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Will Health-Care Reform Save Medical Innovation? An Interview With Dr. Jerry Avorn.

avorn_jerry.jpgSince we've been talking a bit about pharmaceutical innovation and whether it could survive a universal health-care system, I wanted to bring an actual expert on the subject into the conversation. Dr. Jerry Avorn is chief of the division of pharmacoepidemiology and pharmacoeconomics at Brigham and Women's Hospital and author of the terrific Powerful Medicines: The Benefits, Risks, and Costs of Prescription Drugs. A transcript of our conversation follows.

You occasionally hear that a national health-care system would have a devastating impact on medical innovation -- and particularly on drug research. As the thinking goes, the system would save money, but in saving money, it would reduce profits for drug manufacturers, which would reduce the incentives for innovation. Is this worth worrying about?

No, it isn't. This is a threat that we've heard from the pharmaceutical industry for a long time. Virtually every progressive recommendation about health policy for the last 20 or 30 years that the drug industry felt might harm its bottom line has been met by the threat that if they don't make as much money before, innovation will cease and there will be no cures for new diseases. It came up around Medicare drug pricing and generic drugs. It's not a surprise to see it come up around health-care reform.

There are a couple reasons that this is a specious argument. One is that according to their filings with the SEC, the drug companies only spend about 15 cents of every dollar on research and development. That's compared to more than 30 cents in administration and marketing and more than 20 cents on shareholder equity. As an investment in R&D, I think any venture capitalist would say a company spending 15 percent on research is not a robust innovation engine.

The second issue is that if one looks at the new pipeline of drugs that Pharma has been generating in recent years, it's been puny. Wall Street has noticed this as well. There have been 20 or fewer drugs approved by FDA in recent years, which is lower than in past periods. It's sort of an open secret that innovation isn't working that efficiently.

The third leg of the stool is that if you really trace back where the seminal discoveries come from on which new drugs are based, it is federally supported research, usually funded by the National Institute of Health, and frequently conducted at universities or academic medical centers. The drug companies will then identify these discoveries and do hard, costly, and important work commercializing them. And they deserve compensation for that work. But it's disingenuous for them to imply that all the discoveries occur in their walls.

Let's focus on that for a minute. People sometimes say that there's a very sharp distinction between what researchers do and what drug companies do. Academics might be good at basic research, but they have no capacity to carry an idea through to an actual pill. Is that true?

My view is that the translation of an important scientific breakthrough -- let's say the discovery of tumor angiogenosis, which a lot of drugs were based on -- it's not implausible to say the translation of those basic science findings into a marketable product is something that could be done in university settings, and many university groups are moving towards doing their own licensing. It requires capital, but as you see with biotech start-ups, they can often get it. The more industry has dumbed itself down into a large marketing engine as opposed to a large innovation engine, the more they've made themselves replaceable.

Some people have said to me that a lot of the pharmaceutical industry's really innovative work is coming not from inside large companies, but from the acquisition of start-ups.

Exactly. If you look at where their new drugs are coming from an awful lot is coming from buying a biotech company run by real start-ups.

But let's go back to the basic economics for a second. How can it not be the case that if profits go down, incentives for innovation won't follow? How can that be wrong?

It's not true for a few reasons. One is that the amount of really good science you get for your drug dollar is even less than the 15 percent I mentioned before, because that 15 percent also includes the development of me-too drugs. That's one aspect of the answer. We are not getting that much drug innovation for our dollar at present.

But perhaps a better answer is that if we want innovation and scientific discovery we should fund innovation and scientific discovery, not go after it bass-ackwards by paying too much for overpriced drugs and hoping that some of the excess profit will trickle down into innovative research. If I'm right that a lot of the important and useful innovation comes from NIH studies, then the way to get more innovation is to fund innovation. It frankly would be a far more interesting use of any given dollar one wanted to spend.

