For example, Avorn says:
My view is that the translation of an important scientific breakthrough
-- let's say the discovery of tumor angiogenosis, which a lot of drugs
were based on -- it's not implausible to say the translation of those
basic science findings into a marketable product is something that
could be done in university settings, and many university groups are
moving towards doing their own licensing. It requires capital, but as
you see with biotech start-ups, they can often get it.
So once you raise capital to form a biotech startup, you can often develop a drug, which proves that we don't need companies to develop drugs. Huh? Is Dr. Avorn under the impression that biotech startups are some sort of extension campus of the University? They're drug companies. They're just in the larval stage.
Ezra leaps in:
Some people have said to me that a lot of the pharmaceutical
industry's really innovative work is coming not from inside large
companies, but from the acquisition of start-ups.
Exactly. If you look at where their new drugs are coming from an
awful lot is coming from buying a biotech company run by real start-ups
So if we just got rid of big pharma, the real innovators would . . .
Well, actually, they wouldn't do anything, because they wouldn't exist. If we just got rid of big pharma, all the capital that the biotech startups raised in the previous question wouldn't be so easy to raise. Venture capitalists have longer investment time horizons than retail investors or say, mutual fund managers, but those horizons are not indefinite. They need to have a way to get their money back out. That usually happens in one of two ways: the company goes public, or it gets acquired.
Moreover, biotech firms often lack the assets they need to monetize their drugs: things like the research capability to take a drug through trials, or even more commonly, the production, distribution, or marketing capacity to actually mass produce the thing and sell it. These are boring divisions, usually led by people who didn't even go to a decent graduate school, which is why professors of pharmacoeconomics don't know a lot of district sales managers or operations chiefs socially. But without them, the company goes broke. If too many companies go broke, there's no new capital for those academics who want to found an exciting new biotech startup, and they have to go back to begging the government for money.
Once you've conceded that drug discovery needs capital, you've conceded that you need a pharmaceutical industry. The rest, as Shaw said, is just haggling. But Avorn sails on, apparently blissfully unaware that raising capital is something that is usually done by, er, capitalists.
Dr. Avorn seems to think that companies are some sort of giant black box to him--the operations are impossible to see, so all you can do is measure inputs and outcomes on a pie chart. If only there were whole big areas of social science, not to mention the pop business section at your local Barnes and Noble, devoted to describing how companies work for people who might like to know. But alas, there are not, so medical doctors who want to spout off about pharmaceutical firms are forced to do so with no actual knowledge, nor even an educated guess, about how they might work:
Virtually every progressive
recommendation about health policy for the last 20 or 30 years that the
drug industry felt might harm its bottom line has been met by the
threat that if they don't make as much money before, innovation will
cease and there will be no cures for new diseases. It came up around
Medicare drug pricing and generic drugs. It's not a surprise to see it
come up around health-care reform.
There are a couple reasons that this is a specious argument. One is
that according to their filings with the SEC, the drug companies only
spend about 15 cents of every dollar on research and development.
That's compared to more than 30 cents in administration and marketing
and more than 20 cents on shareholder equity. As an investment in
R&D, I think any venture capitalist would say a company spending 15
percent on research is not a robust innovation engine.
This makes about as much sense as saying that Dr. Jerry Avorn cannot be that smart because his brain only weighs about three pounds. Presumably, you can't be really smart--really innovative--unless your brain is at least 30 percent of your body weight!