May 2013 Archives

The U.S. market for prescription drugs is dominated by me-too products.

Just not the kind that is much maligned in the press. Pharmaceutical companies are often attacked for spinning out "me-too" drugs that are only slightly different than earlier versions, but cost as much (or more). The real story there is a bit more complicated, but let's save that argument for another day.

The real "me-too" drugs sold in the U.S. are generics, i.e. drugs that are (for the most part) exact copies of branded (patent-protected) drugs, but sold at a fraction of the price. According to a recent report by IMS health, generics account for the vast majority of all U.S. prescription drugs - a whopping 84%. IMS estimates that by 2016 this figure will rise to 87%. This is a sea change from the late 1990s, when generics only accounted for about 40 percent of the market.

Is this good for patients, and for the health care system? Yes. Is this bad for the patients, and the health care system? Yes. It depends on whether you look at the short run or long run, and what aspect of the system you want to focus on.

First a little history and some explanation: Why are generics, from a volume perspective at least, dominating the U.S. market?

The pharmaceutical industry is, as we've said many times, largely a victim of its own success. The late 1980s and 1990s saw a slew of "blockbuster" drugs launched (Prozac, Prilosec, Zocor), largely for primary care indications like depression, high cholesterol, and acid reflux. This strategy generated billions in profits for the industry, because these indications represent very large patient populations, and patients have to take some of these drugs indefinitely - perhaps for the rest of their lives.

Blockbuster has something of a pejorative connotation, but drug treatment can represent a very cost-effective way of preventing more dangerous and much more expensive complications. Harvard health economist David Cutler, for instance, has estimated that effective use of recommended antihypertensive medicines avoids 833,000 hospitalizations and 86,000 deaths annually. And if untreated hypertensive patients were effectively treated, it could prevent another 420,000 hospitalizations and 89,000 premature deaths.

Even the Congressional Budget Office (CBO), which is very conservative when it comes to estimating offsets for health care innovations, estimates that a 1 percent increase in Medicare Part D prescription drug spending saves about 0.2 percent in other Medicare costs.

But all good things must come to an end, and all patents come with an expiration date. Blockbuster drugs patented in the 1990s or early 2000s have already lost patent protection or will do so in the next few years.

This leaves industry with a pipeline problem, since they haven't produced anywhere near enough new drugs to compensate for the products going generic. And this explains the sea change: companies just aren't moving enough patients onto new drugs as patents expire. When a generic is available, patients will chose the generic 95% of the time. In fact, this year, for the first time ever, total U.S. drug spending actually declined, at least in part because of this tremendous shift towards generics (IMS suggests other factors as well).

Why have branded companies had so much trouble filling their pipelines? They've run into something of a perfect storm.

The FDA has raised the bar for approving drugs for primary care indications, and insurers are also scrutinizing new drugs more closely when it comes to reimbursement. After being stung by rare side effects linked to FDA approved drugs like Vioxx, Avandia, and Phen-Fen, the FDA wants more data from larger clinical trials for primary care indications to rule out rare side-effect problems for drugs that are likely to be used in hundreds of thousands, or maybe even millions, of American patients after the FDA grants marketing approval. This means more tests, larger trials, and closer scrutiny of the potential for rare side effects.

Arguably, this makes sense. With many good, effective drugs already approved, regulators and payers are inevitably going to look askance at new drug candidates that don't have a clear safety or efficacy advantage over existing, and very cheap, generic medicines.

But with development costs rising (due to the aforementioned FDA regulations), industry is rationally going to walk away from developing products that might have incremental benefits, but can't generate sufficient profits to justify the investment required to bring them to market. So products that might have been commercially viable - and would make a real difference to patients - a decade ago just aren't sustainable today.

Scientifically, the low hanging fruit has been picked. If you're looking, for instance, for a drug to lower the risk of heart attacks, we've got LDL cholesterol pretty clearly licked, and you're going to have to look elsewhere (scientifically) to gain a competitive position in a patient population that is taking generic atorvastatin (formerly Lipitor).

So companies find themselves chasing novel mechanisms of action where the science is less well understood. Pfizer, and other companies, got into trouble in this area when they went after drugs to raise HDL cholesterol, and found that, in cases like torcetrapib, raising HDL cholesterol actually resulted in more deaths, not fewer - which was the opposite of what the research had previously suggested.

As companies chase more novel targets they face more scientific, financial, and regulatory risks. Add to this the fact that big time investments in genomics and other new strategies haven't (yet) paid off as handsomely or as quickly as many expected, and you've got a (at least in the short term) a severe pipeline problem.

Bigger isn't necessarily better. As pipelines thinned or slowed, companies looked to restock their shelves and improve their earnings through consolidation, i.e., insourcing other people's pipelines. From a balance sheet perspective, this can make a lot of sense, but it's also a one shot strategy - financial gains from consolidation, in terms of combining sales forces and drawing in outside revenues, can only happen once. Consolidation also makes sense given the regulatory environment (which requires more sophistication) and reimbursement environment (i.e., having more products on market gives you additional bargaining leverage with large insurers and PBMs).

But from an innovation perspective, this approach may not be effective. It's not clear that when you take two different R&D teams, with different cultures and approaches to doing research, each of which might be successful independently, and cram them together - along with the associated layoffs - you're really better off. You just might be more schizophrenic.

Where does that leave industry and patients? Increasingly, companies are focusing on "unmet medical needs" - in therapeutic areas like cancer, multiple sclerosis, cystic fibrosis, and other orphan diseases where there are few good treatment options and less generic competition. This is good for patients, who literally face life and death challenges, and it also gives industry some (frankly) much needed revenues to fund ongoing R&D.

The FDA approved 39 new drugs last year, a record, but 19 of those were for either cancer or orphan diseases. IMS also notes that out of the 28 drugs launched from last year's approvals (a number were approved late in the year, and weren't launched until 2013), representing $10.8 billion in new drug spending, specialty drugs accounted for $7 billion. That gives you a pretty good picture of where the industry's growth strategy is pointed, at least for the time being.

So are we headed to a two tiered market, where generics dominate (at least by volume) for primary care indications, and pharma/biotech focuses on specialty indications? And if that is the industry division of labor, is it sustainable?

Some of the new specialty treatments, like Kalydeco, are also truly game changers for patients. Although Kalydeco helps just 4% of cystic fibrosis patients, the drug seems to be an effective cure for those patients. That's tremendous science, and should be applauded. Cancer is another area where the industry is poised to make tremendous gains.

But all of these medicines are tremendously expensive, because of the "numbers" problem: With a smaller patient population, companies have far fewer (i.e., thousands or even hundreds) patients over which to spread their development costs and generate profits, especially since effective patent times have been flat or declining. Kalydeco, for instance, costs $294,000 annually.

As more expensive products push into the rare disease space, insurers and government payers are eventually going to balk at paying those prices, and they already are to some extent - requiring much higher co-pays from patients for some drugs.

On the other hand, the shift away from primary care indications is deeply troubling because of the enormous impact of chronic disease on patient health and the economy (through both direct and indirect costs, like lost productivity). Diabetes, heart disease, stroke and drug resistant pathogens all require much better treatments.

Burden of chronic disease.png

Without a different approach from the FDA, and a reimbursement environment that rewards incremental and breakthrough innovations in these disease areas, to say nothing of Alzheimer's, we're looking at a tsunami of health care costs and expensive complications from these diseases as the population ages.

The Solution: Broaden Innovative Pathways to Market for All Indications

Policymakers are apt to cheer cheaper generics today without thinking deeply about the implications for innovation tomorrow. Fundamentally, there is a very clear tradeoff between lower drug prices today, and less innovation for patients tomorrow.

The Obama Administration, for instance, seems blissfully untroubled by the implications of imposing Medicaid price controls on Part D, or reducing exclusivity for biologic medicines down from 12 years to 7. The former would save an estimated $123 billion over 10 years, and the latter would save $3 billion over the same time period--but the lost revenues would clearly reduce the industry's capacity to invest in innovation. And research suggests that future innovation has far higher returns to society than lower drug prices today - something on the order of 3-1 - but current policy debates are much more short-sighted than economics suggests that they should be.

What can we do to change the equation? Policymakers should encourage innovation across many different disease areas, both primary care and specialty.

For starters, we should revisit Hatch-Waxman, and slow the erosion in effective patent times so as to encourage more innovation. Companies should get back all of the patent time they lose in FDA mandated clinical trials and drug reviews. This won't prevent a single drug from going generic, but it will allow drug makers to spread their costs over more years, and help reduce short term pricing pressures.

