Monday, June 9, 2014

Profits or Drugs?

There are two stories in The New York Times that, although not directly related, are the basis for today's post. The first, by Andrew Ross Sorkin, Do Drug Companies Make Drugs, or Money?, appeared in the Business Section on page B1 on June 3, 2014. The second, by Andrew Pollock, New System for Treating Cancer Seen as Hopeful, appeared on the same page of The New York Times on the same day. Sorkin's provocatively titled article focused on Valeant Pharmaceutical International's takeover bid for Allergan and on Valeant's strategy, which Sorkin characterized as buying pharmaceutical companies with revenues produced by active and successful pharmaceutical research programs and then increasing profits by cutting back on R&D. Sorkin's article, as the title indicated, posited a tension between focusing on rewarding investors with increased profits and investing in the development of new and innovative therapies. My purpose in highlighting Sorkin's article alongside Pollock's is not to take issue with Sorkin's analysis of Valeant's business strategy, but to respond to the article's title question. The answer is that pharmaceutical companies' primary obligation is to their shareholders and that means their primary objective is to reward those investors with increased profits--that is, "make money." However, as Pollock's article about a very promising new class of anti-cancer drugs illustrates, developing new and medically-valuable therapeutics is a major, although not the only, way that pharmaceutical companies seek to earn those increased profits. Now if all I had to say about these two articles is that pharmaceutical companies, like all other businesses, attract and reward investors by making profits and developing important new drugs is a way of making large profits, I would only be stating the obvious.
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To me, the fundamental question of pharmaceutical policy is this: How can we use the complex legal and regulatory environment in which pharmaceutical companies operate (and here for this purpose I exclude generic pharmaceutical companies) so that making innovative and important new drugs is the best and virtually the only way for those companies to earn the substantial profits required to reward their investors and ensure a future investment stream? In "What is Pharmaceutical Policy and What Is Its Goal?", the post at the top of this blog, I highlighted patent law, the FDA, and the various insurance systems that subsidize some portion of patients' pharmaceutical costs as all having a significant role in steering pharmaceutical companies' development efforts. Thus those areas of law and regulation, as well as others, are responsible for the results of pharmaceutical companies' development efforts--the mix of the amazing and the marginal, first-in-class breakthroughs like Glivec and me-too1 drugs like Nexium. The premise of this blog is that we can have a much better mix of drugs--representing more innovation and providing more health--for the same overall cost or even at a lower cost than we do today.

Each of the major areas of law and regulation can be tweaked to produce overall better results. For example, patent law, as it is currently interpreted by the United States Patent and Trademark Office, encourages narrow pharmaceutical patents that provide ample room for marginal innovation and me-too drugs. The FDA's current application of its oversight of the drug development process does not push drug companies to determine the subgroup of patients who are truly benefitted by a drug. Instead, drug companies narrow the patient population being studied (which defines a drug's labeled indication and potential market) only enough to produce a statistically significant result in clinical trials. If a drug can be shown to be effective in all adults with major depressive disorder, that will become the labeled indication and primary market, even if additional research would have shown that 30% of that population varies in some biological dimension that makes the drug wholly ineffective for that group. As I discussed in my post on "Comparative Effectivness: A Major Priority for Pharmaceutical Policy" (June 2, 2014), the task of funding the research to identify how well competing drugs work, and in whom they work best, is largely left to the government, where adequate funding for that task is very problematic. As for reimbursement, under the Affordable Care Act, insurers must offer coverage of at least one drug in every class, and more if their state's benchmark plan does so.2 However, each insurer's formulary can vary in structure; and, the extent to which the insurer's formulary actually encourages doctors and patients to make optimal choices in deciding on prescription drug therapy is problematic, at best. So pharmaceutical companies set out to make money and a variety of laws and regulations have a profound impact on how pharmaceutical companies plan to and actually do earn profits. As Pollock's story illustrates, the current system does provide the potential for enormous profits for research and development that leads to innovative and extraordinarily valuable new drugs. However, it also leads to extraordinary profits for drugs that provide almost no innovation or additional value, such as Nexium. The goal is to adjust the rules so that we get far more of the former and far less of the latter.

1 "Me-too" is a term used by many participants in the pharmaceutical law and policy world to describe the numerous drugs that are very similar to a highly innovative "first-in-class drug" and enter the marketplace after the first-in-class drug has been approved. In turn "first-in-class" drugs work through a "new and unique mechanism of action for treating a medical condition." FDA, "2011 Novel New Drugs" available at: Generally a new and unique mechanism of action means the drug works on a new biological target in the body. Me-too drugs work through a mechanism of action previously used to treat the same condition and often have chemical structures that are very similar to the first-in-class drug.

2 45 CFR 156.122.

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