more sophisticated multi-tiered prescription plans. This increased exposure to financial liability is now igniting a consumer rebellion, especially among the aging baby boomers.

Specialty drugs will continue to cost more than the patient can afford to pay.
Spending on specialty pharmaceuticals - biotechnology drugs and other expensive medicines prescribed by medical specialists - is growing twice as fast as traditional prescription drugs.¹⁷ Furthermore, this spending will grow by between 20 percent and 50 percent annually. ¹⁸

In the last five years, the prices for specialty drugs rose 40 percent per year while overall drug costs rose 15 percent annually. These drugs have become a multibillion-dollar product line for pharmaceutical manufacturers. With no cap on prices and patients with few options, companies found they could profit in small markets - charging as much as $600,000 a year per patient for drugs that people would need their entire lives.

Even after the current seven-year monopoly for specialty product expires, there is often no competition for many of these "orphan drugs." That is because there is no federal process for gaining approval of generic versions of biotech orphan drugs. ¹⁹

New product development will be inhibited.
Pharmaceutical company investors do not countenance long-term bets on developing high-risk breakthrough technology. As a result, drug companies have generally off-loaded this risk to the taxpayer. ²⁰

Most of the key pharmaceutical breakthroughs of recent decades have been the result of research supported by the government or the nonprofit sector, not drug companies.²¹ These discoveries have delivered the blockbuster patents to the drug companies.

Break through research in cutting edge technologies such as nanotechnology²² and regenerative medicine are far beyond the investment capability of private pharmaceutical corporations.

The evolving dependence of academic research on pharmaceutical funding (see below) tips the focus from the basic research that has produced the above to applied studies that yield a more immediate return on investments.

The quality of academic research will deteriorate further.
Medical school faculty members are now overly dependent upon research funding from pharmaceutical companies. Last fall, the New England Journal of Medicine published a study of 108 medical schools showing that more than 90% let pharmaceutical companies exert significant inappropriate control over research within these institutions.^23,24

Thirteen of the world's leading medical journals joined in speaking out against the inherent risk of drug company funding for research and the resulting distortion of scientific research data for the sake of profits that result.^{25,26,27,28,29} Complaining about this problem is not an adequate response. In the future, scientific journals need to require an independent audit of the accuracy and completeness of research reports before they are sent out for peer review. These scientific auditors should be statisticians and medical experts who are completely free of conflicts of interest. The auditors must be given unfettered access to all of the data. ³⁰

Over the last 25 years, clinical research has been largely privatized. Three-quarters of the clinical studies published in the three most respected medical journals are now commercially funded.^31,32,33 As a result, our medical knowledge grows not in the direction that best improves our health but toward corporate profits. The sad product of all this data spinning - most of the evidence in what doctors believe to be "evidence-based medicine" is more infomercial than dispassionate science.

This was not always so. Before 1980, most medical studies were publicly funded, and most academic researchers scorned industry support. Now, however, the vast majority of clinical trials are commercially funded, and with the financial stakes so high, there is mounting evidence of individual scientists and corporations manipulating their findings.

In addition, most of the senior medical faculty members who serve on boards that review patient safety in clinical trials in academic institutions are consultants to and thereby derive income from the pharmaceutical industry. As of 2001 and early 2002, 94% of medical faculty serving on institutional review boards had relied upon pharmaceutical manufacturer financial support for their research activities.

Proposal for the future
In the past, the reliance upon the patent protected pharmaceutical manufacturer business model has been a relative success. Pharmaceuticals, many being enzyme inhibitors, have literally transformed health care over the last several decades. Previously untreatable illnesses are now prevented, cured, or managed effectively with prescription drugs. The problem we face today resides in the industry's growing multifaceted inability to meet medicine's needs in the future.

