Single Payer Healthcare - Effect on Medical Industry

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The U.S. pay for play system puts politics over mission.

This is a 1995 paper predicting loss of U.S. credibility in drug approval:

IV. DETRIMENTAL EFFECT ON SMALL BIOTECHNOLOGY COMPANIES

The approximate 1300 small biotechnology companies in the United States, all less than 20 years old, [47] seeking to use cutting edge genetic or other technologies to create new drugs and health products, perform a substantial amount of the United States' drug research. [48] Approximately two dozen biotechnology-derived drugs have entered the United States market. [49] About 150 more are in the Investigational stage. [50] According to the Boston Consulting Group, an average of one-third of all pharmaceutical research is based on molecular biology. [51]

Nearly all of these biotechnology companies have no current profits nor products. Funding of biotechnology companies is based on the belief that these companies will produce the world's future drugs which in turn will generate millions of dollars. However, the current drug regulatory scheme threatens the existence of these small biotechnology companies. First, the extreme cost of FDA drug approval increases the funding requirements of small biotechnology companies and decreases investor's willingness to invest in these companies. Second, the FDA's politically conservative approach to drug approval decreases the chance that safe and effective drugs will be approved effectively penalizing small biotechnology companies. These two problems have created a cash crunch for small biotechnology companies which likely will result in a reduction in the number of such companies in the future.

A. Extreme Cost of FDA Drug Approval

The extreme cost of the FDA drug approval process has created a perpetual cycle of capitalization problems for small biotechnology companies: (1) The high cost of drug approval combined with a small biotechnology company's limited financial resources limits the number of products that a biotechnology company can develop and decreases the probability that a biotechnology company will be able to survive the lengthy drug approval process; (2) Investors will not invest because of the substantial risk associated with biotechnology companies due to their reliance on a few products and due to the likelihood that a product will never be approved; and (3) Investor's unwillingness to invest in biotechnology increases the financing problems of biotechnology companies.

The process of drug development takes approximately 10 to 12 years and costs approximately $350 million. [52] Biotechnology companies burn considerable amounts of cash each month and generate no profits.. For example, in 1992, the average biotechnology company burned $664,000 a month. [53] This enormous "burn rate," attributable to each drug run through the FDA drug approval process, limits the amount of potential new drugs that may be pursued in the laboratory and in clinical trials by these small biotechnology companies. Therefore, small biotechnology companies base their success or failure on a few drugs getting to market. Consequently, a failure of a drug in clinical tests greatly devalues the company resulting in a substantial loss to investors. [54] As a result, investors have become unwilling to invest in such risky ventures [55] which has left biotechnology companies scrambling for precious financing for drug research. B. Politically Conservative FDA

Political influence on the FDA has caused the FDA to take an extremely conservative approach to drug approval. The FDA does not base new drug approval decisions by objectively weighing the benefits of a new drug against its potential costs. Rather, the FDA has taken the position that when the slightest doubt exists about a drug's potential harm the drug should not be approved even in the face of substantial evidence of the new drug's potential benefits. Business Week in its January 30, 1995 issue illustrated the FDA's conservative approach to drug approval by reviewing Merck & Co.'s lack of success in getting Varivax, a chicken pox vaccine, approved.

To some critics, nothing demonstrates FDA foot-dragging better than the chicken pox vaccine Varivax. Since 1981, this vaccine has been tested safely on more than 10,000 people in the U.S. Since 1984, 2 million children in Europe and Asia have had versions of it. Yet Varivax is still lumbering through the FDA. An FDA advisory committee first recommended approval in January, 1990, a year after Merck & Co. sought the OK. Early last year, a second panel pronounced Varivax safe and effective. The Centers for Disease Control (CDC) and the American Academy of Pediatrics both urge universal use

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Yet the FDA is unapologetic about its tough stance. Data from 20 years' experience in Japan and elsewhere show that as many as 2% of inoculated children develop mild cases of chicken pox, a higher failure rate than other childhood inoculations. Regulators also worry that -- years later -- Varivax might spawn adult cases of the disease or trigger related viral conditions, such as shingles. [56] Two reasons lie behind the FDA's conservative approach to drug approval. First, Congress controls the FDA through various devices and therefore controls U.S. drug policy. Second, forces opposed to the introduction of new drugs have a greater influence on Congress than those that favor the introduction of new drugs.

