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5
Options for American
industrial Policy
The limited scope of this study has militated a focus on specifics
of the pharmaceutical industry, away from the broader issues of
industrial policy. Thus many critical questions are not addressed
here, questions such as: what is the appropriate U.S. share of a
major industry; what new policies must be pursued to attain this
share; and how should the United States adjust its own policies in
response to competitive policies of other nations? Questions of
this sort are novel and complex and answers to them imply targets
for overall American standards of living and portfolios of U.S.
industrial strength. Some comments on these issues, however, are
in order. On the one hand, some portion of the decline in U.S.
pharmaceutical competitive position, particularly in the 1 950s,
was inevitable given postwar patterns of recovery and growth.
Likewise, the probably 1 990s emergence of significant multi-
national Japanese pharmaceutical competition with associated loss
of U.S. market share may also be inevitable, representing a
belated but natural entry of Japan in yet another high-technology
industry. High levels of Japanese research spending and the size
of their domestic market (second only to the United States)
provide impetus to this development.
On the other hand, if the United States is to maintain stan-
dards of living comparable to those of other major industrial
nations, it cannot suffer indefinite economy-wide declines in its
share of world markets. It is now almost 40 years after World War
II and more than a decade after certain western European nations
equalled the United States in per capita national product. At
some juncture, the continuous 'natural" postwar relative decline
of the U.S. economy must be regarded as "unnatural," and America
must make efforts to maintain or strengthen its share of at least
some industries. Given the historic economic position of U.S.
firms in ethical drug markets, the great expense and long
development time facing foreign entrants into the industry, the
preeminence of A merican biomedical research, and the eno r-
77
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78
mous U.S. government expenditures for health care, a continued
decline of American pharmaceutical competitive position might
well be regarded with concern.
Due to the limitations of this study, the policy options listed
below have been chosen as much for their independent merit as for
their advancement of the American position in pharmaceuticals.
For example, the included proposals for FDA reform have been
advanced elsewhere exclusively to improve delivery of medical
care to American patients. The listed, limited proposals for trade
and antitrust reform have been offered elsewhere for promotion of
freer and more competitive markets. And patent reform has been
suggested to restore equitable treatment of heavily regulated
industries.
The policy options listed below are in no particular order.
TRADE OPTIONS
New ethical drugs are increasingly marketed on a worldwide basis,
and the major U.S. pharmaceutical firms maintain extensive
m ultinational operations. Under these circumstances, U.S.
policies and responses to foreign policies on trade in ethical drugs
have an important effect on development of the industry.
Due to a drafting error in the 1938 Federal Food Drug and
Cosmetic Act, current U.S. law prohibits the export of new drugs
(but not new antibiotics or biologicals) unless the FDA has pre-
viously approved these products for sale in the United States. This
prohibition holds regardless of the comprehensive approval or not
for marketing of a particular drug in the importing country by
local regulatory authorities. This procedure provides an obvious
incentive for firms of all nationalities to-produce drugs outside the
United States, particularly in light of the fact that FDA regulation
tends to entail longer than average approval delays.
Nonetheless, the prohibition against exportation of unapproved
new drugs applies only if the product is in fact labeled as a new
drug. FDA could, through administrative action, permit the
export of finished chemicals that are not specifically labeled for
new drug use, in accordance with the export provisions of the 1938
Act. This would reverse the current disincentive to the produc-
tion of these drugs in the United States and prevent the
exportation of American pharmaceutical technology abroad:
· FDA should authorize the export of unlabeled chemicals for
drug use abroad where a new drug application has not yet been
approved in the United States.1
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79
An additional barrier to trade arises in- discriminatory foreign
national policies. Simple retaliatory measures by the United
States against these policies are likely to be counterproductive,
yet the daily workings of foreign regulatory authorities are not an
easy target of U.S. influence. Given the limitations of this study,
only the following option may be offered:
· A detailed investigation should be undertaken as to the
frequency and incidence of foreign pricing and regulatory prac-
tices that favor domestic products over American and other
foreign origin products with provision for recommendations as to
U.S. policy response.
DOMESTIC ECONOMIC OPTIONS
A diverse set of economic options are available for bolstering the
competitive position of the U.S. pharmaceutical industry.
· The lengthy period of FDA regulatory review after granting
of a patent but before marketing of the product eliminates a
substantial proportion of the intended 17-year protection. As can
be seen in Table 5-1, the average effective life of patented drugs
currently approved for marketing has declined from 13.5 years id
1968 to 10.5 years in 1978, with a low of 6.8 years in 1981.
