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Philosophy in the Boardroom: Hank Takes Barcelona

July/August 2002

What does it mean when the least healthy-looking person in a room full of AIDS luminaries is the U.S. Secretary of Health? At a dinner party given by Pfizer Chairman and CEO, Henry (call me "Hank") McKinnell at Antoni Gaudi's most elaborate private residence in Barcelona, it meant delicious fruit soup and the Secretary's jetlagged countenance on a dozen flat screen TVs throughout the hall. Thrice invoking the "insidious scourge" -- a phrase better left to the mujahadin of a different war -- HHS Secretary Tommy Thompson urged us to bring our cudgels to the battle. The protesters who drowned him out the next day during his talk at the conference center don't know what they missed.

Cudgels to the side, the real reason we had been collected for this typically late-night Spanish feast was to hear Hank throw down a gauntlet -- or at least his keenly felt position paper -- on Pfizer's proper role in society in general and in the war against HIV/AIDS in particular. His message, summed up, is: "Let Pfizer be Pfizer." By this Hank means that a research-based pharmaceutical maker will do best when it's free to discover and develop new drugs that benefit patients, and then sell those drugs at rates that generate sufficient profit to feed its investors and keep the research juggernaut rolling through good times and bad. For this audience, he meant that drug sales in the rich northern countries must produce enough income to subsidize access to drugs in parts of the world less able to pay. In the case of AIDS drugs, the rest of the world happens to be where the greatest need resides. You can't have it all and expect cheap drugs too, says Hank.

This message was aimed at a number of audiences, including advocates for affordable access to essential medications for TB, malaria and HIV/AIDS, although many players have already accepted this logic. UNAIDS, in its call for a "new deal" with the pharmaceutical industry, has said, "high-income countries need to continue to support the... financing systems that allow for investment to be recouped for research and development." But that night, the key target may have been Hank's friend, Secretary Thompson, who, as the chief of the Department of Health and Human Services and an influential member of the Bush administration, stood as a representative of the largest buyer of pharmaceutical products in the world: government. When Hank says the rich countries need to acknowledge their role in paying the freight for the continued flow of drugs to the poor countries, he was pointing the finger at efforts by government to reign in drug costs and beat down prices through coop buying, preferred list schemes and threats of patent reform. One pending strategy, importation of drugs from Canada, is awaiting a green light from Secretary Thompson. These efforts, Hank implied, need to stop. Now.

Pfizer spends $100 million a week on research, said Hank. This shocking number amounts to about $5 billion a year, a figure that roughly tallies with Pfizer's financial statements. After the close of the conference, it was revealed that Pfizer plans to merge with another research giant, Pharmacia, Inc., producing a marketing powerhouse with an R&D budget one third the size of the National Institutes of Health. As a former chair of the U.S. trade organization, Pharmaceutical Research and Manufacturers of America (PhRMA), Hank is no stranger to shocking figures that dramatize the risks of drug making. On the first day of the Barcelona conference, two stories dominated the international CNN report. The first story broadcast the PhRMA mantra that developing a single new drug costs $800 million on average. This prefaced the core message disseminated from the conference that day, one that curiously echoed Hank's: industry can't be expected to sustain a flow of reduced price drugs to the developing world if profits are not generated elsewhere.

Interestingly, the other top story on CNN was a report that pharmaceutical giant Merck had overstated revenues by $14 billion during the past few years by claiming the co-pay dollars pharmacists collect from consumers. Later in the week, Bristol Myers Squibb was also revealed to be under investigation for inflating earnings. One wonders how the industry can claim its profits are under attack if those profits aren't even real.

