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10 Innovation in the Pharmaceutical Industry: Possible Effects of the Proposed Drug Regulation Reform Act of

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1978 GAIL UPDEGRAFF JRB Associates, Inc., McLean, VA 22102 This paper is a discussion of the impact of the proposed Drug Regulation Reform Act of 1978 (DRRA) on innovation in the pharmaceutical industry as assessed by examining the DRRA's economic impacts. (Before proceeding, the reader may want to refer to the brief overview of the DRRA at the beginning of the section on the Economic Analysis of the DRRA (See p.9 ).) Although only a small segment of the paper will discuss the various forces that have led to proposing the DRRA, arguments made concerning U.S. drug laws, primarily since the 1962 Amendments to the Food, Drug and Cosmetic Act (FD&C), that are r e l e vant to direct or indirect effects of this law on drug innovation will be discussed. (The 1962 Amendments required that drugs not only be safe, but also that they be effective.) Hence, a brief synopsis of the ongoing debates surrounding the drug law embodied in FD&C and also the way the Department of Health, Education, and Welfare's Food and Drug Administration (FDA) has administered this law will be presented. Determining the impact of the DRRA on drug innovation involves recognizing several problematic steps in relating regulation and innovation. The first is the evaluation of the dollar costs to industry of the regulation. Second, a determination of the extent to which costs imposed on industry affect R and D expenditures must be made. Next, the extent to which changes in R and D expenditures affect innovation must be assessed. Then, one needs to categorize the innovations (say, therepeutically significant versus not significant) in order to determine whether those innovations that are most beneficial to society are the drug innovations affected. F i n a l l y , it is imperative to attempt to determine the effect of other regulatory and nonregulatory factors on drug innovation. Each of the above points are covered, some to a lesser degree than others, in this paper. However, no attempt is made to cover the potential benefits of the DRRA in terms of preventing "harmful" (ineffective and/or unsafe drugs) innovations from being marketed. 0-8412-0511-6/79/47-109-151$05.00/0 © 1979 American Chemical Society

Hill; Federal Regulation and Chemical Innovation ACS Symposium Series; American Chemical Society: Washington, DC, 1979.

152

FEDERAL REGULATION AND CHEMICAL INNOVATION

The a n a l y s i s of the DRRA. presented below demonstrates that it is p o s s i b l e to p r e d i c t that the proposed A c t , the DRRA, will have both p o s i t i v e and negative economic impacts ( i . e . , will impose savings as w e l l as c o s t s on the pharmaceutical i n d u s t r y ) , and, hence, impacts on i n n o v a t i o n . The d i f f e r e n t s i d e s in the ongoing debate concerning government r e g u l a t i o n of the drug i n d u s t r y and i t s impact on pharmaceutical innovation u s u a l l y appear to overlook t h i s n o t i o n of e f f e c t s in opposite or countering d i r e c t i o n s . In f a c t , the proponents and opponents, r a t h e r than searching f o r t r u t h , appear to be searching f o r the most damning, most supportive case. The r e s u l t is that e f f o r t is p r i m a r i l y expended not on reaching a f a i r and accurate conc l u s i o n , but instead searching f o r the winning argument. I t will be p o s s i b l e to r e l a t e many of the " p r e d i c t e d impacts of the DRRA on drug innovation to previous arguments on t h i s t o p i c . T h i s paper will p r i m a r i l y concentrate, as discussed above, on the economic aspects of the impacts of the DRRA as they i n t e r f a c e w i t h drug i n n o v a t i o n . Economic aspects of the impacts means those aspects that d i r e c t l y i n f l u e n c e the a b i l i t y of f i r m s to f i n a n c e r e s e a r c h and development (R&D) and, t h e r e f o r e , p o s s i b l e innovations. There are a l s o i n d i r e c t economic impacts such as the time it takes to o b t a i n market approval f o r a drug and the p o s s i b l e h e a l t h e f f e c t s t h i s has on consumers from having to forego an e f f e c t i v e a l t e r n a t i v e t r e a t m e n t — t h i s , of course, can have a multitude of monetary e f f e c t s on the p a t i e n t ( l o s t employment, more expensive a l t e r n a t i v e treatment c o s t s , e t c . ) . Of course, the timing of market approval can have negative monetary impacts on the a b i l i t y of drug firms to f i n a n c e R&D because of l o s t or "untimely" s a l e s (untimely in that R&D p r o j e c t s are c u r t a i l e d because drugs t h a t are approved were done so too l a t e to generate revenue in time to support the projects) . The point made e a r l i e r concerning the r e l a t i o n s h i p between R&D expenditures and drug innovation is an important one. Although U.S. i n t r o d u c t i o n s and d i s c o v e r i e s in the drug f i e l d have e x h i b i t e d a d e c l i n i n g trend s i n c e the l a t e 1950's, constant U.S. drug f i r m R&D d o l l a r expenditures have continued to i n c r e a s e , as shown by Grabowski, e t . a l ( 1) . Many have argued, as have Grabowski, e t . a l , that the decrease in drug i n t r o d u c t i o n s and d i s c o v e r i e s is due in l a r g e part to government r e g u l a t i o n , p a r t i c u l a r l y that by FDA. Others have argued that there is a d e p l e t i o n in our knowledge of the drug f i e l d that has l e d to a d e c l i n i n g trend in drug i n t r o d u c t i o n s and d i s c o v e r i e s even though constant d o l l a r R&D expenditures have continued to i n c r e a s e — t h e i n c r e a s e has been taking p l a c e at a decreasing r a t e in the past s e v e r a l years. T h i s argument is o f t e n supported w i t h r e f e r e n c e to the boom years of innovation that came w i t h the v a r i o u s v a c c i n e , a n t i b i o t i c and psychotherapeutic drug breakthroughs. In summary, there does not appear to be a r e a d i l y i d e n t i f i a b l e r e l a t i o n s h i p between marginal changes in 11


10.

