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Minyan Mailbag - Competitive approvals


Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Hey David -

I read on the wires Germany will look to restrict pricing on popular drugs to save a billion Euros a year. Is this another nail in the coffin short-term for the druggies?

Minyan Michael

Minyan Michael:

I don't know for certain what effect this might have on the stock price of the drug manufacturers in the short term. What I can tell you is this is just the beginning. All governments are hemorrhaging cash on healthcare costs and are looking for any way to reduce those costs. Conventional wisdom is "me too" drugs are the culprits behind much of the rise in prescription drug costs and these governments are implementing various ways to limit those kinds of drugs. Germany is taking the position they will ratchet down costs on drugs that have not, in their opinion, demonstrated a significant improvement over existing products.

This is all about the idea of competitive approvals and the theory that introducing this new rule will somehow reduce drug costs. The oft-stated mechanism is competitive approvals will reduce the need for a big pharmaceutical company to spend millions on advertising to market these drugs. Lower marketing costs equal lower costs to patients. So goes the theory.

I agree that competitive trials help doctors to understand exactly what drugs work best for what people. The logic behind the idea that eliminating me-too drugs lowers drug costs escapes me.

Me-too drugs are popular at pharmaceutical companies because they are relatively low risk. Tweak the molecular construct on an existing small molecule drug and you have a "new" drug with substantially the same activity. Because it would be the second drug to market, the approval pathway is already clear so no excess trials have to be done while the FDA figures out exactly what data they need to grant an approval. Sales risk is mitigated because an approved example already exists, providing hard sales data to the bean counters. Doctor and patient education is reduced since the first drug approved has already done most of that heavy lifting.

I'd make the case these me-too drugs are the kinds of drugs that fund innovative R&D at big pharma companies - whether that funding is internal R&D spending or the dollars necessary to fund partnership deals and acquisitions with development-stage biotechnology companies.

Back to your question, Michael. I think this affects drug companies beyond the short term. I doubt we'll exit this decade without some sort of requirement for competitive clinical trials here in the U.S. Whether that requirement will be statutory or market-driven is unknown to me at this time. It makes little difference as the costs of developing new drugs will increase because of the increase in the number and size of clinical trials to prove superiority.

Prof. Miller
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