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But Big Pharma Bad

I have had the exact same conversation defending the pharmaceutical industry dozens of times. Compiled here are a couple of points that I often need to refer back to. There are a lot of arguments contained here, but to briefly summarize the essence or spirit of what I’m trying to convey:

  1. If pharmaceuticals is such a profitable business, why are you not entering the field and making boatloads of money? Pharmaceuticals is a hard business to be in and requires a ton of risk.
  2. The industry exists under a framework of government legislation, which was created to establish certain incentives. Remember that lawmakers have unfortunately have control over these rules and each ‘problem’ of the industry is a direct consequence of rules that lawmakers put into place to establish other incentives.
  3. People in pharmaceuticals are good scientists who want to change the world for the better. The inability to see the other side which mostly emanates from the ‘pharma bad’ crowd is toxic and counter-productive. I guarantee you that people in the industry have spent more time thinking about how to bring drugs to patients than you have.
  4. Frame the discussion in terms of long term versus short term thinking. What are the long term consequences of changing the industry?
  5. Not everything has to be binary. Solving hard problems requires cognitive dissonance and gray areas.

For further reading, I recommend Bruce Booth’s blog Life Sci VC, Peter Kolchinsky’s book The Great American Drug Deal, and No Patient Left Behind, a non-profit dedicated medicine affordability. Contrast this reading to this document by Katie Porter’s group and I think you can understand some of my frustrations.

Drug Prices are too High!

The pharmaceutical industry takes on extremely high levels of risk compared to other industries in order to survive and should be compensated appropriately. Compared to other industries, returns from the pharmaceutical sector are far lower than similarly ‘innovative’ sectors like Tech. In some cases, you are right. But remember that drugs eventually go generic. We should think of currently high patent protected drug prices as a mortgage that we pay such that future generations are able to equitably and affordably receive treatment that they deserve.

Without the high prices of branded drugs, the incentive for developing them would disappear. As a society, we should be willing to pay the price for life saving medicines, and that is why we have insurance to help bear the brunt of the cost. Remember that drugs are the most humane way of receiving healthcare, and are extremely cost effective. In addition, the ability of large, experienced companies like Pfizer to assemble complex supply chains (with the capital to guarantee orders) and thereby deliver valuable drugs at scale is one of those things never mentioned in “Big Pharma makes ungodly profits” rants. Keith Robison on Twitter. Without large companies leading logistics, we would need to live in a world where we can’t guarantee the pharmacy can fill our perscription. Do we want that?

With regards to drugs that are already generic, these markets should be competitive and generics manufacturers do indeed drive down the price. We should be careful however, about quality of generics (a good book on the subject is Bottle of Lies by Katherine Eban). We shouldn’t be so price sensitive that we allow poor quality generics to get through the rigorous standards of the FDA.

Pay for delay

Pay for delay is evil and should be abolished by targeted legislation. Once patent exclusivity is finished, drug companies should not engage in monopolistic behavior, such as preventing competitor generics from receiving drug samples.

Patent Gaming

Drugs like Humira have undergone significant change over the course of their development and sales cycle in order to extend the patent lifespan and extend the exclusivity period. New intellectual property adds real benefit to patients, but I concede that we can argue the relative merits of cost versus benefit. In some cases it may be worthwhile, and in some it may not. There’s always nuance. Do new patents meaningfully improve upon the existing drug? If so, we should consider the marginal benefit fully without dismissal. I don’t think its appropriate to talk in generalities here and say that the pharmaceutical industry is horrible because every plays games with patents. I think we should have enough intelligence and nuance to look case by case and understand in each circumstance whether patients are benefiting.

It should be noted also that this is common partly because of the high cost of biologics manufacturing which make it doubly risky for biosimilar makers to compete and make the product that the original patent covered. Technology is constantly improving however and eventually this cost will be a fraction of what it is now. A key tenant of conservatism is to not do anything stupid or permanent is the trajectory of progress is improving. My guess is that this is a temporary issue that is already looked down upon by the industry and won’t last over time. Upholding the biotech social contract is something everyone in the industry wants ultimately.

Finally, the patent office has a role to play here also right. Ultimately, the patent office is a judge of fairness. They won’t give super broad protection because its anticompetitive. In the case of patent gaming, it shouldn’t be unreasonable for the patent office to have a role to prevent this and I’m honestly surprised that pharmaceutical companies are villified here when they are doing what is in their best interest.