1978 Drug

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154

FEDERAL REGULATION AND CHEMICAL

INNOVATION

In a d d i t i o n , s i n c e t h i s paper is d i s c u s s i n g p o s s i b l e r e v i s i o n s to the U.S. drug laws, the d e f i n i t i o n is a l o g i c a l as w e l l as p r a c t i c a l one to use. N e v e r t h e l e s s , it should be noted that the FDA and others d i s t i n g u i s h between NCE's t h a t a r e t h e r a p e u t i c a l l y s i g n i f i c a n t and those that a r e not. I n s p i t e of the n e c e s s i t y of c l a s s i f y i n g innovations in t h i s way as acknowledged a t the beginning of the paper, no system acceptable to both government and i n d u s t r y p r e s e n t l y e x i s t s . A b a s i c premise of t h i s paper is that p r e s c r i p t i o n (or e t h i c a l ) drugs have been p r o v i d i n g and will continue to p r o v i d e a b e n e f i t to s o c i e t y . The important t h i n g about drug i n n o v a t i o n should be that it is a b e n e f i t to s o c i e t a l h e a l t h , not that it p o s s i b l y means the f i n a n c i a l growth of drug f i r m s . There is support f o r the t h e s i s that p r e s c r i p t i o n drugs may be a s o c i e t a l b e n e f i t (3). At a time when h e a l t h care costs are r i s i n g r a p i d l y (4), drugs provide a r e l a t i v e l y inexpensive form of treatment. A n t i b i o t i c s have allowed the treatment of numerous i n f e c t i o u s d i s e a s e s with a consequent decrease or e l i m i n a t i o n of h o s p i t a l i z a t i o n in many cases. Psychotherapeutic drugs have cut the c o s t of both i n p a t i e n t and o u t p a t i e n t c a r e f o r mental traumas and i l l n e s s e s , and probably increased a segment of the p o p u l a t i o n ' s p r o d u c t i v i t y . Drugs a r e now approved or in the p i p e l i n e f o r treatment of such i l l n e s s e s as u l c e r s , g a l l s t o n e s and c e r t a i n forms of cancer. These treatments are c o n s i d e r a b l y l e s s expensive than surgery in some cases, and they have f a r l e s s negative s o c i a l impact in some i n s t a n c e s . F i n a l l y , v a c c i n e s have reduced the demand f o r h e a l t h care through the p r e v e n t i o n of s e v e r a l once widespread i l l n e s s e s . Of course, there a r e a l s o going to be drugs that a r e not t h e r a p e u t i c a l l y s i g n i f i c a n t and which even may be harmful because they a r e unsafe, or e f f e c t i v e treatment is foregone. A p o i n t that m e r i t s d i s c u s s i o n before proceeding is the b e h a v i o r a l and resource assumptions that must be considered in regard to how the DRRA might be implemented. When HEW S e c r e t a r y Joseph A. C a l i f a n o , J r . first addressed FDA s t a f f s h o r t l y a f t e r coming i n t o o f f i c e , he c a l l e d FDA the most u n d e r - s t a f f e d , underresourced agency in HEW. I t is only l o g i c a l that if any of the c r i t i c i s m s that have been made of FDA (these will be b r i e f l y discussed l a t e r in t h i s paper) is t r u e , and if one g i v e s credence to S e c r e t a r y C a l i f a n o ' s statement, then t h e f a i l u r e s that FDA has been accused of will probably not be solved by a r e v i s i o n of the drug laws alone — s u f f i c i e n t a d d i t i o n a l s t a f f and resources must go along w i t h the DRRA. I f they a r e not provided, i n n o v a t i o n may be slowed as a r e s u l t of the market approval process being slow. Hence, one assumption I make is that t h e i n c r e a s e in resources is adequate to e f f i c i e n t l y administer the drug laws if they a r e r e v i s e d . T h i s might even take a r e v i s i o n in the s a l a r y s c a l e f o r p h y s i c i a n s , as some have advocated, in order to a t t r a c t more medical doctors i n t o the FDA.


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An important b e h a v i o r a l assumption w i t h r e s p e c t to the i n d i v i d u a l s and teams (medical d o c t o r s , pharmacologists, t o x i c o l o g i s t s , chemists, e t c . ) which review a p p l i c a t i o n s f o r approval to market a drug is t h a t , f o r v a r i o u s reasons, they are not adequately motivated. When an important d i s c o v e r y is made in the drug f i e l d , and when the drug (or s e r i e s of drugs) continues to give evidence that it is s a f e and e f f e c t i v e , then who gets the credit — the drug company, of course. The FDA reviewers may r e c e i v e some e x p l i c i t or i m p l i c i t c r e d i t with FDA, but most of the p u b l i c and p r i v a t e p r a i s e will go to the drug company (or the company and the d i s c o v e r ( s ) ) . T h i s n e g a t i v e impact on i n n o v a t i o n , along with low s a l a r y s c a l e s and other adverse f a c t o r s , such as the i n a b i l i t y of these teams to do r e s e a r c h because of the present nature of t h e i r work, makes it d i f f i c u l t to r e c r u i t the r e q u i s i t e s t a f f . However, if FDA reviewers approve a drug that turns out to be unsafe or i n e f f e c t i v e , p a r t i c u l a r l y one that ends up being unsafe, then FDA and these reviewers will take a major share of the c r i t i c i s m — t h i s c r i t i c i s m will come from the p u b l i c , from Congress, and from the E x e c u t i v e Branch, i n c l u d i n g c r i t i c i s m of the reviewers by f e l l o w FDA s t a f f . The r e s u l t of t h i s s i t u a t i o n is probably t h a t FDA and i t s reviewers have become c o n s e r v a t i v e in t h e i r market approval p o l i c y — the negative i n c e n t i v e s appear to be much s t r o n g e r than the p o s i t i v e i n c e n t i v e s r e l a t e d to drug approval. Hence, to change the drug laws without changing FDA s t a f f i n c e n t i v e s may be a f u t i l e e x e r c i s e , depending on what one is t r y i n g to accomplish. This is not meant to be a c r i t i c i s m of the process of drug market approval. I t is meant to r e v e a l what the author's thoughts are with respect to changing the process of drug approval while i g n o r i n g problems perhaps even more important than the process i t s e l f (5). Given the above d i s c u s s e d assumptions and d e f i n i t i o n s , the next t o p i c t h a t is covered is the background or s e t t i n g in which the DRRA was i n t r o d u c e d . Two areas are of importance here. The first is the other i n f l u e n c e s , besides FDA r e g u l a t i o n , that a f f e c t the a b i l i t y of U.S. pharmaceutical f i r m s to c a r r y out i n n o v a t i v e r e s e a r c h and, u l t i m a t e l y , develop new drugs as a r e s u l t of the d i s c o v e r y of NCE's. The second is the numerous c r i t i c i s m s that have been l e v e l e d at FDA by the pharmaceutical i n d u s t r y , Congress, academia, p u b l i c i n t e r e s t groups, e t c . One needs to be cognizant of the i n f l u e n c e s , d i s c u s s e d immediately below, on the drug i n d u s t r y other than FDA r e g u l a t i o n because these i n f l u e n c e s a l s o e f f e c t (1) the amount of R&D expenditures and (2) the p r o p o r t i o n of these expenditures that go i n t o drug d i s c o v e r y r e s e a r c h . The cost of d i s c o v e r y and development of a new drug is a s t a r t i n g p l a c e f o r examining other i n f l u e n c e s , s i n c e other t h i n g s r e l a t e back to it r e g a r d i n g the a b i l i t y of f i r m s to f i n a n c e drug R&D. I t has been estimated


