Resident Scholar John E. Calfee

1. Round Up the Usual Critics

A wave of criticism has descended upon the pharmaceutical industry in recent years (not for the first time, by the way; the 1960s were just as bad). Much of this pursues a few themes. One is that drug prices are too high. A second is that drug development has been unproductive in recent years. A third is that many of the newer drugs are not worth their cost, especially the so-called "me-too drugs," which are biologically similar to older drugs but cost more without being more effective. A fourth criticism is that the industry wastes much of its revenues on advertising and other promotion, reducing funds available for bona fide research. Finally, many of these critics believe that most of the credit for the most innovative drugs should go to the National Institutes of Health (NIH) rather than to private industry.

If these arguments were valid, they would carry at least three strong implications. First, price controls would do a great deal of good (by cutting health care costs) and little harm. Second, the FDA should require new drugs to be superior to existing drugs rather than just superior to placebos. And third, the possibility that these measures would undermine R&D incentives is not a problem because public and non-profit research would generate the truly innovative drugs that could improve our lives in the future.

I believe all these arguments are fundamentally wrong. By far the most important argument, however, is the last: that the current pharmaceutical R&D system is essentially expendable in the sense that it provides little benefit beyond what a much scaled down industry would yield. I will address all these arguments briefly while paying special attention to the last one.

2. What's Been Happening to Drug Prices?

A lot of people confuse higher prices with higher spending. But expenditure increases actually come from three sources: higher prices for existing drugs, more usage of existing drugs, and switching from cheaper to more expensive drugs (usually newer ones). Careful studies usually ascribe roughly equal credit to all three sources. That means that the main reason for higher drug spending is not higher prices, although prices do play a role.

But that's not the only source of confusion. Another is the habit of ignoring, oddly enough, price decreases. That happens when patents expire and generics enter the market. We are now in the middle of the greatest generic surge in history. Using pharmaceutical spending in the year 2000 as a baseline, patent expiration and generic entry has occurred at an annual rate of about 10% of the drug spend in the year 2000. By the end of 2004, drugs accounting for about 40% of spending in 2000 had gone generic, including 5 of the top 10 best-sellers--with 3 more scheduled for 2005-2006 (Prevacid, Zocor and Pravachol).

One reason we don't hear much about this is because the critics simply ignore the biggest price decreases. Typical is the series of annual drug price reports from Families USA, an advocacy group. The May 2004 report, for example, examined price increases between 2001 and 2004. It simply dropped the drugs that had gone off-patent after 2001.

3. The Hidden Dynamics of Follow-On ("Me-Too") Drugs

The most common criticism of drug development centers on the so-called "me-too" drugs that employ the same biological mechanism as pioneer brands. This involves a lot more than such high-profile targets as the anti-ulcer drug Nexium. We should be thinking about antidepressants, cholesterol-reducing drugs, diabetes treatments, anti-psychotics, and other therapeutic categories that have seen both blockbuster sales and rapid innovation. There is quite a bit of evidence that follow-on drugs do a lot of patients a lot of good. The newer statins, for example, often out-perform the older ones in clinical trials where the endpoints are the number of heart attacks and deaths prevented.

Me-too drugs are also a powerful tool for cutting health care costs. We should be glad that our research industry does not target only brand new biological mechanisms. That would be a very expensive business model indeed. Fortunately, the industry also works on marginal improvements, exploiting opportunities to make drug therapy better and sometimes opening the door to really radical improvements that happen to lie more or less next door, scientifically speaking. In the meantime, we get price competition as a by-product. Me-too's almost always undercut the prices of the pioneer drugs. I seriously doubt that the people negotiating drug prices for Kaiser Permanente and other health care organizations would prefer to face just one manufacturer of statins or antidepressants instead of half a dozen.

