Pharmaceutical Pricing and Innovation: Key Issues in the Year Ahead

This year's top policy issue for pharmaceutical manufacturers is to influence legislation providing drug benefits to 40 million Medicare beneficiaries. Republicans gained control of both the Senate and House during November (2002), in part by promising pharmacy coverage for seniors; consequently, President Bush and GOP Congressional leaders are under pressure to fulfil the pledge. They seek a programme that is relatively low in cost and administered by private insurers and pharmacy benefit managers (PBMs) instead of the federal government, an approach that manufacturers support.

Congress backs device user fees and orphan drugs

However, the process of crafting this still very expensive programme will stimulate efforts to reduce drug prices, which risks undermining incentives for new drug development - manufacturers are already filing fewer new drug applications (NDAs) with the US Food and Drug Administration (FDA). Scientific and regulatory challenges erect high hurdles to bringing new products to market, but uncertainty regarding future reimbursement policies may also limit industry research and development (R&D) programmes.

Full agenda

Last year, Congress approved bioterrorism legislation and renewed the FDA user fee programme for drugs and biologics, but left most health policy legislation on the table (see sidebar "Congress backs device user fees and orphan drugs"). This gives the legislators a fairly full health care agenda to address this year:

Coverage for the uninsured. Former vice president, Al Gore, is leading efforts to make the plight of the uninsured a central policy issue for Democrats.

New Senate leaders shape health care debate

Gore emphasizes expansion of federal and state health care programmes, whereas Republicans prefer to increase tax credits to help consumers purchase health insurance. The administration backs a $90 billion tax credit programme (during the next decade) and hopes to gain bipartisan support by setting high standards for the type of insurance eligible for credits.

Liability reform. Physicians have made malpractice and tort reform their top legislative issues, creating an opportunity for pharmaceutical manufacturers to seek limits on damages in lawsuits claiming injury from drugs or vaccines. Last year, the House passed a bill that set caps on malpractice damage awards and limited class action suits, but it died in the Senate. Now there will be Senate hearings on the issue, but any kind of liability reform legislation faces a very tough fight. Democrats almost killed a provision expanding liability protections for vaccine manufacturers that was included in recent legislation establishing the Department of Homeland Security; the measure survived but still faces further scrutiny by Congress.

Stem cell research. The biomedical research community believes that Republicans will maintain strong support for basic research, but budget squabbles have already delayed promised funding increases. A major concern is that GOP conservatives may push through legislation to ban human reproductive cloning that also kills stem cell research. Moderates will work to craft a bill that limits only undesirable cloning but allows somatic cell nuclear transfer research on embryos to continue.

FDA outlines biotech product shift

Medicare Rx. Senate Republicans are expected to begin the debate with last year's compromise bipartisan bill. A prime sponsor is Senator Charles Grassley (Republican, Iowa), who will now chair the Senate Finance Committee that is responsible for Medicare spending (see sidebar "New Senate leaders"). The bill subsidizes insurers and PBMs that offer pharmacy plans within set parameters: maximum monthly premiums and annual deductions, 50% co-pays up to $3500 a year and catastrophic coverage. The programme is projected to cost approximately $370 billion during the next 10 years - half the price of a more generous Democratic plan.

A key concern is how various options for designing Medicare drug benefits will affect the cost of the programme and resulting efforts to influence pharmaceutical prescribing and reimbursement. A recent analysis of Medicare Rx programme design factors by the Congressional Budget Office (CBO) predicts a rapid rise (10% per annum) in Medicare beneficiaries' drug costs during the next decade, and that expanded drug coverage for seniors will boost spending even more. These numbers support the use of formularies, generic drug substitution and other policies to shift cost-sharing to beneficiaries and limit programme expenditures.

Generic drug access. Republican efforts to sweeten a Medicare benefit package to build bipartisan support are also likely to encourage changes in the Hatch-Waxman Act governing generic drug regulation. The broad generic reform bill that was approved by the Senate last July (2002) is not likely to be reconsidered, but there will be interest in adding to a Medicare Rx bill a moderate measure to codify some of the changes recently proposed by FDA. Senator Orrin Hatch (Republican, Utah), who once again chairs the Senate Judiciary Committee, prefers that Congress decides any major revisions to Hatch-Waxman instead of making changes through FDA regulatory action. Hatch is expected to address pharmaceutical and biologic patent issues fairly early.

Decline in new drugs

Restraints on drug reimbursement and patent limits, however, carry the risk of curbing incentives for the increasingly large investment in R&D demanded from pharmaceutical companies. There is mounting concern regarding a decline in the number of new drugs and new molecular entities (NMEs) approved by FDA during recent years, with similar trends apparent in the European Union.