Congress mandates FDA drug approval policy through the use of Congressional oversight committees which conduct rigorous hearings regarding FDA policy. Since the passage of the Kefauver-Harris Amendment, the FDA has been subject to almost continuous hearings from a number of well known Congressmen, including Representatives Fountain and Rodgers and Senators Kefauver, Kennedy and Nelson. [57] Thus, the Commissioner of the FDA is subject to hostile Congressional hearings when the FDA deviates from Congressionally acceptable drug approval policy. [58] Such pressure from Congress inevitably shapes the FDA's drug policy.

Forces that oppose less drug regulation have more influence on Congress than forces in favor of less regulation. Consumer groups opposed to less regulation of new drugs have engineered a considerable following and maintain substantial influence in Congress. [59] These groups have used past drug tragedies as their rallying cry. Deaths and deformities are vivid tangible results of less regulation. These images compel membership by generating a fear of less regulation and by creating a sense of moral duty to oppose less regulation. No Congressman wants to say to his constituents that he was a responsible participant in a governmental system that approved a thalidomide-type drug which causes 1000's of birth defects.

Forces in favor of less regulation have had a tougher time generating support for their cause. [60] First, drug consumers have little incentive to join groups to petition for less regulation. The drug lag does not result in vivid harms which can be used as a source of an emotional rallying cry. Also, the benefits derived from less regulation are dispersed throughout country and therefore a free rider problem exists. [61] Second, while the biotechnology industry has pushed hard for less regulations, the drug industry as a whole does not share the same interests with regard to the drug review process. Large drug companies benefit from a stringent drug approval process because it serves as a barrier to entry to the small firms. Less regulation simply means more competition for the large firms.

Congressional control of the FDA and public sentiment against less regulation have lead to the FDA's conservative approach to drug approval. Congressional pressure on the FDA discouraging approval of potentially harmful drugs may be described as intense. [62] Countless Congressional hearings have been conducted to criticize the approval of new drugs. [63] Meanwhile, no hearing has been conducted to investigate the failure of the FDA to approve new drugs. [64] Former FDA Commissioner Alexander Schmidt summarized the current influence of Congress on the FDA:

When it comes to pure unadulterated and directly applied pressure on the FDA, the industry can't hold a candle to Congress. . . By far the greatest pressure that the Bureau of Drugs or the Food and Drug Administration receives with respect to the new drug approval process is brought to bear through Congressional hearings... The message to the FDA could not be clearer. Whenever a controversy over a new drug is resolved by its approval, the Agency and the individuals involved likely will be investigated. Whenever such a drug is disapproved, no inquiry will be made. The Congressional pressure for our negative action is.

intense. [65]

As a result, the FDA is obsessed with minimizing risk keeping products off of the market for years.

Not only has the FDA refused to approve drugs due to over caution against the potential harms produced by new drugs. The FDA has also refused to approve drugs based on politically motivated moral judgments. For example, RU-486, a drug used as an abortifacient, is scientifically beneficial in that its benefits outweigh its risks. [66] However, while countries such as Great Britain have approved RU-486, the FDA has banned its importation. The reason for such a ban appears to be purely political -- the drug is used to cause abortions. In other words, the FDA has played policy maker rather than the scientific evaluator of new drugs. [67] Such a systematic bias against the approval of drugs compounds the problems faced by biotechnology companies. This bias reduces the likelihood that a drug will be approved even if the product is scientifically beneficial. [68] This is problematic because the value of a biotechnology company to investors is based on the present value of expected future earnings of the biotechnology company. Expected future earnings of a biotechnology company equal the expected revenues derived from sales of the company's drugs if approved multiplied by the probability that the drugs will be approved. The true value of a biotechnology company equals the present value of the expected revenues derived from sales of the company's drugs if scientifically beneficial multiplied by the probability that the drugs developed will be scientifically beneficial. Therefore, the FDA's refusal to approve scientifically beneficial drugs reduces the investment value of a biotechnology company to a level below its true value. A reduction in the value of biotechnology companies reduces their attractiveness as investments resulting in less dollars being available for biotechnology companies.