Second, we should expedite pathways for new or repurposed drugs targeted at subgroups of patients. Drugs that come to market with companion diagnostics could be granted short patent extensions, say six months. Taking old generics and developing new uses for them, including conducting the clinical trials required for FDA approval, should be rewarded with new patent or marketing exclusivity. Repurposing old drugs is less expensive than developing new drugs, given that significant data already exists on their safety profile and mechanism of action. Encouraging more co-development of drugs and companion diagnostics will increase their cost-effectiveness, and help energizing the diagnostics industry. (Here, the MODDERN Cures Act is a great step in the right direction.)

Finally, FDA approval pathways - like accelerated approval or the new Breakthrough Therapies designation - need to be opened other classes of drugs beyond cancer, orphan drugs, and HIV. Here, the Obama Administration can heed the excellent report from the President's council of scientific advisors on doubling drug innovation in the U.S. over the next decade.

The agency and its stakeholders should develop standards for using novel biomarkers and adaptive clinical trial designs to approve drugs for targeted populations for primary care indications and antibiotics as well as specialty and orphan drugs. This would help industry, as well as society, replenish our supply of new medicines in these vital areas.

In the short run, the triumph of generics may seem like financial a windfall to payers and consumers. And largely, it is. But with an aging population, these gains will be short lived and will be far outweighed by the human and economic cost of lost or foregone innovations tomorrow.

It is almost axiomatic today that the future of health care delivery will be dominated by gadgets, apps, and everything in between that track your vital signs in real-time, use genomic and phenotypic testing to guide treatment selection, and portable electronic health records that do away with doctors' chicken scratch and seamlessly integrate across thousands of different systems. Of course, we always tend to view the future through rose-colored glasses, and tend to discount the possibility that things may not work out as we hope (electronic health records have not brought the expected cost savings, for instance), and there will still be many kinks to work out when it comes to precision medicine.

Nevertheless, the trajectory of our health care system is clear - much of the data that will fuel the big data revolution is already on the cloud (many apps readily use this data for various purposes but simply the data isn't completely interoperable across systems) - the velocity (whether we get there 5 or 20 years from now) is less relevant.

But amidst all the hubbub about these new developments (like the potential Star Trek-ification of future health care diagnostics) some have cried foul on an issue that Americans take very seriously - privacy.

Imagine a decade from now, that throughout the day, you're wearing the Apple iWatch - it monitors everything including your blood pressure, body temperature, and the amount of calories burned throughout the day. The information is uploaded to your iTunes account so you can track your daily activity, it shares the information with your electronic health record (maintained by your local physician, ACO etc.) so your health care provider knows what you mean when you say "I run every day!", and somewhere along the line, it ends up being part of a study looking at the effects of wearing the Apple iWatch on weight loss. Of course, the researchers are careful to aggregate the data - removing information like zip codes, addresses, social security numbers and other identifiable characteristics to make sure that no one - not the government, not your health insurer, nor any marketing agencies interested in maximizing their outreach efforts - can use the data to identify any individuals. Unfortunately, the reality is that no matter how careful researchers are, someone is bound to make a mistake - although the risks of re-identification (particularly post-HIPAA) are estimated to be fairly low, as information becomes more digitized this will increasingly become an issue.

Not only is re-identification an issue, but security of the records - protecting against data breaches - will become ever more important. As health information gets stored on the cloud - in a server that is just as likely to be located domestically as it is in India or the UK - it becomes, by definition, less secure. Of course, advances such as public key cryptography (where data is locked by one "public" password, but can only be unlocked by another "private" password), MD5 hashes, and ever-increasing encryption complexity, help to protect against these threats. The impending digitization of health care data will make these innovations ever more important, and federal (as well as state) regulatory standards will have to keep pace.

But let's assume for a moment that digital security will be able to prevent nearly all data breaches, personal information will be stripped where necessary, and federal regulations will help, not hinder, these efforts. There still remains a question that privacy advocates should worry about - that of permission. High profile lawsuits against companies like Facebook (which used members' profile information to help target ads) occur because companies can be negligent (whether intentionally or not) about requesting their users' permission to use personal data. For the time being this isn't a major issue (of course, there are exceptions) - health insurers aren't constantly scouring Facebook just yet to help them determine your premiums. But once again, as information becomes more digitized - particularly relevant health-related information (for instance, how much you run during the week, how many calories you intake etc.) - different stakeholders, like insurers, employers, and the government will certainly have an interest in accessing it (whether to adjust your insurance premiums or to investigate fraudulent disability claims).

The incentive for various stakeholders to seek out relevant personal information about you will put enormous pressure on developers of these gadgets and apps of the future, particularly when it comes to using your data. To maximize the use of these innovative technologies and maximize their benefit to society, companies will need to assure their customers that they will retain complete discretion over how their information is used. Privacy policies will need to be simplified from legalese into easy-to-read language so customers understand when they're signing away their information to be sold to third parties. One competitor for Qualcomm's Tricorder Prize (a competition to develop a Star Trek-like medical device), the Scanadu, offers what may very well be a gold standard for privacy:

The most recent data will be stored on your phone. But you will help us define the way data is stored for the long term. It is anonymized and encrypted. It is your data. What ever we'll do - it will always be opt-in.

You are the only person that has access to your data. You do however have the ability to share the data with doctors or even your friends and only if you want to.  

It doesn't really get any simpler than that. A simple checkbox that simply asks "yes or no" is all that's necessary (here is where federal regulations can help - the DOJ can issue simple "model" privacy language for developers to build off of).

But what about insurers? Surely, they have a right to know (and risk-adjust appropriately) if you have a genetic abnormality that predisposes you to a particular form of breast cancer. Let's ignore, for a moment, the fact that insurers are currently not permitted to discriminate based on genetics. There are other ways for insurers to encourage consumers to share this kind of information without bringing to mind a "big brother" corporate dystopia. The car insurer, Progressive, for example, lets prospective customers attach a device to their car to track their driving for a period of time. The information gathered can then be used to reduce their insurance premiums, but the company promises not to use the information to increase premiums (say, if you're a more erratic driver than other, similar drivers). Rather than penalizing people for sharing their risk factors, insurers can reward them - for instance, by helping to decide what the most appropriate and cost-effective course of action is, if a mutation in the BRCA gene is discovered.

Nevertheless, the onus will remain on developers that are leading the big data revolution in health care to ensure that customers understand what they're sharing (if anything), who they're sharing it with, and most importantly developers will have to allow customers to opt-out of sharing as well. Indeed, the big data revolution in health care can be accelerated if consumers trust that their data is safe and secure, and that they are in control of their data, rather than the big bad insurer, hospital, or generic "corporate giant." The market, along with smart and lean government regulations will ensure that companies that protect their customers' privacy will be the ones that succeed in the big data era. 

In today's evolving healthcare market, hospitals are under increasing pressure to provide better quality of care at lower cost. The fee-for-service payment system that's been in place for years rewards volume, not value. It unintentionally encourages the inefficient use of resources, thereby driving up medical costs because it doesn't connect payment to outcomes. As commercial and public payers attempt to get healthcare costs under control, there is growing recognition that we need new payment models. One approach gaining momentum is bundled pricing.

It was previously reported that over 500 organizations will participate in CMS's bundled payment initiative within the next year. In addition, we know that many commercial payers and providers are collaborating to implement bundled payment programs. As we predicted, bundled pricing is here to stay.

But not all bundled pricing is created equal. There are many definitions. Some approaches are more likely to work than others; and some are a really bad idea, likely to repeat the problems of HMOs in the 1990s. Until accountability for outcomes is tied to payment and the market becomes more transparent, we won't see the changes that are needed within the healthcare system.

One concern is that as hospitals quickly move to adopt bundled pricing initiatives, including those sponsored by CMS, these programs will only focus on lowering costs without delivering better outcomes. Effective bundled payments must deliver a "standardized," evidence-based set of services for a fixed price with specific quality guarantees. This approach will force care providers to align their efforts to manage underlying cost drivers and focus on outcomes.

Healthcare providers must realize that bundled pricing requires more than combining relevant procedural codes and offering services at a reduced price. Implementing bundled pricing requires significant preparation and organizational change. When designing a bundled payment model, measures must be in place to track variability in cost and quality across the continuum of care. The model also requires an environment where clinicians and administrators have established a partnership involving strong communication and coordination. Hospitals that fail to take these steps will have a difficult road ahead of them as stakeholders across the industry demand more value for their healthcare dollar.

As I discuss in Healthcare at a Turning Point, a well-structured bundled pricing model that delivers defined outcomes at a specific price will better meet the demands of both payers and patients. It will ensure that we achieve the ultimate objective - better health outcomes at lower cost. Keeping this objective in mind, how are you seeing the changes described above playing out in your area of work? Please share your thoughts.

