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Brooks Wilson's Economics Blog: Innovation in Pharmaceuticals

Saturday, May 16, 2009

Innovation in Pharmaceuticals

In a recent post, I expressed concern that President Obama's proposed medical care reform would restrain creativity and innovation in the health care sector.  John Lechleiter, the chairman and CEO of Eli Lilly & Co., describes contribution that pharmaceuticals have made to longevity, the creativity of the private pharmaceutical industry, and how proposed reform would slow innovation ("Health-Care Reform and the 'Innovation Test'," Wall Street Journal, May 14, 2009). 

Life expectancy has improved to due pharmaceuticals.
Inventions such as these -- and my list includes only the partial output of the company I work for -- have transformed the most basic expectations of human life in the last century. Today, the average life expectancy at birth in the U.S. is 78; when my mother was born in 1928 it was 57. (She's still in great health, by the way.)

Even in the last two decades of the 20th century, new medicines accounted for 40% of the increase in life expectancy in more than 50 countries, according to a recent study by Columbia University economist Frank Lichtenberg. In other words, for every year that life expectancy has increased, five months can be attributed to the availability of new medicines.
The private sector is the "heart and soul" of the innovation.

Today, a record 861 new medicines and vaccines are in human trials or awaiting regulatory approval in the fight against cancer, along with more than 300 for heart disease and stroke, another 300 for mental illnesses -- including Alzheimer's disease -- and 90 for HIV/AIDS.

U.S.-based private industry is the heart and soul of this innovation drama, investing $58 billion in research and development for new medicines in 2007 alone. Virtually no discovery reaches the point of regulatory approval if it is not shepherded through clinical development by a large biotech or pharmaceutical company. This means companies too often maligned as "Big Pharma" are in fact the only entities with the right combination of expertise, infrastructure and financing to pull this off.

Some widely discussed reform proposals would negatively impact innovation.
Yet in today's policy-reform drama -- if early clues from Washington are a guide -- the requirements of innovation may be written out of the script. Already in defensive mode, several large pharmaceutical companies are restaging the old merger play -- continuing to narrow the ranks of firms with the full-scale capacity to innovate. Meanwhile, skittish investors have retreated, leaving nearly half of all publicly traded biotech companies with less than a year of cash on hand. These trends amount to show-stoppers if they continue...

So it is vital to all of us that we insist that reform proposals pass the "innovation test." Providing insurance to millions of Americans through a government-run plan would fail the test. Similar efforts around the world have led to rationing of health care and created hurdles between patients and the most advanced treatments...

Curtailing health-care costs by allowing the federal government to dictate prices for branded medicines also would fail the test. Price controls and rebate requirements tend to be arbitrary and make it much harder for innovators to attract and recoup investments.

The stakes are high.  Medical care reform should be carefully considered and not rushed through the legislative process as so much recent legislation.

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