156


r e c e n t l y that the cost of d i s c o v e r y and development f o r a new drug is now approximately $50 m i l l i o n (6). T h i s estimate i n c l u d e s the cost of f a i l u r e s during research. Of t h i s c o s t , about h a l f is f o r d i s c o v e r y and h a l f f o r c l i n i c a l t e s t i n g of the drug to determine i t s s u i t a b i l i t y f o r marketing — i . e . , is it safe and e f f e c t i v e ? FDA, u n t i l t h i s year, was not i n v o l v e d in the d i s c o v e r y or i n n o v a t i v e phase. They have now s t a r t e d t o r e g u l a t e animal t o x i c o l o g y l a b o r a t o r i e s , hence they have become i n v o l v e d in the i n n o v a t i v e phase s i n c e it depends h e a v i l y on animal t e s t i n g . FDA has estimated the cost of t h i s involvement to i n d u s t r y , academia and the government at about $50 m i l l i o n (7), but i n d u s t r y claims it will be more. In f a c t , during i n f o r m a l d i s c u s s i o n s o f the DRRA, one drug company executive asserted that it would cost h i s f i r m alone $20 m i l l i o n to comply w i t h FDA's animal t o x i c o l o g y r e g u l a t i o n s . The p o i n t is that FDA is now i n v o l v e d in the d i s c o v e r y phase v i a a new r e g u l a t i o n it has promulgated, but the impact of t h i s i n v o l v e ment on R&D c o s t s is still u n c e r t a i n . FDA's primary impact is on the other h a l f of the c o s t s of o b t a i n i n g drug market approval — the development phase. Accepting the estimate of $50 m i l l i o n and that h a l f of t h i s goes to the developmental phase, we have $25 m i l l i o n in cost that is s p l i t up in s e v e r a l ways. A p a r t of the c l i n i c a l t e s t i n g would be done r e g a r d l e s s of FDA's r e g u l a t i o n s on market approval. Drug f i r m s would do t h i s t e s t i n g to decide which p a t i e n t s would b e n e f i t from the drug ( i . e . , what the market is); to prevent negligence s u i t s ; and to s a t i s f y corporate e t h i c s . C e r t a i n l y the degree of t e s t i n g might vary from company t o company. The problem is e s t i m a t i n g how much would be done and how w e l l . The same goes f o r l a b e l i n g , package i n s e r t s f o r p h y s i c i a n s and other marketing f u n c t i o n s . The view to date is that government must watch over the pharmaceutical i n d u s t r y to assure the p u b l i c of safe and e f f e c t i v e drugs. Thus, at l e a s t some p r o p o r t i o n of development phase costs must be a t t r i b u t e d to FDA r e g u l a t i o n . To date, no one has been able o r w i l l i n g t o estimate what t h i s p r o p o r t i o n is. Whatever the p r o p o r t i o n of development phase costs that can be a t t r i b u t e d to FDA r e g u l a t i o n is, it has been c l e a r l y demonstrated that the cost of drug research and development has been i n c r e a s i n g s i g n i f i c a n t l y — from $30 m i l l i o n in 1967 to $54 m i l l i o n in 1976 by one estimate (6). The cost of t e s t i n g equipment and m a t e r i a l s , s c i e n t i f i c personnel, f a c i l i t i e s , e t c . needed t o meet government r e g u l a t i o n o r due to other f a c t o r s have all c o n t r i b u t e d . These a r e areas where the DRRA will have little if any impact. Yet the cost o f R&D is very important because it determines how f a r an R&D d o l l a r goes, j u s t as food p r i c e s determine how f a r our food d o l l a r goes. Besides the market approval r e g u l a t i o n s of FDA, there a r e other FDA r e g u l a t i o n s that i n f l u e n c e the cost o f drugs. The most s i g n i f i c a n t of these is the s e t of r e g u l a t i o n s f o r good