C. Results: Cash Crunch for Small Biotechnology Companies

Robert T. Abbott, President and C.E.O. of Viagene, Inc. has best summarized the cash crunch faced by small biotechnology companies:

Most second and third tier biotechnology companies have less than 18 months of funding, many have less than 12 months, and dozens have funding for less than six months. According to a recent report by Dr. Robert Goldberg of the Gordon Public Policy Center at Brandeis University, fully 75 percent of biotechnology companies have 2 or less years of capital left. Ernst & Young reports that biotechnology companies are raising capital now at 25 percent of their burn rate (the rate at which capital is being expended.) As has already been mentioned, there are approximately 1300 U.S. biotechnology companies. That means that a staggering 975 companies will need to go to the market in the next two years or face going out of business, merging or selling rights to a larger firm. The seriousness of this situation cannot be overstated. The financing climate for biotechnology companies is, frankly, hostile. Public offerings are essentially impossible to undertake because of the depressed value of most companies' stock. This effect is indiscriminate. Virtually all companies are affected, regardless of company performance. [69]

This cash crunch in the biotechnology industry will lead to fewer biotechnology companies in the United States with a resulting decrease in biotechnology-derived drug innovation. The search for financing is driving many of the small biotechnology companies to trade precious technology for capital to foreign competitors and large domestic pharmaceutical firms. [70] Foreign competitors and large domestic pharmaceutical companies are the recipients of small biotechnology companies' financing troubles because these larger companies are able to acquire the technology for cheep. In addition, the failure to raise cash may cause a biotechnology company to scale back or cease operations. Companies which scale back or cease operations generally abandon potentially promising research resulting in less biopharmaceutical innovation.

Several experts agree with the theory that current government regulation will lead to a decline in small biotechnology companies making the current industry unrecognizable by the year 2000. George Rathman, founder of Amgen, the nation's leading biotechnology company and now head of ICOS Corp., stated in January 1995 that the biotechnology industry "is now seriously threatened by the performance" of the FDA and the "incredibly slow pace of approvals." [71] Several other experts agree with Rathman but vary by the degree to which they feel small biotechnology companies are threatened. Steven Burrill, general partner at biotechnology investment banker Burrill & Craves predicts that the number of biotechnology companies may drop by almost a quarter to 1000 by the year 2000. [72] John Sterling, managing editor of Genetic Engineering News has said that biotechnology companies may drop to 750 by the year 2000. [73] An article in the September 26, 1994 issue of Business Week predicts that perhaps three quarters of United States biotechnology firms are destined to fold or merge. [74]

Robert Abbott also foresees a dramatically different biotechnology industry in the United States in the future:

The industry is now beginning to see significant layoffs . . . I believe these layoffs will forever impact our industry because of the psychological damage that is occurring. Entrepreneurial companies are staffed by people in the early, energetic part of their careers because of the long working hours and dedication required. Salaried employees often work 60 to 70 hours per week without additional compensation.

They are motivated to do this because they share in the company's vision and identify with the entrepreneurial spirit of the workplace. When, and if, such a company has its first lay-off, an irreparable break in trust occurs between the company and its employees. Sadly, it is usually the survivors of the lay-off who are the most affected. From that point forward, the work ethic is never the same. I believe that the layoffs that are now occurring, because of this longest-ever hostile financing environment, will forever change the productivity of our biotech industry, dulling it from what it has been previously. [75] V. DETRIMENTAL EFFECTS ON THE UNITED STATES

Given that the current FDA drug approval process has created a self perpetuating cycle of capitalization problems for small biotechnology companies, it is important to evaluate the effect that a decline in the number of small biotechnology companies will have on the United States. I believe that unless the FDA reduces the cost of drug approval for biotechnology companies and removes politics from its drug approval decisions, the potential decline of small biotechnology companies will result in the following adverse effects on the United States: (1) the substantial reduction in the introduction of innovative new drugs; (2) the decline of the United States as a world leader in biotechnology; and (3) the loss of an opportunity to pursue a potential economic gold mine.

A. The Substantial Reduction in the Introduction of Innovative New Drugs

1. The demise of small biotechnology companies will reduce the introduction of innovative biotechnology-derived drugs . The demise of small biotechnology companies will decrease the number of innovative new drugs introduced in the United States. A substantial proportion of the novel and innovative research in the biopharmaceutical area is performed by the approximate 1300 small biotechnology companies. The increasing number of partnerships between small biotechnology companies and large drug companies whereby the large drug companies purchase the small biotechnology companies' technology serves as evidence of the substantial role small biotechs play in novel scientific experimentation. [76] Given the substantial role small biotechs play in biotechnology research and given the importance of biotechnology in the development of new drugs, a decline in these small biotechnology companies will decrease new drug development substantially.

