How Obama Would Stifle Drug Innovation: Physician

[brendan]

http://online.wsj.com/article/SB122428260748146061.html#printMode

How Obama Would Stifle Drug Innovation
If you want cutting-edge health care, don't make it a cost-controlled commodity.
By SCOTT GOTTLIEB

Pfizer recently said it's exiting the development of drugs for common conditions like heart disease. This is part of a shift underway in the pharmaceutical industry to give up on routine medical problems in favor of discovering "specialty" drugs for rare diseases and unmet medical needs like cancer.

The shift is driven in part by the industry's critics in Washington, who have long maligned drug companies for targeting too many routine medical problems with drugs that were "merely" tweaks on existing medicines. Now these same detractors, led by House Democrats, are proposing controls on access to and eventually pricing of the specialty drugs as well. Under a Barack Obama presidency, this is one way they'll pay for the candidate's plan to create a Medicare-like program for the under-65 crowd. These new controls -- based on a view of medical care as a commodity to be purchased at the lowest price, with little allowance for innovation -- could push drug development over a tipping point.

Specialty drugs offer significant health benefits but for a high price, reflecting the difficulty of developing them. The regulatory process for getting them approved is more uncertain, since the diseases are poorly understood or haven't been tackled before in clinical trials. Enrolling patients with rare conditions is also expensive; they are harder to recruit and often need to undergo more extensive testing to monitor the progress in trials. It can cost less than $5,000 to enroll a single patient in a trial for a primary care drug such as a blood pressure pill, but up to $70,000 for a big cancer study and more than $100,000 for some very rare diseases. Specialty drugs that were once tested on hundreds of patients are now often required by the Food and Drug Administration (FDA) to be tested on thousands.

Success rates are low. On average, a drug stands an 11% chance of making it through clinical trials and reaching patients. Cancer drugs only have a 5% chance of clearing these hurdles. Specialty drugs are also harder to distribute and by definition have a much smaller market for sales.

The big drug makers' shift into these markets isn't a measure of their strength, but a symptom of their decline, as they grope for a profitable niche amid increasing regulation. Mobilizing capital to take on these medical problems requires the promise of big returns for the few drugs that succeed. When a new drug mitigates -- and sometimes cures -- a previously untreatable problem, innovators can often "re-price" the initial treatment of a disease, charging very high prices for the administration of a drug. The initial intervention becomes more costly -- but the new benefits should reduce long-term costs, extend life, or ease suffering.

This ability to re-price provides the economic incentives to pursue a lot of practical innovations. Take cancer, which now accounts for a third of all drugs in development. Cancers that once cost thousands of dollars to treat when there weren't effective options now cost tens of thousands with drugs that are dramatically better. One study estimated that the lifetime costs of treating breast cancer in 1984 were about $37,000 on average. A more recent study of older cancer patients found that just the first 12 months of therapy for earlier-stage breast cancer can top $18,000. But the bigger difference is that today -- thanks to more effective medicines such as Taxol and Herceptin, coupled with better clinical research -- most women live longer and many with early cancer can expect a cure.

Similarly, a little more than a decade ago the initial treatment for advanced colon cancer involved a drug regimen that cost hundreds of dollars. Now initial care -- which incorporates three new drugs and two biologic drugs (those grown in living cells) -- costs more than $20,000. But over that time period median survival has doubled; and more people with earlier stage tumors can use some of the same drugs to be cured.

Of course, high drug costs and re-pricing are deeply unfashionable in Washington, where the political focus is on cutting the cost of delivering care in order to extend government-financed coverage to more people. To pay for a Medicare-like program for younger Americans, Sen. Obama promises to cut up to $290 billion from the cost of health insurance, according to an analysis by my colleague Joe Antos. While some of this is supposed to come from "efficiency" and deploying information technology, the only proposals with budget teeth are Mr. Obama's "pay or play" tax on employers, controls on access to new drugs and medical devices, and his party's proposals to control drug pricing.

Congressional Democrats want to give Medicare the ability to "negotiate" specialty drug prices (they are referred to as "single source" drugs in some bills) or simply fix their price by forcing companies to give Medicare drug plans the same deep rebates that are mandated under Medicaid. Mr. Obama has also championed a "comparative effectiveness" agency -- styled after England's National Institute for Clinical Evidence (NICE) -- that conducts reviews and studies on the clinical and cost effectiveness of drugs to inform central rulings on which patients should be eligible for a new treatment.

NICE's real mission is to protect the British health-care budget. Since 2000 it has denied patients the ability to use the newest cancer drugs -- by my count, in 226 different indications where American insurers, and Medicare, currently pay, and where the National Comprehensive Cancer Network says there is "high-level evidence" or "uniform consensus" of clinical benefit. Cancer survival rates in the U.K. are substantially lower than in the U.S. and the gap continues to widen.

The most economically pernicious effect of price and access controls isn't the impact on revenue from existing drugs -- but how they distort future investment decisions. They will lower expectations that untreated diseases can continue to be re-priced, even with very effective new drugs. I work with health-care investors and companies first hand. They can reallocate capital in the face of protracted political uncertainty. They can also forego traditional discovery altogether, in favor of less socially useful but lucrative areas like lifestyle meds or prescription cosmetics. The last time policy makers waged a concerted effort to control the price of and the access to the most innovative, but expensive new drugs as part of broader health-care reform in the mid 1990s, the percent of venture capital going into biotech fell by almost half in a single year. A lot of that money shifted into Internet companies.

Of course, re-pricing diseases doesn't help people struggling to get basic health care, or those burdened by high co-pays. But there are policy options to address these troubling issues without preying on medical innovation and its health contributions.

Specialty drugs typically appear on the "fourth tier" of health plans, and have expensive co-pays. Drug companies need to explore alternative pricing mechanisms, including approaches that tie their reimbursement to evidence that an individual patient is benefiting. Health insurers need to provide new policy holders with clear, up-front disclosures on co-pays and not stick patients with unbearable bills only after sickness strikes. The FDA can also help lower overall drug spending by adopting reasonable regulatory pathways for diagnostic tests that would enable doctors to target drugs more efficiently to patients most likely to benefit.

Mr. Obama's policies on drug access and his party's plans to control pricing will distort the financial incentives that inspire innovations. This will shortchange the contributions innovations provide.

Dr. Gottlieb is a practicing physician and a resident fellow at the American Enterprise Institute.