The Pharmaceutical Innovation Conundrum

December 16, 2007

Breathless reports highlighting the latest medical breakthroughs are a staple of the media landscape, but they mask a darker reality. Pharmaceutical innovation is on the decline. Large sums poured into medical research by the private and public sectors have not produced the promised payoff. The number of important new drugs and biologics introduced into medical practice has dropped precipitously in recent years and has been on a downward trend for over a decade.

The cause of this slowdown has been the subject of much speculation and research, befitting its status as a chronic disease. Despite numerous diagnoses, the sickness still lacks an effective cure.

How bad is it? Between 1993 and 2004, drug industry expenditures on R&D increased 147 percent in inflation-adjusted dollars, from $16 billion to nearly $40 billion. U.S. government R&D over the same period, primarily from the National Institutes of Health, doubled to nearly $30 billion. Yet new drug applications submitted by pharmaceutical and biotechnology firms to the Food and Drug Administration increased just 38 percent. The number of applications for significant new drugs – those that hold out the great therapeutic promise, increased just 7 percent. And new approvals for unique therapeutic molecules or biologics, the ultimate bottom line for drug discoverers, have declined from a peak of about 40 new drugs per year in the mid-1990s to about 20 per year in this decade.

And there’s no sign of a turnaround. Through the first ten months of 2007, the Food and Drug Administration approved just 14 new molecular entities (a newly invented drug never before approved for use in humans) and just one new biologic. And only seven of those drugs were considered a significant advance over previously invented drugs, making 2007 the worst year in pharmaceutical innovation since Congress passed the Prescription Drug User Fee Act of 1992, which was designed to expedite the pace of new drug approvals.

In 2006, the Government Accountability Office sought an explanation for the declining productivity of pharmaceutical industry research and development. The agency convened a panel of scientific experts to ponder the reasons for rising inputs and declining output. Economic theory suggests that higher investment in R&D should produce higher levels of innovation. And while a mature industry might expect a declining rate of return for each additional dollar invested in new technology development, the absolute decline in research productivity by an industry considered one of the crown jewels of American high technology was simply unprecedented.

Add to this the fact that the pharmaceutical and biotechnology industries have been showered significant government support in the form of direct public investment, tax credits, reduced regulatory burdens and a laissez-faire government attitude toward the industry charging exorbitantly high prices in the largest market in the world, and the government’s auditors recognized something beyond the industry’s traditional lament – “R&D is growing more costly; it now costs (fill in the blank: first it was $500 million; then $800 million; now $1.2 billion) to develop a new drug” – was called for. It has become painfully apparent that throwing more money at the industry in the form of higher prices isn’t going to solve it lackluster performance in coming up with new and innovative therapeutics.

The government analysts highlighted some of the more significant factors, but missed the core of the dilemma. They, like many drug industry supporters, identified the issues of prices, investment, regulation, and risk – core concepts in economics – as the drivers of innovation. They placed too little emphasis on science and public health, which, in my view, have always been and remain the wellspring of medical progress.

Lost in Translation

Every analyst seeking an answer to the declining medical innovation conundrum recognizes the crucial role that scientific understanding plays in coming up with new therapeutic approaches to chronic disease. In its report last year on the declining output of drug industry research and development, the Government Accountability Office noted that the public and private sectors have done a poor job in translating the nation’s massive public investment in basic science and private sector investment in translational science into new therapies.

Think about the remarkable “breakthroughs” of recent years. University and government scientists have mapped the genome, identified key receptors on numerous cancers, and uncovered parts of the biological cascade behind chronic conditions like arthritis, Alzheimer’s and arteriosclerosis. Industry scientists have developed extraordinary tools for discovering new drugs like mass screening of new molecules using computer-chip bioassays and rational drug design based on x-ray crystallography. There’s growing public investment in new fields like gene therapy and stem cell research, which hold out the promise of curing genetic disorders and degenerative diseases like Parkinson’s and diabetes. Barely a week goes by where a news magazine or the nation’s leading papers do not herald the alluring promise of some new biomedical breakthrough percolating in some company’s lab for one of the many forms of heart disease, one of the more than 200 forms of cancer, one of the numerous neurological disorders, or one of the musculoskeletal disorders that contribute to the frailty and infirmities of old age.