Hank's world is changing and although he and his company seem to be out front in their willingness to listen, accommodate and adapt, some of his arguments seem stale and rooted in PhRMA rhetoric. The pharmaceutical industry has historically been a good performer for investors, returning a better reward than such hardware-intensive industries as aircraft manufacturing -- although not so much as the high-flying Internet stocks did during the late nineties. During those go-go years, competition in the capital markets drove the need for more prosaic businesses to maximize profit at all costs. Companies like Enron and WorldCom chose to borrow against their brighter tomorrows to keep the pot boiling. Unfortunately, those tomorrows never came. During this same period, drug industry growth was fueled by a rich, untapped seam of market demand opened by the advent of direct-to-consumer pharmaceutical advertising. Nonetheless, with patent lives winding up and the new markets becoming saturated with me-too competitors, the industry's all-eggs-in-the-basket blockbuster strategy finally started to sputter -- hence the financial Viagra employed by Merck and BMS.

The latest gambit to manufacture growth could be called phago-pharmacosis: gobbling up the competition in a spate of mega mergers. Besides the proposed Pfizer/Pharmacia deal, rumors are rife about GlaxoSmithKline wedding Bristol Myers Squibb (creating an acronym that sounds like a broad alliance of sexual minorities). A GSK/BMS combine would be particularly alarming for those dependent on HIV treatment. This would hand the super company a monopoly on the nucleoside backbone of combination antiretroviral therapy. What impetus would there be to innovate if you already own a piece of every viable AIDS regimen? Legal challenges will surely greet any attempt to create this unhealthy union.

And there's no evidence that bigger pharma companies are better pharma companies. The industry in general is suffering from a dearth of new drugs and the last wave of mergers hasn't seemed to help the situation. By Hank's math and PhRMA's estimate, at a $100 million a week, Pfizer should be pumping out a new drug every two months. But aside from an enhanced lobbying presence in Washington, where's the advantage of size? In contrast, a truly innovative new HIV drug, T-20, developed by tiny Trimeris with the help of Roche, is expected to come to market next year after only about $500 million invested in R&D over the past nine years. Many of the industry's best new ideas are coming from similar boutique biotech companies who license out their discoveries for the majors to turn into major medicine.

Stock prices for a number of the pharmaceutical giants peaked about two years ago and have been sliding since with no signs of a rally. Most analysts say the problem is the pipeline. Against this darkening sky, the perceived threat to intellectual property and pressure on international drug prices from generic HIV medications began to rise. Mix in a growing price backlash in the domestic political sphere, and the industry's traditional mask as the beneficent bringer of health and life had to crack. It was time to play hardball in the courts of law and public opinion. Yet despite the best efforts of PhRMA, both tough and treacly, the tide of events has continued to run away from them.

But consider a different, more idealistic, view. It's possible that a scaling down of profit expectations may actually help the pharmaceutical industry get back to what Hank says he would like to see -- a focus on its core competency of serving patients by making and selling better, safer drugs. While drug research costs are significant, they are but a fraction of what has been flowing into the profit column during the past decade. (In 2001, Pfizer claimed 24 percent of its revenues as profit; it spent 15 percent on research.) Despite declining revenue, why can't investment in research continue at similar levels as long as profit expectations are attenuated? A cooling down of the industry might allow the focus of research to shift from serving the bottom line to serving patients' unmet needs. The urgency to produce only high-margin blockbuster drugs should be retired; that approach hasn't worked anyway -- it's turned out to be a drag on profit. Why can't research into a broader range of drugs to treat a broader range of needs be justified -- and made profitable?

If serving the patient is really what it's all about, then the industry should welcome some of the reforms that Hank finds so threatening. For example, although patents initially protect innovation, patent terms that run on for too long may actually stifle new advancements. Patent reforms that call for reducing the period of market exclusivity might actually free industry to move forward to develop the next good idea without waiting to milk every drop of profit from older inventions. Too often we only see research supporting a new indication, or an improved formulation, appear just as a drug's patent life nears exhaustion. Customers suffer when they are denied access to more tolerable formulations simply to keep market exclusivity alive.

Most big drug companies have reluctantly reduced their prices to compete with those offered by generic makers in developing regions. Soon, these drugs are going to start flowing to patients in increasingly significant numbers. As these worldwide treatment programs come on line, the number of people receiving ART in the world will double, triple, and then balloon to a currently unimaginable size. Many funders, such as private sector providers, will specify competitively priced branded drugs in their treatment programs. The tremendous volume of drugs sold, even at razor-thin margins, may be able to generate considerable profit. And these millions of people on treatment will have been transformed into something the industry values very much indeed: consumers of pharmaceuticals.