Some analysts maintain that the pharmaceutical R&D pipeline remains robust, but acknowledge that fewer new products are coming to market. During the mid-1990s, FDA was approving approximately 120 new drug applications per year, with a record 53 NMEs during 1996. In 2001, FDA approved only 66 NDAs and 24 NMEs, and last year's numbers looked even bleaker last autumn. Similarly, manufacturers are seeking "priority" approval status for only a handful of applications; a sign that fewer new therapies warrant regulatory treatment as breakthrough products.

These developments are prompting industry and policy makers to examine what factors may be slowing development and market approval of new drugs. Manufacturers point out that they continue to invest huge sums in R&D, but that the pay-off has been curbed by regulatory demands and scientific setbacks. Curbs on reimbursement for "me-too" drugs has increased pressure on companies to explore new therapeutic categories, which is more costly and time-consuming.

Pharmacogenomics, for example, promises to produce customized patient treatments that can reduce drug safety issues, and new cell replacement treatments generate enthusiasm, but practical discoveries in these fields are still very far away. Even new breakthrough therapies, such as Merck's promising vaccine to prevent cervical cancer, face questions regarding future coverage and reimbursement.

FDA slow-down?

A key issue is to what extent FDA regulatory policies aggravate these trends. Whereas agency officials emphasize that they cannot approve applications if sponsors do not file them, manufacturers complain that expanded pre-market test requirements add to drug development costs and delays. Sponsors say they now have to run more preclinical screening tests to improve detection of liver toxicity and potential side-effects. They also feel compelled to support larger Phase III trials to obtain more safety data. Not only are such procedures costly, but the added information may lead a manufacturer to halt a development programme based on problematic early data. Records show that manufacturers have considered cancelling the development of products that showed early safety problems but turned out to be major blockbusters.

Industry interprets FDA demands for more preclinical and clinical data as a sign that the agency has become more cautious when approving new products without extensive safety data. FDA has been criticized about several high-profile drug withdrawals during the last 5 years, some involving patient fatalities. Patient advocates claim that tighter user fee approval deadlines have accelerated the application review process too much, whereas manufacturers point to an excessive slow-down in FDA review times.

Agency officials maintain that the numbers indicating longer review times are misleading. With fewer NDAs coming into the agency, a few problematic applications can raise overall review-time statistics. The agency believes that added funding under its third new user fee programme will address key regulatory problems and improve review operations.

Revising FDA agenda

In addition, FDA officials are working to ensure that its operations and policies encourage new drug development and avoid blocking useful new products from the market. The agency has launched programmes to update good manufacturing practice (GMP) standards and to consolidate regulation of certain biotech therapies with conventional drugs in the same therapeutic categories (see sidebar "FDA outlines biotech product shift").

Most importantly, FDA now has a new commissioner to implement new policies and programmes after 2 years without a permanent leader. Even before his official swearing-in on 14 November 2002, Mark McClellan began mapping out his agenda, which features initiatives including:

• speeding safe medicines to market

• accelerated access to generic drugs

• updated drug manufacturing standards

• retaining FDA scientists

• reducing medical errors.

McClellan wants to set standards for barcoding to enhance the safe use of medical products and he acknowledges the importance of addressing regulatory issues on the international front.

Providing agency systems able to review new drugs, devices and biological treatments as quickly and as efficiently as possible is at the top of the list and may require "a re-examination and an updating of the way FDA does its job," the new commissioner told FDA and government officials at a ceremonial groundbreaking for new FDA facilities in the Maryland suburbs of Washington DC. FDA is "not here just to check boxes on an inspection list," he said in his first speech after being sworn in as commissioner. "We are here to implement the best possible approaches to reduce risks to the public health," McClellan stated.

The new commissioner used this opportunity to emphasize the importance of retaining talented scientists if FDA is to fulfil its critical missions. FDA has experienced considerable erosion of top talent, a trend that could accelerate with the shift of key regulatory activities from the Center for Biologics Evaluation and Research (CBER) to the Center for Drug Evaluation and Research (CDER). Jay Siegel, director of CBER's Office of Therapeutics Research and Review, recently left the agency, and other biotech experts are expected to follow suit.

McClellan aims to stem the exodus by establishing a work environment that "encourages creativity, efficiency and superior performance." In addition to building a new campus to eventually house most FDA offices, McClellan supports added educational opportunities and financial incentives for staffers, including salary increases linked to performance and retention allowances for physicians. He suggested that FDA professionals should be involved in research activities that are "relevant" to fulfilling FDA's mission, noting that effective regulation of emerging technologies such as cellular and gene therapies requires "a close connection to the latest scientific developments." Such comments may signal willingness to retain certain research programmes in the agency, a strategy supported strongly by FDA scientists, but opposed by manufacturers who have been unwilling to foot the bill. Resolving this contentious management issue may provide an early challenge for the new commissioner.