Yet years go by without significant advances against any of these chronic diseases, which are the primary causes of ill-health in an aging society. Something clearly is amiss, the report concluded, in translating basic science into usable products.

The report then critiqued the drug industry’s corporate culture, framed by the demands of Wall Street. The financial incentives formed by the stock market force R&D decision-makers to focus most of their attention on developing blockbuster drugs for proven mass markets. Minor aches and pains, allergies, depression, cholesterol management, acid indigestion – the rewards for a successful new entry in one of these categories, whether or not it represents a significant new advance over previous therapies, are measured in the billions of dollars in sales.

However, the cost of developing new drugs in these categories is high and major contributor to growing R&D costs since showing superiority to placebo for these products often requires clinical trials that enroll thousands if not tens of thousands of patients. Why? Since the drug itself has marginal utility, consumers, regulators and the companies themselves require larger trials to allay concerns that the new, unproven product may be less safe than readily available, proven alternatives. The additional expense of the larger trials inevitably inflates research costs and deflects scientific talent from investigating fields where the risk of failure is far greater.

To be sure, there are some areas where the evolution of scientific understanding has reached the point where successful therapeutic intervention is not only possible, but the likelihood of success is high. Yet industry ignores or under-invests in these areas because they only affect a few thousand or tens of thousands of people. The National Organization for Rare Diseases maintains a database that tracks more than 1,000 diseases, most of which receive scant attention from commercial drug developers. Yet the Pharmaceutical Research and Manufacturers Association – the trade group for the U.S.-based pharmaceutical industry – reports only 300 drugs in development for these conditions.

The blockbuster mentality also leads to a proliferation of so-called me-too drugs, which replicate the action of drugs already on the market and add little or nothing to physicians’ armamentarium for fighting disease. Besides the wastefulness of this activity, it also contributes to the high cost of developing drugs. lt is conceivable, of course, for a company developing a new acid indigestion pill to improve on the 90 percent effectiveness of those already on the market. But it’s not likely. And it’s hard to imagine that the medical benefit would ever justify the cost of enrolling ten thousand or more patients in a clinical trial capable of showing superiority in a statistically significant way.

Yet the tests go on. Why? The sad truth is that the upward spiral of drug development costs in recent years in intimately tied to the drug industry’s desperation to replace blockbuster drugs coming off patent with comparable drugs that may provide another 20 years of market exclusivity (and thus marketability), but not much else.

This trend, noted in the GAO report, led the auditors to conclude that the nation’s patent laws were one of areas in need of reform if industry was going to refocus its attention on medically significant products. A series of laws and court rulings have given manufacturers the right to obtain new patents for minor changes in chemical structure, changes in routes of administration, and new uses for old products. These patent extenders provide substantial financial rewards to firms that focus their research attention on extending the marketability of their existing products instead of focusing on the truly new and innovative – always an inherently risky proposition.

Finally, the GAO’s panel endorsed the views of those who partly attribute the slowdown in new drug approvals to regulatory uncertainty, lamenting the fact that the FDA does not have precise standards for measuring the safety or effectiveness of new drugs. Moreover, those standards are constantly shifting, they alleged. In this view, regulatory standards have become progressively tougher in recent years due to a number of high profile safety scandals that led to pulling popular drugs from the market like the fenfluramine/dexfenfluramine combination (1997), Propulsid (2000), Rezulin (2000), Baycol (2001), Vioxx (2004), and Trasylol (2007). With tougher standards have come fewer new drug approvals.

FDA officials vigorously rejects that charge. “I’ve been at the FDA for 15 years and we’ve never changed the standards for drug approval,” John Jenkins, director of the FDA’s Office of New Drugs, told the press when it became apparent that 2007 was shaping up as a very poor year for new drug approvals. Moreover, the rate of approvals has run roughly parallel with the rate of new drug applications, according to FDA statistics.

