The Price Of Innovation

Many of us think the U.S. health care sector will withstand today’s economy because it supplies important consumer products and services.  Politicians and economists expect pharmaceutical companies to employ scientists, develop medically necessary products, and lead our nation to economic health.  But we must also safeguard companies’ incentive to innovate.  Otherwise we risk losing potentially large sources of employment that will keep our nation competitive in the global economy.

Consider biotechnology, a branch of science that uses biological processes to produce useful materials.  Biotech companies have provided many medically promising technologies.  These so-called “biologic products” are derived from living sources – human beings, other animals, microorganisms.  And they are among the most expensive products on the market.

Then again, the average biologics product takes more than 10 years and $1 billion to launch.  Product development requires sophisticated manufacturing techniques.  Companies must obtain regulatory approval from the U.S. Food and Drug Administration (FDA).  A product must undergo extensive testing.  And a high risk of failure pervades the whole process.

If pharmaceutical companies cannot offset these risks, they will no longer maximize their resources to focus on biologics development.  Already, entities like Pfizer Inc. and Merck & Co. have taken steps to acquire competitors – Wyeth and Schering-Plough, respectively – with proposed biologic drugs in their pipelines, rather than develop biologics from scratch.  The New York Times reports that smaller biotech companies are competing against venture capitalists, who may not be willing to finance continued research for products that require time and adjustment in order to test successfully.

The House Committee on Energy and Commerce is now grappling with this issue.  The health subcommittee, chaired by Representative Henry Waxman (D-Cal.), is drafting legislation that will provide a regulatory application process for generic versions of incumbent biologics, known as follow-on biologics (FOBs).

A key issue is how long developers of biologic drugs should enjoy “data exclusivity” over information provided during the FDA approval process.  The sooner FOBs access such data, the sooner multiple generic versions of chemically synthesized drugs enter the market and constrain pricing on brand-name incumbent drugs – according to one FDA study, by more than 60%.

For all these reasons, companies must be allowed to charge premium prices for biologic products.  Innovators must be free of competitive constraints for a period of time that is commensurate with the costs and risks of their investment.