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manufacturing p r a c t i c e s (GMP's). The GMP's are p r e s e n t l y being r e v i s e d , and there is c o n s i d e r a b l e debate as to what the economic impact of these r e v i s i o n s will be on the pharmaceutical industry. One important area of r e g u l a t i o n o u t s i d e FDA's r e g u l a t o r y a u t h o r i t y are cost containment p o l i c i e s and programs such as maximum a l l o w a b l e cost (MAC). (MAC is a proposed HEW program whose o b j e c t i v e is to lower the cost of drugs purchased through Medicare-Medicaid without s a c r i f i c i n g the q u a l i t y of drugs purchased). T h i s program, which FDA is only a c o n t r i b u t o r to through i t s e x p e r t i s e in such areas as b i o e q u i v a l e n c e , can be expected to decrease the revenues of drug firms because the i n d i c a t i o n is that the volume of drugs s o l d will stay the same but the s a l e s p r i c e will be the same or lower f o r drugs under t h i s program. The e f f e c t of a decrease in s a l e s revenue is q u i t e l i k e l y to be a decrease in R&D expenditures ( 9 ) . R e f e r r i n g to what was s a i d e a r l i e r , I cannot conclude that t h i s decrease in R&D expenditures will l e a d to a decrease in drug innovation. The i n t e r n a t i o n a l drug law and r e g u l a t i o n s i t u a t i o n presents still another i n f l u e n c e on the a b i l i t y of U.S. drug firms to generate s a l e s and hence R&D d o l l a r s . Although many U.S. pharmaceutical f i r m s have argued that drug r e g u l a t i o n in t h i s country is, in many i n s t a n c e s , f o r c i n g them to i n v e s t abroad, t h i s is not to say that drug laws and r e g u l a t i o n s are not a l s o g e t t i n g s t r i c t e r in other c o u n t r i e s . In f a c t , W a r d e l l , in h i s most recent work on the s o - c a l l e d "drug l a g " , says that the U.S. is c l o s i n g the gap between Great B r i t a i n and the U.S. in new drugs approved; one of the reasons he g i v e s is a r e l a t i v e i n c r e a s e in drug r e g u l a t i o n by Great B r i t a i n (10). F i n a l l y , on the i n t e r n a t i o n a l s i d e , we can expect f o r e i g n competition to i n c r e a s e as s c i e n t i f i c c a p a b i l i t i e s of other n a t i o n s expand in the pharmaceutical f i e l d . P r o d u c t i v i t y in other n a t i o n s r e l a t i v e to the U.S. is an i n c r e a s i n g l y important t o p i c of d i s c u s s i o n , and there is no reason to b e l i e v e that it will not be j u s t as important an i s s u e in the drug area as it is in other areas. Although there are probably other r e l e v a n t i n f l u e n c e s on drug i n n o v a t i o n besides the FDA's r e g u l a t o r y e f f o r t s , the l a s t i n f l u e n c e I will mention is a p o t e n t i a l one — n a t i o n a l h e a l t h insurance (NHI). A c t u a l l y , NHI could l e a d to an expansion of s a l e s revenue and hence R&D d o l l a r s . The reason f o r t h i s is that NHI is expected to make h e a l t h care ( i n c l u d i n g , of course, treatment by drugs) a v a i l a b l e to a l a r g e r p o p u l a t i o n than is now the case. O f f s e t t i n g these expected revenue e f f e c t s would be r e g u l a t o r y programs such as MAC. A l l of the above i n f l u e n c e s that impose c o s t s on drug f i r m s do so o n l y to a c e r t a i n extent. That extent is the degree to which the drug f i r m s can r a i s e t h e i r p r i c e s to cover cost i n c r e a s e s . The consumer then pays the cost and, in a sense,


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helps to maintain R&D in the pharmaceutical f i e l d . F o r e i g n competition is one f a c t o r that would l i m i t the a b i l i t y of drug firms to cover cost i n c r e a s e s . Cost containment p o l i c i e s f o r h e a l t h care could emerge as another. In a d d i t i o n t o the non-FDA i n f l u e n c e s d e s c r i b e d above with respect to t h e i r e f f e c t on the a b i l i t y of U.S. pharmaceutical firms to fund R&D, the background f o r the r e v i s i o n of the FD&C Act i n c l u d e s the c r i t i c i s m s of FDA r e g u l a t i o n that the DRRA is attempting to address. One o f t e n advanced c r i t i c i s m has a l r e a d y been d i s c u s s e d — the cost of r e s e a r c h and development f o r d i s c o v e r y and marketing of a new drug. (No c o n c l u s i o n was drawn by the author with respect t o the magnitude of FDA's impact on t h i s c o s t ) . Another c r i t i c i s m of FDA and the s t a t u t o r y authori t y it operates under is t h a t there is a "drug l a g " (safe and e f f e c t i v e drugs are approved q u i c k e r in other c o u n t r i e s than in the U.S. as i n d i c a t e d e a r l i e r f o r Great B r i t a i n and the U.S.) in the U.S. as a r e s u l t of the FD&C Act, p a r t i c u l a r l y the 1962 Amendments t o the A c t , and of the way in which FDA has implemented the drug laws. The consequences of t h i s "drug l a g " as put f o r t h by the proponents of the argument are that some drugs that a r e t h e r a p e u t i c a l l y s i g n i f i c a n t a r e not a v a i l a b l e to people l i v i n g in the U.S. as a r e s u l t of FDA r e g u l a t i o n (10). Attempts have been made to q u a n t i f y t h i s l o s s (11), but even Peltzman's well-known c o s t - b e n e f i t study has not escaped c r i t i c i s m (12). The c r i t i c i s m appears to at l e a s t p a r t i a l l y negate Peltzman's c o n c l u s i o n that the c o s t s of the 1962 Amendments exceed t h e i r b e n e f i t s — costs in Peltzman's study r e f e r t o " e f f e c t i v e " drugs that do not reach the U.S. consumer and b e n e f i t s r e f e r to " i n e f f e c t i v e " drugs kept o f f the U.S. market. N e v e r t h e l e s s , the speed at which drugs are granted market approval and the impact of FDA and i t s a u t h o r i t y on drug innovation (the two parameters of the "drug l a g " ) are still v i a b l e i s s u e s . U.S. drug laws have a l s o been c r i t i c i z e d f o r not a l l o w i n g drug companies to export drugs that have not r e c e i v e d FDA approval f o r marketing in the U.S., but have a p o t e n t i a l market(s) o u t s i d e the U.S. and are considered acceptable in t h i s market(s). Since requirements f o r o b t a i n i n g market approval vary by country, some drugs not y e t acted on r e g a r d i n g market approval o r denied approval in the U.S. may still be e l i g i b l e f o r approval elsewhere in the world. Consequently, U.S. drug f i r m s are given the i n c e n t i v e to l o c a t e f a c i l i t i e s abroad (13). A c r i t i c i s m advanced by many i n d i v i d u a l s and groups, but not by the pharmaceutical i n d u s t r y , is that the FDA operates in secrecy when it decides whether to grant market approval f o r a drug. The argument is that s i n c e the s a f e t y and e f f i c i e n c y data that drug firms submit to FDA in support of a drug are p r o p r i e t a r y , the p u b l i c is not given s u f f i c i e n t i n f o r m a t i o n to have meaningful input i n t o the approval process. The argument is then u s u a l l y extended t o say that drugs a r e being approved


