Will More Capitalism Save Pharma?
By Ed Miseta, Chief Editor, Clinical Leader
Capitalism for some people is equated with greed. Whether this notion is born from increasing consumer resentment towards corporate profits, or perhaps that iconic Gordon Gekko speech in the 1987 movie Wall Street still resonates, capitalism seems to be under greater attack with each passing year. Unfortunately, along with greater resentment of capitalism comes ever increased oversight by government agencies seeking to correct perceived wrongs caused by free markets.
In the December 29th, 2014 issue of Forbes magazine, editor-in-chief Steve Forbes makes the case for capitalism, specifically from the perspective of the pharmaceutical industry. Forbes gives two examples to back up his stance.
He references an article in the Mayo Clinic publication Discovery’s Edge, about the battle almost a century ago to fight diabetes. At that time, the diagnosis of diabetes meant almost certain death. Doctors at the Mayo Clinic discovered that special diets, when strictly adhered to, could prolong the life of a diabetic by up to five years. Unfortunately, these patient-specific diets, based on factors such as weight, metabolism, and blood glucose levels, would practically starve the patient. This early testing on human subjects is thought to be one of the first attempts at personalized medicine.
Forbes then notes testing conducted in 1921 by Dr. Frederick Banting and a student, Charles Best, in a laboratory in Canada. Banting and Best were also trying to solve the diabetes puzzle. Their experiments on dogs managed to isolate, refine, and prove the effectiveness of insulin in an “arduous series of animal studies.” Despite their success, the two scientists were reluctant to patent the discovery. Patenting discoveries in the academic world was, at that time, discouraged. Eli Lilly and his managers eventually persuaded the Canadians to relent, but imagine how many patients might still suffer from this disease had patents not led to medicines being made available to all?
Forbes draws several conclusions from these two studies, which bear repeating. The first is that progress comes from new knowledge. Sharing information with others and building on earlier research will speed up the development of life-saving drugs. The knowledge learned from the preinsulin diets was instrumental in developing the diets that now work with insulin to prolong lives.
Second, we need to break Eroom’s Law (Moore’s Law, spelled backwards). Moore’s law, of course, states the computing power of an integrated circuit would double every 18 to 24 months. With the advances made in science and technology, one might expect the efficiency of bringing a drug to market to have increased exponentially as well. Unfortunately, when it comes to bringing new drugs to market, the pharma industry seems to be moving in the opposite direction. The time to get a drug to market can be staggering. Dr. Banting’s insulin solution was on the market in just 18 months. Forbes notes today it can take upwards of 10 years just for a new drug to clear all of the regulatory hurdles in place.
Eroom’s Law states the real cost of bringing a new drug to market will double every nine years. Therefore, the cost of a drug could double simply in the time it takes to go through the approval process. The law might help many understand why the cost of a new drug can be so high for patients and payers. Forbes pegs the average cost of a new drug to be as high as $2.6 billion, but some have speculated that it may be as high as $4 billion when fully adjusting for failure rates (with some drugs topping out at a hefty $11 billion).
Increased capitalism in drug discovery can more quickly enable the availability of lifesaving drugs to patients. Notes Forbes, “Contrary to myth, capitalism greatly expands the possibilities of people to meet the needs and wants of others (or, in the famous observation of Steve Jobs: People don’t know what they want until you show it to them), to foster human cooperation (think supply chains), to be inventive, and to have new products and services reach a wide market instead of being smothered in the cradle, as so often happens in anticapitalist societies.”
Of course pharma can’t go it alone. For 2015, my top wish will be for greater cooperation between pharma, politicians, and the FDA to bring down the time and cost of bringing needed medicines to market. The FDA’s accelerated approval process is certainly a huge step in that direction. The 21st Century Cures initiative, spearheaded by Rep. Fred Upton, will seek greater political involvement to accelerate the time required in getting medical treatments and devices into the hands of the millions of patients in need.
Corporate inversions (re-incorporating a company overseas in order to reduce the tax burden on income earned abroad) were also a big topic of discussion in 2014. In the pharma industry it was best illustrated by the acquisition of U.K.-based Shire by AbbVie. While the Obama administration did take action to stem the tide of inversions (the Treasury Department tightened the rules to deter the activity by tightening rules governing the movement of headquarters to other countries), the rule changes unfortunately do not address the fundamental and underlying problems with the tax code. At 35 percent (39.1 percent when combined with state rates), the U.S. corporate tax in 2014 was the highest of all 34 countries in the OECD (Organization of Economic Cooperation and Development), a lead it has held or been tied for since France lowered its rate in 2005. According to the International Tax Competitive Index, which looks at corporate, consumption, property, and other taxes, the U.S. is ranked 32nd out of the 34 countries, with only Portugal and France being more onerous. Innovation in the pharmaceutical market is lifesaving, but the R&D required is also very expensive.
Finally, I hope for politicians in DC to come together on reforms that will allow trillions in profits held overseas to flow back into this country. In 2012, GE and Microsoft alone had more than $100 billion socked away overseas, with the total U.S. corporate holdings overseas topping out at around $2.1 trillion. It is estimated that three-quarters of all U.S. corporate cash is held abroad to avoid that 35 percent domestic corporate tax should the money be repatriated. That is money that could fuel a lot of expansion, hiring, and, more importantly, drug research, development, and innovation.
In the 2014 Index of Economic Freedom, the rating of the U.S. once again dropped, placing the country in the 12th spot, just behind Denmark and Estonia. Over the 20-year history of the index the score has experienced significant fluctuations. After rising gradually for the first 10 years, the score has suffered a dramatic decline of almost six points since 2006. The U.S. is also the only country to have recorded a loss of economic freedom in each of the last seven years, fueled by an expansion of government and costly regulations in finance and healthcare. With more capitalism a cure for pharma, this is a trend we can all hope will be reversed.