Last week, California released proposed rates for health plans to be sold on the state's exchange - and listening to those championing Obamacare, there wouldn't appear to be much "rate shock" in the proposed premiums. Indeed, the statewide average of the three lowest cost silver plans is around $321, and according the way that California's health benefit exchange frames it, it would appear that premiums are actually falling!

Are premiums really falling? Will lower than expected competition, more comprehensive benefit requirements, and tighter age-band restrictions cut costs?

Let's take a moment to review the evidence.

1. The claim that premiums are falling is likely not true. The California health benefits exchange compares the average of the three-lowest cost silver plans that will be offered in 2014, to the average and "comparable" rate for the small group market in 2013. In most cases, the new plans that will be offered come with a lower price tag than the existing small group plans. But this is an improper comparison. The plans offered on the health insurance exchanges will cater to the individual market - the small group market is used by organizations and companies, and likely offers more comprehensive, employer-sponsored coverage (CBO has noted that employer-sponsored coverage has, on average, higher actuarial value than the individual market).

Estimates of average insurance rates are hard to come by, and can vary depending on the source. Earlier this year, however, consultancy Milliman released a report on the Californian individual health insurance market which indicates a 2013 average premium of about $314 - judging by this standard, the increase is small (around 2 percent, but it is an increase nevertheless). Yet, looking at other data - such as that from the Kaiser Family Foundation - makes it look as though premiums have truly skyrocketed. In 2010, the average individual market premium in California was $157 - this means that over 4 years, premiums will have spiked by around 104 percent. It isn't a stretch to think that insurers would have begun increasing pricing steadily over those years, so that come 2014, the increase didn't resemble a "rate shock."

2. California already has the largest individual market in the country. According to data from the Society of Actuaries, California's "non-group" market pre-Obamacare, was the largest in the country, at around 1.8 million individuals. The next largest was in Texas, at less than half that number. One of the reasons that generally, the individual market is so expensive, is that there really isn't much of an individual market across the country. The large majority of people receive coverage through employers, and the rest through Medicaid or Medicare - and fragmented state rules for how insurers can conduct business in the individual market have led to an expensive an inefficient status quo.

Bucking the trend, however, California's individual market was well developed pre-Obamacare (and California's lower-than-average individual market premium in 2010 is emblematic of that). Yet, one would expect that the new regulations being imposed in California (such as guaranteed issue) would contribute quite a bit to premium hikes. However, the Milliman analysis mentioned above indicates that the newly insured in California will likely have better average health status than the existing insured - a risk pool where the average beneficiary becomes healthier can stymie premium hikes.

3. California is not representative of the country as a whole. Only a handful of states have issued their 2014 rates. As other states confirm what their insurance marketplace will look like, we will have a better idea of the wide-ranging impacts of Obamacare on insurance costs. States with relatively non-existent individual markets that are largely unregulated will likely see the largest premium hikes. California is unique in that it already has a fairly robust individual market. States with a largely non-existent individual market, with uninsured that are in poor health will see the biggest impact. At the very least, champions of the president's 2010 health care law should be cautious about using California as evidence that the law is "working."   

Regardless of which narrative is most convincing, the underlying point is this - premiums are increasing in California. And they will increase in most states as well. It is illogical and unrealistic to think that Obamacare's health exchanges with comprehensive health insurance policies will lower premiums or slow health care costs - they won't. 

As a follow up to our post last week on Katherine Eban's disturbing article on Ranbaxy's massive fraud on the FDA, we thought we'd follow up with a closer look at the U.S.-India trade environment, particularly with regard to pharmaceuticals and intellectual property rights (IPR).

The U.S. runs an $18 billion trade deficit with India, of which approximately $4.5 billion (or 25 percent) is attributable to pharmaceuticals, primarily generic drugs. Although India is an attractive and growing market for U.S. companies, U.S.-based pharma companies have been hesitant to invest in India or to make more of their products available to Indian patients for fear that their IPR will be stolen by Indian companies - with the blessing of the Indian government and courts.

These concerns are not unfounded. In a May 2013 report from the U.S. Trade Representative, India was highlighted on the USTR's "Priority Watch List" for countries with weak IPR and enforcement.

While investors have been hoping for several years that India would strengthen its IP regime and begin to move up the pharmaceutical value chain by producing more innovative pharmaceuticals, it seems to be a case of one step forward, two steps back. The USTR notes that:

In many areas, however, IPR protection and enforcement challenges are growing, and there are serious questions regarding the future condition of the innovation climate in India across multiple sectors and disciplines. ...

In the pharmaceutical sector, some innovators are facing serious challenges in securing and enforcing patents in India. ...

The United States is concerned that the recent decision by India's Supreme Court with respect to India's prohibition on patents for certain chemical forms absent a showing of "enhanced efficacy" may have the effect of limiting the patentability of potentially beneficial innovations. Such innovations would include drugs with fewer side effects, decreased toxicity, or improved delivery systems. Moreover, the decision appears to confirm that India's law creates a special, additional criterion for select technologies, like pharmaceuticals, which could preclude issuance of a patent even if the applicant demonstrates that the invention is new, involves an inventive step, and is capable of industrial application.

The United States will also continue to monitor closely developments concerning compulsory licensing of patents in India, particularly following the broad interpretation of Indian law in a recent decision by the Indian Intellectual Property Appellate Board (IPAB).... In particular, India's decision in this case to restrict patent rights of an innovator based, in part, on the innovator's decision to import its products, rather than manufacture them in India, establishes a troubling precedent. Unless overturned, the decision could potentially compel innovators outside India - including those in sectors well beyond pharmaceuticals, such as green technology and information and communications technology - to manufacture in India in order to avoid being forced to license an invention to third parties.

In other words, India is clearly maintaining policies designed to bolster its domestic generic pharmaceutical industry profits at the expense of foreign competitors and IPR.

When the patent for Novartis' leukemia drug Glivec was overturned, for instance, Novartis was already giving away, for free, supplies that met 95% of the Indian oncology market, selling just 5 percent of its product to the small sliver of insured or affluent Indians that could afford pay a higher price or co-pay for the drug. That's hardly a record of profiteering on human misery.

Indian courts have also overturned patents on drugs like Glivec, Bexxar, and Viread.

At the end of the day, Indian generic companies don't subsist on charity. Indian companies make billions in profits from sales to customers in other affluent and mid-market nations, including the U.S. (about 40% of all pharmaceutical Indian exports), Latin America, and the European Union. Wealthy country taxpayers also underwrite the Indian industry, since 70% of the drugs purchased through international aid programs come from India.

Because generic drug companies don't have to conduct clinical trials to prove that their products are safe and effective, producing generic drugs for export is an enormously profitable business, allowing generic drug companies like Ranbaxy to become large multinational companies in their own right (Ranbaxy currently is the 9th largest drug company in the U.S.; overall, Indian exports around $11 billion in drugs annually.)

As the Ranbaxy case shows, however, the sheltered treatment of Indian generics firms like Ranbaxy from domestic regulators and international aid groups appears to have led to a culture of complacency, entitlement, and greed. As Eban writes,

[Ranbaxy's own] confidential report laid bare systemic fraud in Ranbaxy's worldwide regulatory filings. It found that "the majority of products filed in Brazil, Mexico, Middle East, Russia, Romania, Myanmar, Thailand, Vietnam, Malaysia, African Nations, have data submitted which did not exist or data from different products and from different countries ..." The company not only invented data but also fraudulently mixed and matched data, taking the best results from manufacturing in one market and presenting it to regulators elsewhere as data unique to the drugs in their markets.

Sometimes all the data were made up. In India and Latin America, the report noted the "non-availability" of validation methods, stability data, and bio-equivalence reports. In short, Ranbaxy had almost no method whatsoever for validating the content of the drugs in those markets. The drugs for Brazil were particularly troubling. The report showed that of the 163 drug products approved and sold there since 2000, only eight had been fully and accurately tested. The rest had been filed with phony data because they had been only partially tested, or not at all.

No corner of the globe was untouched by Ranbaxy's fraud - including drug's purchased by the World Health Organization's antiretroviral programs in Africa.

In other words, Ranbaxy fell into the trap that all domestic industries that are shielded from international competition eventually fall into: shoddy quality, bloated profit margins, and negligent management.

Competition is the best solution to this problem. Large Western pharmaceutical companies are increasingly recognizing that there is a business and a moral case to be made in pricing both new products and branded generics at prices that are affordable in many developing nations.