There are several possible explanations for why a large share of the novel research in biotechnology takes place in the small biotechnology companies. First, financial incentives exist for scientists who engage in innovative biotechnology research to either start up their own biotechnology company or perform research for a small biotechnology company. Well known and highly respected scientists probably hold a somewhat inflated sense of confidence in their ability to produce a workable product. The successful introduction of a new drug may generate hundreds of millions of dollars for a small biotech. Therefore, a large equity stake in a small biotechnology company may be more appealing to a highly skilled scientist than a salary paid by a large pharmaceutical company. However, large pharmaceutical companies provide greater assurance to their scientists that projects will not be cut off due to lack of funds. Nevertheless, this fact is mitigated somewhat because a small biotechnology company is more likely than a large pharmaceutical company to remain faithfully committed to a particular research project because unlike the large pharmaceutical company who has several other products in research, the small biotech's success or failure is based on a small number of research projects.

Second, much of the current drug experimentation and innovation is based on potential cost advantages of new products over existing products. Small biotechnology companies have a greater incentive than large pharmaceutical companies to innovate based on cost advantages of new drugs over drugs already on the market because the drugs on the market are manufactured by the large pharmaceutical companies. [77] Third, large pharmaceutical companies are constrained by their shareholders who prefer a consistent return on their investments. To the extent biotechnology research is viewed as risky without the potential for consistent returns, large pharmaceutical companies will be limited in how many resources may be allocated to biotechnology research. Unlike the shareholders of large pharmaceutical companies, shareholders of biotechnology companies do not expect consistent returns on their investment. Shareholders of biotechnology companies invest with the hope that novel biotechnology experimentation will lead to large profits in the future but at the risk of large losses.

Finally, large pharmaceutical companies have limited resources to devote to biotechnology research and have limited expertise in biotechnology. Large pharmaceutical companies, unlike most of the small biotechnology companies, already have drug products on the market. Therefore, a substantial amount of a large pharmaceutical company's resources must be devoted to manufacturing and marketing activities. Large pharmaceutical companies devote approximately 15 percent of their sales revenues to research and development while small biotechnology companies devote approximately 80 percent of their resources to research and development. [78]

Furthermore, pharmaceutical companies devote a limited proportion of their research and development budget to biotechnology-derived drug development. Most drugs produced by large pharmaceutical companies have historically been derived from molecular chemistry, not biology. Therefore, over time, large drug companies have developed considerable expertise in molecular chemistry rather than in molecular biology. Any biotechnology experimentation by large pharmaceutical companies

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entails shifting resources away from this area of expertise to molecular biology. In a large corporation, such a shift is undoubtedly slow and met with considerable protest.

2. The results of a reduction in innovative drug production on the United Slaks. A reduction in U.S. drug innovation will lead to two results. First, less innovation will lead to continuing increases in health care costs. Biopharmaceutical experimentation is based on creating products with some form of a cost advantage. Biotechnology companies are working on developing cures and treatments for diseases which ultimately will reduce the cost of health care. By attacking life-threatening diseases, new biotechnology drugs will reduce the average stay in hospitals, cut the need for operations and decrease the frequency of the usage of many medicines.

Several commentators, including the Clinton administration, have argued that drug companies contribute to the rise in health care costs because of high drug prices. However, this argument fails as applied to small biotechnology companies for several reasons. First, large drug companies factor into their drug prices expenses other than research and development such as marketing costs. Since small biotechnology companies devote almost all of their resources to research and development, the prices for drugs introduced by these small biotechs will better reflect the actual cost of developing the drug. Second, the escalation in drug prices has slowed substantially. After rising at nearly double-digit rates in 1990 and 1991, average drug prices rose 5.7 percent in 1992 and 3.4 percent in 1993. [79] Third, drug prices simply reflect the cost of developing a new drug. Therefore, the FDA is partly to blame for high drug prices and a reduction in the cost of drug approval will lead to a decline in drug prices. [80] Finally, new drugs will be marketed successfully only if they cost less than existing therapies. For example, if surgery is less costly than a new drug treatment, surgery will be preferred and the new drug will not sell.

Reduced innovation also will lead to many Americans being denied biotechnology-derived drugs which could have been developed to prevent, cure or treat their ailments. The costly FDA drug approval process inhibits advancements against diseases and prolongs victims' suffering. Many commentators criticize the FDA's drug approval process as creating a drug lag in the United States. [81] Patients in the United States receive approved drugs later than their foreign counterparts. The decline in biotechnology companies due to the FDA drug approval process leads to an even more serious result: large numbers of innovative biotechnology-derived drug therapies that would have been developed under a less stringent regulatory regime may never be developed. For example, if penicillin had not been discovered and a small biotechnology company with financing troubles was developing penicillin today, a strong possibility exists that penicillin would never be developed. The loss of even one drug like penicillin would harm more people than all of the drug toxicity in the history of modern drug development. [82] B. The Decline of the United States as a World Leader in Biotechnology

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