Eating Today and Eating Tomorrow: Competition, Innovation, and Pricing for Modern Medicine

Thank you for having me. I’m delighted to meet with you because I know we share the goal of helping the people we serve improve their health, prosperity, and well-being.

Europe and the United States share many common problems. We both face aging populations and social welfare entitlement programs that will be funded by a smaller, younger population. This demographic problem is more extreme in Western Europe, but we face it also in America-with our “baby boom” generation that will soon be retiring. I have been working closely with my colleagues from other developed nations so that we can share lessons and ideas about how to deal with these challenges in the context of our welfare or low-income support systems, social security or retirement programs, and health insurance entitlements.

I’d like to speak today about a related area that has broad application outside the context of our aging populations: that is, how to contain health care costs, while still fostering innovation?

We face a world in which advances in medicine are being made-advances that can improve human health, cure or mitigate disease or suffering, and even prevent disease. With our new understandings of the molecular causes of diseases, we are also entering a new generation of health care, of truly personalized medicine, which involves targeted therapies that are appropriate for, designed for, and safe for each individual receiving them. But with new technology comes new cost-and costs are becoming harder to bear as our populations age. And we serve people who want the best medical care money can buy, but they want someone else to buy it. So, we face many of the same challenges, and can learn much from each others’ experiences.

The issue I want to discuss was best framed by Ugandan President Yoweri Museveni when he quoted an African tribal proverb: “You can’t be so hungry as to eat the seeds.” Contrast that with the observation of his countryman, one of the kings of Uganda: “In my country, sometimes the farmers are very, very poor, and when they become hungry, that seed that is there for the land, they will eat it to stay alive.” The important question is, how can we both eat today and eat tomorrow? How do we achieve the delicate balance between immediate consumption and sustainable scientific progress? We must be careful that our desire to drive down prices today does not sacrifice investment for tomorrow. My government is constantly trying to balance these concerns, and we do not take the challenge lightly; nor, I am sure, does yours.

The need for us to step back and consider these issues has become all the more pressing in light of the current focus on the potential of an avian influenza pandemic. The world is not prepared to deal with such a human pandemic in large part because we have insufficient capacity to produce needed drugs and vaccines. And why is that capacity lacking? In recent years, building factories for flu vaccines and antivirals was considered a reckless investment, because the market was so uncertain.

When people read about avian influenza, they demand quick innovation to fight it. And when the next public health threat comes around, they will demand quick innovation for that, too. But the vaccine industry, the drug industry, and the device industry are not floodlights that can be switched on when you hear a noise outside. They are more like gardens that with constant tending yield their harvest every year.

I’d like to begin by discussing the critical role that innovation plays in the health care system and in improving the human condition. Second, I will detail the determinative role that return on investment plays in innovation. Third, I will suggest some government policies and approaches that affect innovation. Fourth, I will raise a lesson learned from the American health system’s experience that may provide an opportunity for other countries to be more supportive of innovation, offer more and better health care choices to their citizenry, and cost little to nothing on balance. Finally, I will discuss an initiative we have underway in America to completely reform the standards by which we develop, assess, and produce new medical products to make our system more supportive of innovation, more risk-based, and just plain smarter and more efficient.

My message is simple. Government actions affect prices, prices affect investment, investment affects innovation, and innovation affects health. The more free competition there is in the pharmaceutical and medical device market, the more innovation the world will enjoy. The current pricing disparities are unsustainable, and the level of innovation is likely to change significantly. Whether it goes up or down is a political decision for all of us.

The Importance of Innovation

Scientific discovery and technical innovation have transformed medical care. For example, in the past twenty years, the drug-eluting stent has greatly reduced the need for many types of invasive heart surgery, and, for many, cancer is now a chronic condition instead of a death sentence.

We’re seeing the practical benefits of genomic inventions-engineered just a few years ago-in the form of new drugs and new diagnostic tests. Our understanding of the genome is creating many opportunities both to cure diseases and to prevent them.