We are now entering an historic flex point within health care. The industry is leaving a one-size-fits-all model for medical therapy and entering an era of individualized medicine. In this era, "pharmaco-genomic" tests will detect the individual patient's susceptibility to disease and predict how he/she will respond to therapeutic options. This genetic based evaluation will dictate therapeutic design and will lead to reduced adverse drug reactions. ³⁴

The pharmaceutical manufacturing business model that is based upon blockbuster products that are based upon patents that are based upon intellectual property, mostly paid for by the taxpayer, is no longer working. The inefficiency of patent-supported drug research may have been acceptable in the past, but with soaring drug prices and the industry's clearly demonstrated inability to innovate, this business model is no longer viable.

What we really need is a pharmacy manufacturing business model that looks more like the electronics industry where innovation and competition drive down the consumer's cost.³⁵

The electronic industry's decline in price is directly attributable to improved manufacturing techniques and increasing levels of competition - both of which are conspicuously lacking in the patent based pharmaceutical industry. The technology sector has consistently produced more powerful but less expensive devices, ranging from cellular phones to microwave ovens and laptop computers. This business model has served society well over the past decade.

The comparison between the pharmaceutical and the technology industries intersects at Moore's law³⁶ and the mapping of the genome. Just as the exponential growth in computing power has driven the favorable cost curve for technology so too the growth in genomic derived therapeutic sites³⁷ should stimulate competition and drive a similar curve for pharmacy cost.

So, how do we construct a pharmaceutical industry that leverages technology to drive down cost to society? It will require restructuring in both the private and the regulatory sectors.³⁸ We need to develop a generic based pharmaceutical industry with open sourced research that is not based upon proprietary, patent based monopolies.

Within this construct, the federal government would increase its existing spending on pharmaceutical related research enough to make up for the non-productive spending now being supported by the patent based system. This would represent an increased cost of between $5 billion and $28 billion.

With the government paying for more than 40 percent of all pharmaceutical costs starting in 2006, the above additional public funding would be more than off set by lower drug costs in entitlement programs (Medicaid, Medicare, VA) and pension plans for public employees with the savings in the private sector representing a bonus. Current estimates project that the savings from this structural change would generate more than a ten-to-one return or about $200 billion a year in drug spending. ³⁹

The researchers in universities, foundations, and the NIH, who currently focus their efforts on basic research, would be the primary recipients of pharmaceutical research funding in the future. This basic research is now the source for developing breakthrough biotech, nanotech and regenerative technologies, and represents the appropriate focus for future research investing.

In addition, funding non-private, non-patent based research opens the opportunity for better cross-pollination between the sciences. Just as in the past where new chemicals to treat disease were discovered serendipitously, in unexpected places such as the rain forest, answers to biologically derived, nanotechnology and regenerative therapeutic approaches will come from fields such as engineering and physics which are outside the biology discipline.

The only real difference from today will be the taxpayer through government and not-for-profit grants and contracts will be the funding source for research. All of the findings from this research will be available to the public. All manufacturers will have access to this data and then be free to compete in the market on efficiency and price just as is the case for the thriving generic manufacturing industry today. ⁴⁰

The model for a not-for-profit pharmaceutical company exists. As reported in the April 14, 2005 edition of the Economist, the Institute for OneWorld Health⁴¹ focuses upon infectious diseases that ravage third world countries.⁴² OneWorld raise development funding from non-commercial sources and enlists researchers to contribute their expertise to the development process pro bono. With public funding, this model for drug development would have the resources it needs to focus development on the needs of medicine, not the propriatary interests of corporate shareholders.

Initiating a debate about alternatives to the current patent based pharmaceutical industry will draw attention. Legions of experts, many with ties to the industry, will argue that medicine's future will collapse without the vital role played by the drug companies. However, they will be unable to overcome the looming reality that the current system is not meeting the market's evolving need.

In reality, we have little choice but to consider options such as the generic based option presented above. The pharmaceutical industry, as currently configured, cannot deliver new breakthrough therapies that are now accessible through the success of basic research. America will not accept the price structure currently in-place, which is now rationing new pharmaceutical therapy, based upon wealth rather than need.

