When Big Pharma's good business makes for good citizenship

It takes a lot to elicit a defense of Big Pharma from these quarters, but a deceptive attack by the radical right has motivated just such an effort.

It seems that nothing escapes the right's malevolent gaze, even an industry such as pharma that embodies the capitalist demiurge. But as a big business, pharma requires the government and its functions of regulation, infrastructure, public education and an economic safety net. That sets the Right's teeth on edge and leads them to denounce business pragmatism as a sellout of 18th-century principles.

The case at hand is an article last week by Avik Roy that appeared in Forbes, the publication of ur-plutocrat Steve Forbes. Roy is a fellow at a right wing think tank, the Manhattan Institute, and a contributor to the National Review, a publication now too extreme even for the son of its founder, William F. Buckley.

The kernel of Roy's argument is quite simple — too simple, in fact. He contends that Big Pharma and its lobbying organization, the Pharmaceutical Research and Manufacturers of America (PhRMA), diluted legislation that would have "turbocharged" drug development by substantially weakening the FDA review process. Roy sees no contradiction or irony in big drug companies' favoring strict, arduous, expensive requirements for drug approval. He believes that a fast, inexpensive process for meeting lax standards would allow small biotechs and startups to register their compounds by themselves rather than partnering with Big Pharmas. The longer process obliges the small companies to obtain financing and regulatory guidance from the Big Pharmas and Roy claims that allows the latter to "skim ... the cream off of biotech pipelines for their own purposes."

Roy's contention would be merely a piece of deluded drivel, betraying a lack of industry knowledge, were it not for his right-wing motives.

To start with, the pharmaceutical industry has always operated through partnering projects between big and small pharma companies. Big pharmas are companies with lots of capital looking for drugs, while small pharmas are companies with drugs that are seeking capital to develop them. This relationship existed even in the 1950s and '60s when FDA requirements were far less rigorous than they are today.

The sources of drug development financing vary according to the stage of the process. A fair proportion of sponsorship for pre-clinical research comes from the National Institutes of Health and other government sources. Much of the financing for early to mid-stage clinical research comes from initial public offerings of stock (IPOs), venture capital and private equity. But researchers such as Ernst & Young, William Lazonick from the University of Massachusetts and Mustafa Erdem Sakinç from the University of Bordeaux showed that, "With the financial crisis of 2008, the market for biotech IPOs virtually dried up." Biotech funding by venture capital and similar sources also deteriorated following the financial meltdown.

In a mid-1990s study of the biotech industry in California, Gus A. Koehler concluded that, "A typical biotech company needs between $250 million and $500 million to fund development until profitability." All of this means the variability and, often, the short-term demands of these capital sources make Big Pharma's mid- and late-stage financing necessary for small companies to complete their drug development.

One might ask why Big Pharma would not also want a totally loosey-goosey, deregulated FDA that would enable them to foist their own snake oil concoctions on an unprotected public. The answer would come swiftly from the product liability attorneys that defended Merck, GSK and the other Big Pharmas against tort actions. Exacting regulatory standards provide a measure of liability protection because pharmas can point to their studies that examined safety/tolerability issues mandated by the FDA. Similarly, the specific cautionary language that the agency requires on individual product labels also reduces liability. Venture capital firms and other sources of earlier stage, fast-in, fast-out capital may not maintain the same concern about liability protection as Big Pharmas because these early financiers often cash out before drugs are launched.

Ultimately, the right doesn't believe in strict regulation because they think the omniscient, benevolent market regulates itself. If companies produce ineffective and unsafe drugs, people will "vote with their dollars" not to buy them.

While bad drugs do have a way of discouraging subsequent purchases, the injuries or deaths to hundreds of thousands of people (see here) seem too high a price to pay for a market self-correction and a delusional ideology. If Big Pharma played some role in maintaining a painstaking regulatory process, then good for them.

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