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that a r e e i t h e r unsafe or i n e f f e c t i v e as a r e s u l t of pressure from the pharmaceutical i n d u s t r y (14). F i n a l l y , the r a t e of r e t u r n (ROR) on R&D investment in the drug i n d u s t r y and the p o s s i b l e e f f e c t of FDA r e g u l a t i o n on ROR has been examined. Schwartzman has argued that even though the p o t e n t i a l f o r d i s c o v e r i n g important drugs is s i g n i f i c a n t , drug companies will a c t u a l l y cut back t h e i r R&D programs (17). The reason f o r t h i s cutback, he argues, is that the expected ROR f o r a drug f i r m with respect t o i t s R&D a c t i v i t i e s has d e c l i n e d from 11.4 percent in 1960 to 3.3 percent in 1972. I t is argued that FDA r e g u l a t i o n is one o f the f a c t o r s in t h i s decrease. Opponents have argued that if ROR on R&D were as low as 3.3 p e r c e n t , then drug companies would stop i n v e s t i n g in drug R&D — the c r i t i q u e of Schwartzman's work is not t h i s simple, of course, but t h i s is a major p o i n t . Economic A n a l y s i s of the DRRA The DRRA was submitted t o Congress on March 16, 1978. The proposed A c t , if passed, would represent the first t o t a l r e v i s i o n of the drug p o r t i o n of the F, D and C A c t s i n c e i t s passage in 1938 and the 1962 Amendments. The DRRA c o n s t i t u t e s a r e w r i t e o f all f a c e t s o f the present U.S. drug l a w s — i . e . , it r e v i s e s s t a t u t o r y a u t h o r i t y w i t h respect t o market approval, manufacture, d i s t r i b u t i o n , promotion and use of pharmaceuticals. In a d d i t i o n , it provides the s t a t u t o r y a u t h o r i t y to d e a l w i t h problems that a r i s e a f t e r a drug is granted market approval. T h i s a u t h o r i t y i n c l u d e s the r i g h t of FDA t o ask f o r r e p o r t s on experience w i t h a drug's use and provides f o r s t i f f e r enforcement mechanisms. The DRRA a l s o a u t h o r i z e s the e s t a b l i s h ment of a N a t i o n a l Center f o r C l i n i c a l Pharmacology (NCCP) as part of HEW. More s p e c i f i c a l l y , it is proposed under T i t l e I that the present process of o b t a i n i n g market approval f o r a new drug (the New Drug A p p l i c a t i o n (NDA) process) be r e p l a c e d w i t h one that i n c l u d e s e s t a b l i s h i n g a monograph f o r a drug e n t i t y first, and then o b t a i n i n g a l i c e n s e t o market drug products made up of one o r more drug e n t i t i e s . The monograph represents the innovator's submission of evidence to FDA that has the purpose of e s t a b l i s h i n g the c o n d i t i o n s f o r s a f e t y and e f f i c a c y of the drug e n t i t y . The b a s i s of d e c i d i n g whether a drug product should be l i c e n s e d is the compliance of the product with the r e q u i s i t e s of the monograph (see J 6 and 17 f o r e l a b o r a t i o n on the monograph). T i t l e I of the DRRA a l s o attempts to provide f l e x i b i l i t y in the i n v e s t i g a t i o n a l use of human drugs. I t does so by c a t e g o r i z i n g these drug i n v e s t i g a t i o n s i n t o three types f o r the purposes of r e g u l a t i o n — d r u g i n n o v a t i o n , drug development, and drug t r e a t m e n t — a n d gearing the r e g u l a t i o n s to the type of i n v e s t i g a t i o n w h i l e still maintaining the goal of p r o t e c t i n g



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human s u b j e c t s . In a d d i t i o n , T i t l e I s e t s f o r t h p r o t e c t i v e measures f o r those who use a drug once it has obtained market approval. These measures p e r t a i n t o drug l a b e l i n g and marketing techniques as w e l l as to e d u c a t i o n a l programs f o r consumers and health professionals. The only other part of the proposed Act b e a r i n g a d i r e c t r e l a t i o n s h i p t o the d i s c u s s i o n in t h i s paper is the p r o v i s i o n s e t t i n g f o r t h c o n d i t i o n s under which a drug product not approved f o r marketing in the United States may be exported (see 16 and 17 f o r more d e t a i l on the DRRA). The a n a l y s i s of s e c t i o n s of the DRRA that f o l l o w s expands on those p a r t s of the Act that have consequences f o r drug i n n o v a t i o n through t h e i r economic i m p l i c a t i o n s . Again, it should be emphasized that the impact of the proposed DRRA depends on how the proposed A c t is implemented. The manner in which it is promulgated is c r u c i a l to estimating i t s consequences. For example, will the good manufacturing p r a c t i c e s now in f o r c e be c a r r i e d over under the new Act? And, what about the r e c e n t l y proposed r e v i s i o n s of the b i o - r e s e a r c h monitoring program f o r s a f e t y and e f f i c a c y t e s t i n g of drug e n t i t i e s , as w e l l as other drug research? W i l l they remain i n t a c t ? These d e c i s i o n s will p r i m a r i l y be made when r u l e s are promulgated based on a new drug law. When t h i s o c c u r s , the pharmaceutical i n d u s t r y , the p u b l i c , and other governmental e n t i t i e s will have an o p p o r t u n i t y t o a f f e c t how the law is implemented. Of course, these same groups now have an o p p o r t u n i t y to a f f e c t the proposed law, which is w r i t t e n in more g e n e r a l language then the implementing r u l e s will be. T h i s is the reason f o r the u n c e r t a i n t y as to what impacts a new law will have. The s e c t i o n s of the DRRA to be discussed w i t h respect t o economic i m p l i c a t i o n s and, e v e n t u a l l y , impact on R&D expendit u r e s , can be d i v i d e d i n t o two c a t e g o r i e s — (1) time and cost saving p r o v i s i o n s , and (2) time and cost expending p r o v i s i o n s . There are four s e c t i o n s or p r o v i s i o n s of the DRRA that are discussed in t h i s paper that f a l l under the "time and cost saving" category: — — — —

the "breakthrough" drug p r o v i s i o n s ; the export p r o v i s i o n ; the drug i n n o v a t i o n p r o v i s i o n ; the batch c e r t i f i c a t i o n p r o v i s i o n .