Patent protection for pharmaceutical innovation may be restored
by extending the duration of each individual patent by the period
of years consumed by the IND/NDA review. The restoration of
patent time would simultaneously render investment in new drugs
more attractive and expand the cash flow from which new drug
research is needed. Patent restoration should be particularly
important for 'breakthrough" or therapeutically significant new
drugs as these novel compounds often take longer than average for
regulatory approval and hence currently receive an even shorter
than average patent life.
· Traditional U.S. antitrust policy has discouraged mergers of
smalls and mid-size pharmaceutical firms in order to prevent
industrial concentration. For example, the merger of U.S.-owned
Parke-Davis and Warner Lambert was delayed for almost seven
years due to antitrust concerns. Further, existing law does not
stop the acquisition of small U.S.-located pharmaceutical firms by
large foreign multinationals, instead it only hampers such acquisi-
tion by U.S.-owned firms. Reexamination of Table 2-15 demon-
strates recent acquisitions by Hoechst, Bayer, and Ciba-Geigy,
which were in 1980 the world's first, second, and third largest
pharmaceutical firms, respectively. These firms further are
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So
TABLE 5-1- Effective Patent life for U.S.
Approved NCEs, 1966-1978
1966
1968
1970
1972
1974
1976
1978
13.6
13.5
14.4
10.9
13.0
11.3
10.5
NOTE: Average effective patent life is seventeen
years minus the average elapsed time for IND/NDA
approval.
SOURCE: Martin Eisman and William Wandell,
"Components of the Decline in Patent Protection
of New Drugs," Research Management, 1980.
themselves each subsidiaries of enormous chemical companies
with aggregate worldwide 1980 sales of il6.5 billion, 315.9 billion,
and 57.1 billion, respectively. Acquisitions are also listed by
SANOFI, a subsidiary of ELF Aquitane, the nationally owned
French petroleum firm (1980 sales worldwide of 518.4 billion). To
the extent that economies of scale in research have instead
shifted against smaller and even mid-size pharmaceutical firms, as
evidence seems in fact to suggest, then merger with eithe r
domestic or foreign partners may be inevitable.
· A second option would be to allow research tax credit for
those research-related expenditures not now eligible for the
investment tax credit, allowing for appropriate carry-back and
carry-forward provisions. The current tax credit applies only to
investment in capital equipment.
· The government should also consider permitting research and
development expenditures incurred in the United States to be
allocated solely to the U.S. income of the taxpayer. Treasury
regulations recently issued to implement Sec 1.8 61-8 of the
Internal Revenue Code require that R6c D expenditures b e
apportioned to both foreign source and domestic income in an
effort to recognize the fact that innovations in the United States
often result in licensing and other revenue from foreign sources.
However the effects of the regulations are (1 ) to apportion
expenses to foreign source income even when that income is
incidental to the innovation; ~ 2) to result in double taxation
because foreign governments do not allow this allocation to be
taken into account when figuring taxes due them; (3) to encourage
the location of RED facilities abroad instead of at home to escape
the effects of the regulations, thereby diminishing both th e
amount of R&D conducted in the United States and, in the
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81
.
long term, the tax revenue generated from its conduct. Recent
changes in tax law have provided temporary reprieve from these
Treasury regulations. Consideration could be given to making the
reprieve permanent.
· A formal study of product liability and its effects on U.S.
innovation is needed. In the pharmaceutical industry, the finam
cial threat of liability suits appears to have particularly severely
affected those industry segments that develop and produce ethical
drugs for healthy consumers (e.g., vaccines, antifertility agents,
preventative medicines). Within the constraints of this study, it
has not been possible to verify the impact of product liability or to
identify appropriate policy responses.
Current and emerging federal policies on the procurement
and reimbursement of pharmaceutical products should provide fair
recognition for innovation. Specifically, these government pricing
policies should recognize research expenditures as a part of the
cost of purchased pharmaceuticals.
R EGULATORY OPTIONS
Regulation of new drug development in the United States directly
affects the foundation of sales and earning growth in the pharma-
ceutical industry. This regulation is intended to permit the mar-
k eting of only safe and effective drugs and to prohibit the
marketing of dangerous or ineffective drugs. Because of th e
enormous public pressure on FDA to be certain about its decisions,
the agency requires a substantial amount of preclinical and
clinical testing, closely scrutinizes new drug applications, and
consumes substantial periods of time in the regulatory process.
Since 1955, it has been recognized that the new drug approval
process needs revision. Dozens of investigations and analyses have
been conducted, resulting in hundreds of specific conclusions and
recommendations for improvement.