The worldwide benefits of ever-better medicines have been tremendous. In recent decades, life expectancies have been increasing steadily in many parts of the world, often due to the worldwide application of better biomedical knowledge.

Let me offer a few examples.

• Over the last 40 years, early infancy diseases have declined by 80% worldwide. Ischemic heart disease has declined by 68% and hypertensive heart disease has declined by 67%.
• Some new drugs help reduce overall health costs and reduce other secondary economic effects such as job absences. Relatively inexpensive ulcer pills have replaced expensive major surgery. New drugs also shorten hospitalizations, help people avoid costly complications after heart attacks, help them avoid costly and debilitating hip fractures, and prevent the expensive complications of chronic diseases such as diabetes and high blood pressure.
• According to data from the Organization for Economic Cooperation and Development, over the past 40 years the use of medicines has helped halve the number of hospital admissions for 12 major diseases including mental illness, infectious diseases, and ulcers.

New drugs, including one made here in Dublin at a facility I visited yesterday, allow children with rheumatoid arthritis to walk and to go to school. New drugs shrink cancerous tumors and help people survive longer with HIV. They prevent or halt heart disease, slow the progression of multiple sclerosis, and cure infectious diseases. New vaccines have essentially eliminated a previously very common form of childhood meningitis in my country and yours.

Prices Affect Innovation

While these advances hold significant promise, they do not come cheap. Today, by some estimates, it costs $1.3 billion American dollars of private investment to develop a new drug, demonstrate its safety and effectiveness, and comply with regulations just to bring it to market in the United States. The cost of developing new treatments has more than doubled over the past ten years, with success rates of new products still as low as ever. As we all know, a great portion of these costs to develop a new drug are amortized costs of all the drug product failures that never make it to market and never turn a profit, but which must be incurred to get the drugs that work.

Innovative medicines cost money to develop. Recent studies suggest that each additional $1 to $2 billion in drug industry investment produces an additional innovative drug every year. The converse is also true. Each $1-2 billion reduction in investment prevents the development of one innovative drug per year. In a world where the FDA approves approximately 30 new drugs and biologics annually, this is a direct and vital link between price, coverage, innovation, and human health.

Unless someone covers the cost of investment in research and development, the investment we all need in new medicines will slow or stop, and so will the continuing improvements in health that we’ve come to expect from modern medicine.

Some Government Actions Hamper Innovation

The problem we face is that in wrestling with the challenge of figuring out how to eat today and eat tomorrow, many governments have steered too far towards the eat today approach. Some regulatory actions and the lack of free markets remain impediments to reaching our potential of eating both today and tomorrow. Given the central importance of that all of our societies attach to access to health care, there is a great temptation in every country to forget that health care goods are economic goods and that economic goods obey economic laws.

The answer is not more government involvement to try to figure out a calculus of how much each country should spend for drugs, as we have heard suggested, but more price competition between drug producers; differences in national income will be reflected in different prices in different markets.

Instead, because of budget pressures, some officials see only two ways to control drug and device spending. They restrict access to new products through national health system coverage decisions and they determine payment for drugs through government decision, not market mechanisms. The governments of many highly developed countries use a wide array of measures to regulate the prices of new drugs, allowing them sometimes to buy drugs for as little as the marginal cost of manufacturing.

The critical difference between the American drug and device market and Europe’s is that there is no single payer for 300 million Americans. Insurers have to compete to enroll beneficiaries. This interplay of the free market forces of supply and demand leads to a balance between the consumers’ demand for low-cost health insurance and access to the drugs that they want or need. But in many European nations, there is for all intents and purposes a single payer for drugs and devices-the government health care system. Those systems don’t generally compete for beneficiary business, so there isn’t the same pressure for access and choice, and those systems control access to an entire nation’s population for a manufacturer. The health ministry is both a monopolist and a monopsonist, and the economic results are predictable: the market power of the national health system often drives prices down below what a competitive purchasing market would bear for a patented innovator product.

