This is not the first time that Roche has left a local trade body: it left PhAMA in Malaysia some years ago too.

Pharma is allowed to self regulate in many countries, with government bodies taking a back seat. As the FT notes, in the UK, “the government’s Medicines and Healthcare Regulatory Products Agency can prosecute drug companies, but until now has left most disciplinary action to the Prescription Medicines Code of Practice Authority, which is run by the ABPI”.

If large companies leave our trade bodies then we have a problem. If we do not want to regulate ourselves, then someone else will have to step in to do the job for us. While this may be no bad thing for our ethical standards, the current some-in-some-out practice is not credible.

The rationale, as stated by the FT (GSK in generic drug alliance), is that in emerging markets “selling large volumes at lower prices is more important”. I live in the emerging markets and I am not convinced.

There is a market for branded drugs, and there is a market for generic drugs. They are different things. It might be necessary to sell generics in the short term, but it is not the only or best thing that we could be doing.

With perhaps the exception of Novartis (and its impressive Sandoz generic arm), one should consider the generic gamble as a hail mary pass not a properly thought through strategy. Unless, of course, someone provides the data, rather than hyperbole, to show that this is actually a good idea for pharma.

The latest numbers show that the annual growth in spending on prescription drugs has been on a downward trend for since 1999. The highlights document notes that, “prescription drug spending growth decelerated in 2007, from 8.6 percent in 2006 to 4.9 percent in 2007″. The explanations for this falling trend are given as, “an increase in the generic dispensing rate, slower growth in prescription drug prices, and growing consumer safety concerns”.

Let’s take a look at these three explanations in turn:

The Growth in the Generic Prescription Rate

An article in NEJM (The Ongoing Regulation of Generic Drugs, 2007) gives a decent look at the regulation of generics in the US and also gives data for the proportion of prescriptions that are generic.

I was rather surprised to see how slowly the generic prescription rate is increasing. Over the last two years, 2006 and 2007, the rate of penetration has actually been slowing down.

This decreasing growth trend is obviously not a good explanation for the deceleration in spending of prescription drugs. In fact the trend is the exact opposite of the description given by the NHEA. Perhaps their other two explanations are more substantial.

The Price of Prescription Drugs

The United States Government Accountability Office (GAO) produced a report in 2007 examining trends in retail prices, described as usual and customary prices, which they defined as those prices that an individual without prescription drug coverage would pay at a retail pharmacy, (Prescription Drugs: Trends in Usual and Customary Prices for Drugs Frequently Used by Medicare and Non-Medicare Health Insurance Enrollees).

This analysis proved more difficult than would have been expected (after all the CPI covers drug prices). The authors wrote, “there is no easy to understand and reliably accurate information regarding the price of drugs paid by consumers”; their solution was to create the dataset themselves.

The results (the nice graph is actually from the newsletter of the American Psychiatric Association) show that over the 7 years through 2006, branded drugs have increased in price by about 6% annually on a slight upwards trend, while generic drugs have been on a relatively flat/decreasing trend increasing by 1% annually. Unfortunately, there is no data here specifically for 2007, the year we are really interested in for this post. However, there is little reason to believe that the trend will dramatically shift in the other direction.

Growing Consumer Safety Concerns

This is an interesting explanation for the deceleration in spending on prescription drugs: people are spending less on drugs because they do not think that they are safe enough. This hypothesis is a can of worms waiting to happen, but let’s take a quick look.

Consumer concern comes from three sources: Drs, the media, and word of mouth. In many respects, these three are interlinked and feed into each other. This is a positive feedback loop with the ability to magnify concerns rapidly.

But there are only two independent sources of input into the system: scientific fact (in the form of clinical trial data), and the local regulatory agency (in the form of warnings, and label updates).

In the US, there is a potential problem because the regulator, the FDA, does not appear to be independent of the feedback loop. In some real sense, the FDA is an active party to the loop:

The FDA publishes a quarterly newsletter on the safety reports that it has received, “Potential Signals of Serious Risks/New Safety Information Identified from the Adverse Event Reporting System (AERS)“. The safety reports themselves are voluntary and generally lack much detail, but they do note a side effect, an identifiable person, and a drug that was being taken at the same time, eg a patient of mine called Mr Blogs complained of pain in his chest while taking drug x. These reports are useful in identifying rare events that may be linked to a drug, but that are so rare that they did not show up in the clinical registration trials, but they are hardly robust. A signal identified would mean that an association between a drug and a given side effect needs to be investigated further, and such signals by definition cannot apportion causality.

