The Pharmaceutical industry has been around since the Middle Ages, and it has affected healthcare in many ways. The development of medicine and having a scientific approach, while being able to understand the human biology such as DNA, has helped achieve miracles. One of the most well known pharmaceutical companies Pfizer has grown since 1849 when it was founded, and they have taken great measurements to achieve success in this field (Pfizer, 2010). They invested much of their shareholder’s money to create penicillin at a faster rate to help war victims during the war (Pfizer, 2010).
Although there has been a vast variety of competition in the 21st century, the pharmaceutical industry during the 20th century did not have much competition and doctors did not mind as much to pay x amount of money for drugs. Patients were not well informed, and counted on their doctor to provide them with the correct treatment (A Recent History, 2007). From the beginning of time this industry has helped patients live longer and has transformed healthcare. The pharmaceutical company is made up of a number of different functions and departments.
Each of these functions is given a responsibility in one area of the company’s activity. These departments are closely related and the success of the company is based on the ability of these functions to work together. The pharmaceutical companies rely on research and development to find new and innovation new drugs. In order for a drug to enter the market it must undergo a series of tests and clinical trials. There are phases the drug must go through and complete in order to meet the requirements of the FDA.
The development of a drug is an ongoing journey, and it can take up to 12 years to develop a drug (Pharmaceutical Patents 2006). The pharmaceutical company uses patents so that other companies will not be able to use the drug. Patents expire 20 years from the date of filing, and once this patent expires generic drugs are able to reproduce the drug (Pharmaceutical Patents 2006). Robust patent protection is needed to guarantee innovation in pharmaceutical endures. The FDA regulates existing and new drugs through its enforcement of the Food, Drug and Cosmetic Act.
Whether a drug is new or it is being altered in some way, the FDA must oversee the processes in order to ensure the safety and effectiveness of the drug. There are various required listings that are provided through the application and approval process by the Agency in order to know the status and history of the drugs; these are IND, NDC, NDA or ANDA. The FDA requires the pharmaceutical industry to pay fees in order to undergo the New Drug Development Process and any kind of alteration or deviation from the original approved drug.
These fees can cost upwards of 1. million dollars per each new drug application and as little as 90,000 dollars for product fees. Each year there are about 130 new drug applications and much of the revenues collected from the fees return to the appropriate FDA centers for further technological growth. Pharmaceutical companies respond to consumer criticism regarding the high cost of prescriptions, that the high drugs prices are a result of the high research and development (R&D) cost. They hid the increasing price into the “black box” which means there is no transparency in it.
This caused the conflicts between public and the drug companies. As the U. S. healthcare reform, the price keep going up and the conflicts will be aggravated unless enhance the transparency in the R&D cost. On March 21st, the House of Representatives voted 219-212 to approve the “Patient Protection and Affordable Care Act (PPACA). ” Known as most as Healthcare Reform Legislation, the PPACA will bring both good and bad news for pharmaceutical companies. The coverage of 32 million patients will benefit the pharmaceutical companies for impressive profit.
However, the revenues derived from this influx of newly insured patients will be offset in part by new taxes and fees that will be imposed years before these patients enter the system. In addition, donut hole in Medicare Part D will still effect the assessment of patients. Therefore, the pharmaceutical companies should be well prepared for the upcoming challenge future. How Pharmaceutical Companies Affect the Healthcare System History The primary roots of the pharmaceutical industry extend back to the Middle Ages.
Most of the major pharmaceutical companies were funded in the late 9th and early 20th century. Many drugs were developed in the 1950’s and there was mass production through the 1960’s due to the development of science, and understanding human biology was one main part (Wikipedia, 2011). The industry started booming in the 1980’s and attempts were made to control the growing industry. One of the attempts was the use of the FDA (Food and Drug Administration) to start regulating and limiting financial links between the companies and the physicians. Drugs for heart disease and cancer started to develop and needed a faster approval process (Wikipedia, 2011).
Pfizer is one of the best known pharmaceutical industries and goes back to 1849 where it was first founded (Pfizer, 2010). In the 1940’s the United States wanted them to start making penicillin faster in order to heal war victims. Large amounts of money were invested in order to accomplish this goal during. These investments made production five times faster than expected, and this was a pivotal moment for the Pfizer’s company. Penicillin was the first real defense against bacterial infection, and in turn became the largest producer of the “miracle drug” (Pfizer, 2010).
To date, the company has made significant contributions to the pharmaceutical industry by developing and producing many life saving brand name drugs. During the 1980’s the pharmaceutical industry enjoyed not having a lavish amount of competition. They began to focus on developing different drugs including: antibiotics, cardiovascular treatments and cancer. Throughout those years, doctors did not mind paying for the drugs provided; however, much of the reason behind this willingness to pay was due to the lack of generic substitute available in the pharmaceutical market.
