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How Should the FDA Incentivize?
The FDA often wants manufacturers to provide additional studies such as for pediatric uses or for testing of off-label uses of already approved drugs. How should the FDA incentivize these studies? Long-time reader Steve (who has good reason to know and thus shall otherwise remain anonymous) writes:
I was reading an article about pediatric drug testing and the BPCA, and I had an epiphany--the people at the table don't have the incentives necessary to solve the problem.
...possible solutions to the problem of limited pediatric testing appear to boil down to: 1) Modify the reward (primarily through exclusivity); 2) Give out grants; and 3) Force studies through a government mandate. These solutions reflect the interests of the three groups sitting at the bargaining table, i.e., 1) Big pharma, 2) Academics, and 3) Bureaucrats. What is totally missing is the idea that incentives can be created on both the risk and reward side of the equation. ... For example, if the FDA fast- tracked NDAs with pediatric data, and guaranteed a decision in 90 days, they could, with minimal cost, cause a major shift in incentives.
...Any thoughts on how the situation can be improved?
The FDA significantly raises the costs of creating new drugs - there are some benefits in better safety and efficacy but I think the current system results in too much drug lag and drug loss. I would cut back on FDA regulation considerably but I am not against more government-financed studies of safety and efficacy. Once a drug is on the market and especially when it is off-patent, knowledge about the drug is a public good and thus often underprovided. I would thus reduce the FDA's control over drug choice but increase the budget for drug information e.g. through NIH financed studies like the Women's Health Initiative which shockingly showed that then widely used homorone replacement therapy increased not decreased coronary disease.
Readers?
Posted by Alex Tabarrok on June 14, 2007 at 07:18 AM in Economics, Law, Medicine | Permalink
Comments
In general, I think more and more of the reimbursement, and perhaps exclusivity, should be given for the drugs that work best. Already we've seen a couple instances of "guarantees" of drugs' effectiveness, whereby the manufacturers reimburse less effective or ineffective drugs.
Similarly with pediatric or off-label studies, the manufacturers would be given a higher reimbursement or granted an extended exclusivity.
Generally speaking, it's attractive to give greater exclusivities for novel compounds and lesser for me-too drugs, but do we really want the government making these subjective decisions after the fact.
Unfortunately, the companies are public, need to post profits and grow fairly regularly. Their strategies of hitting singles (or bunt or just praying for a base on balls), rather than the occasional home run or even extra-base hit, is probably not best for healthcare consumers - arguably the most important stakeholder - while might be best for the shareholders.
And of course these companies spend many, many (hundreds of ) millions more on sales and marketing than R&D. That must change, and eventually will. R&D effectiveness, as measured by new drugs per dollar, is at or near all-time lows.
Posted by: glenn at Jun 14, 2007 8:01:26 AM
I have come to believe both that information problems create huge market failures in healthcare in general, and also that consumers need a bigger say since it is their health that is at stake. In the context of FDA approval, this is consistent with Tyler's view--more government supplied information but less government control over choice. Indeed, my view is that in clinical trials where patients seek a drug which promises high risk/high return, their views should weigh as heavily, even more heavily, than those of a panel of experts.
Posted by: Roland at Jun 14, 2007 8:39:57 AM
Glenn,
"...And of course these companies spend many, many (hundreds of ) millions more on sales and marketing than R&D. That must change, and eventually will. R&D effectiveness, as measured by new drugs per dollar, is at or near all-time lows. ..."
Sales and marketing are better thought of as investments rather than as expenses. If they don't pay off in increased revenue, they will not be pursued To the extent that they have positive returns, they increase the number of marginal drug development projects that will be undertaken.
Regards, Don
Posted by: Don Lloyd at Jun 14, 2007 9:28:04 AM
Don,
"Sales and marketing are better thought of as investments rather than as expenses. If they don't pay off in increased revenue, they will not be pursued To the extent that they have positive returns, they increase the number of marginal drug development projects that will be undertaken."
This is not a foregone conclusion. For example, it is possible that, at least in part, the sales and marketing are simply an "arms race" that is profitable for each individual firm (given that the others are doing it), but not for the industry as a whole and thus reduce aggregate R&D incentives.
(though, if so, we would need to explain why the industry is not clamoring to have the government introduce some kind of advertising ban: 1) because they believe that the government would make a mess of it? 2) because their CEOs come from Lake Wobegon and believe that their own marketing folks are better than average?)
I believe it is also possible (but do not have time to investigate) that the dynamic incentive to invest in new drugs could be sufficiently increased by a constraint on marketing exploitation of competing existing ones that overall R&D would increase even if industry profits decreased.
Best,
Valter.
Posted by: Valter at Jun 14, 2007 11:02:53 AM
Glenn,
If drug companies did not spend (and Don Lloyd is correct, it is better to view it as an investment) money on marketing, you would see fewer dollars in R&D, not more. You are starting from the incorrect assumption that drug companies don't know how to manage their enterprises to maximize their profits. If the marketing doesn't lead to a greater profit, then the companies would not invest in it- they are not idiots.