Blaming the Messenger

Contrary to popular belief, the regulatory environment for new drug development has grown less stringent over the past two decades, not more so. A succession of changes in food and drug laws plus new rules propagated by the FDA itself, which began when an alarmed HIV/AIDS patient community began clamoring for new drugs to treat that deadly disease, substantially liberalized the rules under which new drug development takes place. The Prescription Drug User Fee Act of 1992 sharply reduced the amount of time that FDA reviewers may take to evaluate new drugs once all the data from confirmatory clinical trials have been submitted to the agency.

Regulations put in place the same year allowed new drug applicants to measure surrogate markers, not clinical endpoints, to get new drugs approved. For instance, patients with AIDS saw their white blood cell counts dwindle to near zero. The agency began approving drugs based on a temporary improvement in those white blood cell counts, even though it didn’t substantially increase the likelihood that patients suffering from the disease would survive. It was only when a number of marginally useful drugs were used in combination with each other that clinicians finally figured out how to control the disease in a way that actually saved lives.

The industry also won relaxation of the rules governing industry marketing with passage of the Food and Drug Modernization Act of 1997. Direct-to-consumer electronic advertising began flooding the airwaves. Policing of print advertising and detailing materials (the handouts and gifts used by salespersons who routinely visit physician offices) declined as the number of inspectors on the FDA payroll plummeted. The industry also won strengthened intellectual property protection in the form of extended patent life for conducting pediatric clinical trials or additional market exclusivity for drugs that treat rare diseases.

The FDA Amendments Act of 2007, signed by President Bush in October, passed in large part because of the Vioxx scandal where an estimated 40,000 people died from heart attacks, strokes and other cardiovascular complications that were the unwanted side effect of a painkiller that was no better than many others already on the market. It was the first reversal of the deregulatory trend since the 1970s.

Opponents of the new law at first claimed its passage would slow the pace of innovation. This allowed industry lobbyists to succeed in eliminating most of its more stringent proposals, such as forbidding direct-to-consumer ads for the first three years a new drug is on the market. By the time it passed, even industry applauded the bill.

Why is there any reason to think that this modest bill will slow the pace of innovation, even if it had included the tougher measures? If anything, history shows that the tougher the rules, the greater likelihood that industry will pursue innovative therapies. The number of new drugs and biologics approved by the agency fell consistently over the past 15 years, a period when the legal and regulatory environment was becoming substantially more hospitable to winning approval of new technologies. On the other hand, the greatest tightening of standards in the history of drug regulation – the 1938 passage of the safety requirement and the 1962 passage of the efficacy requirement – ushered in eras of rapid medical progress and an explosion of new therapeutics as companies adapted to the higher, more scientific standards.

It’s unlikely the 2007 law, which focuses primarily on post-marketing safety issues, will have a comparable positive effect. But there’s no reason to think its impact will be negative.

Clearly, something else is at work to slow the pace of innovation. And that something, in my view, is intimately related to the maturity of the drug industry, and its biotechnology offshoot. It’s been a little more than a century since the German histological chemist Paul Ehrlich developed the “magic bullet” theory of medicinal chemistry. He subsequently developed the first antibiotic for treating syphilis.

Today, the FDA has more than 2,400 different approved drugs listed in its so-called Orange Book, covering nearly every imaginable disease (and some that are near to being imagined like restless legs syndrome). A common ailment like hypertension, where there is a clear correlation between reducing its incidence and curbing heart disease, today has at least six classes of molecules and multiple molecules in each class competing for the large patient population requiring the medicines. In the anti-acid field (an age-old affliction; Alexander the Great is said to have died from a burst peptic ulcer after an all-nighter of binge drinking), acid binders like calcium carbonate (the active ingredient in Tums) begat H2 antagonists like Zantac (now over-the-counter), which begat proton pump inhibitors like Prilosec (now over-the-counter), which begat Nexium (the enantiomer half of the Prilosec racemate mixture, which means when you’re taking Prilosec, half of the pill is made up of the chemical in Nexium).