The l i s t i n g represents a s u b j e c t i v e r a n k i n g of the four p r o v i s i o n s (which may represent one or more s e c t i o n s o f the DRRA) based on the author's p e r c e p t i o n of which p r o v i s i o n s will have the l a r g e r time and cost s a v i n g s . The "breakthrough" drug p r o v i s i o n s o f the DRRA are expected by FDA t o i n c r e a s e the a v a i l a b i l i t y of s i g n i f i c a n t new drugs in the U.S. Drugs that a r e considered t o be t h e r a p e u t i c a l l y s i g n i f i c a n t advances (whether they are or not is u s u a l l y


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a p o i n t of disagreement between i n d u s t r y and government as s t a t e d above) will, under t h i s p r o v i s i o n , be g i v e n the o p p o r t u n i t y f o r f a s t e r market approval. These p r o v i s i o n s , t h e r e f o r e , would be expected t o decrease the "drug l a g " in the U n i t e d S t a t e s . In a d d i t i o n , drug companies would r e c e i v e s a l e s from these products e a r l i e r , hence revenues a v a i l a b l e f o r R&D funding would be expected t o i n c r e a s e . O f f s e t t i n g these revenues, however, will be the costs of the post-marketing requirements f o r a "breakthrough" drug, i n c l u d i n g recordkeeping and r e p o r t i n g . The export p r o v i s i o n in the DRRA will allow, under c e r t a i n r e s t r i c t i o n s , drugs that c o n t a i n an e n t i t y , o r e n t i t i e s , f o r which there is not an approved monograph(s) to be marketed outs i d e the U n i t e d S t a t e s . T h i s p r o v i s i o n can be expected to slow, to some e x t e n t , the s h i f t of pharmaceutical f i r m investment abroad. The e x t e n t , again, depends on how the A c t is administ e r e d . There a r e other f a c t o r s , however, a f f e c t i n g investment abroad—investment and tax i n c e n t i v e s , wage r a t e s , a v a i l a b i l i t y of s c i e n t i f i c p e r s o n n e l , e t c . These f a c t o r s may swamp the e f f e c t o f the export p r o v i s i o n . D i v i d i n g , f o r purposes o f a n a l y s i s , the stages o f drug research and development i n t o the i n n o v a t i v e phase and the developmental phase, the DRRA o f f e r s the p o s s i b i l i t y o f l e s s r e s t r i c t i o n s in the i n n o v a t i o n phase; i . e . , the drug i n n o v a t i o n p r o v i s i o n . T h i s p r o v i s i o n s t a t e s that in the i n i t i a l phase o f c l i n i c a l t r i a l s f o r new drugs, only those aspects o f the t r i a l s that may a d v e r s e l y a f f e c t the h e a l t h o r r i g h t s of p a r t i c i p a n t s will be r e g u l a t e d — s c i e n t i f i c design and other t e c h n i c a l aspects will not be. I f the A c t were implemented to accomplish what i t s s t a t e d o b j e c t i v e s a r e , and if the i n t e n s i t y o f review by FDA in the developmental phase i n c r e a s e d by s h i f t i n g r e s o u r c e s , the cost to pharmaceutical companies o f b r i n g i n g a drug to market, and the time it takes t o b r i n g a drug t o market, should decrease. The f i n a l cost and time s a v i n g to be d i s c u s s e d is the batch c e r t i f i c a t i o n p r o v i s i o n . The important aspect of t h i s p r o v i s i o n is that FDA, not i n d u s t r y as in the p a s t , will now be r e s p o n s i b l e f o r c e r t i f y i n g the q u a l i t y o f batches o f such drugs as a n t i biotics. Hence, given that FDA would be paying the b i l l and would be r e s p o n s i b l e in p a r t f o r an adequate supply o f drugs such as a n t i b i o t i c s , the c e r t i f i c a t i o n process is expected to be t i m e l y . Furthermore, under t h i s p r o v i s i o n , companies can e s t a b l i s h a c e r t i f i c a t i o n r e c o r d t h a t will allow them t o be exempted from t h i s r e q u i r e m e n t — a time as w e l l as cost s a v i n g s . Four p r o v i s i o n s will be d i s c u s s e d in t h i s paper under the time and c o s t expending p r o v i s i o n s . S u b j e c t i v e l y ranked in order o f probable time and c o s t expenditures, they a r e : — — — —

t h e s a f e t y and e f f i c a c y data r e l e a s e p r o v i s i o n , the post-marketing study and m o n i t o r i n g p r o v i s i o n s , the p a t i e n t package i n s e r t (PPI) p r o v i s i o n , and the u n i t o f use packaging p r o v i s i o n .


