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• Pharmaceutical Progress Has Cut Deaths by Disease
• Scientific Advances Provide New Research Opportunities
• Growing Commitment to Research
• Drug Development—A Long and Risky Process
• Benefit and Risk Assessment
• FDA Modernization to Speed Drug Approval
• Cost-Effective Pharmaceuticals Can Cut Overall Health Costs
• Improved Patient Compliance Enhances Health Outcomes
• Cost-Effectiveness of Pharmaceuticals Drives Healthy Industry Growth
• Managed-Care, Generic Competition are Changing the Pharmaceutical Marketplace
• Government Programs Affect Patients and Pharmaceutical Industry
• U.S. Leadership in Drug Innovation Due to R&D, Free Market
• Patent Protection Essential to Drug Innovation

PHARMACEUTICAL PROGRESS HAS CUT DEATHS BY DISEASE

Breakthrough medicines and vaccines have played a central role in this century's unprecedented progress in the treatment of fatal diseases. Leading causes of death have been eliminated, and Americans of all ages enjoy vastly increased life expectancy and improved health.

Antibiotics and vaccines figured importantly in the near eradication of syphilis, diphtheria, whooping cough, polio, and measles. Likewise, cardiovascular drugs, ulcer therapies, and anti-inflammatories have had a major impact on heart disease, ulcers, emphysema, and asthma. While much progress has been made, many challenges remain.

• Major diseases such as AIDS, Alzheimer's, arthritis, cancer, depression, diabetes, heart disease, osteoporosis, and stroke still afflict millions of Americans and cost society more than $645 billion annually.

SCIENTIFIC ADVANCES PROVIDE NEW RESEARCH OPPORTUNITIES

Advances in biomedical science are helping researchers develop novel approaches to attack infectious, chronic, and genetic diseases. New knowledge and novel research techniques in biochemistry, molecular biology, cell biology, immunology, genetics, and information technology are transforming the process of drug discovery and development.

• As the human genome is mapped, myriad potential new targets for pharmaceutical innovation will be identified. Currently, only about 500 distinct targets exist for drug interventions. That figure is expected to increase 6- to 20-fold, to 3,000 to 10,000 drug targets, in the near future.
• Already, more than 60 new biological therapeutics and vaccines have been approved by the Food and Drug Administration (FDA) and are on the market. And more than 60 million patients worldwide have been helped by medicines produced through biotechnology.
• Three hundred and fifty biotechnology medicines—produced by 140 pharmaceutical and biotechnology companies—are in development.

GROWING COMMITMENT TO RESEARCH

Pharmaceutical discoveries have been nurtured by growing investments in R&D by pharmaceutical companies. PhRMA tracks aggregated industry R&D expenditures and sales through a detailed annual survey of its members. Survey results are presented in the appendix of this report. They show that:

• R&D expenditures by research-based pharmaceutical companies are projected to reach $26.4 billion in 2000, a 10.1 percent increase over 1998.
• In 2000, approximately $6.0 billion of total company-financed R&D will be allocated to products acting on the central nervous system; $5.0 billion to products affecting neoplasms (cancers), the endocrine system, and metabolic diseases; $4.1 billion to products acting on the cardiovascular system; $3.6 billion on products acting on infectious diseases; $1.5 billion on products acting on the respiratory system; $0.9 billion on products acting on the digestive or genito-urinary system, and $2.4 billion on biological products (including vaccines).
• Over the past 20 years, the percentage of domestic U.S. sales allocated to R&D has increased from 11 percent to 20.3 percent. Meanwhile, the average R&D-to-sales ratio for all U.S. industries is less than 4 percent.

Publicly funded health research has also increased substantially in recent years. Government and academic scientists lead the way in basic research that advances knowledge about diseases, their causes, and operations. Industry scientists then lead the way in translating these advances in knowledge into medicines available to prevent, cure, and treat diseases.

• Although the budget of the National Institutes of Health (NIH) has more than doubled in the past 10 years, its share of total health R&D in the United States has decreased from about 35 percent in the mid—1980s to about 29 percent today. Over the same period, industry's share of total health R&D has increased from 34 percent to 43 percent.
• According to NIH, public-private research collaboration has been a critical component of NIH's core research efforts.

DRUG DEVELOPMENT—A LONG AND RISKY PROCESS

Investment in pharmaceutical R&D entails great risk. As science has allowed researchers to target more complex diseases and test more complex drug molecules, the length and complexity of drug development have increased dramatically, increasing both the risks and the need for capital.

• Total drug development time has grown from an average of 8.1 years in the 1960s, to 11.6 years in the 1970s, to 14.2 years in the 1980s, to 14.9 years for drugs approved during 1990—1996.
• Since 1980, the average number of clinical trials conducted prior to filing a New Drug Application (NDA) has more than doubled and the number of patients in clinical trials per NDA has increased three-fold.
• According to the Boston Consulting Group, the average pre-tax cost of developing a drug introduced in 1990 was $500 million, including the cost of research failures as well as interest costs over the entire investment period.
• On average, only 3 out of 10 approved drugs recover average R&D costs. Companies must rely on these highly successful products to fund R&D.