Additionally, trusting patients had no suspicion of inadequate treatment by their beloved doctors. By the 21st century many aspect of the industry changed. Managed care organizations were created to control healthcare costs. There were many generic drugs being developed and HMO (Healthcare Managed Organization) insurances were limiting doctor’s prescriptions of brand name drugs because they resulted in larger expenditures to the company (Walsh, 2010). As a method of patient care, doctors prescribed generic drugs to the patients since the HMO’s did not cover brand names.
Aside from these negatives towards the pharmaceutical companies, the introduction of the Internet into cultural society proved to be problematic as well (Walsh, 2010). The vast amounts of information provided to patients on the Internet regarding the various generic brands and the various places where to purchase them at lower costs continue to pose an imminent threat (Gottinger, 2010). Consumers are now much more knowledgeable about medicine and alternative methods on how they can treat themselves.
Many, to avoid high costs are experimenting with natural therapies before turning to medicine (A Recent History, 2007). Although many things have changed in the recent decades, pharmaceutical companies have continued to provide essential medicine to better the lives of millions of people. Structure The structure of the pharmaceutical industry begins with the discovery and development of a new drug. The process of this development is divided into two stages: new lead discovery (preclinical research) and new product development (clinical development).
For both of these stages there are different time-lines and expenses. Each drug must go through a series of stages in order to be put into the market and must be able to prove that the drug is safe, effective in treating a specific disease for which it was designed, and that the drug can be made cleanly and reproducibly each time it is prepared. The beginning process of a new drug starts with the department in Discovery Research, which is in charge of finding new compounds and making sure that they are safe enough to test in humans. There are many departments that help with the discovery of a drug.
A Research Planning department is a management team that sets therapeutic targets, budgets, and resources. Those who are responsible in preparing new chemical entities (NCEs) are a part of the Chemistry Department. These NCEs are then screened for biological activity and prepared to see if there are active ingredients that can be used in advanced testing. The Pharmacology/Molecular Biology/Screening department examines each NCE with a series of screenings. This is called primary screening and is used to determine whether the compound is in fact active, or if it is inactive.
When a compound is active and shows a high similarity for a target receptor there is a secondary screening that happens to make sure that the beginning results were correct. The Safety Evaluation department shows that the NCE and its metabolites do not accumulate and do not cause harmful effects during a short-term administration. The tests are carried out in bacteria and yeast, as well as two animal species. The Formulations Research Department concocts a dosage form such as a pill, tablet, or capsule that is absorbed into the blood stream.
The new future drug must be able to reach and uphold a level adequate to sustain its biological effect. Human studies will be derived from the previous studies; however, it is more frequently conducted in animals. The Process Research department produces the NCE in quantity for advance testing, dosage form development, and other supportive activities. Legal Affairs then writes the patents that are necessary in order to protect the pharmaceutical industry’s purposes. A patent must be filed before any public revelation. If the compound is reported before the patent is filed it will then be considered public property.
In 1970 there were 126,000 new clinical entities prepared with a screening of 700,000; however, out of these screenings only 1,000 NCEs were sent to be examined in the clinics (The Process, 2010). The clinical development starts after the FDA approves that the NCE is safe to test in humans. Many events happen during the New Drug Development Process and are done in phases. Phase I is the establishment that the NCE is safe to humans. The population of patients in these tests is limited to a small group of 20-40 healthy people who are volunteers.
In this phase the studies are used to regulate toxicity, dosages, blood levels, excretion profiles, and pharmacokinetic profiles (The Process, 2010). In Phase II the NCE is then found to be effective in treating the disease. The population in this phase is limited to 100 test subjects and 300 test subjects. The adverse side effect of the drug is observed for toxicity, its ability to combine with other medications, and bioavailability of different formulations. Phase III is when the degrees of the disease are studied. There are also controlled trials done to observe the safety, efficacy, and dosage for the compound.
In Phase IV there is post marketing surveillance that is used to screen the drugs proficiency in treating larger populations. Also, in this phase additional adverse effects are recorded. In addition to these phases there are also toxicology studies done in animals to assure long-term safety, as well as dosage formulation and stability. Additionally, metabolism studies are conducted to make sure that the drug does not accumulate and become a toxic substance. A New Drug Application (NDA) is prepared after all phases and activities have been completed.
This application comprises all data from the beginning of the studies. Although there is a law that states that the FDA must respond to an NDA within 180 days, there are often times when questions arise, which means that supplementary studies must be done. The average cost to developing a new drug is more than $800 million (Research and Development, 2006). This includes expenditures on projects that were not successful. This amount is also a representation of the cost that larger pharmaceutical companies spend on an innovative new drug.
