Counter Economics

How efficient is the current pharmaceutical industry? The industry has 6 different drugs which are copies of each other for “erectile dysfunction” (a medical term for being either too overweight, out of shape or too old to maintain an erection) Some say it does not need to be analyzed and that the US pharmaceutical industry is so shockingly innovative that they deserve all the money they pull from the system. We disagree.

How Pharmaceutical Research is Managed in the US

In order to understand how so much goes into pharmaceutical research, but so little comes out in terms of beneficial drugs, it’s important to understand how drugs research is funded and who performs the research. Did that last sentence surprise you?  It’s true, the US pharmaceutical comes up with very few new drugs per year. Almost all the drugs you see, such as Crestor or Flowmax are really just old drugs that have seen just minor enough alterations to get a new patent. However, they are the same chemical compound, and they have the exact same effect in the body. They do this partially because the period of pharmaceutical discovery has mostly passed and no program such as the Human Genome project (which was mostly a boondoggle and giveaway to elite interests such as the politically connected Genentech) is going to change that. So instead pharmaceutical companies are passing off the illusion of innovation for real innovation. This is really nothing new. Car companies have been creating design changes in order to create the illusion of progress since the mid 1920s, the difference here is that pharmaceuticals are in the area of public health.

The FDA is No Help

Big pharma have so taken over the FDA that they willingly rubber stamp almost any new drug no matter how illusory the benefit. In fact the leadership of the FDA is primarily pharmaceutical executives, who have every incentive to get drugs approved for the companies that they go back to after their FDA stint and for which they hold stock options in.

NIH vs. Pharmaceutical Companies

There are two research paths in the pharmaceutical industry. One is the NIH, which spends roughly $30 billion per year on basic research. The other is pharmaceutical companies which mostly perform and run clinical trials, but also perform research in assaying chemicals found by NIH supported university research. This comes to roughly $25 billion per year. Pharmaceutical revenues are roughly $325 billion per year (according to Reuters). Most the costs that the pharmaceutical companies incur are “marketing” related costs (over-paying doctors for clinical trials in order to get them to prescribe drugs, buying off top university research professors, patenting and re-patenting drugs, paying for pharmaceutical reps for distributing company propaganda, lobbying in congress, television advertising etc..). As can be seen, some of these marketing costs are not really marketing costs as much as bribes.

The Current System

Under a system where the NIH took over final drug development and clinical trials patents could be removed from the drug business altogether. The productivity of drug companies is atrocious. For the $325 billion in yearly expenditures (to which we must add the $30 billion of the NIH budget bringing it to $355 billion) , US drug companies produce roughly 7 innovative drugs, and most of these are very narrow drugs which do not cure ailments but extend the life of late stage terminal diseases. 78% of drugs are simply extending the life of old drugs which could come off of patent, or copying another drug that already exists. This is according to (Marcia Angell as well as Dr. Jerry Avorn – two of the top experts in the field) Secondly the cost of clinical trials is greatly increased by the fact that a good portion of the payment to doctors is in fact a payoff to prescribe drugs (for those that are already approved), and in 78% of the cases, the drugs they are performing a trial on are not new chemical compounds. For this reason we estimate that pharmaceutical companies only do actually $2.5 billion in research on new drugs. (and a number of these drug tests are falsified) However, they claim $325 billion in drug revenues. Even if all of their research was beneficial and non-corrupt (which we estimate less than $2.5 billion of it is) it still would not entitle the industry to $325 billion off of it.

Handing it All Over to the NIH

If the NIH took over clinical trials, it could do so at a cost of only $32.75 billion dollars (their current budget + the actual contribution of pharmaceutical company research). These unpatented discoveries could then be released to the generic manufacturers. This new system would mean no advertising, no pharmaceutical reps (doctors can read journals for their medical information, or if they don’t have time (and most of them don’t) they can go to Consumer Reports Health.com which provides a quick rundown of the benefits of drugs in an easy to read and digest format). This would allow the doctor to begin working for the patient rather than the pharmaceutical industry when prescribing drugs. It would also allow the doctor to being looking for other factors related to health problems rather than taking a narrow minded drug approach because that is where their bread is buttered. Generic drug companies have low profit margins and low costs of doing business. It cost less than ½ again as much to provide generic companies with a good profit for manufacturing and distributing the drugs because it is a very simple operation with high economies of scale. This would mean the total drug cost to Americans would not be more than $32.75 billion x 1.4 = $45 billion. This would reduce US health care costs by roughly $280 billion per year. In fact, there would be so much only left over that we could even increase the NIH budget by another $10 to $20 billion creating somewhat of a renaissance in medical research and providing more employment in the industry. This would require that most the old drugs, which should come off patent because they have been artificially extended through the abuse of patent law, need to fall into the public domain. It also means that the major pharmaceutical companies essentially go away and become small generic manufacturers with no ability to influence health care policy. For all the calculations see the image below.

