Pharma Spending Less on Finding New Drugs

Worried about me-too drugs?  The medicalization of human variability in order to medicate them into compliance and/or sell them quack cures of dubious value?  Ever-rising prices for brand name drugs pushing seniors into penury?

Well, you can breathe a (slight) sigh of relief.  For the first time ever last year, the global drug industry cut its R&D spending.  The trend is expected to continue, at least in the near term.

If you'll excuse me, the rest of us will be over here in the corner, freaking out a little bit.

It's tempting, of course, to blame this on Obamacare, and I certainly wouldn't rule out the possibility that this is at least part of the explanation.  But there's no evidence that this is the case, other than the crude time correlation.  Derek Lowe suggests that the answer is simpler: the return to R&D spending in the industry has been falling for a long time, as many therapeutic areas are crowded with generics (or soon-to-be generics) that already do a very good job.  The remaining areas (cancer, central nervous system, obesity) turn out to be very tough, and there's no guarantee that we'll ever find pharmaceutical interventions that do what we want.

R&D constant dollar graph.png

There's an interesting discussion to be had about whether the market outcome differs from the socially optimal outcome--whether falling returns to pharmaceutical R&D mean that we should be putting more resources into it, or fewer.  But I'll leave that aside for the nonce, because I'm not sure what I think, and talk about what this means for the rest of the health care system.

You might initially think that this is good news for cost control--the expensive brand name drugs will all go generic, and we'll save a bunch of money on prescription drugs.  And indeed, this is absolutely true.  But this will have repercussions for other areas of health care, and those repercussions are not good.  While some drugs are simply an added expense (think chemotherapy prolonging the lives of people who would otherwise have died sooner), many of the real blockbusters substitute for labor-intensive treatment.  Statins instead of cardiac catheterizations or coronary bypasses.  Avandia instead of amputations.  Hydrochlorothiazide instead of nursing home care for your massive stroke.

We'll still have all those drugs, of course.  But with less R&D, we'll presumably see fewer pharmaceutical substitutes for the expensive conditions we still spend a lot of money treating, like Alzheimer's. Which means that health care expenses might actually rise faster than we expect.  Most of the rest of the health care system is subject to a phenomenon known as Baumol's Cost Disease, which I described thusly a few years ago:

. . . medical productivity doesn't improve as fast as most of the rest of the economy--basically, activities that are very labor intensive don't tend to have massive productivity gains. That's why it still takes just about as many teachers to teach 50,000 sixth graders as it did fifty years ago. Similarly, it still takes one person to give you a sponge bath and administer your pills.

There's a caveat however: antibiotic resistance.  Without antibiotics, a lot of our heroic interventions become a lot more deadly, which means less likely to be performed.  And someone who has died from an infection following their coronary bypass will not be around to demand an expensive knee replacement.

Unfortunately, that's not exactly ac omforting thought.
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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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