A lot of the reason that the industry has become a bit flabby in its innovativeness is really the fault of all of us. Doctors will prescribe drugs that are expensive and no better than generics. Patients will see an ad and go demand that drug from their doctor. HMOs don't have careful formularies. We've made it too easy for companies to put their money into marketing. If you're a company like AstraZeneca and you put tens of millions of dollars into marketing "purple pills," you can demonstrate a return on your dollars much more reliably and lavishly than by putting that money towards new research into uncertain drugs. Much as it would seem that drug companies make new money by discovering new drugs they can also make a lot of money simply be advertising and refreshing existing patents.

It sounds like you're saying that one policy that could really help innovation would be comparative effectiveness review.

Comparative effectiveness could ironically be one of the best stimuli for innovation because it would put industry on notice that if you come up with a drug that is no better or more expensive than what we have, no one will buy it, so you better perform better in R&D. It makes it harder to compete based on marketing. Right now, the bar is not high enough.

What are some other policies that could encourage innovation?

There is a whole category of innovation we desperately need which is innovation in our health-care delivery system. We desperately need innovation in how we communicate with patients and do our diagnostic work-ups, all that is desperately needed, just as much as product innovation. And that would be a huge boon to our health-care system. If comparative effectiveness research is done and its findings are taken seriously, not only will it not rule out a drug being lucrative for a company, it will actually enhance the possibility. If you come up with a drug for cancer that reduces morbidity and mortality, an efficient comparison effectiveness health care system will make that adoption process quicker. And we'll also need ways to develop the comparative effectiveness findings into clinical behavior.

It seems like Health IT could help with that.

Definitely. When you go to order a drug on a computer, something could pop up and say, you know, there's a better drug for this.

Last question. What about prize systems as an alternative path to the patent system?

It's an appealing idea. It would help undo some of the mischief that comes from a patent policy that is problematic. It puts all of the ownership and IP power in the hands of whoever ends up with the molecule in the end. We actually had a meeting at Harvard about a related topic last year and a speaker said that anyone who proposes that should also be comfortable with the idea that no economists would get paid unless they won the Nobel prize. It's an interesting idea, but I'd prefer to see a reformed patent system that made it harder to get a patent just by changing the color or the shape or the isomer.

By Ezra Klein  |  August 3, 2009; 5:42 PM ET
Categories:  Interviews  
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Comments

Hmm... Jerry Avorn.

Anyways, a lot could be said, but here's the important part:

"A lot of the reason that the industry has become a bit flabby in its innovativeness is really the fault of all of us. Doctors will prescribe drugs that are expensive and no better than generics. Patients will see an ad and go demand that drug from their doctor. HMOs don't have careful formularies."

Yup. This is the key. Pharma, as a profit maximizing industry, is giving people what they are willing to pay for. If people stop paying for minimally incrementally better drugs (e.g. Nexium, the purple pill) then they'll stop making them. If we pay for value, they'll focus on the areas that the most value can be extracted, i.e. areas of high unmet need.

Comparative effectiveness is indeed the answer-- but as I've said before, folks are dancing on the issue by focus on the need for more study. When it comes to drugs, the comparison between the therapies is mostly known-- not in a scientifically pure sense-- but good enough to make decisions. Good enough for NICE, for example, which has access to the same data Medicare could if it wanted to. But its a lot easier for Obama to talk about the need to find more information-- "if doctors and patients only could know the blue pill is better than the red pill"-- rather than putting cost-sharing and physician compensation models in place to shift behavior to the blue pill that we know is already more effective and NICE has already implemented rules.

The reality is that the rest of Europe already is practicing value-based purchasing (albeit imperfectly) when it comes to drugs, and we could do it if people we willing to really address the problem. Of course, that would mean comparative effectiveness would really mean "cost effectiveness" for treatments with data, and broad recognition that too much of medicine is practiced with little to no data at all.

Posted by: wisewon | August 3, 2009 8:08 PM | Report abuse

It's been shown that pharmaceutical industry profits can actually rise when they drop their prices because more people can afford to fill their chronic meds. It's that old supply and demand thingie; demand goes up when price goes down.