Partly, this is because the market for their products in wealthy countries is saturated, with sales flat or declining (thanks in part to patent expirations, the total value of the U.S. prescription drug market actually declined in 2012, according to IMS). Not only does the developing world represent a new sales and profit opportunity, Western companies can compete on quality - backing up, with their brands, the quality of their product in markets where fake or substandard products routinely sold to patients.

Broadly, Western companies are also making much better efforts to expand access to their newer products. GlaxoSmithKline, for instance, caps prices of its products in 49 of the world's poorest countries at 25 percent of their developed world prices.

GSK and Merck have also pledged to make their rotavirus vaccines available to developing countries at sharply reduced prices through the Global Alliance for Vaccines and Immunisations (GAVI). Gilead, a leading innovator in HIV/AIDS either sells its life-saving AIDS medicines at little or no profit in poor countries, or licenses them (as in the case of South Africa) to local producers who sell them at affordable prices.

How does this relate to intellectual property rights and Ranbaxy's fraud?

Strong IPR regimes in developing countries - including India - will encourage large Western firms to expand access and sales even more broadly in developing markets.

Protecting IPR would also open India's domestic market to more foreign direct investment, injecting the much-needed expertise, technology, and adherence to international regulatory norms into India's pharmaceutical industry. This would be a win-win, for India, which would be able to raise the quality of its generic products while also expanding into the production of branded drugs.

Generic companies that make excess profits selling substandard drugs are the only companies who have anything to fear from greater competition. Indian patients would benefit from improved access to higher quality, but still affordable generic and branded medicines.

Ironically, regulators in the U.S. and EU - when they pay attention, as they likely will now - already have enough muscle to police Indian companies. It is the world's poorest countries, where regulation is weakest, who have the most to gain from bringing international regulatory and IPR standards to bear on Indian manufacturers.

India won't likely get serious about fixing its lax regulations and weak IPR restrictions until Congress and the Obama Administration signal that the status quo is unacceptable, given the risk to American patients. And if they don't, America should look elsewhere for high quality generic drugs.

Reports and news stories abound with news of a slowdown in national medical spending over the past few years. Indeed, from 2009 to 2011, growth in health expenditures has remained relatively steady at 3.9% annually - moreover, in 2010, the gap between GDP growth and growth in health spending was only 0.1%, while in 2011 GDP grew 0.1% faster than health spending. If this trend can be sustained, the story goes, we may finally be seeing health care spending growth reach a plateau. Unfortunately, a few sobering facts make this unlikely.

2 Years of Growth Are a Poor Prediction

Evaluating the optimistic claim, Victor Fuchs writes in the New England Journal of Medicine:

Some observers place great emphasis on the particularly slow growth of national health care expenditures in 2010 and 2011. How useful is the experience of growth over a period of 2 years...[t]he answer seems to be not at all.

Fuchs compares 2-year rates of growth in health care spending and the subsequent 20-year growth rates, finding that there is surprisingly a negative relationship, but one that isn't statistically significant. Indeed, it seems odd to take the results of 2 years of growth and assume that they are indicative of a new, long-term trend. The Great Recession without a doubt contributed to a slowdown in health care spending (and utilization) as well - so unless we are entering a "new economic normal" of perpetually weak growth (certainly undesirable no matter how much it slows health care spending) examining two years of growth in a vacuum speaks little about the future of health care spending.

Even as costs for certain segments of the health care market (like inpatient services or pharmaceuticals) grow slower than before (for instance, part of the slowdown in health spending has been attributed to the "patent cliff" that hit pharmaceutical companies), costs will continue to grow - and there is little reason to think that the dynamic of health care costs growing faster than GDP will change in the near future.

Demographic Changes Will Grow Health Spending

Not only is a two-year benchmark a poor estimate for the next decade, it also ignores something that is almost a cliché - the population is aging, and aging fast.

aging_pop.png Source: Census Bureau

According to Census Projections, the elderly population will skyrocket by 2030 - and this trend will continue unabated to 2050. By 2050, the percentage of the population that is 65 years and older will grow to 20 percent, from around 13 percent in 2010. And while this may be a long-term trend, the short-term doesn't look much better either. In their recent updated budget outlook, the CBO notes that an aging population will play heavily into increasing deficits in the later part of this decade.

An aging population means more individuals with health care needs that include chronic diseases like diabetes and Alzheimer's - all of which are expensive and difficult to treat.

Obamacare Expands Health Insurance Coverage

Although in the long-run, and relative to the total size of our health expenditures, this may not be very much, Obamacare is projected by CMS to increase health care spending by about $500 billion over 10 years. As my colleague, Paul Howard, and I discussed at great length in a recent report, Obamacare's focus on a comprehensive insurance expansion along with reducing out-of-pocket spending means that under any and all assumptions, the law will certainly increase health care costs and spending.

Simply put, having more people with comprehensive insurance coverage that covers everything from routine doctor's visits to $9 birth control pills, will result in more people using health care resources - all culminating in greater health expenditures.

Fundamentally, all evidence points to the dip in health care spending growth being a temporary slowdown. Without radical reform to our health care system that encourages (rather than discourages) thriftiness with health care spending (by focusing on high-deductible plans and HSAs) and without broad reform to major government health programs (as opposed to gimmicky savings under Obamacare) health care spending growth will grow unabated. 

If you haven't read Katherine Eban's gripping (and somewhat terrifying) exposé of gross fraud and deception at the Indian generics multinational Ranbaxy, you don't know what you're missing. Or more accurately, what might have been hiding in your medicine cabinet for the better part of a decade. Eban writes that,

On May 13, Ranbaxy pleaded guilty to seven federal criminal counts of selling adulterated drugs with intent to defraud, failing to report that its drugs didn't meet specifications, and making intentionally false statements to the government. Ranbaxy agreed to pay $500 million in fines, forfeitures, and penalties -- the most ever levied against a generic-drug company. (No current or former Ranbaxy executives were charged with crimes.) ...

Fortune's account of what occurred inside Ranbaxy and how the FDA responded to it raises serious questions about whether our government can effectively safeguard a drug supply that last year was 84% generic, according to the IMS Institute for Healthcare Informatics, much of that manufactured in distant places. More than 80% of active pharmaceutical ingredients for all U.S. drugs now come from overseas, as do 40% of finished pills and capsules.

In a nutshell, Ranbaxy duped the FDA and other international regulators for years, fabricating documents and tests that the drugs it was selling met regulatory requirements for safety and efficacy, especially in comparison to the innovator medicines they were meant to mimic.

The story isn't likely to end with last week's settlement, since Ranbaxy has already said it is laying off 1/3 of its global sales force, and the company's officers may still face additional criminal charges or lawsuits from individual consumers.

For years (exactly how long is unclear) Ranbaxy submitted fake data to the FDA, falsifying or backdating records requested by regulators, and substituting tests on branded drugs for their own putative manufacturing runs. The scale of the fraud is breathtaking, and calls into question how the FDA could've been fooled so thoroughly for so long.

Most disturbingly, we don't know if Ranbaxy is a rogue actor or the tip of a corrupt iceberg in the loosely regulated Indian pharmaceutical industry. This is especially disconcerting given that Indian drugmakers have been growing their stakes in the U.S. generics market.

Generic Drug Share.png

FDA regulators and inspectors have a tremendous workload, especially as the industry has shifted to a global manufacturing model. They simply cannot inspect every manufacturing facility outside the U.S. on the same schedule they do for the U.S. (According to the GAO, 40% of domestic facilities are inspected every year; which means U.S facilities are inspected about once every two-and-a-half years; internationally, that falls to around 11% or once ever nine years). (To the agency's credit, they have been making progress in inspecting more facilities, as the GAO report notes.)

Broadly speaking then, the FDA regulatory system operates on trust. Trust that the data submitted to the agency by the regulated companies and their contractors is genuine. This is different from a rogue contractor substituting substandard ingredients in Heparin, or oncologists buying drugs on the internet in an effort to boost their margins. Here we have a large multinational company, the ninth largest generic drug company in the U.S., and the second largest drugmaker in India (just behind Abbot's Indian subsidiary) simply thumbing its nose at U.S. and E.U. regulations with a sense of total impunity.

Last year's PDUFA agreement, FDASIA, for the first time included a new generic prescription drug user fee program, to allow the FDA to hire more reviewers to review - and likely expedite - generic drug applications. Hopefully, this will also lead to more scrutiny of companies, like Ranbaxy, that operate outside the U.S. (as per GAO's recommendations) and whose manufacturing facilities face less scrutiny from U.S. regulators - and weak enforcement from domestic regulators.

FDASIA also contains provisions for increasing the inspection of foreign facilities, and for working with foreign regulators to task agency inspectors at the highest risk facilities (less inspections, for instance would be required in the E.U.) and more in higher risk countries with lax regulation, like India.

