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4 New Developments Affecting the Industry The industry structure and competitive performance in the phar- maceutical industry have not undergone radical change since the therapeutic revolution that occurred around World War II. While there is little prospect for developments of similar magnitude in the next decade or so, the future of the industry should not be regarded as completely predictable by simple extrapolation of past trends. Two features of the industry that promise to alter these trends arise from recent advances in biomedical sciences and from the growing innovational significance of Japanese~wned firms. A discussion of these follows. SCIENTIFIC ADVANCES Co ntinued pharmaceutical innovation requires persistent expan- sion in the underlying- scientific base. This expansion has so dramatically occurred in medicine, pharmacology, and chemistry that, according to numerous reports, the ethical drug industry verges on a burst of significant new products. Whether this devel- opment is imminent, knowledge in basic biomedical science has expanded so rapidly and consistently in the past few decades that steady progress in the knowledge required for drug development can be confidently predicted. Recent upturns in the number of NCEs approved by the FDA for marketing in the United States have fueled this optimism (see Table 2.4, comparing the years around 1970 with more recent years). More important than this upturn (which in fact has been relatively modest and unlikely to be repeated) has been the spectacular success of a single new drug, Tagamet, introduced five years ago by Smith Kline and now the best-selling prescription drug in the United States (see Table 2.9~. Apart from its tremen- dous financial success, the most interesting features of Tagamet 72

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73 concern the manner of its development, which is indicative of the changes in industrial pharmaceutical RED generated by recent scientific advances. Traditional pharmaceutical research depended in part on extensive screening of drugs with inevitable importance to r serendipity in discovery of new medicines. While the popular misconception that this screening was conducted with little or no guidance from chemistry or biology is simply false, it is nonethe- less true that the extent and quality of direction provided by basic science for pharmaceutical research have vastly improved. Gerald Laubach, President of Pfizer, Inc., summarized the impacts of improved scientific direction as follows: There is literally no comparison between the concepts an d methodology that I had as a scientist in the 1950s and those that the presentably scientist brings to the task. Everything can be done more powerfully, efficiently, and incisively and that has made a difference in the qualitative potency of drug research and in the qualitative contribution of the products that are coming out. The industrial effects of greater research precision may help a given dollar volume of research expenditures yield an increased number of INDs (or drugs entering clinical trials) and a given num- ber of these INDs yield a greater number of actually marketed products. Prediction of future levels of marketed NCEs is thus complicated by the improved productivity of RED, and simple extrapolations of past trends would provide underestimation of the volume of new drugs. Tagamet was designed using these new procedures, having been developed atom by atom to affect specific physiological processes. If the cumulative industrial effects of improved pharmacy tical research increase productivity, this will serve to decrease the average cost of new drug discoveries and increase the earn ings potential for these discoveries, thus indirectly encouraging additional research expenditures. From the perspective of this study, however, these positive developments, if they occur, will affect foreign-owned and located pharmaceutical firms largely to the same extent that they will comparable U.S. firms. Thus, while increased productivity may insure continued innovation and growth for the industry as a whole, it has essentially no implication for the relative position of U.S. firms. Further, there are two important limitations to the impact of recent advances in basic science for the pharmaceutical industry. The first limitation arises in that the principal bottleneck in pharmaceutical RED is not the generation of new substances with desired therapeutic effect, but rather the assurance that these

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74 s ubstances are safe from adverse side effects. Advances in toxicology have lagged those in other biomedical sciences. Panel member Dr. Lewis Sarett, Senior Vice President of Merck dc Co., Inc., addressed this issue. I have been principally discussing new opportunities to achieve therapeutic specificity, ways to attack new diseases or to attack older ones with new weapons. The steady evolution of basic biomedical sciences over the past 50 years has made this task less and less difficult. The existence of many excellent medicinal chemical prototypes contributes heavily: penicillin, indomethacin, propranol and cimetidine spring immediately to mind. Where such prototypes are absent, new In vitro receptor methodology and clear perceptions of active sites of enzymes facilitate discovery of new prototypes. Improved instrumenta- tion helps. But does this mean that we can expect a surge of new drugs? Not so, and in fact the statistics on new investiga- tional drugs show that the number-~t least of those originated in the U.S.- has declined even in quite recent years to a frac- tion of its earlier level. As you know, many reasons have been advanced for this: regulatory agencies, and escalating costs of development exacerbated by inflation over lengthy periods of time, for example. Undoubtedly these do contribute. But I would submit that the rate-limiting stage of drug discovery has shifted away from efficacy which, as I have said, is not so hard for the chemist and pharmacologist to achieve today- - nd toward safety, which is difficult to predict and even more difficult to control. Here I am not referring to safety in the gross sense. Of course, the record shows that new and experimental drugs have a superb history of safety when administered by the clinical pharmacologist under the guidelines of the animal toxicologist. But safety in the sense of freedom from the occasional potentially serious adverse reaction, a problem which does arise although infrequently in broader usage, is the frontier which now limits pharmaceutical innovation. Of course only a minority of new product candi- dates survive the preceding animal toxicology tests. Of the small group which does find its way into Phase I in the clinic, only 10 percent eventually survive to become marketed drugs. Is this for lack of efficacy? Not usually. I believe experience demonstrates that most fall by the wayside for reasons associated with unacceptable adverse reactions. Just from reading the newspapers, it is easy to recall examples of drugs which have started off bravely and faltered as toxicity began to manifest itself.1 Thus, both regulatory and product liability concerns about toxicity may impede new drug development.