By some accounts the U.S. drug market is 45% of the world market for pharmaceuticals. A recent study by the U.S. Commerce Department evaluated the effect of price controls by industrialized countries, and found that reforms that would lift price controls would increase revenues for patented products by $18 billion to $27 billion annually. That’s a 25% to 38% increase over actual 2003 revenues from sales of patented drugs in the OECD countries considered. This translates into $5-8 billion in global research and development lost to price controls, which could have developed 3-4 fewer new molecular entities annually in a system that generally approves only 30 new drugs and biologics each year. These data show just how much of a negative impact price controls have on revenues and on research and development.

When people realize that other consumers are paying much lower prices, they often put pressure on politicians to do something. And sometimes politicians are tempted to give them what they want. Already, there are troubling signs. Some state and local governments in the United States are unfortunately currently debating taking action to control prices. Recently, the City Council of Washington, D.C. passed price controls. The more governments do this, the more innovation is put at risk. And the best thing for innovation and for health would be for governments everywhere to restore free markets-for drugs as well as devices, for generics as well as for brand names-and encourage strong competition. Strong competition creates choices, lowers prices, and benefits everyone. And it encourages sustainable innovation.

Low prices are not the only problem; the process of achieving these prices also hurts innovation. Driving these hard bargains takes time and delays the availability of already developed and authorized medicines and devices. Some products never make it to market. And for those that do, it is not uncommon in some countries for the drug regulatory agency to authorize a product but the launch of the product – that is, access by patients – is delayed for several years as the price negotiations with the government payor proceed. As these negotiations grind on, patients are denied needed therapies and innovators lose precious life under their patent to attempt to recoup their investment.

A report by the G10 Medicines Group, which reviewed the impact of governmental regulation of health care and business in Europe, recommended reducing the time between granting a marketing authorization and pricing and reimbursement decisions. According to the report, “The price negotiating systems and reimbursement structures in a number of Member states can lead to significant delays.”

Compound these delays with the already slow product development and authorization process itself, and the result is a serious erosion of patent life, which is the only opportunity for a manufacturer to recoup research and development costs, even if it was able to charge competitive prices.

In the United States, the time to launch a new drug after regulatory approval for marketing averages 4 months, while in Europe, launch times range from 7 months in the United Kingdom to 19 months in Greece. In the 1980s, about 6% of drugs were first launched in my country. But by 2003, 18 of 31 drugs, or 58%, debuted in the States.

I know that many factors contribute to these disparities, but the increased time it takes for drugs to come through protracted price negotiations, to actually launch on the market, and to gain adoption among doctors and patients cannot be ignored.

Some might say: “Yes, we favor innovation, and our systems allow for market returns for those products that are truly innovative; what you are talking about are so-called ‘me-too’ drugs that offer only incremental innovation.”

Here, I would respond that the answer reveals a fundamental misunderstanding of how medical advances are achieved. Consider heat-stable insulin. We might see it as a slight variation on regular insulin. It would be an incremental innovation. But in Africa, where good storage is expensive and rare, heat-stable insulin would save lives. And in the West, it would save money, because expensive refrigerated shipping would not be needed.

Another example would be new drugs to treat tuberculosis. The current drugs are effective but must be taken for several months, and some patients must be supervised or they forget to take them. New TB drugs could shorten the treatment time, improving patient compliance and saving money on directly observed therapy.

Moreover, whether innovation is incremental or transformative is not a question that can be resolved by bureaucrats, even scientifically trained bureaucrats. That is obviously a question for doctors and consumers to decide for themselves. Should we tell them whether a camera phone is an incremental improvement over a cell phone? Over a camera? The market will tell us if a product offers enough of an improvement to justify a higher price. And if a product really is a “me-too”, then why on earth shouldn’t we encourage its free entry into the market, consistent with patent rights? Such entry will only increase competition, expand choice and medical options, and decrease prices on existing products.

