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Godzilla vs. Mothra? Relman vs. Epstein!

Arnold Relman is back. The co-author, with Marcia Angell, of The Truth About The Drug Companies, has a long review in The New Republic of Richard Epstein’s new book on the industry, Overdose.
Not everything in Epstein’s book is right, and not everything in Relman’s review of it is wrong. But when Relman misses, he misses big. Take, for example, this:
“Indeed, the industry’s greatest enemy is itself. Innovation by the major pharmaceutical firms has certainly fallen off sharply in recent years, but there is good evidence that the cause lies with the industry’s own policies rather than with government regulation. The drug companies are being driven more by financial ambition and marketing considerations than by scientific or public health objectives, and that is the root of their current problems.”
That must be why we plowed all that money into genomics, among other technologies: marketing made us do it. I knew we’d track down the culprits eventually! OK, Relman’s targets here are the “me-too” drugs, which I’ve written about many times on this site. I get the strong impression that he underestimates the cost and difficulty of developing these – he seems to think that it’s pretty much a breeze once the first drug in a class has hit the market. Actually, to my mind, one of the main advantages companies are seeking in a me-too is that the first drug has proven that a market exists, and that its mechanism actually works. The development costs for the later drugs, though, aren’t hugely cheaper than for the first one. And, I might add, they still don’t always work.
Inside the industry, people spend a lot of time talking about why productivity has gone down (we’re in agreement on that point). But you don’t hear many people advancing Relman’s pet thesis, that we’re spending too much time chasing each other. That’s because I think he’s confusing cause and effect a bit: we’re not unproductive because of the me-too drugs – we’re making me-too drugs because a lot of our other stuff doesn’t work.
Believe me, companies would love to come up with new therapies for underserved markets – Alzheimer’s, say – or to come up with anticancer compounds that would do for the many what the likes of Gleevec do for the few. And we’d certainly make money at these, too – if we could find a way to do them. Saying that it’s for lack of trying just doesn’t ring true.
That mention of making money brings up another favorite part of Relman’s review:
“Regardless of the disease it targets, and whatever the benefit, no one has ever adequately explained exactly how the “value” of any new drug can be translated into dollars. It seems more likely that the price of newly approved patented drugs is simply set at whatever the manufacturer believes the market will bear. “
Good Lord! Where will it end, if companies price things according to what they think that people will pay for them? I look forward to the establishment of the Relman Board, which will determine, by means doubtless beyond my abilities to understand, the True Price (trademark applied for) of all drugs. Problem is, Relman himself probably looks forward to that, too. . .

23 comments on “Godzilla vs. Mothra? Relman vs. Epstein!”

  1. Grad says:

    I’d be interested to hear how he thinks anyone sets prices. I imagine it would be entertaining and depressing at the same time.

  2. P,E, says:

    I’ve actually heard talks where they said drugs are way under-priced. Consider the cost of a course of antibiotics for pneumonia against the continued life the person taking them gets to enjoy.
    Even HIV medications are ‘cheap’ for someone who’s middle or upper-middle class.
    Not to say that some drugs aren’t waaaay over-priced in this analysis, just that I don’t think proponents of ‘we should pay what drugs are worth’ schemes really mean it in all cases.

  3. Karen says:

    I always thought drug companies should emphasize how cost effective their drugs are, compared to other alternatives. For example, if a patient taking a drug doesn’t have to be admitted to the hospital, that’s a huge cost savings – the cost of a few days in the hospital is much higher than the cost of even an expensive drug.
    However, because of the way the insurance system is set up, more people have to pay out of pocket for drugs than have to pay out of pocket for hospital stays or doctor’s visits. So the patient is more aware of the cost of a drug, compared to the cost of a doctor’s visit or a hospital stay. I had high deductible insurance for a while, and that made me realize very quickly how much it really costs to see a doctor if you’re paying out of pocket (hundreds of dollars – thousands if you have to go to the hospital) – most drugs are a bargain by comparison.

  4. Kay says:

    Industry apologist, me thinks.

  5. Rick says:

    While I don’t necessarily disagree with your counter or those made in other comments, I think his point is more directed to the macroeconomic model of major pharmaceutical companies. The reality is that market size is a primary driving force in the industry and that does not always sit well with the average Joe. It’s an easy target…

  6. Tyrosine says:

    Here we go again. I read “The Truth About Drug Companies” and while Marcia Angell certainly has the credentials, she certainly did not have enough valid points to fill a book. Yet I do disagree with you on the point about innovation.
    Drug companies are looking for the highest reward/risk ratio and not for the most innovative drugs. What that translates to is that if another company was the first to be a trailblazer and establish a novel mechanism and show that a market exists, other companies will follow. In other words, the “me-too”s are spending safe money on non-innovative drugs. Outside of our med chemical world (where we focus in on small details and differences), to medical doctors, most drugs within a class are more or less the same. To the point that the industry is spending money on non-innovative drugs, I don’t think you can argue. However the pharma industry is not in the business of innovation, it is in the business of making money (like every other business). In order to increase innovation, the rewards will need to be increased which will invariably involve government regulations, changes to the patent system, or changes in the way the FDA approves drugs and grants exclusivity.