Big Pharma Is Not Innovative

This point doesn’t make any sense. Firstly, they are. Secondly, who cares? The way the industry is set up, why does it make sense for the people who have to be responsible for conducting clinical trials and bringing drugs to patients and managing supply chains and doing patient education to also be doing the cutting edge research and coming up with all the new drugs? The NIH and other grant organizations fund academic researchers, who spin out their most promising research into companies, and if the science really is robust, the companies get to commercialize. But there is an amazing amount of attrition that happens in between. The rate of return on basic science from a talent, dollars, and time perspective just doesn’t make sense for a large organization to spend on. So of course large pharma isn’t coming up with the most ‘innovative’ new modalities because they can just acquire them when they become mature enough to commercialize. And we should applaud big pharma for making these acquisitions, for without them clinical trials would be 10x slower and more expensive, and patients would need to wait longer for access to new life saving medicines. And remember, for every buyer there is a seller. If smaller companies thought they could bring a drug to market themselves, they would. The negotiated price for a partnership or buyout is a reflection of the balance of risk/reward that each side evaluates. That’s how a market works.

I’m also fascinated by how people thing large pharma scientists sit around and do nothing all day. These are highly motivated, smart, and creative scientists and clinicians who work tirelessly to solve problems and develop drugs. If you actually read journal papers, you’ll see that big pharma does publish and they do solve many important problems that require big pharma level of resources. For example, the Regeneron Genetics Center sequences 100,000 people annually and has been a treasure trove for GWAS studies. Pharma is solving structural biology problems, chemistry problems, and engineering problems in the background that won’t always get published in Nature, but if you read specialty journals like Medicinal Chemistry or even bigger journals like Science Advances/Translational Medicine, it is saturated with big pharma researchers. Check the compounds published monly on Drug Hunter, almost all are pharma sourced. There is a lot going on in the background that you don’t hear about like vaccines, s’molecules, monoclonals, or just exploring newly discovered academic targets that aren’t tip of the iceberg new, but incredibly important and impactful to patients. Big pharma’s ability to do those quickly and efficiently is an integral part of the ecosystem. Read this article on how Paxlovid was developed and tell me with a straight face that pharma doesn’t do good work.

Last point is that it’s a mistake to think of innovation in the strict technological sense. Innovation is not just a matter of invention of a new modality or some new process; it’s also coming up with new approaches to business models, supply chains, markets, and policies that will help new inventions come to life and reach global scale. Pharma is world class at this.

Big Pharma Doesn’t Take Any Risk

Can we please agree that developing a drug is way different than running a grocery store and the relative profit margins just cannot possibly be compared? Drug development is hard, and the inherent risk built into this undertaking means there is a ton of variance in outcomes. If you cherry pick profit margins of the winners and ignore the many many losers, that is not analysis, that is dishonesty. Only the semiconductor industry spends more on R&D than the pharma industry. Upwards of 90% drugs don’t make it through clinical trials, and the cost to bring a drug to market is somewhere around $1 B.

If your argument is that large biopharmas too often develop ‘me too’ drugs that don’t meaningfully improve upon standard of care, I’m sure that you can find some examples of this, but there are also benefits of clinicians having several drugs to choose from and having multiple companies operating in the same space. Briefly, they enable price competition, provide researchers with more clinical data, and promote faster patient uptake and usage both in mature and developing markets (LianBio?).

The reality is that pharmaceutical companies are uniquely required to take risk and if they don’t, they wither and die. We really don’t want companies to go bankrupt. They do so much good for the world.

M&A is Bad

M&A drives activity in the pharmaceutical industry and is necessary to bring drugs to patients. M&A recycles capital, talent, and experience back into the ecosystem, allowing a continuous process of company formation and new drug development. Pharmaceuticals are not like groceries where more competition easily drives down price. I wish it were like that, but thank god there aren’t enough patients or enough money in the healthcare system to support 5 Pfizers, 7 Mercks, and 4 J&Js.

I’m against big corporations

I can’t help you. The benefits of multi-national corporations and their ability to manage supply chain, guarantee contracts, quickly upscale production, execute clinical trials, pick and fund partnerships, and recycle capital and talent throughout the ecosystem are many, but include saving millions of lives and trillions of dollars in economic activity.

Insulin and EpiPen

See here for some good discussion on Twitter. There are a lot of nuances about why common medications have the prices that they do. The price of insulin has plateaued and the average cost has begun to decrease over the last several years. This article from GoodRx is a good read regarding price dynamics. Recently, Walmart released a line of low cost human insulins at $25 a vial, and NovoLog at $73 a vial. There are also several programs to cap the out of pocket cost of insulin from insurers and pharmacies. Pharmaceutical companies also have discount programs for those unable to afford their insulin. Semglee, the first interchangable biosimilar was approved by the FDA and made available to patients in November 2021. Things are getting better.

