Big Pharma Faces Trouble as FDA Becomes More Like Its European Counterpart

by: Dana Blankenhorn

Slowly, and unusually quietly, the FDA is becoming more-and-more like the European Medicines Agency (EMEA), which regulates Europe's drug approvals. This has enormous negative implications for U.S. drug makers.

The difference in approach is stark. The FDA approves drugs based on “safety and effectiveness.” If it's safe, if it works, insurers have to pay for it. So does Medicare. European regulators, by contrast, must also consider whether a drug is worth the money.

So when a drug is approved in the U.S., drug companies can advertise to create demand for it. Only when drugs are used in ways the FDA has not approved must patients pay. That's why the U.S. is 65% of the world pharmaceutical market. Demand comes from the bottom-up. When Europe approves a drug, state regulators must then decide whether they will pay for it. Demand comes from the top-down.

That is why this week's decision on Avastin and breast cancer was a watershed. An FDA panel said Avastin doesn't usually work for breast cancer. A patient group insisted that in some cases it does, and said that unless FDA head Margaret Hamburg overrules her science panel, women who can't afford to pay the $100,000/year cost will die.

The patients' group may be right. Avastin may work in some cases. But the panel decided that is not usually the case. The off-chance of Avastin working in some people isn't worth the price.

The U.S. approach favors expensive, less proven treatments. Doctors have more leeway. This provides a huge incentive for drug makers to do research here and fund studies here. It's why even Roche, makers of Avastin, while based in Switzerland, has most of its assets, like Genentech, which developed Avastin, in the U.S.

The pressure is not all one-way. European drug companies are moving research toward China and India, which have lower costs, since only 24% of their sales are in Europe. That's one reason why Europe approved Avastin for breast cancer the day after the FDA rejected it.

But in general companies like Roche (OTCQX:RHHBY), Pfizer (NYSE:PFE), Merck (NYSE:MRK), Abbott (NYSE:ABT) and Novartis (NYSE:NVS) can see the trend. FDA approvals are getting harder, costs are going to be considered.

Even if regulators were more friendly, cost pressures would be telling. Drug price inflation helps drive insurance rate inflation, insurance rate inflation reduces the number of people insured, and it all spells a smaller market. That is why all the reforms promised for Medicaid, Medicare and by the Affordable Care Act mean drugs are going to have to increasingly meet a cost-effectiveness test.

And in the long run that is very bearish for the sector.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I ran the SmartPlanet Health blog for over a year and covered the health reform debate at ZDNet. Thus I wanted to put the action on Avastin in some market perspective.

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