Biomedical Engineering Reference
In-Depth Information
23.1.2
Unique Features of the Pharmaceutical Industry
To understand the first relatively unique feature of the pharmaceutical context, let us
start with a bit of history. Through the late 1950s and early 1960s, pregnant women in
Australia, Canada, Europe, and other parts of the world (not including the USA) were
prescribed thalidomide during their first trimester to treat morning sickness. It was
later determined that using this drug led to many birth defects in children. The US
FDA at that time, despite having limited regulatory authority and only 180 days to
police new drugs, had somehow prevented thalidomide from receiving government
approval (Scherer
2000
). This success paved the way for the US Congress to empower
the FDA with considerable authority and latitude to ensure that new drugs were both
safe and effective. Since then, the FDA has continued to establish and implement
rigorous standards before new medicines are introduced in the US market.
Now, the Congressional Budget Office (CBO) estimates that the process from
discovery to new drug launch (via preclinical, three phases of clinical trials and the
approval process) takes an average of 12 years and costs 0.8 billion US dollars.
2
And only a small fraction of the new molecular entities (NMEs) that enter the
process eventually make it to the product launch stage. For instance toward the end
of the 1990s, the Cystic Fibrosis Foundation started to support a search for mole-
cules that corrected defects in the CFTR protein; it is only in the first week of 2012
that regulators approved Kalydeco, produced by Vertex Pharmaceuticals (Kaiser
2012
). Interestingly, while the above process is risky (because the NME can fail at
any stage), time consuming and requires a huge upfront investment, it can be rela-
tively cheap (costing as little as a few hundred thousand dollars) to reverse engineer
an approved medicine and come up with say a generic substitute. This last feature is
often absent in other industries because the latter entrant is forced to duplicate much
of the R&D before introducing the substitute product.
Consequently, patent protection in the pharmaceutical industry is particularly
stringent and prevents easy mimicking by competitors. This protection, along with
a relatively inelastic demand—since consumers' costs are subsidized by insurance
payments, and because the relatively wealthy segment of the population may
purchase brand name drugs even when the insurance does not cover their use—
leads to relatively high prices (cf. Frank and Salkever
1992
). As an example, the
2
Of course, only about one-third of new-drug applications are for NMEs. A majority of these
applications are for either reformulations (or incremental modifications) of existing drugs or new
“on-label” uses (see CBO 2006 and DiMasi et al.
2003
). Also, generics have a simpler approval
process by using an ANDA, which essentially means that they do not have to engage in clinical
trials. Further, among the many available alternative strategies (see Chap.
9
in this topic), pharma-
ceutical companies may sometimes engage in “evergreening” their original patent via either late
filing the follow-on patents, developing follow-on drugs with minor modifications, or even engag-
ing in collusive agreements with generic manufacturers. Both the 2003 Medicare Modernization
Act as well as the FTC have introduced some changes (e.g., in terms of the nature of agreements
between companies) to limit evergreening (see the discussion in Danzon and Keuffel
2007
).
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