Magazine article Strategic Finance

Ethics Issues Still Dog Pharmaceutical Industry

Magazine article Strategic Finance

Ethics Issues Still Dog Pharmaceutical Industry

Article excerpt

This editor believes it's time that the U.S. pharmaceutical industry rethinks a number of its strategies, including the apparent priority of "profits over people." This is needed not just to serve the public interest, but also because of the effects that continually increasing healthcare costs have on U.S. companies. In response to concerns about rising costs and continuing worries about patient safety, the U.S. Government Accountability Office (GAO) undertook several studies to examine issues relating to the pharmaceutical industry.

One 2006 GAO study, "New Drug Development: Science, Business, Regulatory, and Intellectual Property Issues Cited as Hampering Drug Development Efforts," investigated the cause of declining research productivity in the pharmaceutical industry. Though significant scientific advances continue to raise hope for the prevention, treatment, and cure of serious illnesses, the GAO reports that the number of completely new drugs being produced has actually been declining--despite steady increases in research and development expenditures. In the words of the Food and Drug Administration (FDA), the federal agency responsible for approving the sale of new drugs, "Innovation in the pharmaceutical industry has become stagnant." Yet industry profits continue at their extremely high level.

The GAO analysis shows that annual research and development expenditures increased in inflation-adjusted terms from nearly $16 billion in 1993 to nearly $40 billion in 2004, a 147% increase. At the same time, the number of new drug applications (NDA) increased by only 38% and actually declined in the most recent years. Even more alarming, the predominant, and increasing, proportion of NDAs has been for "me-too" drugs that have very few chemical differences from existing older, noticeably cheaper drugs already on the market. The net effect of this declining productivity is an increase in drug costs to consumers in exchange for little or no incremental medical benefit. According to the GAO, the number of innovative drugs representing important therapeutic advances for treating disease--those that are new molecular entities (NME)--increased by only 7% during the same period.


Examples of NDAs that don't involve innovation include a new formulation of a previously approved drug, a new salt of a previously approved drug, a new combination of two or more existing drugs, and a new manufacturer. Many times, pharmaceutical manufacturers put up with the high costs of testing and guiding these "new" drugs through the FDA regulatory bureaucracy in order to reap the benefit of extended patent coverage. With a new patent, a maker can charge the highly inflated prices for which the U.S. market is legendary.

Some of the more blatant and callous examples of these consumer-gouging business practices include AstraZeneca's (AZ) re-branding of Prilosec, the heartburn medication, as Nexium. This occurred just as Prilosec was about to become generic. AZ used an expensive marketing campaign to hail the "new" drug (now it's purple!) as almost being a medical breakthrough--despite the lack of medical evidence to back up such a claim. Such strategy appears to be within the ethical boundaries of this company. Eli Lilly, after losing its Prozac patent, introduced an exact copy with a new color and called it Sarafem. Schering-Plough salvaged part of the market for its drug Claritin (Loratadine) by making minor changes to formulate it into Desloratadine, calling it Clarinex, a "new" and patentable drug.

According to FDA protocols, an NDA may be approved for sale if it exceeds only the very low bar of being more effective than a placebo for treatment of a disease. Manufacturers don't have to demonstrate that a new drug has greater effectiveness than an existing drug. In other words, a company doesn't need to prove that its new drug is medically advantageous to the consumer.

Because of the alleged high cost of research, the pharmaceutical industry has placed great strategic emphasis on creating high-priced "blockbuster" drugs that have the potential for wide usage. …

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