A study has shown that new drugs entering existing classes of drugs in a market environment are often priced at a discount. Of 20 drugs examined in the study, 13 were discounted by at least 5 percent. If anything, these drugs help reduce drug costs by increasing competition. Manufacturers are business people. They would not develop new variations if they did not reasonably anticipate a demand for them. We must remember that when new classes of drugs emerge, many drugs within the class are developed at the same time or as improvements on earlier versions.

Yet worldwide costs of developing and approving new drugs continue to grow. As we develop drugs for indications for which we do not have good therapies and as we develop classes of drugs that have not been administered to human beings before, the process of taking good ideas from lab bench to bedside has steadily become more costly, more financially risky, and more difficult.

Saving Money with Generics

I want to be clear that a better global solution to these drug and device costs doesn’t mean that medical spending needs to go up. I did not come to ask you to increase your spending on medicines.

Rather, I came to ask you to work with us and with each other to find more efficient ways to spend our health care funds and to make better medicines more affordable and accessible worldwide. Right now, many countries could do more to encourage innovation in health care by opening their systems to competition so consumers can get better quality and lower prices.

One way to do this is through increasing competition between generic and brand name drugs. Some countries use price control systems to prop up local manufacturers, retarding generic substitution and increasing health care costs. It is hard to imagine that such a situation is sustainable in the long run as national health policy, especially when the national health authority is paying for most of these drugs for its citizens.

By contrast, our consumers benefit from an extremely competitive generic drug market. The recent study by the U.S. Commerce Department of 10 OECD countries found that generic drugs are used most widely in the U.S. and in Poland. For a set of widely used medicines for which patent protection had already expired, the share of total doses that were generic was almost 86% percent in the U.S. and Poland, whereas less than 70% of the doses in the UK and Germany were from generics and less than 30% of the doses in France, Greece, and Switzerland were from generics. Across all drugs, patented and off patent, recent data show generic drug sales in the U.S.-at 58% by volume-are more than double the generic sales volume in France, which is at 28%, and almost double the generic sales volume in Italy, which is at 34%. And in most cases, the percent of European sales of unbranded generics is less than half the volume of unbranded generics in the United States.

Not surprisingly, generic prices are lower in the United States-with its vigorous competition among generic drugs-than in Germany, Italy, the United Kingdom, and France, to name a few countries, which accounts for the increased share of generic volume. Americans pay a third less for generic drugs than the French, and about half what Italians and Germans pay. Though 53% of prescriptions in the United States are filled with generics, they account for only 12% of drug spending. When there is full generic competition, the price plummets to about 20% of the branded price prior the expiration of the patent.

Notice what’s going on here. Americans pay lower prices for generics without price controls. Free competition governs the generics market in the United States and it works extremely well.

Here is the bottom line: It’s possible to redirect billions of dollars in drug spending, through greater use of less expensive generic drugs, permitting greater financial rewards for developing and providing access to valuable new drugs quickly.

According to the Commerce Department report, if OECD countries removed price controls from generic drugs and increased generic utilization, they could save $5-$30 billion annually. This suggests that we could allow prices on patented drugs to rise to competitive market levels while at the same time significantly or fully offsetting the cost through a more competitive generic market. This approach encourages innovation without spending more money, because more generic competition means that you can’t keep making money on the same old drug for many, many years. At the same time, it must be part of a process that forces innovative drugs to compete against generic drugs-and gives innovative drugs the chance to realize their value and thus provide the necessary incentives for R&D.

Other Actions to Increase Innovation

We are also taking steps in the U.S. to improve the processes we use to develop and manufacture new drugs so that we can maximize the investments we make in biomedical research and drug discovery.

I want to tell you about some of these efforts and to ask for your help in working on them. For only by increasing our collaboration on modern medical innovations will we maximize the health benefits of new discoveries.