Despite its lack of additional efficacy compared to the OTC medications that could be obtained at a fraction of its price, Nexium was the second best-selling drug in the world in 2006 with $6.7 billion in sales and a 16.9 percent annual growth rate. A similar analysis could be conducted for many serious ailments like cancer, arthritis, diabetes and asthma. It’s not that these diseases have been cured by the pharmaceutical revolution. Many drugs that exist today only mask symptoms or provide very inadequate relief. Other drugs, such as many of the new antidepressants, are not much better than placebo in treating the disease. Many cancer drugs only extend life for a few months or years, and even then at a frightful cost in terms of caustic and sometimes harmful side effects.

The need for better drugs is clear. But after a century of concerted research and development by tens of thousands of scientists and physicians working in the public and private sectors, the low-hanging fruit of medical progress has been picked.

The Challenges Ahead

Today, there are two great scientific challenges facing medical science. In the advanced industrial world, the biggest challenge is discovering cures for the diseases that affect aging bodies like Alzheimer’s, cancer, Parkinson’s, diabetes, and crippling arthritis. In many of these fields, science hasn’t matured to the point where effective intervention is possible.

There’s no guarantee that it ever will. Because I wrote a book debunking industry’s claims about the cost of new drug development, I often get asked, “So, how much do you think it costs to develop a new drug?” I often begin my response this way: “Let’s start by calculating how much it costs to develop an effective Alzheimer’s drug.” The answer to that hypothetical is an infinite amount of money. Why? Since there are no effective drugs for treating Alzheimer’s, to presume a cost based on historic calculations of drug development costs in other fields is to presume that scientists will succeed some day, which may not happen.

After all, in the four decades since President Richard Nixon declared war on cancer, the government spent nearly $100 billion in current dollars (and the private sector additional billions more). Yet physicians still don’’t have an effective treatment for many of the 200-plus forms of that disease.

The wild frontier of medical research today is personalized medicine. Much of the hope surrounding stem cell therapies is based on the idea that cells containing personal DNA and grown for a specific purpose are less likely to be rejected by the body. Cancer tumor analysis – breast cancer may be a half dozen different diseases – has created the new field of targeted drugs. And the fact that some drugs’ side effects only effect certain people is allowing scientists to think about evaluating individual genetic make-up so physicians can target medicines to those who will only experience their benefits, and not their risks.

But to the extent any of these personalized medicine strategies succeed, it will erode the drug industry’s blockbuster marketing model, based as it is on selling common cures to tens of millions of people. For the industry to maintain current levels of sales and profits based on targeted therapeutics will require unprecedented price levels on every breakthrough. It’s an untenable economic model in aging societies necessarily concerned about health care cost containment.

The second great challenge facing medical science today is meeting the medical needs in areas of the world where the patients have very little money. Where there is no money, there is no market, and hence does not attract investment by the global pharmaceutical industry. Malaria, leishmaniasis, Chagas disease, hookworm, drug-resistant tuberculosis, diarrheal diseases – the list of infectious diseases devastating the developing world is long, and the science to develop cutting edge therapeutics for treating them is at the pharmaceutical industry’s fingertips.

But its resources are rarely deployed in that direction because there is no potential financial payoff. The latest combination pill for treating chloroquine-resistant malaria must be sold at 10 cents a dose or it will not reach the people who need it the most. The drug industry simply will not invest significant sums in that arena for that paltry return.

The same dynamic is at work in first world markets where there is also demand for medical innovation. The U.S. is now experiencing a major outbreak of drug-resistant bacteria, primarily in its hospitals where two million patients are infected each year, resulting in about 90,000 deaths, according to the Centers for Disease Control and Prevention. More than 70 percent of the bacteria responsible for these hospital-acquired infections are resistant to at least one antibiotic. Yet, according to a database available on the Pharmaceutical Research and Manufacturers Association website, there are just 20 anti-bacterials in development. That is far less than the 77 drugs and vaccines in development for HIV/AIDS, for instance, even though bacterial infections are a comparable public health threat with similar levels of mortality.