  7. SynChem says:

    On me-too drugs:
    1. One can argue a better me-too drug is of great benefit to the patients–more efficacious and less toxic, especially in the oncology area. But it’s also fair to say that it is less innovative.
    2. Few drug companies (even some big ones) can afford going after truly unproven novel targets. Those who do tend to go out of business rather quickly. And have the critics wondered why?

  8. SynChem says:

    To be more accurate on my second point, I should’ve said few companies can afford committing too mamy resources going after novel targets. Too risky for their own survival.

  9. Pharmacoepidemiologist says:

    I’m not so sure Relman is so far off in space. Genomics is hardly the driving force for new compound discovery these days. The reality is very few new (and even fewer really innovative) products are making it to market. That’s not the fault of the government. It IS the fault of the marketing types who, for the most part, run the US pharmaceutical industry. That’s who Relman is attacking–and with good reason. Look at the big pharma houses and tell me what really innovative products have come from them the last five years. Not much. It’s not for lack of resources, either.

  10. Palo says:

    Relman says:
    “The drug companies are being driven more by financial ambition and marketing considerations than by scientific or public health objectives, and that is the root of their current problems.”
    And Derek replies:
    That must be why we plowed all that money into genomics, among other technologies: marketing made us do it.
    I don’t see the connection between these two statements. Derek’s reply is a non sequitur. Saying that marketing drives Pharma business model these days, and that a lot of the money spent on marketing is NOT spent on innovation doesn’t mean in any meaningful way that the money spent on innovation is decided by marketing. It only means what it is clear from Relman’s writing:
    There is a lot of money that goes into marketing that could be used in innovation.
    And exactly the same non sequitur approach is taken by Derek on this:
    “Regardless of the disease it targets, and whatever the benefit, no one has ever adequately explained exactly how the “value” of any new drug can be translated into dollars. It seems more likely that the price of newly approved patented drugs is simply set at whatever the manufacturer believes the market will bear.”
    Good Lord! Where will it end, if companies price things according to what they think that people will pay for them? I look forward to the establishment of the Relman Board, which will determine, by means doubtless beyond my abilities to understand, the True Price (trademark applied for) of all drugs.

    R&D for cancer drugs takes roughly the same investment than a new allergy drug. A new cancer drug sells for many thousand of dollars a year, an allergy drug does not. The same with a new me-too drug, which, according to industry’s fans, are novel useful and take a lot of money to develop, yet, the sell for the same price of existing drugs with the same target. So, where did Relman go wrong, Derek?
    You don’t like Relman, that we know. You don’t like what he says, that is clear. But you just took a few sloppy shots without much substance.

  11. DaveL says:

    I love the fact that oil companies, car manufactures, electronic industries, the movie industry, the music industry and every other industry charges what the market will bear and people will stand in line for days and complain bitterly if they can’t get their hands on the newest gadget. Look at the iPhone and Wi released in the past quarter. No complaints about the huge pricetag on those babies! Just complaints that they stood in line for days and the stores ran out! I’ve taken Relman’s comment and replaced “drugs” with “Cell phones” to see how it sounds.
    “Regardless of the need it targets, and whatever the benefit, no one has ever adequately explained exactly how the “value” of any new cell phone can be translated into dollars. It seems more likely that the price of new cell phones is simply set at whatever the manufacturer believes the market will bear. ”
    If it’s “fun” people will gladly pay any price. If it helps the quality of life, reduces pain and disease, and prolongs life then it should be free otherwise some great evil is behind the scenes.

  12. Still Scared of Dinosaurs says:

    On a very weighty but nontheless unimportant topic, was that a typo in the title or is “Motha” a really sideways attempt at taking a shot at Relman?

  13. d_orbital says:

    DaveL – very nice!

