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How To Solve Big Pharma’s Innovation Problem

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Staff writer Sophia Chan examines the lack of innovation from US Big Pharma firms and proposes her solutions for how the Biden administration could solve this.

Big Pharma has long been Public Enemy Number 1 amongst American citizens. With soaring drug prices, it is not hard to see why. Weight loss drug Wegovy is a prime example: a monthly dosage of Wegovy currently retails for $936, or $11,232 per year. To put this into perspective, the current US federal minimum hourly wage is $7.25 an hour. The average full time worker in the US works 8.42 hours a day, and there were 260 working days in 2023. Therefore, someone who worked full-time at the US federal minimum wage would have earned $15,871.70 in 2023, a full year’s supply of Wegovy would approximately be equivalent to 70.8% of their salary.

President Joe Biden touched on this during his state of the union address: “We finally beat Big Pharma!”, he declared. “Instead of paying $400 a month for insulin, seniors with diabetes only have to pay $35 a month! And now I want to cap the cost of insulin at $35 a month for every American who needs it!” He was referring to the Inflation Reduction Act, which aims to reduce drug prices through price caps and granting negotiation powers to Medicare for the first time ever in America history. Whilst this is great for the affordability of American healthcare, Mr Biden’s policies fail to address an equally serious problem that plagues big pharma: a lack of innovation.

The traditional justification behind big pharma’s high drug prices is a need to earn sufficient profits for reinvestment into research and development (R&D). In 2019, then-speaker of the House Nancy Pelosi attempted to pass a drug pricing bill that would lower prescription drug prices. This faced significant backlash, with the CEO of the Pharmaceutical Research and Manufacturers of America claiming the bill would trigger a “nuclear winter” for innovation in the pharmaceutical industry. Even then-President Donald Trump joined the raucous, tweeting “Pelosi and her Do Nothing Democrats’ drug pricing bill doesn’t do the trick. FEWER cures! FEWER treatments!”

However, research shows that academia and smaller bio-tech firms are more innovative than big pharma. The mRNA technology behind the Moderna and Pfizer-BioNTech vaccines was developed by the National Institutes of Health, the University of Pennsylvania, and MIT.  A paper by Kennedy et al. found that big pharma was the sole originator of 14% of first-in-class cancer drugs – small bio-techs originated 46%.

Policies designed to boost R&D efficiency within the pharmaceutical industry are therefore as needed as short term measures to lower drug prices. Specifically, the Biden administration should foster the growth of smaller bio-techs and academic research, as well as encourage more bio-tech start-ups by targeting the following areas:

Increasing collaboration between academia and private pharmaceutical firms

Firstly, there should be further collaboration between academia and private pharmaceutical firms. This paper by Spicer, Colcomb, and Kraft suggests that academia is too focused on pure science, rather than applying pure science to more practical applications. An excessive focus on pure science teaches students that industry and academia are two completely different sectors, reinforcing the view that you cannot transition from one to the other, when in reality there is a much more fluid relationship between the two. These problems are further exacerbated by the fact that there are currently few professors that are knowledgeable on both the industrial and academic aspects of pharmaceutics.

Academia’s focus on pure science can be attributed to its differing incentives. The corporate setting is driven by profits, the academic by the pursuit of knowledge. This corporate pursuit of profits may hinder development for certain much-needed goods due to a lack of marketability, or a lack of confidence that there will be sufficient stock of initial capital to fuel investment. This leads to fundamentally different processes of drug creation. In academia the process may be far slower, but it can also lead to more ground-breaking therapies as scientists are given the time, flexibility and freedom that firms may not be able to afford. The World Wide Web is a prime example: it took Tim Berners-Lee 11 years to develop the World Wide Web from a prototype system (known as ENQUIRE) to it becoming the internet we know today. Berners-Lee worked for CERN, a large, intergovernmental institute of scientific research, for the large part of that time.

In other words, academics can study diseases and potential cures more thoroughly, as well as explore more unconventional ideas and hypotheses, which generate the huge steps forward needed for innovation. Academics may also be more passionate about their work and can therefore persevere through a lengthy research process, whereas companies need to generate enough profit to meet short-term shareholder demands in order to stay afloat.