The international generic makers deserve credit for spurring the coming revolution in access. But they are not just copycats. The big generic makers employ their own pharmaceutical chemists and they are slowly starting to add value to the molecules they manufacture. New, more practical, combinations of HIV drugs, such as AZT, 3TC and efavirenz in a single pill are available from generic makers -- combinations that would never be made if left to the branded makers. Additional creative combinations and perhaps even improved formulations can't be far behind. The "quality card" often played by PhRMA is of legitimate concern. But there is no reason why the quality of drug product output by new purpose-built factories can't actually exceed that produced by the aging plants of the majors. Earlier this year, Schering-Plough was sanctioned for quality lapses in its Puerto Rican factory. If generics are offering better choices at a better price, then isn't the customer well served?

Finally, as generic makers gain expertise and clinical experience with state-of-the-art drugs, we can expect to see research innovations as well. Last year, Dr. Reddy's Laboratories, an Indian generic maker, licensed original discoveries to a branded pharmaceutical maker for clinical development. It seems the tide of intellectual property can flow both ways. If bloated pharma has strangled innovation in its own labs, then maybe the research creativity of some surprising new international partners may be part of the solution.

The Future?

Down the road, many observers predict big changes in drug development helped along by insights from the genomic revolution. These changes could shake things up in ways that few have yet realized. As we learn more about the genetic and functional basis of disease, exquisitely tailored drugs may be designed to treat or correct medical problems with unprecedented efficacy and safety. An individual's genetic profile might one day guide a doctor as she prescribes drugs that have been designed to act in concert with that patient's blend of genes. The mechanisms of toxicity will be better understood and drugs might be custom selected that correct imbalances without creating new disease.

The drug discovery process too will be dramatically different. Already, drug companies are incorporating methods that screen for known toxicities at the earliest stages of their search for chemical compounds that might become useful drugs. AIDS drug researchers are testing their promising compounds against a wide range of virus mutants that have already become resistant to existing drugs. It's no longer acceptable to go forward with a drug that can only act against yesterday's virus.

One day automated arrays of assays using chip technology may allow rapid multi-dimensional evaluation of thousands of compounds. And as new chemical libraries of promising molocules are generated in the light of our improved understanding of suites of interrelated proteins (the proteome), several equally safe and effective drugs might be developed that can provide nuanced treatment for genetically diverse individuals and populations.

Herein are the seeds of a radical transformation of the pharmaceutical industry as it has developed during the past 30 years. If there is no one "best" drug for everybody, then the concept of the blockbuster pharmaceutical product becomes obsolete. The existing business model of paying for marginally profitable drugs with the high profits from superstar exclusives will have to be rethought. As our knowledge and capabilities improve, one size will no longer fit all. Call it the boutiquing of the drug industry.

Of course, there may also be efficiencies from the coming technologies that can help shorten discovery and development times and thereby allow longer periods of patent protection and market exclusivity. And if a suite of related compounds can move through the approval process simultaneously, then the problem of dealing with a diversified mix of "models" may not impede the marketing of the core drug concept. But these are big changes to negotiate and will involve an evolution in animal and clinical trial design as well as a set of serious challenges for the FDA and other worldwide regulatory agencies.

Hopefully, as the pharmaceutical industry sees its paradigm changing from a purveyor of a few products to the millions, to a supplier of the right product for the right individual, it will find itself capable of -- and rewarded by -- serving a truly worldwide marketplace with a diverse range of needs, genomes and abilities to pay.

Of course, if the discovery, development and delivery of new HIV treatments ultimately devolves upon the shoulders of only two or three consolidated pharmaceutical giants, then the crucial ingredient of competition driving this fanciful future may evaporate. If that becomes the case, then go light on the AZT ... it may have to last a long, long time.

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This article was provided by Gay Men's Health Crisis. It is a part of the publication GMHC Treatment Issues. Visit GMHC's website to find out more about their activities, publications and services.
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