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The impact of the s a f e t y and e f f i c a c y r e l e a s e p r o v i s i o n is, at present, one of the few impacts f o r which p u b l i c l y a v a i l a b l e , q u a n t i t a t i v e impact data e x i s t s . T h i s p r o v i s i o n permits the d i s c l o s u r e of s a f e t y and e f f i c a c y data submitted f o r a drug e n t i t y monograph. The degree to which data is made p u b l i c depends on whether the monograph has been approved; p o r t i o n s of the data are a v a i l a b l e p r i o r to monograph approval only to i n d i v i d u a l s or e n t i t i e s that take p a r t in the hearing on the approval request. A l l data r e p o r t s are a v a i l a b l e without r e s t r i c t i o n a f t e r monograph approval, subject to the f i v e year p r o v i s i o n d i s c u s s e d below. Because data is r e l e a s e d p r i o r to approval of the monograph, the p a r t i c i p a t i o n of more i n d i v i d u a l s and e n t i t i e s in the process may, at l e a s t in some cases, slow down the approval of monographs. On the other hand, the d i s c l o s u r e of data allows more s c i e n t i f i c knowledge to come to bear on the d e c i s i o n of approving a drug e n t i t y . Furthermore, the a v a i l a b i l i t y of all data a f t e r monograph approval is expected to reduce d u p l i c a t i v e t e s t i n g to support the s a f e t y and e f f i c a c y of a drug product, because the necessary s t u d i e s f o r a drug e n t i t y are already a v a i l a b l e . Estimates of the degree of d u p l i c a t i v e t e s t i n g would o b v i o u s l y be u s e f u l in a s s e s s i n g the b e n e f i t s of t h i s p r o v i s i o n . To date, no r e l i a b l e estimates are p u b l i c l y a v a i l a b l e . Although the DRRA s t a t e s that no one can use the s a f e t y and e f f i c a c y data submitted by an innovator to request the approval of a monograph, a study by the Economic S t a f f of the Food and Drug A d m i n i s t r a t i o n concludes t h a t , based on c e r t a i n assumptions about the l o s s of market share by i n n o v a t i v e ("research-intens i v e " ) f i r m s , the degree of s h i f t in s a l e s to f o r e i g n f i r m s , and the amount of s a l e s gained by n o n - r e s e a r c h - i n t e n s i v e f i r m s , the d i s c l o s u r e of s a f e t y and e f f i c a c y data will still have a negative impact on pharmaceutical R&D expenditures (18). The FDA study contains the f o l l o w i n g paragraph in the Executive Summary: " F u l l d i s c l o s u r e of S&E data is estimated to decrease U.S. pharmaceutical f i r m s ' R&D expenditures by $56 m i l l i o n or up to 4.7 percent of recent l e v e l s of R&D. The impact on R&D investment is a consequence of i n c r e a s e d comp e t i t i o n in the i n d u s t r y and the accompanying s h i f t s in s a l e s from innovators to other U.S. firms and to f o r e i g n f i r m s . Innovative or r e s e a r c h - i n t e n s i v e firms in the aggregate i n v e s t a h i g h e r p r o p o r t i o n o f s a l e s i n t o R&D than other U,S. f i r m s . The estimated p o t e n t i a l l o s s in s a l e s o f all U.S. firms is approximately $600 m i l l i o n , an event which would occur over a m u l t i - y e a r p e r i o d , " (18)


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I t is noted in the Executive Summary to the FDA study that the impacts given in the above paragraph do not take account of the p o s s i b l e " m i t i g a t i n g e f f e c t s of the May 17, 1978, v e r s i o n of the DRRA, such as the p r o v i s i o n that the data cannot f o r a p e r i o d of f i v e years be used to o b t a i n market approval f o r a drug product without the permission of the i n d i v i d u a l or e n t i t y that submitted the data o r i g i n a l l y . On the other s i d e of the c o i n , however, is the f a c t that if one does not accept some or all of the assumptions of the FDA study, the s a l e s l o s s , and in turn the l o s s in R&D funds, could be s i g n i f i c a n t l y g r e a t e r . The competition, through " i n t e l l i g e n c e " use ( i . e . , a c q u i r i n g knowledge from) of s a f e t y and e f f i c a c y data, and through i t s use to o b t a i n approval to introduce generics onto the market, could have another negative e f f e c t besides that on R&D expenditures. The i n c e n t i v e f o r innovators would be to s h i f t the i n t r o d u c t i o n of new drugs to f o r e i g n markets, thereby accentuating the "drug l a g " . Of course, the increased competition may i n c r e a s e innovation. I t is d i f f i c u l t to estimate the consequences of p r o v i s i o n s in the DRRA f o r post-marketing s t u d i e s t o , say, examine an adverse f i n d i n g more c a r e f u l l y or monitor drugs a f t e r approval. These p r o v i s i o n s are d i s c r e t i o n a r y ; hence, the number of drugs to which they would apply is impossible to estimate. Also, costing out such requirements is e q u a l l y d i f f i c u l t because of l i m i t e d U.S. experience. On the whole, however, it might be a n t i c i p a t e d that marketing approval f o r some drugs would be granted e a r l i e r with the a v a i l a b i l i t y of these p r o v i s i o n s . Hence, there would be a p o s s i b l e time savings, but at some c o s t . This cost f o r postmarketing s t u d i e s could, however, be more than o f f s e t by increased revenues. T h i s p r o v i s i o n is in the time and cost expended category because the argument t h a t it will cost appears stronger than the argument t h a t it will save s i n c e the l a t t e r argument is more c o n j e c t u r a l in nature. 1 1

The p a t i e n t package i n s e r t (PPI) p r o v i s i o n ( t h i s provides that p a t i e n t information on dosage, adverse e f f e c t s , e t c . , would be i n c l u d e d with p r e s c r i p t i o n as w e l l as over-the-counter drugs) of the DRRA appears to have gathered more a t t e n t i o n on the cost impact s i d e than is warranted. The PPI should save expensive p h y s i c i a n time at a s m a l l cost per p r e s c r i p t i o n . However, as long as no hard f i g u r e s e x i s t , the cost of PPIs will undoubtedly continue to be an i s s u e . And, f i n a l l y , there is u n i t - o f - u s e packaging ( i . e . , c e r t a i n drugs may be r e q u i r e d to be packaged in q u a n t i t i e s used in an "acceptable treatment regimen"). T h i s is again a d i s c r e t i o n a r y p r o v i s i o n . How c o s t l y ? Even if the number of drugs that would f a l l under t h i s p r o v i s i o n were known, it is necessary to estimate the cost of switching the pharmaceutical production and marketing system over to u n i t - o f - u s e packaging methods. T h i s would r e q u i r e some d e t a i l e d cost work.