But the FDA is never going to be able, for cultural and logistic reasons, to simply show up at Indian plants and deliver the same degree of scrutiny that they can at U.S. based operators.

Here's another idea: Congress should consider requiring the FDA should to utilize its own or private laboratories to conduct spot inspections of foreign generic drug shipments on a regular but random basis to ensure that companies (especially those without a proven record of consistent quality) haven't run up a "test batch" for FDA scrutiny and then later substituted substandard or adulterated drugs for the U.S. market.

This should be done on a "trust but verify" basis, with more frequent spot inspections from high risk countries or suppliers with a spotty safety record, with inspections tailing off after the company demonstrates it can consistently deliver high quality products.

The results of all FDA testing should be shared with the public, on a website, to name and shame companies that don't meet FDA standards (and help consumers identify those that do). If a company batch fails a testing requirement, they should be fined and a larger inspection of that entire drug line should begin.

If widespread problems are detected sanctions should escalate rapidly, and repeat offenders should be debarred from selling to any federal programs and/or loss of Hatch-Waxman exclusivity until the problems are resolved. The key will be to prevent companies like Ranbaxy from playing shell games with the agency while violations drag on for years.

These may seem like harsh penalties - and the FDA is rightly concerned about drug shortages for critical medicines - but until the FDA and Congress signal that the integrity of the U.S drug market is a priority, unscrupulous firms will bet that their frauds will go undetected and unpunished.

The 1984 Hatch-Waxman Act has led to a sea change in the U.S. drug market, accelerating generic drug access and rewarding companies that are "first to file" successful patent challenges with six-months of exclusivity. But the enormous financial stakes, combined with fiercely competitive generic industry, may push companies to cut corners in an effort to lower costs and maintain high profit margins. This is what seems to have happened at Ranbaxy.

Worse yet, Eban's article implies that Ranbaxy's substandard drugs may have killed people, including AIDS patients in Africa. A list of drugs currently supplied by Ranbaxy includes medicines for anxiety, high blood pressure, Alzheimer's, depression, and malaria. Poorly controlled disease due to substandard medicines could've easily led to serious hospitalizations or deaths for these indications.

The FDA says that it doesn't think that anyone was harmed by these drugs, and the vast majority of generic medicines are (probably) safe. But Eban's article should shake everyone's confidence. Given the size of the U.S. market, and the relatively high background rate of morbidity and mortality for many chronic diseases, it might be very difficult to detect complications or side effects resulting from Ranbaxy's drugs. But that doesn't mean that they aren't there. And this isn't the first time that the FDA has had to walk back assurances of generic drug effectiveness or safety.

Whatever you think of the FDA's approach to regulation of innovator drugs, this is one area that conservatives and liberals should rally together and demand higher standards. The Ranbaxy story strikes at the heart of the FDA's core mission of ensuring that a drug is safe, contains the ingredients listed in the label, and performs as advertised compared to its branded cousin.

It's especially disquieting that it took the FDA years to crack down on Ranbaxy, and that the agency continued to approve Ranbaxy drugs - including generic Lipitor (which itself erupted in a scandal due to glass particles being found in the drug) - long after whistleblowers were feeding the agency inside information.

Here's one final question this time for Indian patients, policymakers, and international aid groups that have championed India's generic drug industry: If Ranbaxy is willing to treat its largest and most important market with complete contempt, what standards operate inside India or other developing countries, especially when, as Eban notes, Ranbaxy's own executives refused to expose themselves or their families to the firm's drugs?

In the U.S., the expansion of the FDA's powers to regulate drug safety grew out of a number of scandals and deaths that called into question the industry's ability to self-regulate. If India wants to continue to have access to the U.S. market, Indian policymakers should seize this opportunity to raise the quality level across the entire industry, and prevent even worse scandals down the road.

If Indian regulators don't act, Congress should restrict access to the U.S. market until they do.

(Roger Bate, at AEI, provides an excellent overview of quality problems afflicting the Indian generic drug market. He also suggests that one of the forces inhibiting the development of a "quality first" drug culture at Indian pharma firms is the country's weak intellectual property regime, which discourages foreign companies operating in more stringent regulatory environments from investing in Indian subsidiaries. From this perspective, it will be interesting to see if Daiichi Sankyo's takeover of Ranbaxy will help change the company's dysfunctional corporate culture. Or maybe the Japanese company will find some way to walk away, given the current scandal.)

As I've written here and elsewhere, Obamacare furthers a public misconception of what "health insurance" is meant to be. The law requires plans that are sold on health insurance exchanges to cover a vast array of benefits ("Essential Required Benefits") that include basic, inexpensive preventive care with no cost-sharing. And by doing so, the law mistakes what insurance actually is - a financial instrument to help individuals pay for costly, unexpected, events.

You want insurance that covers everything from an annual doctor's visit to the $9-a-month birth control pill? Then be prepared to pay more.

Ultimately, however, the insurance exchanges are likely to affect a relatively small share of Americans - at last count, about 25 million according to the CBO.

The majority of Americans - around 160 million - will continue to receive insurance through their employers (whether this is desirable or not is a whole different question - hint: most economists believe it isn't). But even here, Obamacare's miscalculation of what insurance should be, is creeping in.

Perhaps what's most noteworthy about Obamacare is that it offers a case study for Econ 101 students in unintended consequences.

Obamacare's major change to employer-sponsored coverage is that firms with 50 or more (full-time equivalent) employees will be required to offer health insurance to their full-timers, else pay a per-worker penalty of $2,000 (there is a separate penalty for workers who are offered "unaffordable" health coverage).

Because one goal of the health reform law was to disrupt as little as possible existing coverage (remember that "you can keep your coverage if you like it"), requirements for employer-sponsored insurance are significantly less onerous than those for plans sold on the exchanges. The only real requirement is that employer-sponsored plans have to cover preventive services with no lifetime benefit limits.

As can be expected, we've already seen employers discuss cutting hours and employment as ways of avoiding this mandate. But a WSJ piece out on Sunday offers insight into a third strategy: cutting benefits.

As the WSJ article points out, a number of businesses including two food-chains in Texas will offer "skinny," mini-med plans - relatively inexpensive form of health insurance. These types of policies have been around well before Obamacare and typically don't include coverage for surgeries or hospital stays, and when it comes to drug coverage, tend to only cover generics - they can often be priced at under $100-a-month.

For those of us concerned about health care costs and waste in the health care system, this is a mixed blessing. Perhaps few employers will embrace mini-med plans; maybe many will. The big picture, however, is what deserves attention. There appears to be a growing industry-level move that focuses more on insuring routine health events like doctor's visits along with (or, as in the case of mini-meds, instead of) expensive events like surgeries and hospitalizations.

This is exact opposite of what you'd want to see.  We should be encouraging people to pay for more routine costs out of pocket, rather than relying on insurance.  For really big ticket items - like hospitalization or expensive chronic illnesses, insurance should bear the cost.

Such is the law of unintended consequences that Obamacare is extending coverage for many services where the evidence on value is actually pretty weak.   

Before Obamacare, the American health care system was bifurcated (trifurcated, really - but that's a discussion for another day): those with health insurance and those without.

Underpinning the law was unambiguously a belief that when someone wants to see a doctor, they should be able to do so at minimum cost to them - costs to others be damned! That regular doctor visits are cheap (and getting cheaper courtesy of companies like Wal-Mart!), or that annual physical exams (that will now be effectively free) have not been shown to improve health outcomes was never a concern to the drafters of the law. But they missed something potentially worse - further fragmentation of the health care system.

Those receiving health insurance as a result of the employer mandate (or those whose employer-sponsored insurance will change its benefits package) might end up becoming "second-class" policyholders who can see a physician at no cost to them, but god forbid they land a kidney infection that requires a weeklong hospitalization. We know that this wasn't the intention of Obamacare's backers, but their preferences blinded them to another set of problems. It's understandable that the authors of the law missed such potential market shifts - after all, it's hard to see the forest for the trees when you're layering regulations on a market with very few signals thanks to other regulations.

"Reformers of the reform" should take heed and remember that insurance doesn't need to be comprehensive - covering the most unexpected events is all that's necessary. Direct Primary Care memberships - like Primary Care 1 in West Virginia - can be cost-competitive with mini-med plans, while offering a far wider range of services. Layering catastrophic insurance on top of that would help cover rare but expensive events that mini-meds don't. And in a bit of good news, Obamacare allows such plans to be sold on the exchanges and they even qualify for federal subsidies (albeit with a requirement that the DPC plan provide a "medical home" as well).

