The Good, the Bad, and the Unhealthy

I think it’s important to understand the cost of not acting versus the cost of acting. And when talking about acting, first, let me wander over to Hollywood…

In an old-time Hollywood Western, it’s pretty easy to tell who the good guys are and who the bad guys are…The good guys wear a white hat. The bad guys don’t.

What kind of hat do your friendly regulators from the Food and Drug Administration (FDA) wear? The answer for most people is that, obviously, they wear a white hat.

And then if you ask them, “How about those folks at the pharmaceutical companies?”

Well, often people think that they wear a black hat.

Why is that a common perception?

Well, for one thing, the FDA’s stated mission is to protect you. They’re here to make sure that they’re regulating…that nobody’s going to poison you…that everybody is going to tell you about side effects…that when there is a nasty side effect, they’ll take the stuff off the market.

On the other hand, pharma’s stated mission is to make a profit.

That’s why you get this dichotomy of black and white hats. Business and regulators. Now I’d like you to consider that pharma’s hats may not be so black and the FDA’s hats might not be so white.

Assume for one second that pharma’s only purpose is not to generate a profit, but to generate a profit by saving lives. And if that’s true, then maybe what we want to do is have a slightly more nuanced version of regulation, and of who’s wearing the white hats and the black hats. And maybe pharma ends up wearing a hat that is a bit striped.

And just maybe, the hats at the FDA look identical…

Here’s what’s been happening at the FDA… according to former commissioner Alexander M. Schmidt:

“In all of FDA’s history, I am unable to find a single instance where a congressional committee investigated the failure of FDA to approve a new drug. But the times when hearings have been held to criticize our approval of new drugs have been so frequent that we aren’t able to count them…The message to FDA staff could not be clearer.”

The FDA has never been asked, “Why didn’t you do this? Why didn’t this drug come to market?”

This is a real issue for everybody because if we don’t start explicitly measuring the costs of not acting — or explicitly measuring the cost of acting slowly — we are not only going to force the U.S. pharmaceutical industry offshore, but also a lot of you are going to die of stuff that you shouldn’t die of. A lot of breakthrough drugs and therapies will never come to market.

On the one hand, we’re living in a period when we’re increasing research databases time and again and again, to the point where we’re going to generate double the amount of data in the life sciences in the next 2½ years. So there’s this enormous scientific wave of discovery on the one hand. But at the same time, research and development (R&D) costs per new drug are soaring.

The cost to test a drug versus a protein has decreased 10-fold. And you’ve got transgenic mice that allow you to test very quickly. So given all these advances, why haven’t we cured cancer yet? Why haven’t we cured Alzheimer’s? Why haven’t we cured Parkinson’s? Why is it taking so long to have a malaria vaccine?

It turns out that the average number of procedures that you need to go through to bring each medicine to market has increased from an average of 96 in 1996 to about 158 today. That’s one reason why the time it takes to bring something to market has increased from 460 days to at least 780 days. R&D costs are soaring as a result.

In fact, over the last 60 years, new medicines created per $1 billion invested have dropped by a factor of 100. This is Moore’s law in reverse.

What does it mean when one of the main industries in the United States has a productivity output per $1 billion invested that drops by a factor of 100? What happens when you have one of the major industries in the United States operating in the reverse of Moore’s law?

That is not a good outcome.

The dirty little secret is we don’t measure these hidden opportunity costs. Instead, we focus on some person that was hurt by some combination of pills and you see all these advertisements on cable television asking, “Have you been hurt by Drug X? Call Polanski and Sons. Call So-and-So. Sue.”

And eventually, what begins to happen is, as the hurdle rates go up, the new drug pipeline dries up. And today what we’re looking at is an almost impossible hurdle rate of over $1 billion per drug to come to market. It means that very few medicines make the hurdle rate. Occasionally, you do see one…but these are rarer and rarer.

The higher these costs climb, the lower the incentive to invest in the R&D that will deliver breakthrough medical drugs and therapies.


Juan Enriquez
For Tomorrow in Review

The Daily Reckoning