Another part of the me-too story gets almost completely ignored even though it is extraordinary important. For me-too manufacturers, advancing the science is a way to gain a competitive advantage. The classic example is the statin class of cholesterol drugs. Research on one of the follow-on drugs (Pravachol) demonstrated for the first time that using a statin to reduce cholesterol would actually prevent deaths from heart attacks, something that had previously been assumed without proof. (See the informative account by Robert Langreth in the November 16, 1998 Wall Street Journal.) Additional trials for several statins, including Lipitor, the formidable challenger to Zocor and Pravachol, has demonstrated that serum cholesterol is far more important than almost anyone thought (for preventing strokes, for example). We still don't know where all this research will lead, but it has already taken medical research far beyond what anyone envisioned when Zocor first hit the market in 1991.

There are lots of other stories about the benefits of new research from me-too drugs, but they are part of a larger story: new uses for old drugs.

4. The New-Use Revolution

The data showing a slowdown in new drug approvals exclude essential information: discoveries of new uses for old drugs. This kind of discovery has become so common that it amounts to a "new-use" revolution. One of the scientific ironies of the new era of pharmaceutical research is that as drugs become more tightly targeted on biological mechanisms, their uses actually become more diverse. This is because the body typically uses specific mechanisms over and over again, sometimes in what appear to be completely unrelated ways.

Consider the SSRI antidepressants. A recent Science article on the diverse and unexpected applications of drugs that fiddle with serotonin reuptake--which is what the SSRIs do--concluded that the very term "antidepressant" is misleading because there is no scientific reason to think of this drug as being just for depression.[1] Fighting depression just happened to be the first really useful condition that was explored for this very interesting class of drugs.

Another example is the Cox-2 inhibitors like Celebrex (and Vioxx, which is important in this story and may return to the market partly for this reason). These were invented to relieve arthritis pain. But the Cox-2 enzyme turns out to be important for lots of things including cancer and Alzheimer's. Clinical trials to exploit these leads have been underway for years. Celebrex has already been approved for reducing the risk of colorectal cancer, and Vioxx has also achieved promising results. Of course, the big news recently has been that these drugs may cause heart attacks. But even here, me-too economics is of surpassing importance. The traditional NSAIDS (non-steroidal anti-inflammatory drugs) like Alleve and Advil may have the same heart attack risks. The potential risk has been there for decades, but only the new drugs--the Cox-2s--have been put through large-scale long-term clinical trials because those are the only ones still under patent. This is an example of how me-too drug development adds importantly to the research base. Thanks to the me-too's, we are learning about NSAIDs, heart attacks, cancer and probably much more.

Also dominated by new uses are the new targeted cancer drugs, which attack such specific biological mechanisms that they avoid killing every fast-growing cell in sight (as traditional chemotherapy tends to do).

The implications are clear. The annual count of new drug approvals will only show a tick when a new cancer drug or a new statin gets its very first approval. But a new use for an old drug can be as valuable as an entirely new drug, or even more valuable when you consider that we know more about the safety profile of old drugs and one drug will sometimes do the work of two (preventing both heart attacks and strokes, for example).

5. The Marketing-R&D Link

Pharmaceutical marketing is often attacked as being inimical to good research. More nearly the opposite is true. We can assume that on average, marketing increases profits. Because the bulk of private pharmaceutical R&D is funded from profits, marketing is an important tool for generating research funds. It is hardly an alternative use of funds, as is sometimes argued.

Another connection between marketing and research is more subtle but perhaps even more important. Drug development is essentially speculative, driven by the prospect of future profits but with no assurance of any profits at all. Those future profits depend partly on the firm's ability to market the results of successful research. There is a feedback process from marketing (or rather, from the ability to use marketing methods when the time comes) back to R&D. If marketing is curtailed, the returns from research are blunted and then so is research itself.

The notion that really good drugs don't need marketing is without foundation. The medical literature is full of documented examples of under-diagnosis and under-treatment of conditions very amenable to cost-effective drug therapy. Marketing is sometimes essential to get useful drugs into the hands of physicians and patients.

6. We Have a Drug R&D System That Works

I think we have a pharmaceutical R&D system that really works. It consists of a cycle, repeated over and over again, running from near-basic research on biological mechanisms, through animal and human testing including clinical trials that sometimes last for years, FDA approval, market uptake by patients and physicians, post-approval research, the arrival of competing me-too's, perhaps an onslaught of new uses for old drugs, and finally the day when one by one, the prices of each pioneer and each me-too drug drops off a cliff when generics enter the market.