164


Summary and Conclusions I t can be seen from the above d i s c u s s i o n that there a r e some p o t e n t i a l time and cost savings a s s o c i a t e d with the DRRA that are expected to c o n t r i b u t e to the R&D e f f o r t of pharmaceutical f i r m s . However, there a r e a l s o some p o t e n t i a l time and cost l o s s e s assoc i a t e d with the DRRA. Furthermore, there is a p a u c i t y o f q u a n t i t a t i v e estimates of those time and cost savings and l o s s e s . P r e s e n t l y , no d e f i n i t i v e c o n c l u s i o n can be reached on the economic consequences o f the DRRA. Furthermore, it is never expected that all the monetary b e n e f i t s and costs can be summed to a r r i v e at such a c o n c l u s i o n , or to make an assessment of the impact on i n n o v a t i o n r e s u l t i n g from these b e n e f i t s and c o s t s . However, there is an obvious need f o r more and b e t t e r economic analysis. A look a t what has been done to date r e v e a l s that only one p r o v i s i o n of the proposed A c t , the s a f e t y and e f f i c a c y data r e l e a s e s e c t i o n , has been s t u d i e d in any s i g n i f i c a n t d e t a i l f o r economic impact. Admittedly, t h i s p r o v i s i o n is one of the most important, but the other p r o v i s i o n s discussed in t h i s paper could, e i t h e r s i n g l y o r in some combination, have an even greater economic impact and, consequently, impact on drug i n n o v a t i o n . In a d d i t i o n , there a r e other p r o v i s i o n s with seemingly l e s s economic and i n n o v a t i v e impact, not discussed above, which may be elevated to importance or added as the 1979 v e r s i o n of the DRRA is reviewed and r e v i s e d by Congress. I would l i k e t o make a p l e a . Although the DRRA is not the only f o r c e bearing on the success o f the pharmaceutical i n d u s t r y and the i s s u e , t h e r e f o r e , o f drug i n n o v a t i o n , it is p o t e n t i a l l y one o f the most important p i e c e s of l e g i s l a t i o n , and thus f o r c e s , to a f f e c t t h i s i n d u s t r y . Therefore, I would l i k e t o see increased cooperation on the p a r t o f both i n d u s t r y and government with respect to data resources and s t u d i e s of the DRRA. I t all goes back t o an emphasis on a n a l y s i s that is designed to c o n t r i bute t o a policymaker's a b i l i t y to make d e c i s i o n s , and not on a n a l y s i s designed to win arguments. F i n a l l y , not t o overemphasize the r o l e of economics in making d e c i s i o n s on i s s u e s such as those surrounding the DRRA, it may be t h a t economics can and should play only a s m a l l part in these d e c i s i o n s . That is, perhaps such d e c i s i o n s should be based p r i m a r i l y on s o c i a l grounds. Too much appears to be expected of economic a n a l y s i s , p a r t i c u l a r l y c o s t - b e n e f i t analys i s . Normally only p a r t s o f a problem and a l t e r n a t i v e s to s o l v i n g it are amenable t o economic a n a l y s i s . We should not expect more r e g a r d l e s s o f the recent surge in demands f o r economic impact a n a l y s i s .


10.

UPDEGRAFF

1978

Drug

Regulation

Reform

Act

165

Literature Cited 1.

Mitchell, Samuel Α . , and Link, Emery A. (editors), "Impact of Public Policy on Drug Innovation and Pricing; Proceedings of the Third Seminar on Pharmaceutical Public Policy Issues", pp. 47-82, The American University, Washington, D.C., 1976.

2.

Mashaw, Jerry L., and M e r r i l l , Richard Α . , "Introduction to the American Public Law System: Cases and Materials", West Publishing Co., St. Paul, Minn,, 1975.

3.

Schwartzman, David, "Innovation in the Pharmaceutical Indus t r y " , The Johns Hopkins University Press, Baltimore and London, 1976.

4.

"Unhealthy Costs of Health Care", Business Week, September 4, 1978, pp. 58-68.

5.

Myrdal, Gunnar, "Objectivity in Social Research", Pantheon, New York, New York, 1969.

6.

Hansen, Ronald W., "The Pharmaceutical Development Process: Estimates of Current Development Costs and Times and the Effects of Regulatory Changes", University of Rochester, Rochester, New York, 1977 (mimeograph).

7.

Updegraff, G a i l , "Some Thoughts on Professor Hansen's Paper; 'The Pharmaceutical Development Process: Estimates of Current Costs and Times and the Effects of Regulatory Changes'", Food and Drug Administration, Rockville, Maryland, 1977 (mimeo graph).

8.

Reinsch, Susan, "Economic Impact Assessment of Proposed Rule making—Non-Clinical Laboratory Studies; Good Laboratory Practices", Food and Drug Administration, Rockville, Maryland, 1978 (mimeograph).

9.

Pracon, Incorporated, "Study to Assess Impacts of Releasing Safety and Effectiveness Data on the Pharmaceutical Industry's Incentives to Invest In and Conduct Research and Development Programs", Food and Drug Administration Contract No. 228-778052, Vienna, V i r g i n i a , 1978.

10.

Lasagna, Louis; Wardell, William; and Hansen, Ronald, "Technological Innovation and Government Regulation of Pharmaceuticals in the U.S. and Great B r i t a i n " , National Science Foundation Grant No. RDA-75 19066-00, University of Rochester, Rochester, New York, 1977.


166

FEDERAL

REGULATION

AND CHEMICAL

INNOVATION

11.

Peltzmen, Sam, "Regulation of Pharmaceutical Innovation; The 1962 Amendments", American Enterprise Institute for Public Policy Research, Washington, D.C., 1974.

12.

McGuire, Thomas; Nelson, Richard; and Spavins, Thomas, "An Evaluation of Consumer Protection Legislation: The 1962 Drug Amendments: A Comment", Jour. Pol. Econ., (1975), Vol. 83, (No. 3), pp. 655-661.

13.

Grabowski, Henry G., "Drug Regulation and Innovation; Empirical Evidence and Policy Options", American Enterprise Institute for Public Policy Research, Washington, D.C., 1976.

14.

Department of Health, Education and Welfare, "Review Panel on New Drug Regulation", Government Printing Office, Washington, D.C., 1977.

15.

Schwartzman, David, "The Expected Return from Pharmaceutical Research; Sources of New Drugs and the P r o f i t a b i l i t y of R&D Investment", American Enterprise Institute for Public Policy Research, Washington, D.C., 1975.

16.

H.R. 11611 and S. 2755, 95th Congress, 2nd Session, "Drug Regulation Reform Act of 1978", May 16, 1978.

17.

Department of Health, Education and Welfare, "Drug Regulation Reform Act of 1978; Section-by-Section Analysis; H.R. 11611 and S. 2755", 95th Congress, 2nd Session.

18.

Dworkin, Fay, "Impact of Disclosure of Safety and Efficacy Data on Expenditures for Pharmaceutical Research and Development", Food and Drug Administration, Rockville, Maryland, 1978 (mimeograph).

RECEIVED

March 8,

1979.


Innovation in the Pharmaceutical Industry: Possible ... - ACS Publications

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