On the flip side, companies may have more streamlined and efficient methods of drug creation because creating high quality drugs as quickly as possible will lead to more profits. Lingering on the research process for too long increases the costs of production through the need to pay staff for longer and fill vast research faculties with expensive equipment. Moreover, if competitors manage to produce a drug that has similar effects first, the company risks losing customers and wasting its initial investment. Both scenarios hurt profits.

Profits are essential in the pharmaceutical industry, but particularly amongst the larger firms. This is because the larger firms are of a similar size. Therefore the only way for a firm to increase its market share and differentiate itself from direct competitors is to earn more profits and either re-invest it into further drug development or into purchasing smaller companies.

There are therefore advantages and disadvantages to drug creation in academic and corporate settings. The benefits of both can only be reaped if there are more students versed in both the theoretical and practical aspects of the field. The government should work with colleges to introduce more graduate programs with paid placement and internship opportunities in the pharmaceutical industry; France’s CIFRE (Industrial Agreements for Training through Research) PhD contracts are a good example. This would prepare students for careers that involve both industry and academic work.

Encouraging more people to work in academia

Secondly, the Biden administration should encourage more people to work in academia. Academia is a relatively unpopular career path due to its high barriers of entry. Aspiring academics must first spend thousands of dollars’ worth of tuition fees on a bachelor’s degree. They then need to spend an average of 7.3 years earning a PhD. Yet researchers’ salaries are low when compared to professionals. In 2020, the average salary of a life sciences academic was $70,741, while the average salary of a pharmaceutical industry professional was $134,827. Academia consequently struggles to attract a large pool of talent. If left untreated, this could offset efforts to increase collaboration levels between university researchers and those who work in the pharmaceutical industry.

A large portion of funding for US big pharma comes from American taxpayers. For example, Johnson and Johnson’s Stelara received 6.5 billion USD worth of funding from government ran National Institutes for Health. Yet more of this funding is spent on advertising rather than on R&D. This calls into question whether private markets are an appropriate model for pharmaceutical products. Whilst it would be impossible (or extremely difficult) to nationalise the pharmaceutical industry, it is possible to shift the focus of the industry from big pharma firms to smaller bio-techs and academia instead. By comparison, these are usually much more focused on R&D and can use the funding in a more efficient manner. That is to say, taxpayer funding that was previously given to big pharma should be redirected to increasing researchers’ wages to ensure the very best talent is attracted.

Even though the highly expensive barriers to earning a PhD would not lower, the returns on investment for PhD students would increase in the form of higher wages, which could incentivise more people to view academia as a financially viable career path. If timed with the introduction of more programs aimed at bridging the gap between industry and academia, this would result in more researchers that understand both practical and pure science well.

Increase funding and reduce FDA regulatory costs for smaller bio-techs

Finally, the Biden administration should increase funding for smaller biotechs, as well as reduce FDA regulatory costs. Smaller companies in the pharmaceutical industry face one major problem: funding. In particular, they often cannot afford to conduct the billion-dollar clinical trials required for FDA approval.

Larger pharmaceutical firms exploit this through purchasing the rights for drugs from smaller bio-techs, using this to shorten the lengthy and costly drug development process. They then earn even more profit relative to their smaller competitors, leading to further disproportionality in market share between those at the and those who are not.

Big pharma firms also often purchase the smaller bio-tech itself and providing them with funding in return. Whilst this may sound mutually beneficial, it results in less market competition, especially since the larger company may acquire firms that they view as having a high level of potential. If these high potential bio-techs are allowed to grow even further, they may become a large threat in the future. Thus, big pharma firms are incentivised to curb this threat early on by enticing smaller bio-techs with funding in exchange for an acquisition. This dependence on mergers and acquisitions is an extremely prevalent problem across big pharma; for example, 430 M&A deals were announced in the global pharmaceutical industry in Q1 2024 alone

If the costs of clinical trials were reduced for smaller bio-techs, they would be able to sell their own drugs themselves. Big pharma firms would be motivated to improve the efficiency of their drug development pipelines as the “easier way out” of buying out drugs from smaller firms in the sector no longer exists.

Looking to the future

The IRA’s price caps and Medicare’s newfound powers are a step in the right direction for improving American healthcare, at least in the short term. If the Biden administration wins the election and is able to implement even more healthcare policies, Mr Biden would be well advised to address big pharma’s innovation problem to encourage longer lasting improvements in American healthcare.

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