The disproportional effort cannot be explained by the relative size of the markets. Sales of HIV/AIDS medications worldwide in 2006 were about $5 billion, while antibiotic sales totaled over $30 billion by one estimate, with more than $8 billion in the U.S. alone. It also can’t be explained by the difficulty of the task. While developing new antibiotics isn’t necessarily easy, it is a well worn path where new classes of potential molecules have recently emerged. It is reasonable to assume that a sustained research effort could result in numerous new and useful antibiotics.

So what explains the relatively paltry effort? Once again, it is a failure of the market to respond to social need. The bulk of the antibiotic sales are generics and work perfectly well for their intended use. If a company brings a new antibiotic to market, it will not be able to use traditional marketing techniques to push older, cheaper rivals aside. Physicians and hospitals will hold the new drugs in reserve for the most resistant cases, thus limiting sales. Again, the dynamics of the market — not science — is holding back innovation.

We must add a third major factor retarding the pace at which the pharmaceutical industry brings new drugs to market. To cope with rising health care costs, payers are increasingly unwilling to pay for new drugs that do not represent a significant medical advance over previous, proven therapies available at generic prices. This is most pronounced in Europe and Japan, where national health care systems have institutions in place like England’s National Institute for Health and Clinical Effectiveness to make these determinations. But even in the U.S., where drug industry lobbyists have been successful in fending off drug price negotiations or bulk purchasing by Medicare, comparative effectiveness search and cost-effectiveness analysis are making headway among sophisticated purchasers and prescribers.

Unfortunately, there is no evidence as yet that this payer push-back is forcing the industry to refocus its research efforts on more medically significant products. Between 1989 and 2000, 58 percent of the 361 new molecular entities (NMEs) approved by the FDA were considered “standard” for review purposes, that is, they did not represent a significant advance over existing therapies. And in the first ten months of 2007, when the FDA approved just 14 NMEs, eight were considered standard – almost the exact same percentage as the earlier era.

But as drug firms survey the political landscape, the prospect of greater efforts at cost control is having an impact on their projections for the future. Several major drug firms have recently announced layoffs of research staff while streamlining their operations. They are also stepping up their purchases of new drug candidates from biotechnology firms, or buying those firms outright, as a way to bolster their lagging R&D pipelines.

While the output of these efforts is not guaranteed to have more significance, it suggests that the frequently-utilized strategies of me-too drug development (substituting enantiomers for racemates; developing the six or seventh molecular entity in a class; developing an entirely new class of drugs for a well-treated condition – all of which are usually done by in-house R&D departments intimately familiar with the earlier versions of those molecules or treatments for those conditions) may play a lesser role for industry R&D in the future.

For several decades, industry has insisted that the high cost of pharmaceuticals is the price that must be paid to spur innovation. What patients and practicing physicians got in return was some significant new therapeutics that did indeed substitute for other, more costly health care interventions like operations or long hospital stays. But it was accompanied by a lot of waste in the form of me-too drugs, excessive marketing, and a health care research system that pursues incremental change in well-established markets rather than the truly innovative.

What is needed now are reforms that will create disincentives for wasteful research, reward what’s medically useful, and allow the delivery of these therapeutics to everyone who needs them at prices they can afford. The policy world is filled with ideas about how to build such a system: requiring comparative effectiveness studies on all new and old drugs; prizes for breakthroughs; separating R&D from manufacturing, marketing and sales; patent pooling.

There’s no guarantee of success in taking this path, either for industry or policymakers, since the low-hanging fruit of the medicinal revolution is still picked. But it should help hold down health care costs in the short run, and reassure patients and those who pay the health care bills that the portion of their health care dollar going to industry-funded research hasn’t been wasted.

And it might even help the drug industry’s CEOs relearn the lesson articulated by George Merck Jr. more than a half century ago. “We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered that, the larger they have been.”

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