But with its public newsletter, the FDA does not identify signals needing further analysis. It identifies “potential” signals that may or may not require further analysis at some time in the future. This kind of crystal ball gazing is embarrasing at best and dangerous at worst. If people are discouraged for unscientific reasons from taking an effective medicine then the consequent morbidity and mortality that results is on the FDA’s hands.

So Which Explanation is the Best?

The generic prescription rate appears to be on a slowing growth trend lately and certainly does not appear to be influencing the deceleration in spending on prescription drugs.

It is possible that prescription drug price inflation slowed in 2007 but this is not immediately clear from the data publicly available. The trend was fairly stable and showed a slight upward trend from 200-2006.

While it is difficult to measure changes in consumer safety concerns, it would seem reasonable to believe that they had an effect to some degree in the US.  It is a little concerning that the FDA appears to be fanning the flames with its quarterly “potential” safety signal newsletters.

And at the end of these happy years, we find that we have put a price umbrella over the market and in so doing we have literally built the market for generic competition to our drug.

Our response has been disappointing: branded generics (also called second brands).

While attempting to maintain the price of our premium branded drug, we launch a branded generic version closer to the generic competition’s price.

There is nothing wrong with pricing your product to different market segments, but the differential must be based on features which some are willing to pay extra for. In the drug business, all three of these drugs options are deemed by the regulators to be clinically the same.

We have a schizophrenic attitude to generic drugs. On the one hand we like them so much that we are selling them, while on the other we keep our original brand implying that there is some superiority. We then launch branded generic drugs which are somewhere in between. We never actually claim that brands are better than generics, we never claim that our generic is in any way less good than our brand.

There is no marketing angle for us in the current model.

You have to take your hat off to the brazen business of offering a drug to a person at one price, and essentially the same drug to a richer looking person at another.

We may learn to our chagrin that people do not like being thought of as mugs.

Probably not, is probably the correct answer. How do we get away with charging so much for drugs that add so little in terms of extra days of life? I suspect that apart from the usual economics of it, there are two additional factors:

1. Once people are given the death sentence of a terminal cancer diagnosis, they become desperate and irrational and therefore demand becomes price inelastic

2. Cancer tends to hit in middle age and later, a time when people generally have some money put aside

Perhaps the pricing of cancer drugs is partly driven by the existence of a market segment of rich, desperate and irrational people.

What put a bee in my bonnet this ASCO? The Forbes article did, in particular two quotes in it:

The authors note that one trend that may further inflate the cost of cancer therapy is containment rather than cure. The big news is around the possible long term use of therapy to subdue cancer cells, the downside being that if you stop treatment the cancer comes back. William Burns, head of Roche’s pharmaceuticals division happily notes, “we have learned that it is a drug to start with and stay with”. And that phrase rolls off the tongue a little too easily for my taste.

But Burns is trumped by OSI Chief Executive Colin Goddard who, speaking about another drug trial that has not shown improvement in survival, noted: “We estimate we have the potential for at least $500 million in new [U.S.] business from this study”.

Don’t get me wrong: there is a place and a need for marketing people to do their thing, and for finance guys to do theirs. But ASCO is a medical meeting. If you do not want to look greedy then keep the commercial talk for afterwards.

The top reason why this strategy cannot work: ethical standards.

Our field force and medico-marketing arms are tightly regulated both internally, and externally through local industry body codes of conduct and international bodies such as IFPMA. The american firms also have the US Foreign Corrupt Practices Act (FCPA) to follow.

Rather than argue the point of how ethical or not we are in reality, I want only to point out that the strongest generic competitors are not beholden to the same regulations. The playing field is not level.

The second reason why this strategy will not work: competitive edge.

Unlike pharma firms, generic companies have been competing head to head with identical drugs with thin margins for years. We have always had scientific differentiation between us and our competitors. Pharma could always find a niche for its products to live in. We are not trained, and certainly not ruthless enough, to compete in a non-scientific arena.

The third reason, and the one I am least knowledgeable on: overhead costs.

We did not begin embracing generic drugs until the patent cliff could be avoided no longer. It is fair therefore to assume we are doing so to fill the hole while we develop some new drugs. When these drugs arrive, we will need the medical and marketing muscle to scientifically differentiate from our competitors again and so we cannot strip these people from the organisation just yet.

A model involving big overheads and selling drugs with thin margins is not something I would necessarily invest in.

