Healthy Skepticism Library item: 16626

Warning: This library includes all items relevant to health product marketing that we are aware of regardless of quality. Often we do not agree with all or part of the contents.

Publication type: Magazine

Developing new drugs: Reds under our meds
The Economist 2009 Aug 27
http://www.economist.com/businessfinance/displaystory.cfm?story_id=14327335

Abstract:

Could health-care reform in America stop innovation in pharmaceuticals?

THE number of Americans denouncing their president’s plans for health-care reform as unvarnished socialism would presumably rise dramatically if Barack Obama decided to institute price controls for drugs. Yet a study published this week in Health Affairs, an industry journal, suggests he should do exactly that.

Governments around the world are struggling to cope with the rising cost of health care, and of drugs in particular (see chart). Many rich countries have resorted to price controls, and some on the American left advocate them noisily. But drug firms maintain that America, where they are free to price patented pills largely as they please, is the engine of global pharmaceutical innovation, while price-controlling Europeans are free riders. That, says PhRMA, the industry’s lobby based in Washington, DC, is because price regulations seen in other rich countries “chill innovation, impede patients’ access to the newest cutting-edge medicines, and trigger innovators to relocate to countries with more progressive public policy.”

The new study, written by Donald Light, a visiting professor at Stanford University, claims that European drug firms are more innovative than American ones, in spite of price controls. That flies in the face of an influential paper published in the same journal in 2006, which examined the geographic origins of drugs registered between 1982 and 2003 and concluded that favourable public policies had helped propel America to the top of the list. PhRMA has rushed to denounce Mr Light’s study, insisting it gives a “distorted picture” and understates the impact of “home-grown innovation”. (One of the authors of the earlier paper, Henry Grabowski of Duke University, has also taken issue with Mr Light’s findings.)

The tiff exposes two fallacies that come from looking at a globalised industry through national spectacles. Both sides attribute new drugs to a specific country of origin (based on the location of the headquarters of the firm that first launches them). But Patricia Danzon of the Wharton Business School argues that this makes little sense when most big drug firms have laboratories in several countries and often acquire drugs under development from biotechnology firms located elsewhere. By the same token, firms develop drugs for the global market, observes Alan Garber of Stanford, not just for the local one. So the imposition of price caps in a given country will not necessarily quash innovation there, thanks to the lure of exports.

The exception to this rule, of course, is the United States, which alone accounts for over 40% of global sales. So what would happen if America’s Congress imposes price regulations? If the cuts are swingeing, then the prize for inventors everywhere will be reduced. But short of such a radical scenario, pricing reform would not kill off innovation, according to Sanford Bernstein, a financial-research firm. It has analysed the likely impact of a cut of 20% in the prices Medicare, the government health scheme for the elderly, pays for its drugs. It concluded that the earnings per share of big pharmaceutical firms would drop by 3-8%.

There is even reason to think that pricing reforms may boost innovation. Britain and Germany are pioneering comparative reviews of drugs’ effectiveness and cost-benefit analyses aimed at reimbursing firms for new drugs based on how well they perform. Some firms have embraced this idea: Janssen-Cilag (owned by Johnson & Johnson, an American conglomerate) persuaded Britain’s health service to accept Velcade, its expensive cancer drug, by offering a money-back guarantee if it did not work as well as promised.

The American pharmaceutical lobby is violently opposed to making such an approach compulsory. Some suspect that its opposition stems from the fear that many expensive and profitable pills would be found to be of dubious value. But as Ms Danzon points out, “Comparative-effectiveness reviews are an indirect form of price control-but one that is consistent with encouraging innovation.”