Other drugs cost much less to produce. Research and development costs are astronomical due to many unsuccessful clinical trials. Also, more focus is being put on chronic illnesses instead of acute illnesses. Drugs for chronic illnesses are much more expensive to develop and take longer and broader clinical trials. The pharmaceutical companies invest this high amount because they know that the returns will be much more. The development of most drugs can take up to 12 years, and the company receives no returns in investment unless the drug is successful.
In 2005, the federal government spent more than $25 billion on health-related research and development (Research and Development, 2006). The pharmaceutical industry uses patents to protect them by giving them exclusive right to drug for up to 20 years (Pharmaceutical Patents, 2006). Pharmaceutical patents cover products that take a long time to develop so in reality the patent is only effective for 11. 5 year (Pharmaceutical Patents, 2006). The patents allow the pharmaceutical company to recover investments by having exclusive rights for the allotted time period.
The Pharmaceuticals developed by these companies fall under the regulatory power of the Food and Drug Administration. Since its inception in 1906 the FDA has enforced the Food, Drug and Cosmetic Act (FD&C Act) in order to assess the safety and effectiveness of many of the drugs developed. As per the FD&C Act a drug is anything that is “Intended to treat or prevent disease or intend to affect the structure or function of the body or intended to be a component of any such article” (New Drugs, 21 U. S. C. 355) As such all of the products produced by the pharmaceutical companies fall under FDA regulation.
As mentioned previously, the New Drug Development Process is comprised of four phases, which with the successful completion of each phase, various checkpoints are made in order to review the results of the investigations. While in these trial phases, FDA regulations require the drug to be identified with an Investigational New Drug listing (IND). This listing will provide the necessary trial information in order to provide it and its subjects with potential health insurance coverage, immigration admissibility and interstate movement.
Upon the successful completion of the clinical trials, a new drug is characterized by two identification numbers. The first is a National Drug Code (NDC), which serves as a universal product identifier for human drugs. The second is the New Drug Application (NDA), which provides information to the history of the drugs investigations/trials and the specific information regarding the composition and manufacturing of the drug. (Development & Approval Process, 2011) The FDA requires a fee in order to begin the trial phases of the new drug.
Fees are assessed based on two main criteria: the type of application and supplements for approval of drugs and biological products and the various establishments where the products are made. The Agency considers that any changes to the chemical composition and the dosage of an already established drug be approved as well through the application of an Abbreviated New Drug Application (ANDA).
For Fiscal Year 2012 beginning on October 1, 2011 and ending September 30, 2012, the FDA will charge approximately 1. million dollars for an application requiring clinical data, about 900,000 dollars for an application nor requiring clinical data or a supplement requiring clinical data, 500,000 for establishment fees, and 90,000 for product fees. These fees are established by the Prescription Drug User Fee Amendments of 2007, which authorizes the collection of these fees. These fees are set and do not change for a period of four years. Every fourth year fees are revised taking into consideration inflation and safety provisions. (Department of Health and Human Services, 2011)
The projected workload for the fiscal year 2012 has 130 new drug applications (including those requiring clinical data and those not requiring clinical data), about 200 supplements, and about 1000 manufacturing supplements. Considering the steep costs of these fees, those companies who are unable to pay the fee or the full amount of the fee can file for exemptions. The fees collected by the agency are appropriated throughout the Center for Drug Evaluation (CDER) and Research as well as the Center for Biologics Evaluation and Research (CBER).
Department of Health and Human Services, 2011) Current Impact There is a public debate that drug prices increase gradually and health care spending rising rapidly. Its core thesis is how new drugs are discovered, tested, and sold—and in how well those processes satisfy U. S. consumers. Conflicts on those issues, however, reveal that the intricacy economic circumstance forces that govern the drug-discovery process cannot be widely understood. Drug companies respond that the high drugs price due to the high research and development (R&D) cost.
However, as the book “The Truth About the Drug Companies” indicated, “In 2001, drug companies put these costs (R&D cost) at $802 million (in 2000 dollars) for each new drug they bring to market. Later, the consulting firm Bain &Company upped that to $1. 7 billion per drug, but they included marketing expenditures. ” (Angell, 2004) Is it really $802 million? In this situation, Congress of The United States and Congressional Budget Office published a report named Research and Development in the Pharmaceutical Industry. It explained why this happened. The content was as follows.
Pharmaceutical markets, however, are particularly complex in many aspects. Private companies’ choices about what to work on and how intensively to invest in research and development can be affected by large public-sector investments in basic biomedical R&D. The returns on private sector R&D are attractive, on average, but they change considerably from one drug to the next. Consumer demand for prescription drugs is often indirect, mediated by doctors and health insurers. New drugs must cover costly and time-consuming testing before they can be sold.