Posted by: J_Bean | August 3, 2009 8:19 PM | Report abuse

PS Its disheartening for me to read things like the following from a health care journalist:

"Some people have said to me that a lot of the pharmaceutical industry's really innovative work is coming not from inside large companies, but from the acquisition of start-ups."

This isn't a "some people say this, and some say that." There are facts that are available that pretty clearly state the case. I know this is out of your comfort zone in terms of knowledge, but some of these questions are pretty brutal. (You're asking if academia can develop a drug fully on its own? Really?)

Posted by: wisewon | August 3, 2009 8:35 PM | Report abuse

Ezra - If you have been reading my comments for the last couple of years, you would have learned all this long ago. Or better yet, google Alan Sager.

Posted by: lensch | August 3, 2009 8:56 PM | Report abuse

Medical innovation will wither.Other countries look to the United States for creativity and research.

Posted by: tsapp77 | August 3, 2009 9:48 PM | Report abuse

A lot of the reason that the industry has become a bit flabby in its innovativeness is really the fault of all of us. Doctors will prescribe drugs that are expensive and no better than generics. Patients will see an ad and go demand that drug from their doctor. HMOs don't have careful formularies.

--------------------------------------

exactly. some insurers have moved to mandatory generic substitution otherwise it will cost you. basically what they say is that you have say a three tiered copay plan (say $15/$35/$60). If there's a brand name and a generic both available and you specifically choose the brand name you'll pay the cost of the brand copay PLUS the difference in retail cost of the brand and generic.

Its amazing how often people don't need generics then. Insurers IF they survive need to again play the "heavy" because everyone hates them anyway.

Posted by: visionbrkr | August 3, 2009 10:37 PM | Report abuse

Here's the real question we should be asking Pharma about innovation:

Why should sick Americans subsidize artifically low drug prices for Europeans?

Seems kind of socialist to me...

Posted by: TheChairman66 | August 3, 2009 10:59 PM | Report abuse

As you all never tire of reminding me, I am not a professional health practitioner. But it's also true that you are not professional journalists. Sometimes you ask a question not because you don't know the answer, but because you're eliciting information.

Posted by: Ezra Klein | August 3, 2009 11:14 PM | Report abuse

If you're interested in an explanation for the decline in Rx innovation, you can read "The Pharmaceutical Innovation Conundrum," (http://www.gooznews.com/archives/00906.html), which was based on a speech I gave to the European Hospital Pharmacists Assn. a few years back.

Concerns about price controls impact on drug/device innovation is thoroughly misplaced. That's not where health improvement will come from in the next few decades. What this nation needs is innovation 1) greater investment in public health; and 2) innovation in its health care delivery system, which is more of a process question than a technology question. We have plenty of medical technology. We just don't use it very well.

Posted by: GoozNews | August 3, 2009 11:16 PM | Report abuse

The idea that patented drugs are priced artificially low in overseas markets is a bit suspect. I'm not sure that the "natural level" is especially meaningful when we're talking about artificial monopolies.

Most of these overseas markets are actually pretty favourable environments for pharmaceutical companies - the industry is still lucrative - just not as absurdly lucrative - they just haven't been able to flex market power as effectively as they do in the united states.

In Australia, for example, the Pharmaceutical Benefits Scheme heavily subsidises drugs under the scheme (great for drug companies), but in exchange means they have to bargain on more equal footing, with evidence of comparative cost effectiveness (not so good for companies, and especially bad for me-too drugs).

Moving to an arrangement where drug buyers in the US have more bargaining power would certainly change the incentives in the market, but I'm not entirely sure that's a bad thing - rewarding improvements in cost effectiveness, along with genuine innovations is likely to shift the industry's focus away from finding patentable, incremental modifications to existing drugs, and towards more useful ends.

Posted by: timgarmstrong | August 4, 2009 3:36 AM | Report abuse

Ezra - "Sometimes you ask a question not because you don't know the answer, but because you're eliciting information."