We can no longer permit the declining pharmaceutical manufactures to damage our public policy making, destabilize entitlement programs, destroy retirement plans, degrade the research quality of our academic institutions or generate unconscionable profits from defenseless patients. These manufactures have demonstrated their investor dictated inability to transition from the highly profitable one-size-fits-all blockbuster era to the individual therapy era. Over the horizon medicine requires affordably priced orphan drugs, which the patent based industry cannot deliver. The cost for funding these new technologies just as is the case for public services and infrastructure can only come from federal research funding.

It is now time to thank the patent based pharmaceutical manufactures for their prior contributions and bid them success in their future outside of medicine.

djgibson@winfirst.com

1. A drug whose sales exceed $1 billion per year. Generalists rather than specialists usually prescribe these products.
2. Under the Orphan Drug Act, passed in 1983 to encourage the development of treatments for rare diseases, pharmaceutical and biotechnology companies can exclusively market medications with orphan status for seven years. The Food and Drug Administration (FDA) awards orphan status to treatments for diseases that affect less than 200,000 U.S. residents annually.
3. Source: IMS Health.
4. Across the industry, total FDA new drug approvals dropped 47% from 1998 to 2004.
5. The drug industry spends far more on salespersons than it does on scientists. Its army of nearly 70,000 U.S. salespeople costs roughly $7 billion a year. And although they often deliver information doctors need, they do so at a high cost: The average sales call lasts seven minutes but costs companies $100 to $300 each to make.
6. Think Mevacor, Zocor, Pravachol, Lescol, and Lipitor
7. In 2003 alone, the industry spent $3.22 billion on direct to consumer advertising.
8. In 1998, according to the research firm Competitive Media, Schering-Plough Corp. spent $136 million advertising just one medicine, its allergy drug Claritin. That is more than Coca-Cola Co. spent advertising Coke, or Anheuser-Busch spent advertising Budweiser beer.
9. The reason for this lies in the disruption these mergers cause in the labs. The new merged company invariably demonstrates a product pipeline that is significantly smaller than those of the predecessor companies.
10. Based upon government records analyzed by the Center for Public Integrity.
11. Executives and employees of the pharmaceutical industry donated more than $17 million to candidates for federal office in the 2004 election, favoring the governing Republicans 2-to-1.
12. The Bush administration's price estimate has escalated from $400 billion over the next decade to $720 billion.
13. American political customs assume that we suspend our disbelief and buy into the notion that there typically is no quo for the quid, that lobbyists and their business clients shower millions of dollars on politicians not because they are seeking favors but because it is the patriotic thing to do. The conventions of the game also require us to believe that politicians aren't influenced by huge campaign contributions, and that they go on golfing trips to Scotland, or seminars in Maui for California legislators, to better educate themselves on pressing legislative business.
14. With his casinos, phony charities and Scottish golfing trips, Jack Abramoff has drawn attention to Washington's fascinatingly filthy underbelly. The stench has a long history. The list of nefarious characters that got caught trading favors for lobiest money include: Jim Wright selling his "book" in bulk to the Teamsters, Tony Coelho of "Honest Graft" fame, Abscam, the Keating Five, Clark Clifford and BCCI to mention just a few.
15. "Duke" Cunningham (R-San Diego) left a paper trail of gifts such as a Rolls-Royce (and $17,890 in repairs), use of a corporate jet, silver candelabra, Persian carpets, a sofa, a sleigh bed and much more, all courtesy of the defense industry which got Pentagon contracts in return.
16. http://www.kff.org/healthpollreport/feb_2005/index.cfm
17. Source: Medco Health Solutions Inc., one of the largest pharmacy benefit managers in the market today.
18. Specialty drug costs reached $42 billion in 2004 and will rise to almost $69 billion next year, when spending on specialty pharmaceuticals is projected to make up 25% of the nation's pharmacy bill.
19. Without competition, biotechnology prices often remain high for years after patents and other government-granted exclusivities expire. For example, Genzyme Corp.'s Gaucher Disease drug, Cerezyme, is priced at $200,000 for the average patient today, 14 years after the first version came to market and four years after the expiration of its orphan-drug exclusivity.