According to a recent NIH press release, the atrition rate in the pre-clinical phase of development is so bad that researchers call it the “valley of death”! They think 80-90% of compounds fail to make it to human testing; some inside industry think that even this is low-balling it, and that number is closer to 90% (The NIH Takes the Plunge, In the Pipeline).

Some more numbers from the NIH press release:

• “NIH estimates that, in total, more than 6,800 rare diseases afflict more than 25 million Americans. However, effective pharmacologic treatments exist for only about 200 of these illnesses.”

• “Studies suggest that it currently takes more than a dozen years … to take a potential drug from discovery to the marketplace”

• “it takes two to four years of work and $10 million, on average, to move a potential medicine though this preclinical process”

The WSJ reports that, “Stephen Groft, the director of the rare diseases office, said the program is starting with $24 million in funding this year with expectation of receiving the same amount each year until 2013”

• USD24 million for 4 years is an investment of USD92 million;
• Each drug costs USD10 million “on average” to get through pre-clinical development, and so there is enough money to develop about 10 candidates;
• 90% of these candidates will fail, leaving just one successful compound;
• With the timelines given, this compound would come to market in 2020;
• According to Steven Paul, President at Lilly Research Laboratories the chance of getting from phase 2 trials to market is 1 in 8 (Blockbuster Drugs and Innovation) – I cannot find the ph1 attrition rate;

This program has about a 12% chance of resulting in one effective treatment in 2020 for one out of the 6600 untreated rare diseases.

It is a step in the right direction, but let’s not get carried away.

Rare diseases are those that affect less than 200,000 Americans, and neglected ones are those that affect the global poor disproportionately.

The program will identify suitable compounds for research in these disease areas and NIH will take them through pre-clinical development themselves. If they manage to get one through that far then they will look for external partners to take the compound on to phase 1 trials in humans.

Why do they feel the need to step in? According to the NIH press release, “Private companies seldom pursue new therapies for these types of illnesses because of high costs and failure rates and the low likelihood of recovering investments or making a profit”. As acting Director Raynard S. Kington notes, “The federal government may be the only institution that can take the financial risks needed to jumpstart the development of treatments for these diseases, and NIH clearly has the scientific capability to do the work.”

This is good news. Governments have a duty to to use some of our tax dollars to look after the less fortunate members of society. Some commenters are missing this point. The WSJ health blog for example: “It’s tough to get drug companies to work hard on drugs for diseases that are either rare altogether or common only in parts of the world where people can’t afford to pay much for treatment” (NIH Treads Where Drug Industry Rarely Goes). The point is that the pharmaceutical industry has no duty to be in unprofitable areas, and if it does venture there then it should be recognized for what it is: philanthropy.

By offering to cover the cost of some of their current Pfizer drugs for up to 12 months, this program does three things: 1) takes some financial worry from the shoulders of these people, 2) keeps them on Pfizer’s drugs when they would otherwise be quite likely to either switch to a cheaper version or stop therapy altogether, and 3) increases the chances that those that benefit from the scheme will stay on Pfizer meds when they get a new job.

This is the holy trinity of recession marketing goods: good PR, goodwill, and good business sense.

We also know the name of the chap behind the idea: Dr Jorge Puente, a medical man.

Like my appetite for lettuce, in the real world people do not take their chronic meds for very long either. So what good do these drugs really do if a patient takes them for only 3 to 6 months?

An article in the FT (The line from peddling pills to “disease management”) discusses the attempts being made to improve patient care and drug compliance using approaches outside of the traditional Dr-patient relationship. These strategies aim to address real problems: neither do patients take their medications as directed for long enough, nor do they curb their unhealthy lifestyles enough. The assumption is either that Drs are not inclined to provide this kind of support, or that they do not have the time. The solutions being looked at involve communicating with patients between their visits to the Dr. These may include reminders to take meds or advice on exercise and eating better. The hypothesis is that these interventions will improve drug compliance and have a positive effect on patient outcomes, ie patients will live longer healthier lives. By avoiding the expenses incurred by ill health, there may be financial benefits too for whoever would have been billed for them.

If we generously assume that these programs can double average compliance from 3 to 6 months, then for a 50 year old patient who will suffer an MI on his 65^th birthday, this improved compliance would mean taking his medication for 3.3% of those 15 years, rather than an unassisted 1.6%. Intuitively, this does not look like a particularly impressive result.

I am a fanatical believer in drugs. But I know that even I am not very good at taking them. If we really want to shift the needle on our life expectancy then we will have to do more than take a statin for 3 months. It pains me to admit it, but we may need a more holistic approach.