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A Tale Of Two Drug Classes Shows Why U.S. Mustn't Go Europe's Way

Paul Howard, Ph.D.
Investor's Business Daily
December 1, 2006

A decade ago, Europe's pharmaceutical industry started to lose its competitive edge—thanks, at least in part, to drug price controls and health care rationing common to EU nations. Today the U.S. leads the world in creating new drugs and medicines because we offer a dynamic—and yes, profitable—market for pharmaceutical innovation.

But congressional leaders have made it clear that the pharmaceutical industry should brace itself for major initiatives designed to reduce drug prices and spending. And the proposed ideas are nothing if not bold: price "negotiations" (de facto price controls) for the Medicare Drug Benefit, drug importation and broad restrictions on the marketing of drugs.

Policymakers should tread carefully. If Congress follows Europe's example, the U.S. could lose its status as the leading center for pharmaceutical innovation. To understand the risk, consider the contrasting roles that pricing signals have played in the development of medicines to treat cancer and those to treat bioterrorism attacks.

In 2001, the FDA approved Gleevec, a breakthrough drug for chronic myeloid leukemia, or CML. Before Gleevec, companies saw little appeal in the leukemia market, with just a few thousand new patients every year. Existing treatments for CML were thus limited, and prospects for new drugs slim. But all this changed after Gleevec revolutionized the treatment of CML, leading to a stunning 98% of patients achieving complete remission.

This clinical breakthrough made Gleevec an enormous financial success for Novartis and convinced competitors that even a few thousand patients was a market worth pursuing. Last June the FDA approved Sprycel, from Bristol–Myers Squibb, to treat the even smaller cohort of patients— about 20%—who become resistant to Gleevec.

When Brian Druker, who helped develop Gleevec, wanted to explain why companies are now eager to develop niche leukemia treatments, he pointed out that Gleevec became a blockbuster, with $2.1 billion in gross sales in 2004.

On the other hand, when governments use—or even just threaten to use—their enormous power to force price concessions from manufacturers, innovation suffers.

After anthrax–laced letters killed five Americans in the wake of the 2001 World Trade Center attacks, Secretary of Health Tommy Thompson threatened to suspend Bayer's patent on its antibiotic Cipro unless the company agreed to his "preferred" price. Bayer, faced with the prospect of generic companies getting the right to break its U.S. patent, caved and slashed its price from $1.83 to less than $1 per pill.

In 2004, Congress passed legislation, called Project BioShield, designed to spur private sector development of treatments for potential bioterrorist attacks. But nearly three years after the bill was signed, pharma companies have expressed little interest in the program. Not a single new product has been approved by the FDA.

Why? One major reason is the suspicion that, in the event of an attack, the government will offer pennies on the dollar for bio–terror drugs and will break patents to ramp up generic production. Instead of joining the biodefense effort, big companies are thus focusing their efforts on diseases like cancer or heart disease–where financial rewards are left to market forces.

This isn't to say that companies should be able to charge high prices forever; in fact, it's impossible. Limited—term patents for new drugs mean that today's expensive blockbuster drugs are tomorrow's cheap generics. From 2005 to 2011, dozens of popular branded drugs will go off–patent, including the world's best–selling anti–cholesterol drug, Lipitor.

American patients have the best of both worlds: High initial prices—and the lure of handsome profits—encourage companies to invest in research and development of drugs to treat rare diseases. Then after these medicines lose their patent protection, patients and insurers gain access to many of the world's cheapest generic drugs, ensuring an ongoing balance between cost and innovation.

Our system isn't perfect, however—particularly for the low–income uninsured. But if Congress is serious about helping them, it should focus on market–based reforms that promote competition and affordable insurance.

Congress should offer the same tax deductions to individuals purchasing health insurance as those offered to employer–based health insurance. Refundable tax credits or vouchers should be targeted at low–income Americans to help them buy any kind of health insurance—including, but not limited to, health savings accounts.

Congress should also create a national market for health insurance so consumers can shop for the best combination of price and coverage across state lines.

Finally, Congress should give the FDA the authority to levy user fees on generic drug applications, which would help the agency process its backlog of hundreds of generic applications. User fees have helped accelerate the review and approval of new drugs, and the same resources should be available to expedite generic approvals.

Incentives matter. Europe has a proud history of drug discovery—but its future is clouded by short–sighted policymakers. That's the real lesson Congress should take from our European cousins.

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