  14. Analytical Chemist says:

    In defense of me-too drugs, I think that there is a disconnect between the pundits’ derision of such drugs and the efforts of HMOs, governments, and insurance companies to keep a lid on drug costs. How do you do this effectively if Pfizer (or Merck or GSK or BMS or Lilly…) sells the only XYZ reductase inhibitor on the market? When Lipitor came on the market years ago, it improved the potential horsepower of statins in doctors’ arsenals, and created active market competition that led to competetive pricing to get into formularies and further innovations, both “me-toos” and leaps forward (e.g., Zetia and Vytorin). When Zocor went off patent, the collective cost of statins as a class declined as many people had the choice to switch to generic simvastatin. And what if there’s a problem with one drug in a class? If it’s the only one on the market, many patients will suffer. Luckily, when ritonovir had to be withdrawn from the market, there were other “Me too” AIDS drugs to save the day.
    I believe in the positive power of capitalism–So sue me. Why is it shameful for consumers to have a choice of multiple drugs in a class, but it’s great to have 12 different SUV models to choose from? It infuriates me at how much higher the bar is set for Pharma. Yes, it’s a for-profit business, and we want to make a profit for our shareholders. Patients benefit substantially along the road to that profit. We deliver a very real service with very real value, and people complain that we don’t do so for free. But because it is profitable, we continue on and develop new drugs that save and enrich lives. To those of you who work in the development side of the industry, have you seen drugs dropped because the potential sales aren’t enough to justify the investment? I sure have (as recently as this morning). As the critics encourage governments to further tighten down on our profit margins, I wonder if they will miss all the drugs that don’t get developed as more and more niche markets become unprofitable?

  15. SRC says:

    The Relman quote re “value” is revealing. First, it reveals the Relman has zero grasp of economics. Second, and strongly correlated with the first, to the extent he thinks about economics, it reveals that he (probably unwittingly) subscribes to a Marxist perspective, that some intrinsic value exists independently of what others (aka the market) consider something to be worth, and are willing to pay for it.
    One counter to this perspective is to ask its adherent what he thinks a glass of water is worth. Then add the condition that the buyer is drowning, or dying of thirst. Same glass of water, either way.
    (For those who are truly beyond redemption, Marx’s labor theory of value is the next stop: that the value of something is a function of how much labor went into creating it. To counter that one, it’s interesting – but generally a waste of breath – to ask whether a pothole filled with a teaspoon is then more valuable than one filled by a skiploader. Great fun to watch the reaction!)

  16. Derek Lowe says:

    Palo, when I made the comment about genomics, I was referring to one of the reasons I think that pharma is in the shape it’s in. We’ve made some big bets on technologies that haven’t paid off the way we’d hoped. The genomics line was meant with a rueful smile, and a look back at the cost in both money and opportunity/time.
    Remember, the money spent on marketing is (in theory) supposed to come back, with interest. It’s a way to make more money. The decision, of course, is whether you’re going to take the money you have at the moment and spend it on marketing, or spend it on research.
    To the accountants, marketing expenditures are a lot more like an investment than research expenditures are – since most of the marketing dollars bring in income, and most of the research dollars are never heard from again. Of course, the research budget is supposed to earn its keep with the occasional winner, too, but marketing pays off more quickly and reliably.
    You can, in fact, overspend in either direction. After a certain point, marketing doesn’t pay off much at the margin. And if you plow all your money into the research labs, you’re walking away from extra cash that you could have had by running some ads and hiring some sales reps, cash that you’re probably going to need.
    As for your second point:
    R&D for cancer drugs takes roughly the same investment than a new allergy drug. A new cancer drug sells for many thousand of dollars a year, an allergy drug does not. The same with a new me-too drug, which, according to industry’s fans, are novel useful and take a lot of money to develop, yet, the sell for the same price of existing drugs with the same target. So, where did Relman go wrong, Derek?
    Oh, Relman’s right that drugs are generally priced at what the market will bear. I’m just amused at how stunned he is by that thought.

  17. acucucuuc says:

    Palo,
    This is similar to what Derek said above, but:
    You wrote in comment 10: “There is a lot of money that goes into marketing that could be used in innovation.”
    I don’t understand why you think that.
    I assume:
    – The people who run pharma companies (hereinafter “they”) allocate $ in a mix that they believe will maximize profits: X% to marketing, Y% to R&D (I assume that R&D is what you mean by innovation), Z% for widgets, etc.
    – They are correct, i.e., the mix they choose does maximize profits
    – all the $ allocated come from profits
    Suppose they changed the mix so that X-a% goes to marketing and Y+a% goes to R&D. Profits decrease, which leads to less $ for everything in the next go-round.
    How do you know that the new mix for R&D (Y+a of the new, lower profits) will be greater than the old mix for R&D (Y of the old, higher profits)?

  18. such.ire says:

    To be fair, Palo’s statement that “There is a lot of money that goes into marketing that could be used in innovation” is not false. They could be used for research spending, which would lead to more innovation. Of course, that doesn’t mean that that reallocation is sustainable or even desirable, from a societal point of view, for the reasons acucucuuc gave.
    Still, I don’t know if Relman is actually accurate in saying that drugs are priced at what the market can bear. Drug prices probably are a bit too high, due to third-party payment systems in place by law for prescription drugs. Sure, it’s still cheaper than the hospital (usually), but supply and demand always skews with a subsidy…

  19. SNP says:

    Saying that marketing drives Pharma business model these days, and that a lot of the money spent on marketing is NOT spent on innovation doesn’t mean in any meaningful way that the money spent on innovation is decided by marketing.
    Maybe that’s what Relman meant, but I read the words he wrote as saying precisely that the money spent on innovation is decided by marketing.
    At any rate, I have the same reaction I always do for these things: if Relman knows how to produce drugs more efficiently and cheaply, he should start a company, demonstrate that, and I’ll be thrilled to go work for him. Curiously, none of the people who know exactly how pharma research should work ever seem to want to put their ideas into action.