Those in Congress concerned about how the implementation of the law will play out should focus their energies on making the law more friendly to catastrophic plans on their own (for those who are healthy enough and don't need an annual doctor's visit, for instance) by allowing the use of premium subsidies for these low-cost plans.

I'm sure that consumers, medical policymakers and insurance companies are just oozing with joy. After all, we are rapidly heading for pharmaceutical paradise--a pharmacy packed with really cheap generics and not much else.

This will not only save tons of money, but also stick it to those bad boy pharmaceutical companies that invented the drug in the first place, and then sucked us dry by fighting off the noble generic companies for an extra two minutes of patent protection so they could suck us even drier.

Doesn't get any better than this. At least until you swallow the pill.

In today's "big surprise of the day," Ranbaxy Laboratories, India's largest generic manufacturer got a little $500 million slap on the wrist from the U.S. Justice department.

The company admitted that a few years ago that they manufactured and subsequently sold substandard drugs, which were made at two different facilities in India. Well, anyone can make an honest mistake. Except perhaps Ranbaxy, which as part of the settlement, admitted to lying about the problems by intentionally making false statements to the FDA.

Their guilty plea added up to three felony counts, $150 million in criminal penalties and another $350 million in civil penalties.

The drugs in question were for treatment of acne, epilepsy, neuropathic pain and one antibiotic-- ciprofloxacin.

This is hardly the first time that Ranbaxy has had problems with drug "quality"--a misplaced euphemism if ever there were one.

In 2008, the FDA prohibited the importation of 30 drugs from two of Ranbaxy's plants in India, and instituted a so-called "Application Integrity Policy," which stopped the review of any new drug applications from one of the company's facilities. The reason? Once again, fraudulent record keeping and reporting.

In a sane world, one might think that the company might be asked to take their business elsewhere, but sanity seems to have become, well, insane.

Despite the company's accomplished track record of incompetence and fraud, in November 2011 the FDA still gave permission for Ranbaxy (and only Ranbaxy) to sell the first generic version of the Lipitor. This was clearly well-deserved, as evidenced by the fact that in 2102, Ranbaxy was forced to recall multiple lots of the drug after the pills were found to contain glass particles.

One might think that this would be enough, but one would be wrong.

According to a recent Fortune report, the U.S. Dept. of Veterans Affairs recently signed a large contract to buy generic Lipitor from, who else? Ranbaxy. Two months ago.

OK. This stopped being funny quite a while ago. And the take home message is even less amusing--saving money is so important to our government and medical providers that they are going to look the other way while a bunch of hacks in India feed you a steady supply of crappy drugs.

And Ranbaxy's response doesn't exactly inspire confidence. According to CEO Arun Sawhney "While we are disappointed by the conduct of the past that led to this investigation, we strongly believe that settling this matter now is in the best interest of all of Ranbaxy's stakeholders; the conclusion of the DOJ investigation does not materially impact our current financial situation or performance."

Which is about as comforting as in February, when the company also issued a statement that "[I]t was confident in the continuing safety and quality of its products."

Which begs the question, "what would happen if they weren't confident? "Oops- you swallowed a hand grenade instead of a cipro? Please hold."

And if you think this is an isolated incident, you perhaps ought to consider a little Wellbutrin therapy. Except last year, Teva, Israel's giant generic manufacturer was forced to recall all of its Budeprion XL, their version of Wellbutrin XL, (the generic name is bupropion). The problem? Its U.S. manufacturer, Impax Laboratories had a little problem with the time-release formula.

This is no laughing matter with bupropion, since the 300 mg time-release pill released the drug much too soon putting patients at risk for seizures, and cardiac arrhythmias. The maximum immediate-release dose for the drug is 100 mg, which was exceeded by the failure of the time-release formulation, leaving patients susceptible to side effects early on and sub-therapeutic blood levels later.

These are two of the biggest generic companies around, which makes me wonder what will happen when Joe's Pharmaceuticals starts making generic heart drugs in a U-Haul in Newark.

These are our future medicines, and inevitably most of us will eventually run into one. The FDA has shown little ability to catch this until after the problem has already occurred, and the cheap prices are simply too enticing.

This is just getting started. Open wide folks. There's going to be a lot for you to swallow.

I'm going to have a little fun with Josh Bloom's recent posting, not because I don't respect him or his writing--I do--but because we can use it to illustrate an important point.

His posting was about Merck and Liptruzet and he asked how Merck could look itself in the mirror when "Merck is trying something that is as good an example of marketing without innovation as you'll ever see." He went on to say, "Liptruzet behaved, as expected, just like Vytorin. It reduced LDL cholesterol more [than] for patients who took Lipitor alone, but it did not reduce patients' chances of developing heart disease. Not surprisingly, this left some doctors to wonder why it was approved at all."

In other words, if Merck can't prove that Liptruzet does more than just reduce LDL, then it's just a big marketing scam. For fun, let's gain some perspective by substituting Merck with Ford and Liptruzet with the F-150 pickup.

"The Ford F-150 pickup carries workers and tools to jobsites around the country. It has been used for carpentry, masonry, steel working, HVAC, concrete, logging, plumbing, and roofing, but, at least so far, Ford has been unable to prove that the F-150 can do other, even more amazing things. With the F-150 pickup, Ford is trying something that is as good an example of marketing without innovation as you'll ever see."

Perhaps Ford has not proven the F-150's ability to do other amazing things because those things are difficult or expensive to prove. Or perhaps the study is underway, as is Merck's IMPROVE-IT study of Vytorin. Maybe down the road someone will show that F-150's can be used for other, important things. Or, maybe not. In the meantime, the stuff the F-150 does is still impressive and, by being on the market, it gives consumers a choice and provides competition for Dodge, Chevy, and Toyota.

If customers did not see the value in F-150's, they wouldn't buy them. The fact that they do buy them shows that they see value. And these are the people who are most directly affected by owning a new pickup, as opposed to outside "experts" who might have different values and preferences, and certainly have less skin in the game.

Pharmaceuticals are somehow seen as different. The opinion that Liptruzet shouldn't be given a chance on the market shows little respect for the ability of patients, physicians, and payers--the real people who take, prescribe, and purchase drugs--to form their own opinions based on their own experiences. I, for one, would prefer the pharmaceutical market to be more like the automotive market.


At the end of last night's Intelligence Squared debate, 53 percent of attendees thought so - up from 24 percent at the beginning.

So what is it that swayed a room of oncologists, physicians, and even celebrities like the father of DNA, Jim Watson? Arguing for the motion were former FDA Deputy Commissioner and American Enterprise Institute Resident Fellow, Dr. Scott Gottlieb, and Manhattan Institute Senior Fellow, Peter Huber. The duo made a compelling, if somewhat wonky (try explaining the difference between Bayesian and frequentist statistics in under a minute), case that the FDA's aging clinical trial requirements are ensuring that the most needed medicines - those that treat diseases like Alzheimer's, antibiotics that are effective against resistant bacteria, and many others - will either never make it to market, or will take years longer than what is reasonable.

Indeed, listening to Dr. Gottlieb and Huber, it becomes evident (as we've discussed on MPT numerous times) that the large population requirements and the onerous statistical certainty that the FDA requires are keeping drug development from progressing - moving from treating the average patient to treating the individual. A glimmer of hope, however, remains. The FDA has demonstrated its ability to be more innovative in the past - its fast track and accelerated approval designations helped get cancer drugs and HIV/AIDS drugs to market in record time. As Huber put it, the very existence of a fast track designation, indicates that there is something patently wrong with the standard trials.

But what about the other side? Surely there is an argument to be made in favor of the FDA's caution. Arguing against the motion was Dr. Jerry Avorn of Harvard Medical School, and Dr. David Challoner, VP for Health Affairs Emeritus at the University of Florida. The crux of the rebuttal, however, was not quite as compelling - in essence, Avorn and Challoner believe that the FDA is approving drugs fast enough, and requiring them to do so any faster would be very risky. The statistical certainty demanded by the FDA is a necessity for an agency charged with ensuring the safety of our food and our medicines. In years that few drugs were approved, they argued, the fault lies with the pharmaceutical industry for not coming up with enough new drug candidates.

The problem with this line of reasoning is twofold: first, Huber's point on the fast track designation is on the money. The fact that fast track and accelerated approval designations were necessary to get urgently needed drugs on the market is in and of itself an indictment of the clinical trial process. Certainly, cancer drugs often do much harm to the patient, and AIDS cocktails were notoriously rife with side effects. But it's hard to imagine that anyone would have preferred having these two drug classes go through the decade-long development process of FDA clinical trials.

