Eli Lilly CEO Sidney Taurel

"Do you believe we already have all the medical innovation we need? . . . If actions can be taken as answers, I have to assume that many policymakers" believe we do, said Eli Lilly CEO Sidney Taurel, criticizing restrictive pharmaceutical price controls at a March 18 AEI conference.

Taurel described the unique nature of the pharmaceutical industry, in which at the discovery stage thousands of compounds are tested for every drug that enters the market. As a result, the development of drugs is quite expensive--$800 million to $1 billion for a new drug.

Because of these costs, Taurel explained, "major pharmaceutical companies are built upon and driven by blockbuster drugs"--highly innovative drugs with sales above $1 billion a year. All the "big pharma" companies anchor their portfolios with some of these rare and elusive drugs, which represent the first or best treatment for major medical needs. However, "no company has ever found a way to produce big, innovative drugs efficiently, economically, or even predictably."

One of the most important preconditions for innovation in the pharmaceutical industry is market-based pricing. Yet, Taurel observed, "policies supporting innovation are dwindling, while policies discouraging it are proliferating." Third-party observers without access to other information on the motives involved "might reasonably conclude that this amounts to a worldwide campaign against pharmaceutical innovation."

Although currently under threat, "there [remains] only one market in the world that supports pharmaceutical innovation--the United States," Taurel said. The U.S. market is hardly free of government intervention, yet "it is the one market where global innovators find the incentive they need to keep pushing the boundaries."

In other countries, the environment for pharmaceutical innovation is much worse.

Lacy Glenn Thomas III of Emory University outlined the problems in Japan: "It is not that [Japanese pharmaceutical firms] are incapable of innovation, it's that they have been trained by their institutional environment [to be] dysfunctional." The lack of competition among firms "represents a fundamental failure of industrial policy."

A major problem Thomas discussed is that Japanese doctors also serve as pharmacists and receive a commission for every drug they prescribe. An associated problem is the Japanese drug-pricing regime, which renders older drugs cheaper--creating incentives for doctors to prescribe newer drugs to increase their commission. "The incentive is to have wave one, wave two, wave three, wave four of the exact same products, each molecularly different, in order to have high-priced products that doctors will be able to prescribe. If you're doing that, you can't play the blockbuster game. You're fragmenting your resources into products that will sell basically in Japan and nowhere else in the world."

The German story is analogous, said AEI scholar John E. Calfee. "You end up in a similar paradox in the sense that you have a country that is masterful in the arts of applying high technology, and in both cases the countries are not doing very well in this particular market." Calfee saw this problem as part of a larger trend in Europe, which had been a major player in the pharmaceutical market but now has a relatively minor role. Just as Thomas criticized Japanese pricing, Calfee found German and EU pricing to be major problems because they remove the incentives for pharmaceutical companies to produce major new drugs.

Unfortunately, Taurel said, these countries are not alone: "The market restrictions in Germany and Japan . . . are unique only in their particulars. In general, they reflect a global pattern." Warning against price controls in America, Taurel said controls would encourage companies to divert money from research and development on higher-risk, blockbuster drugs in favor of "deliberate imitation and incremental improvements to existing products. The pharmaceutical market would become a world of 'me toos.'" Lower-risk ventures would help companies offset the lower returns.

Taurel concluded that the institution of "short-sighted controls" would "forsake millions of sufferers and yet never deliver effective cost control. It would leave us stranded partway along the curve of progress--advanced enough to do some good at great cost, but not enough to really begin to shrink the massive cost of disease."