E-drug: The Economist on 'Big Pharma'
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The Economist, 6 December 2003
Big Pharma: The benefits of hypertension
Growing pressure on pharmaceutical firms is a force for good
Firms today fall from grace with the alarming ease of wayward
bishops; few industries, however, have tumbled as far, as fast and on
as many fronts as drugmakers. Only five years ago, big firms were
celebrated as the purveyors of exciting new medicines, such as
Viagra, and even more stimulating earnings growth.
Today, firms are seen by many as more profiteering than
profit-making. Companies are castigated for spending billions on
research and development, only to deliver too many "me too" drugs
and too few genuinely new ones. Comparable sums spent on sales
and marketing-particularly on direct-to-consumer advertising in
America-are lambasted for corrupting doctors and creating demand
on the back of fancy publicity rather than legitimate medical need or
product superiority. Efforts to fend off lower-cost competition from
manufacturers of generic drugs through patent lawsuits leave
companies accused of driving up the drugs bill in rich countries and
depriving millions of life-saving medicines in poor ones. The shares of
most big drug firms now trade at a discount to the market, as
promises of bright times ahead are marred by risk.
To be sure, pharma companies come in for criticism not just because
they are more profitable than those in other sectors but because they
are profitable in a field, medicine, where money makes people
uneasy. And not only are drug companies profitable, but also visible:
in America, rising hospital and physician costs are as much to blame
for soaring insurance premiums as pharmaceuticals, but it is drugs
which are the most obvious recurring expense and the one that
consumers are asked, at least in part, to shoulder directly. Firms are
caught between shareholders, who fear drug prices will fall, and
consumers, who complain about their rise.
Some of the pain which big firms now feel is undoubtedly
self-inflicted. Firms were slow to recognise the gathering storm
around the lack of access to life-saving drugs in the developing world.
Their public relations on most other issues remains pretty clumsy too,
and their promises to investors have been overblown.
And yet it is also true that producing new drugs today has become a
more complicated, costly and risky business than before and many
firms now face a couple of years during which they will have relatively
few new products coming to market. For example, using the human
genome to identify promising new treatments is proving a much more
difficult scientific task than many had predicted, and it will be many
years before the promised flood of new drugs occurs.
Current pressures on pharmaceutical firms are forcing a long-overdue
examination of how they organise research and development and
these changes could cut the cost, in time and money, of R&D and
eventually boost output (see page 57). GlaxoSmithKline, the world's
second-largest company, this week showed early signs that such
root-and-branch re-engineering is starting to bear fruit. The final step
drug firms will need to take is to prove that the drugs they produce
really do justify the prices charged, in conferring appreciable benefits
compared with existing therapies.
No quick fix
Drug firms cannot be expected to achieve this,on their own. Like all
firms, they respond to incentives, and only more intelligent behaviour
by regulators and customers alike-whether the public-heath systems
of Europe and elsewhere or the public and private insurance
schemes of America-can provide the correct signals.
Currently, many drug prices in America, for example, are set largely
by what other drugs in the same class cost and how much others are
paying. What prices should be based on is a rigorous assessment of
the benefit, measured across various parameters, which a new drug
brings to individual consumers and society more broadly, above and
beyond existing treatments. Admittedly, this is no easy task. But it is
not impossible. Some countries in Europe, for example, have set up
independent agencies to undertake such cost-benefit analysis.
However, governments often use such analyses solely to beat down
prices, and are unwilling to reward genuine innovation when they find
it by paying higher prices for better drugs. America, on the other
hand, tends to pay for novelty without systematically assessing its
value. Both European and American customers of the industry need
to change. Companies are understandably wary of throwing lots of
money into comparative trials only to show that their new medicine is
not much better than a rival's. And yet governments should
encourage such trials, occasionally by providing direct financial
assistance for them, but more often by promising to pay more for
drugs which are significantly and demonstrably better.
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