Cold storage is expensive. Insulin is a biologic, which makes manufacturing somewhat tricky. Another reason for relatively higher costs is that insulin has continued to improve since the product was first developed. 1st generation insulin is fine, and is very cheap, but doctors recommend newer insulins that are engineered to deal with the complexities of patient compliance, dosing, and improved efficacy.

Sanofi, Novo, and Eli Lilly dominate the insulin market because its a difficult product to make profitably. Even mighty Merck tried to make a biosimilar insulin and failed. It’s a hard business to be in. If it’s so easy, why doesn’t the government do it? With time however, costs are coming down and patients are getting their medicine which turns a tragic and ugly disease into a manageable chronic condition.

Regarding the EpiPen, a generic version was approved in 2018, with an average retail price of $112. The EpiPen produced by Mylan now only commands <10% of sales. The drug industry has ways of regulating itself through normal market competition and in quite beautiful fashion, the industry has worked its magic here again. Now and forever ever after, patients have an affordable epinephrine autoinjector for severe allergic reactions.

Don’t buy the panic, especially when most are using old statistics. Things have gotten much better in the last several years and will continue to as drug makers continue to work tirelessly for patients and their families.

Share Buybacks

You can apply this argument to any company and if you want to make it, we should be having a broader conversation about this across all industries, not just pharmaceuticals. Why do share buybacks exist? To return value to shareholders and recycle capital throughout the ecosystem so that new companies can be formed. Where does the pool of venture financing get replenished? When LPs are able to exit positions and reap the rewards of being long term investors of a company.

R&D Share is Low

I think we need to differentiate large pharma versus startups. Sure, large pharmas spend roughly 20% on R&D, but smaller companies spend upwards of 80%. Most biotech/biopharma startups fail, and given the low probability of success, the only thing that can make these companies attractive to investors is the hope of eventual returns via drug revenue. If we cap drug prices, we decrease the net present value (NPV) of programs at small companies much more than we hurt large pharma profits.

Another point is that even though 20% seems low, it represents quite a substantial bit of money that is continuing to grow year over year (Pfizer spent ~$10 B in 2020 for example). Outside of the semiconductor industry, no other industry spends more on R&D. Critics of the industry paint the popular picture of big drug companies as huge advertising shops with little vestigial labs stuck to them. This couldn’t be further from the truth. Each company has several research campuses, employing thousands of scientists. The Novartis Institute for Biomedical Research and the Regeneron Genetics Center are just two successful examples of pharma funded basic and translational research. The narrative that large pharma spends more on marketing than R&D is simply false. If you spend 5 minutes of effort trying to calculate how a company manages to spend $10 B on TV ads, you’ll have a really tough time.

The reality is that commensurate with the growth of R&D share, the number of new drugs is growing rapidly year over year as well. The share that a company will decide to spend on R&D is decision based upon a risk calculus that depends on anticipation of future profits. The following from the CBO provides a strong overview of the major factors affecting pharmaceutical R&D spending.

As large multinational corporations in a heavily regulated industry, large biopharmas must spend the rest of the 80% of revenues in areas that to most people, make a lot of sense. Not much room for evil activities given these responsibilities:

  1. Salaries and benefits for its employees.
  2. Manufacturing and quality control of its products, including maintenance and building of physical plants.
  3. Purchasing of state of the art equipment to control its manufacturing processes.
  4. Warehousing and distribution capabilities throughout the world.
  5. Regulatory and clinical trials capabilities to ensure that research projects proceed through regulatory approval.
  6. Sales and marketing of its products to targeted physicians who will prescribe those products and patient education.
  7. General administration to oversee all the functions of the company, including corporate financial reporting, accounting, human resources, etc.
  8. Payment of interests on loans.
  9. Corporate tax on profits.
Medicare Should Negotiate Down Drug Prices

CBO estimates that if Medicare is allowed to negotiate drug prices, over the next 30 years, we will see 60+ less drugs and 4 annually in perpetuity. This is just simply going in the wrong direction.

We should promote free markets, which have demonstrated the ability to meet unmet needs in cost. See Mark Cuban’s new company CostPlus and Alexey Borisy’s new company EQRX.

How should we be criticising the industry?
  1. Bad and dishonest study design
  2. Anti-competitive practices like pay for delay (and other refusals to uphold the biopharma social contract of eventual genericization)
  3. Dishonest marketing
So what should be done?

This isn’t my area of expertise. Insurance reform maybe to not bankrupt poor patients. Improved preventative public health. Americans are incredibly unhealthy and because of this we should be willing to pay extra for healthcare compared to other countries. To lower costs we simply need to get healthier.

In the end though, I think things are getting better. We don’t need to do anything drastic if things are already getting better. Unlike chess, its okay to just not make a move.