Sorry. My point was that Alan Sager had written about this info years ago, so you could have also written about it long ago. Now can we have some postings on the evils of marketing and the $100 Billion or so a year we can save if we rein it in? Here are a couple of interseting articles:

http://www.nytimes.com/2007/11/25/magazine/25memoir-t.html

http://www.theatlantic.com/doc/200604/drug-reps

Posted by: lensch | August 4, 2009 7:52 AM | Report abuse

This is absolutely true-- this tired excuse of "killing innovation" has run its course. That is why the desperate opposition to progress is now pathetically grasping at the ghostly straws of abortion and killing grandma.

http://bit.ly/h7FYs
http://bit.ly/u9wru

Posted by: murzee | August 4, 2009 8:53 AM | Report abuse

Gaah! We're supposed to choke off the pipeline for new drugs because "it's not implausible" that maybe something else could take its place?

And the "me-too" drug spin that this guy is pushing is a flatout lie and pure political power grab. If Ezra gets his way, anyone who suffers from an ailment where small differences in drugs can make a big difference in treatment (depression, etc.) is going to lose out, as Ezra's superior knowledge decides who deserves to get better and who can get by with "good enough."

Posted by: tomtildrum | August 4, 2009 10:29 AM | Report abuse

Great interview. Personally I think the prize system makes a whole lot of sense. I wish people wouldn't dismiss the idea with such nonsensical analogies like economists getting paid only for winning the Nobel. This idea has real value for dispelling some real and destructive costs from the current system. See Dean Baker's talk, Intellectual Property: Patents, Copyrights and Other Protectionist Barriers, for a good discussion:
http://www.cepr.net/index.php/economics-seminar-series/

If people could focus on how a new system should work instead of trapping us with the status quo, they would do us all a great service.

Posted by: bcbulger | August 4, 2009 10:35 AM | Report abuse

What does Avorn mean when he says companies spend 20¢ per dollar on stockholder equity? That doesn't make any sense. Does he mean they return 20¢ to the stockholders in the form of dividends?

It makes me wonder if he really understands how a company works.

Posted by: rsbsail | August 5, 2009 11:44 AM | Report abuse

"No, it isn't. This is a threat that we've heard from the pharmaceutical industry for a long time. Virtually every progressive recommendation about health policy for the last 20 or 30 years that the drug industry felt might harm its bottom line has been met by the threat that if they don't make as much money before, innovation will cease and there will be no cures for new diseases. It came up around Medicare drug pricing and generic drugs. It's not a surprise to see it come up around health-care reform."

"The second issue is that if one looks at the new pipeline of drugs that Pharma has been generating in recent years, it's been puny. Wall Street has noticed this as well. There have been 20 or fewer drugs approved by FDA in recent years, which is lower than in past periods. It's sort of an open secret that innovation isn't working that efficiently."

So in other words, the stifling of innovation they have been warning about for the past 20 or 30 years has, in fact, occurred, just as predicted. How exactly does that support your argument for more changes they warn will further stifle innovation? Talk about bizzarre double-think.

Posted by: ab1301 | August 5, 2009 3:22 PM | Report abuse

Innovation requires incentive. Drug manufactures base all research on patent protection. They charge high prices during the 7 year patent period, then try work on new products which are basically the same product, but allows them to create a new patent period.

The gov't can lower drug prices and create incentive to create new drugs by offering longer term patents in exchange for lower prices during the patent period. This would result in lower prices, and curtail the practice of making minor changes to extend patents.

Instead, competing companies will have strong incentive to come up with new drugs, since they can not sit back and wait for patents to expire. If companies want to put a product out, they will need a new better product. Companies with patents will not waste R&D dollars on useless changes to products (which gets charged back to the customer). Patients will get lower cost drugs from the start, rather than having to wait 7 years for generics, which get replaced by new patented drugs that aren't any different than the original drugs.

Here is the suggestion:
Offer longer patents for lower prices.

This will curtail "fake upgrades" to existing products and force competing companies to come up with real improvements (since they won't be able to live off the R&D of the original developer by marketing generics after the 7 year patent period).

Posted by: aullman | August 9, 2009 11:01 PM | Report abuse

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