Most recently, at the request of Congress, an independent
Commission on the Federal Drug Approval Process was convened
to make specific recommendations for revising the current new
drug review system. The report of that Commission contains
several recommendations that would substantially improve the
present process.
This study has not attempted to assess or quantify the public
health impact of current FDA regulations, the impact of these
regulations on the pharmaceutical industry, or the change that
would be achieved by adopting the recent Commission recom-
mendations. Even without such quantification, however, it is clear
that the reforms of existing procedures and regulations
recommended by the Commission would promote thorough, yet
more rapid, review of new drugs.
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82
All of these reforms could be adopted, in their entirety,
through internal FDA reform by rewriting relevant regulations.
Such a change in current regulations would be more expeditious
than an attempt to adopt them through legislative enactment.
Thirteen of the more important Commission recommendations,
and comments on the improvement they could make in pharma-
ceutical technology, follow.
The IND Process
Early Clinical Research
To permit more drugs to be tested more expeditiously, the
preliminary requirements for introducing new chemical entities
into humans (such as drug chemistry, animal toxicology, and
protocol specificity) should be studied with the goal of
simplifying them consistent with the protection of human
safety.
Earlier introduction of new chemical entities into humans would
reduce the time prior to NDA approval, thus reducing the required
investment and increasing the industrial return.
Objectives of Investigational Drug Regulation
The IND regulatory system should recognize three distinct
categories of regulated activity based on the purpose of each
activity: (1 ) basic research, (2) drug development, and (3)
therapeutic use of investigational drugs. In each category, the
regulatory requirements should be rationalized and revised to
meet the public policy objectives appropriate to the category.
By tailoring different regulatory requirements for each of these
different types of IND submissions, FDA could focus its attention
primarily on drugs intended for pharmaceutical development and
thus expedite the new drug approval process.
Clinical Development Studies
The FDA should provide guidance to sponsors on the informa-
tion needed from clinical development studies to supper t
N DAs. On request, the FDA and outside experts should
become more actively involved in the planning of clinical
development trials.
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Use of advisory committees and other outside experts to resolve
disputes on the type of evidence needed to prove safety and
effectiveness would, in particular, clarify FDA regulatory reguire-
ments and shorten the time needed to obtain an approved NDA.
Preclearance of Clinical Research
An experiment should be tried in which certain types o f
clinical research, such as early clinical studies, are precleared
through either channel of a dual-channel regulatory system, in
which the sponsor of a drug may select either the FDA or a
non-government body that is subject to FDA standards and
monitoring to review the IND submission.
Use of expert panels outside FDA to review IND submissions for
clinical pharmacology research would encourage such research by
reducing the regulatory burden and cost.
The NDA Process
Application of the Standards for Drug Approval
The FDA Commissioner should clarify through regulation the
interpretation and application of the statutory and regulatory
standards for establishing substantial evidence of the effec-
tiveness of a new drug. Effectiveness should be found to have
been demonstrated either by two--or when appropriate, one--
adequately designed and wel Controlled studies that indivi-
dually provide the necessary substantial evidence of effective
ness or by the accumulation of data from adequately designed
and welLcontrolled studies that taken together provide such
substantial evidence.
By eliminating FDA's current rigid administrative requirement of
at least two adequate and well~ontrolled clinical studies,
approval of an NDA can often be expedited.
The NDA Submission and Its Review
N DA submissions should be greatly streamlined. Summary
presentations of data should replace the individual cas~report
f arms. The clinical sections of NDA submissions should be
designed to facilitate efficient review and should contain
tabulations of all the data needed to assess the design, con-
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84
duct, and analysis of the important studies; they should not
routinely include the individual case-report forms o r
tabulations of every datum those forms contain.
By reducing the bulk of the NDA submission, such submissions can
be submitted earlier and reviewed more quickly, thus permitting a
substantial reduction in the regulatory burden.
Utilization of Outside Expert Advice
. . .
The system of new drug development and approval should be
m edified to afford a more significant role to experts from
outside the FDA, drawn from the academic and government
biomedical research communities. On the request of the FDA
or the drug sponsor, outside expert consultants should be
available both to advise in the investigational development of
each new drug entity or important new use of an approved drug
and to participate in the review of its NDA.
As already noted, use of outside experts to resolve scientifi c
policy issues will help assure better scientific decisions and
expedite the entire NDA review process.
Application of the Standards for Drug Approval
The FDA Commissioner should revise the agency's review
procedures, consistent with the Congressional intent, to insure
that due weight be given in the approval process to the judg-
ment of experts, including clinical investigators and medical
specialists, as to whether the effectiveness standard has been
met.