The Math

The Excel spreadsheet of this analysis can be downloaded from the orange widget in the lower right hand side of this blog.

How Easy Would It Be?

What is amazing is how easy this policy change would be (practically, not politically). The NIH can easily run clinical trials and do it far better than pharmaceutical companies. Pharmaceutical companies should not running clinical trials, or even paying for clinical trials at all. Universities used to perform more clinical trials, but big pharma has increasingly begun to use private practice doctors or trial mills that they completely control. They then receive the studies, and compile them and then send only the ones the like to the FDA, where they have already positioned executives from their company into the top roles through political appointment.

Better Quality Drugs

Another issue that could be changed with an NIH takeover is better drugs could be developed. We could even decide as a society to give another 5 to 10 billion to the NIH, there would be so much excess created by removing the pharmaceutical companies, which could lead to even more useful drugs and more money for the actual workers, medical researchers. Because of greed and narrow self interest, big pharma is pushing mostly the wrong drugs to clinical trials. Right now drugs that are not very socially beneficial are developed because they are the most profitable. The major category being lifestyle drugs. Pharmaceutical companies don’t develop drugs that support that overall objectives of the health care system, but rather develop drugs that are very profitable. By having the NIH take over drug development, social goals in public health can begin to come to the forefront.

Indirect Cost Benefits

The indirect cost reductions would be enormous. Pharmaceuticals are a force that corrupts everything it touches. In addition to developing the wrong drugs, and re-patenting old drugs that are not improvements, they have a big place at the health care policy table that they do not deserve. They sit there for one reason, the corrupting influence of their money.

Because this plan would essentially break the pharmaceutical monopoly, relegating them to nothing more than generic drug manufacturers, it would actually change how health care is practiced in the US. The indirect cost savings fall into the following categories:

• The major pharmaceutical companies would wither away as lobbyists in Washington and would lose their ability to corrupt medical schools and motivate the profession to look for pharmaceutical solutions to every problem.
• Over prescriptions, which is currently a huge problem would be greatly reduced because pharmaceuticals would tend to be prescribed only if they actually benefited the patient.
• The medical industry could begin to refocus on health and prevention.
• Many people currently employed in non value added activities (pharmaceutical marketing and influence peddling activities) could be redirected to beneficial pursuits.
• Many clinical trials that are currently run need not be run. This would greatly reduce the load of pharmaceuticals on trial subjects, which they are, in the majority of cases, being mislead into thinking that they are doing something beneficial for themselves and for society. (the very fact that clinical trial recipients are taking placebos when the exact drug was tested years ago is a loss for the system in terms of health efficiency.)

The indirect benefits are difficult if not impossible to quantify. However, indirect benefits being ½ of the direct benefits could be easily justified. This would bring the benefits to $280 billion x 1.5 or $480 billion, or ½ trillion. Health care costs are growing in an unsustainable fashion, this could be critical change which in addition to reducing costs would more likely than not lead to better health for the country’s population.

Other Sources: CEPR and Dr. Marcia Angell

In case anyone thinks these are just the musings of one source, it should be considered that we got this idea from Marcia Angell, the former editor of the New England Journal of Medicine and Harvard Professor of Medicine, and the CEPR, which is probably the best progressive think tank in the country. An interview with Marcia Angell is included below:

Both of these sources have proposed what we have proposed above. Our main contribution is the spreadsheet above. What is interesting is that without using the high level math estimation of CEPR, we came to about the same conclusion as their estimates. That is drugs should cost no more than $50 billion in the US under and NIH plan. Furthermore the quality of drugs developed would greatly increase.  However, it’s important to note that drug research is generating a declining number of new drugs, so the research area may be in a way subject to diminishing gains.