  20. srp says:

    DaveL, Analytical Chemist, and others have noticed the obvious–Relman is an economic illiterate. I would not pin Marxism on him; rather, he seems to have a medieval “just price” view of market interactions. The diamond-water paradox probably still befuddles him. You can bet he complains that NBA players make so much more money than schoolteachers. And so on.
    Finally, why do Palo and others continue to repeat the idea that marketing budgets crowd out R&D spending in pharma companies? It makes no sense. The expected rate of return on each dollar of R&D depends on the level of marketing expenditure. If there were zero marketing expenditure, then the rate of return on R&D would be zero (can’t profit from a drug you don’t sell) and so zero R&D investment would be optimal. Greedy capitalists should jointly set R&D and marketing budgets to maximize profit.

  21. Analytical Chemist says:

    Good point, SRC. I think Relman also misses the extensive postmarketing outcomes studies that Pharma conducts to justify value to governments that set price controls. For example, it has been quantified how much antihypertensive drugs save money by preventing more serious disorders that require more expensive therapies (e.g., hospitalization, dialysis, operations) and adding ultimate value to the ecconomy by decreasing mortality and adding to worker productivity.

  22. MedChemist says:

    I don’t see what the big deal is with the me-too drugs: if the market is attractive enough for a company to develop a me-too drug, that implies that many people are taking the original drug and (supposedly) benefiting from it. The company developing the me-too drug will have to price their drug more attractively than the original drug in order to carve out a piece of the market. Thus, many patients will get access to cheaper drugs.
    With respect to pricing of novel, innovative drugs: their price is mostly determined by what insurance companies and HMOs are willing to pay. They will only cover drugs if the alternative (surgery, hospitailization, nursery homes) is more expensive.
    Finally, in regards to the cost of cancer drug vs allergy drugs: if indeed development of both drugs cost the same, it makes perfect sense that the cancer drug is more expensive. Luckily, there are fewer cancer patients than allergy sufferers. The net profit per drug dose sold therefore needs to be higher for cancer drugs than for allergy drugs in order to make back the money that was invested in the first place. If we were to force the industry to price all drugs equally, we could expect to only see drugs for very large markets be developed. Although that may drive down the cost of your daily dose of Viagra, it would be hard to explain this model to people suffering from rarer diseases.

  23. I’m afraid I’ve missed most of the fun here, but I wanted to weigh in on what I think is one of the most interesting and least understood elements of drug pricing. It’s a simple question: Why isn’t there more actual price competition among prescription drugs?
    To me, this gets to the heart of what it means to charge “what the market will bear” for drugs, because for the most part, there is no such market. Price competition is the engine that drives the market mechanism, and without it, producers have every incentive to set prices as high and as close to the customer’s pain threshold as possible. This works in pharmaceuticals because the customers — insurance companies and Medicare, for the most part — will generally accept the high prices and pass them on to premium-payers or taxpayers. It may not be the biggest element of healthcare-cost inflation, but it’s certainly non-trivial.
    Now, someone might argue that discounting and similar marketing practices amount to price competition of a sort, and there’s probably a smidgeon of truth to that. But it’s a funny kind of market where true prices can’t be openly discussed, and where a buyer’s ability to take advantage of lower prices is dependent on volume purchases — which can directly affect patient health, as the recent spotlight on erythropoietin overuse suggests — or requires the threat of formulary changes or what have you. It’s equally odd that list prices tend to go in exactly one direction — up — for no particularly good economic reason that I can detect, except for the fact that drug companies want to keep delivering smooth earnings growth to investors. That, in turn, helps explain why true competition in the form of generics almost always pops the price bubble of a branded drug in fairly dramatic fashion.
    “Charging what the market will bear” for drugs, in other words, is something of a sham and a delusion, because the process at work isn’t really a capitalistic mechanism worthy of the name. Generally speaking, the only thing constraining prices is the threat of killing the golden-egg laying goose by, say, sparking a political backlash. And this system only works because the players in the game seem confident that no one is going to do anything so crass as undercutting his “competitors” on price.
    Note that I’m not saying drug companies don’t compete against each other, because of course they do. It’s just that competition tends to be limited to marketing and efficacy/toxicity/convenience considerations of the products themselves — but not price. Why not? I’m sure someone’s put together a sophisticated reason for this, but it’s hard to escape the feeling that no one has incentive to compete on price because it would ruin what’s been a pretty good racket so far.

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