A smaller return means a smaller R&D budget, a smaller R&D budget means fewer drugs developed, and you would pay more for the drugs that are developed.
The only half-way decent criticism I have seen about pharmaceutical marketing is that it drives the consumption of inappropriate drugs. However, in this case the blame, if there is any that is to be dished out, should be directed to the doctors, insurance companies, and the patients. No one is hold a gun to their heads.
Posted by: Yancey Ward at Jun 14, 2007 11:11:38 AM
"And of course these companies spend many, many (hundreds of ) millions more on sales and marketing than R&D."
This is almost certainly misinformation you've picked up second or third hand from Marcia Angell's NYT piece a couple of years ago. She interpreted the "marketing and administration" line item of 10-K filings with "marketing". Since "administration" includes almost all non-production overhead costs (computers, secretaries, mailroom assistants, almost everyone's salaries, paper, pens, telephones, etc.) it should come as absolutely no surprise whatsoever that administration costs (much less marketing plus administration) would exceed research budgets. In almost any company, the M&A line item is one of the largest costs. (The only major exception is sometimes 'Shipping').
Posted by: Sebastian Holsclaw at Jun 14, 2007 11:32:26 AM
Without rather extensive testing how do we know if the drug is high risk high reward for the patient or low reward high cost. If the idea is that informed consumers should be making the decisions then how are the consumers to make informed choices based on trials with e.g. 25 patients and a poorly designed experiment. The HRT experience is an example of years of uncontrolled experiment with drugs that probably on balance damaged health but improved the quality of life for many. A well controlled experiment at the introduction of HRT would have given women over many year the information to make the informed choice and probably would have resulted in reduced morbidity and reduced health expenditures.
Posted by: Sonia at Jun 14, 2007 11:40:43 AM
I wonder to what extent this is exacerbated by differing standards in other countries, and the apparent need to provide different standards of proof? It seems to me that it would be worthwhile for a lot of people and cut costs if the US were to negotiate a drug safety protocol with other industrialized nations (particularly Canada and the EU nations) so that a drug approved in one country can be approved either automatically or at minimal cost in all the others.
Posted by: John at Jun 14, 2007 1:06:49 PM
Sebastian - I'll stand by my statement, thank you. I'm not familiar with the article you mention, but I don't need to be. I've picked up my information from SEC reports and discussions with the companies themselves (perhaps you should do the same). While simple line items are arregates of expenses (SG&A as well as R&D), and therefore difficult to say precisely, the industry as a whole spends more on marketing and sales than on pure research.
Yancey and Don - I think your viewpoint, while sometimes correct, in this case, is wrong. Valter is right. The industry had been in an arms race. I can almost guarantee you if Pfizer were to announce a halving of its salesforce, the other companies would announce cuts as well. In your world, the opposite would happen.
Posted by: glenn at Jun 15, 2007 8:11:18 AM
"I've picked up my information from SEC reports and discussions with the companies themselves (perhaps you should do the same). While simple line items are arregates of expenses (SG&A as well as R&D), and therefore difficult to say precisely, the industry as a whole spends more on marketing and sales than on pure research."
I'm afraid I have to doubt you unless you are including the cost of samples and giveaways to poor people (which I don't think you want to discourage). Exactly which company do you mean that has high enough SG&A to make you doubt it? Another good test is to compare the ratio of SG&A expenses to R&D from when advertising was illegal to now. The ratios are almost identical (see for example old filings from Pfizer or Merck). There are also hundreds of small pharmaceutical companies who never engage in any advertising whatsoever. They have enormous costs which have to be paid when they get bought out by the bigger companies. They also have to be paid a high enough premium to incentivice working for them and investing in them even though almost all of them fail without ever turning a profit.
(This is also why I don't understand how 'the big companies just buy their best drugs from smaller companies' is a useful objection. It doesn't change the incentive problem one little bit).
Posted by: Sebastian Holsclaw at Jun 15, 2007 10:26:38 AM
"I can almost guarantee you if Pfizer were to announce a halving of its salesforce, the other companies would announce cuts as well. In your world, the opposite would happen."
This is kind of an ironic statement considering the large cuts in its sales force that Pfizer has announced in the past six months.
Posted by: Sebastian Holsclaw at Jun 15, 2007 10:28:01 AM
To a certain extent, pharma companies are already incentivized to invest in pediatric R&D; for drugs tested in children, they get an additional patent life extension (I don't remember how long...a year?).
Part of the pediatric problem is also social. I attended a lecture from a former pharma CEO, who said that one of the main problems with pediatric medicine (as opposed to, say, cardiac medicine) is that pediatricians are very averse to risk, and so tend to avoid experimental medicines much more than other fields.
Posted by: such.ire at Jun 16, 2007 2:12:20 PM
Sabastian -
Not ironic at all, since then Wyeth has followed Pfizer's lead. Merck as well.
Posted by: glenn at Jun 18, 2007 5:54:07 AM
Posted by: 鑽石 at Apr 2, 2008 8:47:51 PM