BENEFIT AND RISK ASSESSMENT

Pharmaceutical companies and the FDA take extraordinary measures to ensure the safety of all approved prescription drugs.

The drug development and approval process takes so long in large part because the companies and FDA proceed carefully and methodically to evaluate safety risks in four distinct stages: preclinical safety assessment; pre-approval safety assessment in humans; safety assessment during FDA regulatory review; and post-marketing safety surveillance.

FDA MODERNIZATION TO SPEED DRUG APPROVAL

The pharmaceutical industry has long sought to ensure that the FDA has the resources to thoroughly and expeditiously review NDAs. Enactment of the FDA Modernization Act in 1997 is expected to eventually reduce the time required for drug development and approval by perhaps an entire year.

The new law extends the 1992 Prescription Drug User Fee Act, under which industry agreed to pay $327 million during 1993—1997, to enable FDA to hire 600 additional reviewers. Over the next five years, companies will pay at least $550 million in user fees so FDA can implement additional improvements. As with the earlier law, FDA has agreed to a number of specific performance goals to streamline the development and approval of new drugs. Other provisions of the FDA Modernization Act will authorize FDA to:

• Streamline the drug application and review process.
• Provide additional market exclusivity for drugs studied in children.
• Provide fast-track approval for drugs meeting certain requirements.
• Expand patient access to investigational drugs for serious diseases and conditions.
• Maintain a public data bank on clinical trials.
• Implement new standards for demonstrating substantial evidence of effectiveness.
• Allow the dissemination to doctors of peer-reviewed scientific information on off-label uses for approved drugs under strict conditions.
• Use scientific advisory committees and outside experts to assist in the drug review process.
• Submit an annual report to Congress on its performance in meeting its goals.

The law also requires FDA to cooperate with other governments to harmonize regulatory requirements for drug approval. Harmonization efforts have been under way for eight years, with drug regulators and representatives of the pharmaceutical industry from the U.S., Europe, and Japan participating in the International Conference on Harmonization (ICH). The aim is to eliminate duplicative requirements for drug development and approval, thus providing patients with more timely access to new medicines.

COST-EFFECTIVE PHARMACEUTICALS CAN CUT OVERALL HEALTH COSTS

Prescription-drug therapy is highly cost-effective. Other interventions—such as surgery, hospitalization, physician visits, and nursing care—are typically time-consuming and expensive. Prescription-drug therapy often eliminates or reduces the need for these more costly interventions.

• A recent study sponsored by the NIH found that treating stroke patients promptly with a clot-busting drug not only reduces disability, but also saves health care costs. Use of the stroke treatment resulted in net savings to the health system of more than $4 million for every 1,000 patients treated.
• A new drug is lowering the total cost of caring for patients with migraine headaches. Although drug expenditures increased, the total costs of treating migraines declined 41 percent as a result of treatment with the new drug.
• Combination drug therapy with three anti-viral medicines—including a protease inhibitor—can reduce HIV in many patients to undetectable levels, reducing the need for hospitalization and enabling AIDS patients to return to work. According to a study presented at the 12th World AIDS Conference in 1998, the Department of Veterans Affairs found that giving patients full access to new AIDS drugs helped realize a net savings of $18 million in treatment costs in 1997. The annual cost of the combination therapy ranges from $10,000 to $16,000. In contrast, the cost of treating advanced AIDS in a hospital is estimated at $100,000 a year.
• The Centers for Disease Control estimates that every $1 spent on the vaccine for measles-mumps-rubella (MMR) saves the health system $21, every $1 spent on the oral polio vaccine saves $6, and every $1 spent on the diphtheria-tetanus-pertussis vaccine saves $30.

IMPROVED PATIENT COMPLIANCE ENHANCES HEALTH OUTCOMES

• Only about half of the medicines prescribed for long-term therapy are taken correctly. Non-compliance such as underdosing, overdosing, or missed doses costs society more than $100 billion annually due to increased hospital and nursing-home admissions, lost productivity, and premature deaths.
• Innovative programs to improve compliance are often part of larger disease-management efforts. Such programs attempt to integrate the various components of health care delivery into a systematized effort to manage disease.

COST-EFFECTIVENESS OF PHARMACEUTICALS DRIVES HEALTHY INDUSTRY GROWTH

The cost-effectiveness of prescription drugs—combined with a steady stream of new product introductions—has contributed to healthy industry growth.

• Sales by research-based pharmaceutical companies are projected to reach $149.1 billion in 2000, an 11.2 percent increase from $134.1 billion in 1999.
• According to IMS Health, a health care information company, the main drivers of growth in the late 1990s have been non-price factors, including increased volume of prescriptions, record sales of new products and new product formulations, and the changing mix of available products being used. In 1998, 80 percent of industry growth was attributed to such factors.