We at HHS, especially at our Food and Drug Administration, have embarked on a bold “Critical Path” Initiative to take a drug from scientific breakthrough to actual, effective treatment as quickly and safely as possible. We’re speeding drug development and saving money. We have been heartened by the interest our European colleagues have shown in this initiative, and we look forward to working with you on this in the years to come.

Making the critical path of product development less costly and more certain has long been the goal of many of our activities. But the fact remains that basic biomedical science has surged ahead, and the development and validation of new development and manufacturing technologies have not kept up.

For example, the investment emphasis in biomarker discovery has not been matched by a parallel investment in biomarker validation-demonstrating which potential biomarkers actually predict a clinical outcome, so that product sponsors can use such biomarkers in product development and physicians can use them to make treatment decisions.

Our plan is to identify the best opportunities for improving product development and science and then work with industry, academic groups, and others to conduct the applied research necessary to develop and validate new drug development and assessment tools that will reduce the time, cost, and uncertainty of developing reliable new technologies.

Essentially, we are working to expand from a system heavily weighted toward empiricism to validated, deductive scientific reasoning.

We are working to move from trial and error to a direct, mechanistic understanding of how medical products affect human physiology. With more informative biomarkers, sponsors could make smarter choices on which drugs to cease work on and which to move forward for further testing. Clinical trials could be shorter and less costly. Drugs could be targeted more safely and effectively in a new era of personalized medicine.

We also need to bring our production processes and regulation into the twenty-first century. Drugs are currently manufactured in batches and quality tests are frequently conducted only after manufacturing. While this approach succeeds in producing high-quality drugs, it is often wasteful and expensive and there are important opportunities for improvements in the efficiency of quality assurance by better and more innovative applications of modern process development, engineering sciences, and control technologies including modern process analytical methods.

Manufacturing accounts for nearly 25% of a drug’s cost, and product waste is up to 50% for some products. The Massachusetts Institute of Technology and the accounting firm Price Waterhouse Coopers studied manufacturing processes and determined that the total cost of the current manufacturing infrastructure exceeded that of research and development by two or threefold.

To address these concerns, FDA launched its Current Good Manufacturing Practice (cGMP) initiative in 2002 as part of Critical Path. Our existing system of Good Manufacturing Practices is, like our drug approval process, weighted towards empiricism over deduction. Our system involves overlapping and redundant requirements, batch testing, and record-keeping requirements that pose constant delays to the production processes. Our goal is to create a production regulatory model that is risk-based and targeted to the areas of the production process with the greatest jeopardy for safety and that allows for production processes to be designed according to science and logic, not just outcomes.

And so we’re hopeful that as we come together to improve the critical path of drug development-to ensure that we’re using the latest scientific knowledge to improve the process of developing new treatments and demonstrating that they are safe and effective and reliable-we can see a lot more of the biomedical progress being made in laboratories turned into safer, more effective, and more affordable treatments.

These are just some of the steps we are taking. I’m looking forward to future collaborations with you on these and other efforts to make sure that we have a global market that encourages medical progress rather than curtailing it.

Conclusion

In closing, the future need not be a binary choice between each government doing the best it can on its own to lower drug prices, choking off medical innovation in the process, or raising health care costs still further to pay for medical innovation that our nations cannot easily afford when we act alone.

We stand on the verge of a revolution in personalized medicine. The entire world should be energized and excited. And those of us who are government officials should not take actions that could delay that revolution or put it at risk.

The struggle between eating today and eating tomorrow is complex indeed. But I am confident that, given the great potential for worldwide improvements in medical care in the coming years, we can find ways to bring safe new cures to patients, while making medicines more affordable. Working together, we can set an example for a world that is getting smaller every day-and that should be getting healthier every day as well.

Thank you.

Last revised: July 5, 2007

HHS Home | Questions? | Contact HHS | Accessibility | Privacy Policy | FOIA | Disclaimers

The White House | USA.gov | Helping America's Youth

U.S. Department of Health & Human Services · 200 Independence Avenue, S.W. · Washington, D.C. 20201