Big Changes in Pharma Land

As many of you probably know, Merck announced yesterday that it will be cutting 7,000 jobs. It's a reaction to a slew of bad news for the pharmaceutical companies, including losing patent protection, Vioxx and other drug problems, and declining sales. Unfortunately for Pharma, the public is less than sympathetic:

The backlash among consumers upset about problematic drugs such as Vioxx was evident in a recent Harris poll measuring public attitudes toward industries. The October survey found that just 9 percent of Americans believed the pharmaceutical industry to be honest and trustworthy. Some 51 percent of the 1,833 adults polled said drug makers should be subject to more government regulation, second to only the oil industry, which was at 55 percent.

Ouch. A 9% approval rating is pretty awful, but the obvious result of lawsuits and other bad press. Most companies aren't reacting by trying to design better drugs for their key markets (heart disease), but their business model in general:

The company characterized the actions as the first phase of a worldwide restructuring aimed at lowering costs, improving efficiency and boosting competitiveness.

They are, however, going after the lucrative heroic image markets:

The big drug companies are likely to focus more on developing vaccines and treatments for cancer, AIDS and other life-threatening illnesses, said analyst David Moskowitz of Arlington investment bank Friedman, Billings, Ramsey Group Inc.

"These products have smaller markets than for other major drugs like those for cardiovascular disease," Moskowitz said. "But we are finding out that these products carry significant pricing power, and that is piquing the interest of the major pharmaceutical companies."

I find the evolution of Pharma's business model fascinating. One thing that always concerned me about the huge drug companies is that they have little incentive to develop drugs for rare diseases because so few people can take them. Instead they focused on huge lucrative markets -- heart disease, ED drugs, depression, etc. But the backlash brought by these drugs has pushed Pharma to offer more hope to the terrifying diagnosis of cancer or AIDS. Whether they can actually do so, and whether that pricing power is sufficient remains to be seen.

This is good news; we need more and better cancer and AIDS therapies. But we have to keep an important factor in mind, one that Matthew Holt has been drilling in lately. Therapies like those for cancer and AIDS are prohibitively expensive. Rounds can easily total $200,000. We, at some point, have to take a realistic look at health care costs and how much we're willing to pay. If my loved one would die without a $200,000 treatment I know I wouldn't blink in requesting it. If most of us believe that, we need to accept the reality of the cost. If that means employer-sponsored health care, it means major increases in premiums and cost sharing. If it means universal insurance, it means tax increases. Obviously waste can be cut out, and some spending can be brought under control. But new expensive therapies will continue down the pipe line.

Unfortuantely our politicians have skillfully insulated us against spending without feeling the pinch (can we say multi-billion dollar deficit?). Someday we will have to take an honest accounting of what good health care is worth, and that day is getting closer.

Comments

[Steve Mudge]

What if we separated the researcher from the drug manufacturer. The government buys the newly created drug from, say Pfizer, at a fair price. It then sends the drug out to bid for a manufacturer, like Teva. Pfizer has been paid for their research and Teva just has to manufacture the drug. It might take the "well, we have to charge so much because it costs so much to develop it" idea out of the equation. And yet it leaves incentive to develop cures. And there are lots of little biotechs out there that don't want to or can't afford to market their drugs who would benefit from this setup.

[opit]

Where were you guts when Ozra Klein and Kevin Drum (among others) were thrashing around trying to figure out the best health care model ? The current overexpenditure in medicine lies in the ridiculous paperwork necessary to run medical billings. Pharma is nuts too but not the prime offender.