MANAGED-CARE, GENERIC COMPETITION ARE CHANGING THE PHARMACEUTICAL

About 80 percent of employed Americans are now covered by either an HMO, a preferred-provider organization, or a point-of-service plan—all examples of managed health care. Managed-care organizations frequently use a variety of cost-containment techniques specifically directed at pharmaceutical expenditures. The resulting effects on total health costs and quality of patient care, however, are not always adequately assessed.

• Overly restrictive formularies may have unintended consequences. A 1996 study found that HMOs with restrictive formularies experience higher use of other medical services.
• In 1997, private third parties—such as HMOs and other insurance plans—reimbursed 60 percent of prescriptions, up from 26 percent in 1990.
• Market competition for novel pharmaceuticals from similar patented follow-on products now often occurs in a matter of months. Generic competition is intense and immediate once a patent expires.
• Generics accounted for 47.1 percent of prescription volume in 1999, up from 18.6 percent in 1984.

GOVERNMENT PROGRAMS AFFECT PATIENTS AND PHARMACEUTICAL INDUSTRY

Government, at both the federal and state levels, is a major purchaser of pharmaceuticals—for the Medicaid program, veterans' hospitals, the Defense Department, state-senior assistance programs, AIDS drug assistance programs and, to a limited extent, Medicare beneficiaries.

• Most government programs that cover prescription drugs mandate various forms of price controls, including rebates, discounts, caps on prices, and limits on price increases. Various restrictions are also imposed on beneficiaries' access to drugs.
• State-run Medicaid programs often restrict access to prescription drugs through prior-authorization and other cost-containment techniques, which sometimes increase costs in the long run.
• In 1998, manufacturers' government-mandated rebates to Medicaid were projected to be $2 billion. The total amount of Medicaid rebates paid by manufacturers has stabilized because nearly half of Medicaid recipients are now enrolled in managed-care programs. Since managed-care plans may negotiate their own discounts with manufacturers, Medicaid rebates are not required for enrollees in these plans.

U.S. LEADERSHIP IN DRUG INNOVATION DUE TO R&D, FREE MARKET

The pharmaceutical industry is increasingly multinational in scope. Historically, the centers of global research have been in large countries with free markets that foster innovation.

• Approximately 36 percent of pharmaceutical R&D conducted by companies worldwide is performed in the United States, followed by Japan with 19 percent of global R&D.
• Of 152 major global drugs developed between 1975 and 1994, 45 percent were of U.S. origin, 14 percent originated in the U.K., and 9 percent were of Swiss origin.
• Countries that impose price controls reduce the competitiveness of pharmaceutical companies based in their countries, without effectively reducing drug expenditures or containing health care costs. Growth in pharmaceutical expenditures has actually been greater in countries with price controls than in the U.S.

PATENT PROTECTION ESSENTIAL TO DRUG INNOVATION

Strong worldwide patent protection is essential to spur pharmaceutical innovation. By protecting intellectual property, patents provide research-based pharmaceutical companies with a necessary period of market exclusivity to recoup their huge investments and provide them with the capital necessary to develop the next generation of medicines and vaccines.

• A survey based on a random sample of 100 U.S. firms in different industries revealed that patent protection is most important to the pharmaceutical industry. Drug companies indicated that 65 percent of their medicines would not have been developed or commercially introduced if patent protection had not been available.
• In the United States, despite having the 20-year patent term that is typical world-wide, the average period of effective (post-FDA approval) patent life for new drugs introduced in the 1990s has been only 11—12 years. Under current law, patents for new drugs can only have some, but not all, of the time lost to development and the approval process restored, and the total time is limited to 14 years. Innovators in other industries typically receive 18.5 years of effective patent protection (opportunity to market their products following patent issuance).
• Generic copiers of pioneer drugs are not required to generate clinical data demonstrating the safety and effectiveness of their products; they need only reference an innovator's data and demonstrate that their copies are bioequivalent to the pioneer drug to gain market approval immediately upon patent expiration.
• Countries with research-based pharmaceutical companies provide a period—distinct from the patent term—during which generic companies may not rely on an innovator's safety and effectiveness data to gain market approval. Current U.S. law limits this protection of proprietary data to five years compared to a period of 10 years in European countries with advanced pharmaceutical industries, such as the U.K. and Germany.
• In some developing countries, patent pirates freely copy innovative medicines without compensating patent holders. Patent piracy is a major problem in Argentina, India, Egypt, and South Africa.
• A World Bank study found that 86—100 percent of leading U.S., German, and Japanese chemical and drug companies consider a country's system of intellectual property protection very important when deciding whether to invest in research and development facilities in that country.
• Recent examples of countries enjoying the benefits of stronger patent protection include Mexico and Brazil. Both countries experienced dramatic growth in pharmaceutical R&D investment after strengthening their intellectual property laws.

Strong intellectual property protection provides the indispensable incentive to invest in pharmaceutical research—which leads to the discovery and development of more cures and better treatments for patients all over the world.