This has brought remarkable new drugs in the past few years, including Xolair for asthma; Amevive and Raptiva for psoriasis; Remicade and Enbrel for rheumatoid arthritis; and Forteo for osteoporosis; and the so-called "targeted" cancer drugs such as Avastin, Gleevec, and Herceptin. More is on the way. An exciting example is the prospect of cancer vaccines that can treat people who already have cancer rather than prevent illness like most vaccines do.

7. There Is No Replacement in Sight

That leaves one big question. Can we get innovative drugs from something other than the profit-seeking private sector? There is no reason to think we can. Quite aside from such practical questions of how to decide where to spend public research monies and how to stop spending when projects fail (as almost all do), there is a more fundamental point. We already have a public research track record to examine. In principle, publicly funded drug research can run all the way from basic research through clinical trials to FDA approval and, if the believers in this approach are correct, it can be conducted at reasonable costs including reasonable amounts lost in drilling dry holes.

If this were really a reliable public drug development system, we should have seen its fruits by now. They would have arrived where that kind of research is most valuable: in the testing of off-patent drugs with great potential and in the creation of new drugs where profit incentives are inherently weak because intellectual property is weak. We should have seen, for example, clinical demonstrations of aspirin for heart disease and cancer much faster than actually occurred. If aspirin had been under patent, its manufacturer would not have taken decades to test the much-discussed hypothesis that aspirin could prevent heart attacks. Or consider HDL, the so-called good cholesterol. If HDL were a patented molecule, we would be reading about all sorts of clinical trial results because boosting HDL may be even better than reducing LDL, which is what the typical statin drug does. But the most prominent (and perhaps only) clinical trial of HDL reported so far involves a very odd HDL variant that, yes, happens to be patentable and has in fact been patented. This important point was emphasized, to its eternal credit, but none other than the editorial writers at the New York Times, whose Nov. 9, 2003 editorial concluded ". . . the fact that such a promising treatment was widely ignored because there was no immediate profit potential is disturbing. In theory, the nation's great web of government-financed medical research institutions should step in to promote development of the kinds of drugs and therapy that industry regards as unprofitable. This story makes one wonder how many similar gaps exist in the vaunted American research establishment."

There are lots of other examples. Research incentives to develop new antibiotics are weak because doctors prefer to use new antibiotics only as a last resort in order to avoid incubating drug-resistant bacteria. The public sector has decried the shortage of new antibiotics but has created hardly any on its own. Research on micronutrients has moved at a snail's pace on such promising substances as folic acid and its relatives, and vitamins B, C, D, and E, whose potential benefits range from preventing birth defects to preventing cancer and heart disease. The same is true about research on the so-called "good fats" such as omega-3 fish oil, where a trickle of publicly supported trials has documented great potential to reduce the risk of heart disease. Even ordinary methanol (beverage alcohol) may be a potent heart attack preventative (it raises HDL). Again, the research has been glacially slow. Finally, there are diseases endemic in poor nations, such as malaria and TB, where progress has been stalled for decades despite billions of public and non-profit dollars for research on pharmaceuticals and vaccines.

One has to doubt whether the public sector is capable of creating breakthrough new drugs. If the public and non-profit sectors were even a remotely adequate substitute for the private market, we would know it by now.

8. Conclusions

I would like to leave four thoughts for the reader. First, changing FDA rules to discourage me-too drug approvals would make R&D far more expensive, would discourage competition and therefore raise healthcare costs, and would forestall the wave of new research that has revolutionized our scientific understanding of the therapeutic categories where competition has been most intense. Second, marketing is not a diversion from useful R&D; it motivates much of the most valuable research. Third, we have a drug development system that works. It creates drugs that are so valuable that their prices are the focus of debate, after which those prices typically plummet as patents expire and generics enter. Finally, it is perfectly clear that no alternative drug development exists. We know this because public and non-profit drug development has failed to take create obviously needed drugs where market incentives have been weak.

John E. Calfee is a resident scholar at AEI.