The second problem with Avorn and Challoner's reasoning is that it ignores an important class of drugs - antibiotics. Over the past two decades, antibiotic resistance has become a growing public health problem, and many of our last-line antibiotics are beginning to fail (cephalosporins are often not effective against gonorrhea, for instance). New antibiotics are hard to come by, however, because of a variety of reasons (an important one is that the "low-hanging fruit" has already been picked), but chief among them are the stringent requirements for antibiotic trials set by the FDA - these requirements are designed to meet a level of statistical certainty, but this often make antibiotic development impractical or prohibitively expensive.

Nevertheless, this is a debate that is likely to continue. While the FDA has acknowledged that some of its guidelines may need to be updated, the agency has been slow to issue definitive and easy-to-follow guidance to guide the development of personalized medicine. Hopefully, officials at the agency were paying attention to last night's debate.

The discovery of a new drug-resistant strain of gonorrhea - now being called a "superbug", should worry policymakers. This is only the latest (and certainly not the last) instance where antibiotic-resistant bacteria threaten public health. The last line of antibiotics that treat gonorrhea - cephalosporins - are beginning to fail worldwide (a recently developed antibiotic in this class ceftobiprole medocaril, however, has shown some efficacy against a methicillin-resistant staphylococcus aureus (MRSA) - though the FDA rejected approval in 2008). 

Among all drug classes, antibiotics are known to have among the lowest risk-adjusted net present value (NPV: the discounted future revenue minus discounted costs) - around $100 million; compare this to an estimated $300 million NPV for cancer drugs or $1.15 billion for drugs treating musculoskeletal conditions. In effect, this means that antibiotics fall fairly low on drug companies' lists of new projects. Though there are many reasons for antibiotics' poor value for companies, it is widely agreed upon that FDA clinical trial regulations (particularly as they affect antibiotic development) contribute significantly. 

Just like any other drug candidate, when a new drug application (NDA) is filed for an antibiotic, there needs to be supporting evidence demonstrating its safety, correct dosage, and efficacy using the FDA's 3-phase clinical trial approach. But antibiotics have to face yet another hurdle - traditionally, drugs are tested against a placebo to establish efficacy. However, when it comes to putting antibiotics through clinical trials (usually patients are signed up in a hospital setting) using a placebo in the control arm of the study presents an ethical dilemma of offering someone with a serious infection a simple placebo (more importantly, the point of a placebo is to verify that particular conditions won't clear up on their own - while simple upper respiratory infections very well might, it's hard to argue that a MRSA infection will). Because of this, antibiotics are put into what are known as "non-inferiority" trials; drug sponsors have to show that new antibiotics are - within a certain margin - no worse than existing treatments.

The problem here is twofold - first, the FDA's clinical trial designs require very large patient samples, and place restrictions on previous antibiotic use (the patient can't have taken another antibiotic within a certain time period before being entered into the trial). For antibiotics, which have very specialized markets (these markets tend to have higher than average mortality rates because they are usually in a hospital setting), large sample sizes are often unrealistic, and neither is the expectation of no prior antibiotic use (because patients are often given an antibiotic immediately when being admitted for an infection). Second, while the FDA has (thankfully) moved away from imposing pre-defined non-inferiority margins and has given investigators more discretion in doing so, the guidance is still relatively stringent and has not helped spur antibiotic development. In particular, the guidance still favors a "fixed margin" approach, where the non-inferiority margin is identified based on historical placebo trials (the alternative, the "synthesis" method is less conservative but more nuanced - it combines estimates for effect versus a comparator drug as well as versus a placebo). The preference for placebo-focused trials undoubtedly causes confusion when placebo trials are unavailable or impractical.

Besides the FDA regulations, other issues with antibiotics development are inherent to the market - antibiotics are short-term therapies, with a course of therapy typically lasting around a week. By contrast, cancer therapies can last for months, or statins for a lifetime, giving drugmakers a much longer time frame to recoup their costs and generate profits.

But is there really a pressing need for new antibiotics? Or is the drug-resistant strain of gonorrhea a one-off finding? A few statistics should answer this:

  • More Americans die from MRSA every year than from AIDS. 
  • Growing antibiotic resistance has led to doctors using old, highly toxic antibiotics like collistin, which may often kill the patient just as well as the infection.
  • The number of new antibacterial agents approved in the U.S. is at an all-time low.

The need for antibacterial drugs is undeniable. A growing number of pathogens are becoming resistant to all but the most toxic antibiotics in our armamentarium - many of these (like gonorrhea) used to be highly susceptible to available antibiotics but developed resistance over time. All is not doom and gloom however - the reauthorization, last year, of the Prescription Drug User Fee Act (PDUFA V) included a provision known as the GAIN Act. This established an additional five years of Hatch-Waxman exclusivity for antibiotic NDA-filers, resulting in a total of 10 years of market exclusivity with or without a patent. The law also gives antibiotics priority review and fast track status to reduce the review period and speed up the path from Phase I testing to NDA filing. While there may be marginal benefits for drugmakers, because the market exclusivity runs concurrently with patent life, the impact of an additional five years of Hatch-Waxman exclusivity is unlikely to be a game-changer.

Even more importantly, however, the law mandated that the FDA create a new pathway for approval of antibiotics. A specialized designation (with complete and thorough guidance) for antibiotics that simplified the development process and peeled back unnecessary regulations would be the best step that the FDA could take in helping spur antibiotic development. Since PDUFA V, the Infectious Diseases Society of America (IDSA) and the President's Council of Advisors on Science and Technology (PCAST) have proposed a "special population, limited medical use" pathway, which has received some FDA support. However, antibiotics approved under such a pathway would be very restricted to only the subpopulation for which trials establish an adequate benefit-risk ratio (though at the same time, this would hopefully make approval more predictable). Nevertheless, this seems to be a moot point for the time being, since no official draft guidance has been issued from the FDA, and the idea is still in the discussion stages with industry groups.

An adequate supply of antibiotics, and the ability to fend off ever-evolving bacteria is crucial to a future rife with chronic diseases and a generally "older" population. FDA regulations are hampering the ability of pharmaceutical companies to provide this supply. Policymakers should pressure the FDA to make good on its PDUFA obligations and to re-examine its antibiotic trial guidance. The limited use designation, when FDA takes action on it, may be valuable for the industry - a streamlined, focused pathway would help justify higher prices for antibacterial drugs, increasing the class's NPV for drugmakers. And while some may clamor about pharmaceutical companies profiteering from people's sickness, think of it this way - if we're willing to pay tens of thousands (even hundreds of thousands) of dollars for a cancer treatment that offers a few extra months of life, we should be willing to pay at least as much for an antibiotic that unquestionably saves a life.

The pharmaceutical industry does many wonderful things, yet most people regard it as one step below head lice on the food chain.

This week, Merck, with some questionable help from the FDA, gave more ammunition to industry critics, who typically maintain that the industry contributes little innovation, and is simply concerned with profits.

For the most part, this criticism is biased and uninformed, but this time I'm siding with the critics. Because Merck is trying something that is as good an example of marketing without innovation as you'll ever see.

The company just received approval for the cholesterol-lowering combination drug Liptruzet-- a functionally similar (identical?) version of their own Vytorin, which is a combination of their statin Zocor and Schering's (now part of Merck) cholesterol absorption blocker Zetia (ezetimibe).

Liptruzet, ironically happens to be a combination of Zetia and atorvastatin (generic Lipitor). Yes--Merck is substituting a former Pfizer drug for their own Zocor with combining it with Zetia to make a "new" medication with additional patent protection. This is innovation?

Worse still, both Vytorin and Liptruzet are of questionable use. In 2009, studies showed that Vytorin, despite lowering LDL and total cholesterol did nothing to prevent cardiac events. In fact, a 2009 New England Journal of Medicine article concluded that not only did Vytorin fail to reduce heart disease, but "the use of ezetimibe led to a paradoxical increase in the degree of atherosclerosis in association with greater reduction in LDL cholesterol, an effect we hypothesize may stem from unintended biologic effects of this agent."

Liptruzet behaved, as expected, just like Vytorin. It reduced LDL cholesterol more for patients who took Lipitor alone, but it did not reduce patients' chances of developing heart disease. Not surprisingly, this left some doctors to wonder why it was approved at all.

Dr. Steven E. Nissen, chairman of the department of cardiovascular medicine at the Cleveland Clinic commented "This is extremely surprising and disturbing."