20. The industry claims to spend about $27 billion a year on research. As discussed above, most of this spending is used to game the patent system. Significantly, greater funding each year comes from universities, charities and direct government support through the National Institutes of Health for basic science research that leads to break-through discoveries.
21. For example, the polio vaccine, understanding the immune system, learning how to modulate inflammation, understanding the role of chemical balance in the central nervous system, defining the role of enzymes in lipid metabolism and understanding the virology causing AIDS -
22. Nanotechnology, the science of building materials atom by atom, will yield new medical diagnostic tools and treatments unlike anything available today. Fully developed, this technology will make today's microchips seem primitive. Billions of dollars in federal spending for research and development will be needed to fulfill the promise of this technology.
23. Mello MM, Clarridge BR, Studdert DM. Academic medical centers' standards for clinical-trial agreements with industry. N Engl J Med 2005; 352: 21.
24. These academic institutions rarely ensure that their investigators have full participation in the design of the trials. Research faculty members lack unimpeded access to trial data and do not have the independent right to publish their findings.
25. JAMA; Vol. 286 No. 10,; September 12, 2001 http://jama.ama-assn.org/issues/v286n10/ffull/jed10056.html
26. The Lancet, the New England Journal of Medicine, the Journal of the American Medical Association and other major journals accused the drug giants of using their money - or the threat of its removal - to tie up academic researchers with legal contracts so that they are unable to report freely and fairly on the results of drug trials.
27. The New England Journal of Medicine made public its concerns about crucial data having been withheld from its 2000 report on a study sponsored by Merck exaggerating the safety of its blockbuster drug Vioxx, now withdrawn.
28. In January of 2006, Johnson & Johnson subsidiary failed to include the deaths of two patients in a clinical trial of its new drug for heart failure, Natrecor, in an article published in the Journal of Emergency Medicine.
29. Drug makers do not just buy advertising in pages of academic journals. According to Richard Horton, editor of the Lancet, they also pay up to $1.75 million for reprints of articles favorable to their drugs, which sales reps then hand out to doctors.
30. Source: John Abramson, M.D., clinical instructor at Harvard Medical School and author of "Overdosed America"
31. The New England Journal of Medicine, the Journal of the American Medical Assn. and the Lancet.
32. Source: John Abramson, M.D.
33. A 2003 report in the Journal of the American Medical Assn. found that clinical studies funded by drug companies are three times more likely to conclude that the sponsor's drug is the treatment of choice, compared to studies of the same drug that were not commercially funded.
34. These previously unforeseen drug reactions cause 100,000 deaths and two million hospital admissions each year in the U.S.
35. Electronic technology consumer pricing has plunged 88 percent since December 1997, while the consumer price index as a whole is up 22.5 percent over the same period.
36. Moore's law is a rule of thumb in the computer industry about the growth of computing power over time. Attributed to Gordon E. Moore the co-founder of Intel, it states that the growth of computing power follows an empirical exponential law.
37. The 30,000 to 40,000 human genes suggested by genome sequencing data create many more pharmaceutical proteins models and logarithmically increases the targets for therapy.
38. The Food and Drug Administration has become a liability that primarily serves the interests of manufacturers in today's market.
39. Dean Baker, an economist, co- directs the Center for Economic and Policy Research in Washington. Web site: www.cepr.net
40. There will no longer be a need for direct to consumer advertising. The incentive to subvert governmental policy making with political contributions will be gone. In addition, will we see the army of drug reps traipsing though doctor's offices hawking proprietary branded me-to products disappear in the future.
41. http://www.economist.com/printedition/displayStory.cfm?Story_ID=3860425&no_na_tran=1
42. About 90% of the planet's disease burden falls on the developing world. Yet only 3% of the research and development expenditure of the pharmaceutical industry is directed toward those ailments. The rest goes towards treating diseases of the rich.