The Excel Spreadsheet

To interact with the spreadsheet yourself, download it from the file box towards the lower right of this screen where all the documents are kept.

References

The estimate of the percentage of drugs spent on “me-too” drugs or re-patenting old drugs is from Marcia Angel. The Plan

Drug companies should no longer be permitted to control the clinical testing of their own drugs. There is too much evidence that this practice biases the research in favor of the sponsor’s drug. It also distorts the type of research done, since companies are more interested in increasing sales than in obtaining medical knowledge. We really don’t need one more study of whether a new drug is better than a placebo for some slightly different use, but drug companies sponsor them because they help to expand the market. O ensure that clinical trials serve a genuine medical need and to see that they are properly designed, conducted, and reported, I propose that an Institute for Prescription Trials Drug Trials be established within the National Institutes of Health (NIH) to administer clinical trials of prescription drugs. Drug companies would be required to contribute a percentage of revenues to this institute, but their contributions would not be e related to particular drugs (as is the case with the FDA user fees). The institute would then contract with independent researchers in academic medical centers to conduct drug trials. The researchers would design the trials, analyze the data, write the papers, and decide bout publication. The data would become the joint property of the NIH and the researchers, not be controlled by the sponsoring company. – Dr. Marcia Angell

CEPR

The distortions resulting from these huge gaps between price and marginal cost should cause an honest neo-classical economist great pain. At the onset, the lost consumer surplus from patent and copyright protected pricing is enormous. The basic rule on this issue is that the size of the deadweight loss is proportional to the square of the gap between price and marginal cost. The United States alone is projected to spend $210 billion this year on prescription drugs. In the absence of patent protection, the same drugs would probably cost no more than $50 billion.” “Drug patents also distort the direction of research by pushing it in the direction of patentable results. Research directed at finding cures or treatments based on diet, exercise, or environmental factors will not be pursued in a health care system that relies exclusively on patent monopolies to finance research. This neglect can be offset by government funding targeted specifically towards these areas, but the patent system will direct resources elsewhere.” “However, there are alternatives and they already exist. The most obvious alternative is direct government funding of drug research. This already occurs on a massive scale. In fact, the $30 billion that the United States federal government pays each year to support bio-medical research at its National Institutes of Health (NIH) is approximately 20 percent larger than the $25 billion that its pharmaceutical industry claims to spend on research. While this research is primarily directed towards more basic science (in order not to interfere with the efforts of the drug industry), there are many instances of new drugs being developed almost entirely through NIH support. It also requires some extraordinary claims about epistemology to argue that public funding of NIH is an efficient mechanism for supporting basic research (a contention strongly supported by the pharmaceutical industry), but somehow would prove to be a boondoggle if the agency took on the responsibility of developing new drugs and bringing them through the FDA approval process.” “Since half of this money may go to research copycat drugs of little social value, the savings from eliminating drug patents in the United States may be more than 10 times as large as the spending necessary to replace the useful research performed by the pharmaceutical industry”  – CEPR

New Drugs Brought to Market

“Even worse is the fact that there are very few drugs in the pipeline ready to take the place of blockbusters going off patent. A fact that is the biggest problem facing the industry today. And its darkest secret. All the public relations about innovation meant to obscure precisely this fact, the stream of new drugs has slowed to a trickle, and few of them are innovative in any sense of that word. Instead, the great majority are variations of oldies but goodies—”me-too” drugs. Companies are merging to combine their pipelines or co-marketing the same drug while scrambling to find drugs to license from the government, universities, and biotechnology companies. But these sources are themselves experiencing difficulties in coming up with new drugs. Of the seventy-eight drugs approved by the FDA in 2002, only seventeen contained new active ingredients and only seven if these were classified by the FDA as improvements over older drugs. The other seventy-one drugs approved that year were variations of old drugs or deemed no better than drugs already )n the market. In other words, they were me-too drugs. Seven of seventy-eight is not much of a yield. Furthermore, of those seven, not one came from a major U.S. drug company. – Dr. Marcia Angell