Data on drug efficacy and safety derived from studies con-
ducted in other countries should be given full weight as
evidence in proportion to their quality. The routine replica-
tion of randomized control trials should not be required;
rather, when relevant foreign trials are convincing in
themselves, it should be sufficient for a sponsor to provide
clinical experience in the United States to supplement the
results observed abroad.
These two recommendations would similarly reduce the need for
duplicative clinical testing, which is extremely costly and time-
consuming, and thus permit the earlier marketing of new drugs in
this country.
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FDA Management
Resources for the New Drug Review Process
Congress and the Administration should ensure that the FDA
has sufficient and stable resources to review and act promptly
on INDs and NDAs.
Adequate clerical personnel are particularly important to assure
timely processing of documents and response to inquiries.
Im proving Interactions with Industry
The FDA Commissioner should encourage the timely and
equitable resolution of disputes regarding INDs and NDAs by
ensuring that mechanisms appropriate for different types of
disputes are in place and readily accessible. In particular, the
Commissioner should expand on existing mechanisms and
explicitly encourage their use. An ombudsman function should
also be established in the Commissioner's Office where
administrative or procedural problems can be taken when they
cannot be satisfactorily or promptly resolved with line
management.
An arm~length or adversary relationship between FDA and the
pharmaceutical industry is not conducive to prompt and efficient
handling of the NDA review process. Cooperation and a close
working relationship must be fostered to expedite important
regulatory decisions.
Tracking the Review Process to Ensure Timeliness
The FDA Commissioner should be provided with timely infor-
mation on the status of NDAs undergoing review. Toward that
end, a computer-based system for tracking NDAs should be
utilized to enable the Office of the Commissioner, as well as
senior Bureau of Drugs management, to review regularly the
status of NDAs and to report appropriate information to the
Commissioner.
Any efficient system for expediting review of NDAs must be based
on an accurate tracking mechanism.
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Conflict of Interest and Expert Advisers
Barriers to the participation of the best qualified outside
expert advisers in the drug approval process must be
addressed. In particular, the FDA Commissioner should
request from the U.S. Department of Justice a less restrictive
interpretation of the federal conflict-of-interest statute than
that issued in 1978.
The use of outside experts to help assure sound scientific decisions
and expedite the review process depends upon the availability of
the best~qualified scientists in the field. Current restrictions
unnecessarily limit the availability of many highly qualified
experts whose advice could be important in the prompt resolution
of important questions.
Im proving Interactions with Industry
The FDA should provide guidance to its staff to encourage all
review personnel to conduct timely, forthright, and evem
handed discussions with sponsors of the significant issues that
arise at any time during the IND and NDA review process. An
atmosphere of mutual respect and professional conduct should
be encouraged and maintained. Formal communication should
be limited to situations where such formality is warranted.
By reducing formality and promoting greater interchange between
industry and FDA, regulatory decisions can be discussed more
freely and thus be made on a more sound and timely basis.
Adoption of these Commission recommendations, and the other
related recommendations not reproduced here, will not assure an
optimum drug regulatory process. They will, however, begin to
address the serious deficiencies found in the present system
without any loss of public health protection. To the extent that
the system is improved, the pharmaceutical industry and therefore
the public will gain immeasurably. Equally important, as incen-
t Ives to invest in new pharmaceutical research are increased,
greater gains can be expected in the discovery of new drugs that
are effective in reducing the public burden of serious diseases that
still remain to be conquered. Thus, the very economic incentives
that will help return the U.S. pharmaceutical industry to its
former stature will have important public health benefits as well.
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NOTE S
1. One member of the panel dissents from the panel support
of this policy.
2. Statement of William M. Wardell to the Subcommittee on
Investigations and Oversight of the Committee on Science and
Technology, (J.S. House of Representatives, February 4, 1982, p.
14.
3. For detailed assessment of the problems associated with
the term of patents for drugs, see Statement of Peter Barton Hutt
on Behalf of the Pharmaceutical Manufacturers' Association
before the Subcommittee on Investigations and Oversight of the
Committee on Science and Technology, U.S. House of Represen-
tatives, February 4, 1982; Office of Technology Assessment,
Patent-Term Extension and the Pharmaceutical Industry, 1981;
.
General Accounting Office, FDA Drug Approval--A Lengthy
Process that Delays the Availability of Important New Drugs, Rep.
No. HRD-80-64, 1980; Pracon, Inc., The Effective Patent Life of
P harmaceutical Products: Trends and Im plications, 1978; and
Eisman and Wardell, ''The Decline in Effective Patent Life of New
Drugs," Research Management, January 1981.
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Representative terms from entire chapter:
drug approval
