Drug Companies vs. R&D?

by: Derek Lowe

I know that many people are getting tired of this topic. But many people who work in the industry have never met someone who's convinced that drug companies are just standing in the way of innovation, and that all the good stuff comes from the NIH, anyway. So allow me a couple of quick quotes from Dr. Jerry Avorn, chief of pharmacoepidemiology at Boston's Brigham and Women's Hospital, and (thus) a person who should know better:

". . .Virtually every progressive recommendation about health policy for the last 20 or 30 years that the drug industry felt might harm its bottom line has been met by the threat that if they don't make as much money before, innovation will cease and there will be no cures for new diseases. It came up around Medicare drug pricing and generic drugs. It's not a surprise to see it come up around health-care reform.

There are a couple reasons that this is a specious argument. One is that according to their filings with the SEC, the drug companies only spend about 15 cents of every dollar on research and development. That's compared to more than 30 cents in administration and marketing and more than 20 cents on shareholder equity. As an investment in R&D, I think any venture capitalist would say a company spending 15 percent on research is not a robust innovation engine.

The second issue is that if one looks at the new pipeline of drugs that Pharma has been generating in recent years, it's been puny. Wall Street has noticed this as well. There have been 20 or fewer drugs approved by FDA in recent years, which is lower than in past periods. It's sort of an open secret that innovation isn't working that efficiently.

The third leg of the stool is that if you really trace back where the seminal discoveries come from on which new drugs are based, it is federally supported research, usually funded by the National Institute of Health, and frequently conducted at universities or academic medical centers. The drug companies will then identify these discoveries and do hard, costly, and important work commercializing them. And they deserve compensation for that work. But it's disingenuous for them to imply that all the discoveries occur in their walls.. . ."

Read the rest of the interview if you want to hear how we'd all be better off if everything turned into biotech start-ups. But you say that you thought those were companies, too, and weren't funded by NIH money, but rather by investors who are often hoping for a deal with a big drug company? Adjust your thinking! This last quote should help you:

". . .if we want innovation and scientific discovery we should fund innovation and scientific discovery, not go after it bass-ackwards by paying too much for overpriced drugs and hoping that some of the excess profit will trickle down into innovative research. If I'm right that a lot of the important and useful innovation comes from NIH studies, then the way to get more innovation is to fund innovation. It frankly would be a far more interesting use of any given dollar one wanted to spend. . ."

Megan McArdle has done the work of attacking this at greater length than I can right now, and her post is a good palate-cleaning read after the Avorn interview. One tiny point she brings up that Dr. Avorn might want to internalize is that 15% is actually quite a large percentage of R&D spending. Apple (NASDAQ:AAPL) spends 3%, and Google (NASDAQ:GOOG), 10%. Intel (NASDAQ:INTC) manages to get all the way up to 15%. At any rate, the whole post is worth reading, and was clearly written in a mood of complete exasperation. Which I share.