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75 A second limitation derives from the extensive supply of medicines. For many categories of disease, a pharmaceutical treatment of choice is already well established. Given the natural concerns over safety of new medicines for these categories, drug development shifts toward types of disease for which treatment is currently not efficacious. These research opportunities are, in general, more complicated and expensive than those addressed by past innovations. . . . JAPANESE DEVELOPMENTS Traditionally, Japan has not been a significant presence in world pharmaceutical markets, largely because Japanese-owned firms were not at all successful at innovation (see Tables 2-1, 2-5, 2-6, 2-11, and 2-1 8~. - Several recent developments, however, have combined to increase dramatically the volume of Japanese drug discoveries and, thus, expected future sales. The first relevant development has been the large and continuing growth in research outlays by Japanese owned pharmaceutical firms (see Tables 2-1 and 2-2~. This growth has been encouraged by a major revision of Japanese patent law in 1975, extending coverage from "process" to 'substance." Prior to this change, domestic Japanese firms could legally produce imitations of drugs sold by other firms so long as a unique process for production could be found, a relatively easy task. The new patent policy protects investments in research by preventing ready imitation. Additionally, pricing policies of the governmentm dministered national health insurance system have been adjusted to systematically favor innovative products and to provide lower prices for more established drugs. This pricing structure provides continued incentives for research to discover new products. Finally, the pharmaceutical industry has been targeted by the government for international expansion, an action that lays groundwork for coordination of trade' pricing, and health~are policies to promote overseas expansion. The resulting rigor of the Japanese drug discovery effort may quickly dispel notions of the "imitative"or non-innovative nature of Japanese pharmaceutical firms. Actually, it is important to recognize that the imitative character of the late 1960s Japanese drug industry as a whole was the result of conscious policy decisions by public authorities. Faced with overwhelming foreign competition in this market, the logical first step for development of a competitive domestic industry was promotion of generic-type firms. This promotion was achieved by denying (mostly foreign) innovators adequate patent protection, by disadvantaging foreign firms through non-tariff trade barriers, and by generous pricing policies. Once a production~riented domestic industry was flourishing, however, the Japanese government, in the mid-1970s,

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76 began to systematically skew a broad mix of policies, especially patent and pricing policies, in favor of more innovative firms. This second stage of Japanese industrial policy contrasts sharply with recent U.S actions, such as the eroding U.S. patent life (see Table 5-1) and progeneric pricing policies for cost~ontrol. The outcomes of these new corporate efforts at innovation and new government industrial policies is only now becoming visible in the world market. Yet those changes that are observable ar e quite dramatic. In 1981, Japanese firms ranked first in terms of the largest number of major new drugs introduced into world markets, being responsible for 17 out of 65 such products. U.S. firms, despite their larger aggregate research budgets, ranked second with 13 products launched. In third and fourth place were West German and Swiss firms, respectively, with 9 and 7 new products.3 In 1982, Japanese firms accounted for over 16 percent of all U.S. patents issued for pharmaceutical and medicinal products, up substantially from previous levels (compare Table 2-6~. Fully 38 percent of all U.S. medicinal patents granted to foreign firms In 1982 went to Japanese originators.4 Japanese pharmaceutical houses are forming joint ventures with U.S. firms to market Japanese discoveries. Prominent among these arrangements are links between Abbott and Takeda, and Fujisama and Smith Kline. These linkages are clearly first stems toward direct marketing of Japanese products overseas. . . J 1 he long lags between strategic action by firms and governments and actual market impact in the pharmaceutical industry provide a substantial cushion for established American and European firms against any Japanese competition. But it must be remembered that if the Japanese targeting is successful, as it has been in so many other cases, then these same lags will make reversal of any Japanese gains exceptionally difficult. NOTES 1. Lewis Sarrett, "Chemistry and Health," address to the AAAS Annual Meeting, January 1982. 2. Scrip, September 14, 1981. 3. Scrip? March 1 0,1 98 2. 4. Biotechnology Patent Digest, February 14, 1983. 5. "Innovative Japanese drugs move into the U.S.," May 10, 1982.