This sentiment is echoed (and then some) by Philip Gelber, M.D., Chief Cardiologist at Cardiovascular Consultants of Long Island. "It is surprising to me that the FDA approved this combination drug. The modern movement requires that drugs not just be safe and effective in their immediate goal, but to also show efficacy in improving outcomes. Cardiac medications should not just reduce the cholesterol count, but reduce the risk of heart attack and stroke as well." He continues, "There was, I'm sure, pressure by big pharma to get this approved, which by pairing it with another drug, would in effect restore blockbuster Lipitor back to branded status. A tricky move, but one which doesn't make folks any healthier."

So, why on earth would we need a virtually exact copy of a drug that doesn't even work? This is for Merck to answer.

I also don't understand what the FDA was thinking here.

Are they under so much political pressure to approve new drugs that they will accept just about anything? Because it sure seems that way right now.

This past January, FDA Commissioner Margaret Hamburg bragged about the improved performance at the agency, which approved 39 new drugs last year compared to 30 in 2011, and 21 in 2010. She said, "Not only have we been able to approve more new drugs that have real benefits for patients but also classes of drugs that signal where we are going in areas like personalised medicine, where we've been able to use diagnostics to target sub-populations of responders."

But last week's approval of Liptruzet makes me wonder whether they are simply playing a numbers game for the sake of public perception. Because if there is any drug that does not have any obvious benefits for patients, it is Liptruzet.

This is a sentiment shared by Dr. Nissen. He said, "It seems like the agency is just tone deaf to the concerns raised by many members of the community about approving drugs with surrogate endpoints like cholesterol without evidence of a benefit for the disease we are truly trying to treat--cardiovascular disease."

This episode just plain smells bad on many levels. I get the feeling that just about everything except science is driving this, and this will be a black eye that Merck will be inflicting on itself and the rest of the industry.

This piece is cross-posted at the Manhattan Institute's state and local issues blog,

Fiscal instability is not only an issue nationally - driven largely by health care spending - but at the state and local levels as well. A new GAO report illustrates the magnitude of the fiscal challenges facing states, and identifies the (unsurprising) culprit:

The [simulation] show[s] that [state and local] health-related costs will be about 3.8 percent of GDP in 2013 and 7.2 percent of GDP in 2060...[t]he model projects that the [state and local] non-health-related costs will be about 10.5 percent of GDP in 2013 and about 7.7 percent of GDP in 2060.

The ever-growing burden imposed by health care spending means that by 2060, the national state and local fiscal gap will be around 4 percent of GDP - in nominal terms, that's about $5 trillion based on CBO projections. Because health care costs - enshrined in promises to government employees and retirees, as well as Medicaid spending on the poor - will drive this fiscal growth, which is unlikely to slow down (health care spending on current employees and retirees is governed by contracts, which makes it difficult to pare back; Obamacare's Medicaid expansion ensures that in the states that undertake it, many more residents will be covered making it more difficult to slow down its growth) other state and local outlays will fall on the chopping block. This phenomenon of "crowding out" is nothing new; because localities operate with limited funds (revenue must be raised through taxes, bond issuance, or from federal grants), each slice of the pie has to get smaller.

Indeed, the GAO report also acknowledges that wages paid to state and local employees will likely fall as a share of GDP (this phenomenon may ironically increase retirement promises that localities make to employees).

For states that are expanding their Medicaid programs under Obamacare, the expansion may seem like a reasonable way to shift costs to the federal government. At first, the federal government picks up the full cost of new enrollees, while later on, states will only be responsible for 10 percent of the costs. For the majority of states, however, this will still mean an increase in spending.

Reports like this underlie the need to drastically reform government health care spending - Medicare (on the federal side) and Medicaid (on both the state and federal side) are seen, unambiguously, as eating up an ever growing share of revenue going forward. Obamacare expanded Medicaid, shifting some costs to the federal government, while bringing "productivity adjustments" to Medicare in the form of provider cuts. Neither approach represents actual reform, however; analysts in the private sector and at the CBO routinely note that government health care spending is on an unsustainable trajectory.

Worse still, the latest FY14 budget from the White House drew a line around Medicaid, taking it "off the table."

Perhaps the one silver lining for Medicaid is that it remains largely a state-administered program that simply has to operate according to federal guidelines. Because of this, states have become testing grounds for new approaches to offering the poor affordable health care. Managed care penetration for instance, where tight networks of providers are often given financial incentives to provide more efficient, outcome-based care, varies significantly among the states. New York has more than three-quarters of its Medicaid population in managed care contracts; Maine, on the other hand, has less than half. Other innovative approaches have also taken hold - the Healthy Indiana Plan took a "consumer-driven" approach, offering Medicaid beneficiaries an HSA product that was partly funded by the state, to help keep down unnecessary health care spending - the results have largely been positive.

Just because one reform worked in Indiana doesn't make it ideal for other states, however. State medical needs vary greatly, and no amount of central planning will change that - basic demographic differences like income and age distribution can drastically affect a state's health care spending. Fortunately, states can request waivers from the federal government to experiment with new ways of paying for Medicaid services or administering the program.

Whether these waivers will continue to be issues as regularly as they have in the past is unclear - a uniform Medicaid program is essential to Obamacare's coverage expansion, and HHS may choose to approve fewer and fewer waivers as a way of better controlling the program. Other, more drastic approaches are likely only pipedreams for now - Medicaid block grants based on the successful welfare reform of the 90s would create a natural cap on future spending growth, as my colleague Paul Howard has written.

Real reform to Medicaid would take advantage of states' abilities to be "laboratories of innovation"--the current administration could take the first step by assuring states that even with a Medicaid expansion, HHS would continue to consider even the most drastic waivers. 

Estimates of Americans without health insurance hover between 15 and 20 percent - depending on the source (much of this is a difference in whether you ask about being uninsured presently or being uninsured at any time during the past year). According to the CBO, Obamacare will expand coverage to some 25 million people through exchanges and 12 million people through Medicaid expansion (a net of 27 million fewer uninsured because some people will lose employer coverage and others will lose existing non-group coverage). By CBO's estimates, this cuts the number of uninsured down to around 10 percent - about 30 million people.

This coverage expansion, however, masks some confusion about what health insurance really is. Beth Haynes, Executive Director of the Benjamin Rush institute points out the underlying problem:

Think about your auto, life and homeowner's insurance. Each of these is designed as a means to pay for unexpected, unpredictable, very expensive occurrences outside of the control of the policyholder... So what is it we have that we call health insurance but isn't? We have the prepayment of medical expenses. We expect our "insurance" to cover predictable, relatively inexpensive events like health maintenance checks, minor illnesses and injuries -- and to pay for them with minimal out of pocket spending.

Unfortunately, almost none of the discussion about America's health care woes attempts to clarify the point that insurance is designed to protect against catastrophic events - not cover every day, basic expenses. As Paul Howard and I have written previously, there isn't much logic in forcing "Cadillac" coverage (comprehensive coverage with little out-of-pocket spending) on a person that only needs coverage for the most catastrophic events (a young, healthy person, who can afford to cover a basic doctor's visit once a year but wants to hedge his bets against an unexpected cancer, for instance).

Because insurance companies are required - currently by states, and come 2014 by federal regulations - to cover basic expenses with minimal cost to the individual, the only place to shave costs remains in covering catastrophic episodes - the ones that tend to cause medical bankruptcies.

The problem is rooted in the idea that we can cut costs while offering more expansive coverage - you can't have your cake and eat it. More expansive coverage by definition means spending more money, regardless of who is paying. The fact that many people under Obamacare won't bare the full weight of their medical costs doesn't change the underlying price being paid for an inflated "insurance" product.

Think of it this way: you can get cheap auto insurance for under $100 a month; it will likely have a high deductible (say, $2,000) and no auto insurance covers maintenance like oil changes and tire rotations. But if your car gets totaled in an accident (which shouldn't happen often), you shell out the $2,000 deductible and the insurance company pays for the rest. That's how insurance works - except in the health care sector. Subsidies under Obamacare will mask the true cost of the law, but won't fundamentally change the fact that American health insurance isn't real health insurance at all.

keep in touch     Follow Us on Twitter  Facebook  Facebook

Our Research

Rhetoric and Reality—The Obamacare Evaluation Project: Cost
by Paul Howard, Yevgeniy Feyman, March 2013

Warning: mysql_connect(): Unknown MySQL server host '' (2) in /home/medicalp/public_html/incs/reports_home.php on line 17
Unknown MySQL server host '' (2)


American Council on Science and Health
in the Pipeline
Reason – Peter Suderman
WSJ Health Blog
The Hill’s Healthwatch
Forbes ScienceBiz
The Apothecary
Marginal Revolution
Megan McArdle
LifeSci VC
Critical Condition
In Vivo Blog
Pharma Strategy Blog
Drug Discovery Opinion