Moreover, it may cost hundreds of millions of dollars to develop an innovative new drug that then will cost only a few cents per dose to manufacture—and the price of the drug will have no obvious connection to either cost. Comparative information about drug quality from unbiased, head-to-head clinical trials of competing drugs is seldom published, although it would help drug purchasers make the best choices—and in turn improve the market signals that guide private companies’ decisions about research and development.
An understanding of how such factors interact with the industry’s R&D process is necessary to recognize the underlying causes of any failure of the market to encourage a socially optimal level of drug R&D (Austin, 2006). Despite the fact that Austin described in the report, R&D cost is still a black box, there is no transparency, so that it made public set such a rebate. With the addition of U. S. Healthcare Reform, the ACA will affect the pharmaceutical sector, both quantitatively in terms of the size of the prescription drug market and qualitatively in terms of industry structure and competitive dynamics.
The institutional structure of health insurance and delivery of care drives system costs will determine the size of the U. S. pharmaceutical market in the future. At the same time, demographic shifts, growth in drug prices and sales volumes, and broader insurance coverage also will affect total drug sales. All these will aggravate the conflicts unless break the “black box” inside. Integration Into Obama’s Healthcare Plan On March 23, 2010, President Obama signed comprehensive health reform, the Patient Protection and Affordable Care Act (PPACA), into law.
The PPACA is groundbreaking as it addresses consumer protections, the pivotal role of employer-provided insurance coverage and government’s role in providing health care access for the most vulnerable populations. (Harry and Kristina, 2010) In addition to these reforms, the legislation also includes the following provisions of interest to the pharmaceutical industry:
Requires enhanced disclosure of the financial relationships pharmaceutical manufacturers and distributors have with healthcare providers and non-profit organizations; Increases the Medicaid Drug Rebate paid by manufacturers from 15. 1% to 23. % of the Average Manufacturer’s Price for brand name drugs; Imposes new fees and taxes on the pharmaceutical, health insurance and medical device industries; The annual fee for brand name pharmaceutical manufacturers begins in 2011 and totals $28 billion over 10 years; Requires manufacturers to offer pharmaceuticals for sale to 340B entities. (National Marfan Foundation, n. d. ) Signed into law, the PPACA can be viewed as both good news and bad news for pharmaceutical companies. On one hand, the pharmaceutical companies can take advantage of an estimated 32 million patients who will get health insurance coverage in the act.
The 32 million patients not only means to extent the risk pool and lower the premium, it also stimulate the pharmaceutical companies to make the market share larger and make plans to embrace the future margin. On the other hand, the benefit derived from this influx of newly insured patients will lead to new taxes and fees which will be imposed years before these patients enter the system. Under current law, beside corporate taxes, there are no fees or taxes targeted toward drug companies. PPACA would create an annual fee on certain manufacturers and importers of branded prescription drugs.
It is estimated that there are approximately $3 trillion dollars used for expanded and modified healthcare system. The Reconciliation bill (Section 1404) would amend the annual target revenues to $2. 5 billion for 2011, $2. 8 billion per year for 2012 and 2013, $3. 0 billion 2014 through 2016, $4. 0 billion for 2017, $4. 1 billion for 2018, and $2. 8 billion for 2019 and thereafter. (Mulvey, 2010) This fee structure would be based on annual sales and will set a certain target each year.
Pharmaceutical companies with more than $5 million in U. S. sales will pay fees based on a share of their prescriptions in the total U. S. prescription drug market, with the exclusion of orphan drugs. (Ensor, 2010) In addition to these fees, new taxes will be imposed on manufacturers of “branded prescription drugs” and most medical devices. These taxes are in addition to the fees already charged by the Food and Drug Administration for review of full new drug applications for drugs and 510(k)’s and Premarket Approval Applications for medical devices. (Mullin, 2010).
Unlike other fees, the taxes will not be paid to FDA but assessed by the Department of Treasury and paid to support health insurance coverage. Last but not the least, a key goal of the health care reform was to eliminate the so-called donut hole in Medicare Part D. Under the PPACA, pharmaceutical companies must provide a 50% rebate on branded drugs for patients while they are in the donut hole. (Ensor, 2010) It is wide recognize that this may stimulate patients to stay on branded drugs instead of changing to generics when available.
Although the costs may decrease, for some insures, out-of-pocket affordability will still avoid access to high-cost drugs for certain number of patients. The PPACA both bring an opportunity and a challenge for pharmaceutical companies. What await them are either big profit or heavy taxes and fees. Companies with distribution agreements will need to address responsibility for payment of the taxes in license and distribution agreements, and address issues such as joint and several liabilities. Pharmaceutical companies should be aware of these new taxes for budgeting and legal issues as well as on the alert for further changes.