uses Pfizer's withdrawal of torcetrapib to illustrate the steep economics of drug developmentvery high initial investments in research with very uncertain prospects of successand to explain why drug price negotiations for the Medicare drug benefit would hurt the industry and patient health.
The drug industryor Big Pharma, in the partisan argothas been under siege. And the storyline peddled by critics is that little innovation comes from drug companies anyway: A lot of research is done in governmentfunded labs such as the National Institutes of Health, then the drug companies step in at a late stage of development, claim a patent and make out like bandits. So imposing such incentivekilling policies as Medicare price controls wouldn't really harm drug development.
This is a politicized fantasy. Only the private sector has the knowledge and resources for efficiently isolating useful chemical compounds, and only one in 25 candidate drugs identified by the industry ever makes it to market. In the case of torcetrapib, Pfizer's loss in sunk R&D costs was something approaching $1 billion, which is not atypical in developing any new drug. That's not to mention 15 years of effort, or the $20 billion in Pfizer market capitalization wiped out since the bad news broke. The government's grant of monopoly patent protection for a certain time is the compromise struck by the political system to reward that upfront capital expense.
The highrisk nature of the drug business is illustrated by the stock prices of many major companies, which have dropped significantly in recent years. Europe has already done a lot to kill incentives for research and development with price controls, and the last thing the industry needs is to see those policies replicated in Washington.
It's also the last thing patients need. The drug industry's development of cholesterollowering statins (such as Pfizer's Lipitor) has dramatically lowered heartattack risk. Heart disease remains the single biggest killer of Americans, however, and Pfizer's hope for torcetrapib was that it would lift the amount of "good cholesterol" in the bloodstream. This wasn't a search for some "copycat" treatmentwhich is another misguided complaint of the drug company critics.
Another lesson of the torcetrapib failure is thatthe Vioxx episode notwithstandingthe drug industry generally polices its own products. Pfizer's blind trial was monitored by independent researchers, and they alerted the company that the compound appeared to increase mortality in heart patients, not decrease it as hoped.
A new study by economist Benjamin Zycher (published by the Manhattan Institute) estimates that any apparent savings from having Medicare "negotiate" drug prices would be more than wiped out by the cost in "lifeyears" lost from a decreasing number of new, beneficial drugs. Let's hope the new Democratic Congress can recognize the importance of fostering research when it takes up Medicare policy and FDA reauthorizing legislation next year.