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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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83 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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85 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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86 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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87 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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