Change in the Pharmaceutical Industry : USA, UK & Europe, especially Germany : Working Paper by Harvard’s Daemmrich Summarized by Rob Houck

LawPundit: The following summary by Rob Houck (here published with the author’s consent) of a working paper by Arthur Daemmrich of the Harvard Business School came to our attention indirectly via assistance from Janine Labusch. Thank you. Materials in [brackets] have been added viz. modified by LawPundit, e.g. an updated URL reference.

Summary by Rudolph (Rob) Houck, Eaton & Van Winkle LLP, 3 Park Avenue, 16th floor, NYC, NY 10016, 212-561-3608,, May 6, 2009 of WHERE IS THE PHARMACY TO THE WORLD? INTERNATIONAL REGULATORY VARIATION AND PHARMACEUTICAL INDUSTRY LOCATION, Working Paper 09-118, by Professor Arthur Daemmrich, Harvard Business School.

The Harvard Business School publishes a weekly on-line newsletter announcing its faculty’s new research. Many of the articles are interesting and offer insights into commercial, legal and political questions. Professor Daemmrich’s research is particularly interesting because it compares trends in the US and German pharmaceutical industry and their causes. This memo summarizes his “working paper.” A complete copy is available at [].

DISCLAIMER/DISCLOSURE: This summary was prepared [by Rudolph (Rob) Houck] from a public source, without the input or approval of Professor Daemmrich. Some sections are taken directly from his Working Paper but not put in quotation marks [LawPundit: we have for purposes of this paper added quotation marks where appropriate since Houck’s article was originally not intended for publication, and we requested to publish it.].

SUMMARY: Two models of drug development have developed: one which focuses on mass-marketing blockbuster drugs and a newer, consumer-oriented model. Another development is the increased influence of “patients and disease-based organizations in defining disease categories,” structuring clinical trials and making regulatory decisions. Prof. Daemmrich notes this second trend is prevalent in the US and not in Germany and may have helped the US take over world leadership in the pharmaceutical industry.

INTRODUCTION: Pharmaceutical companies are products of both the free market and intense regulation. They play a major role in national economies. Important recent factors include: rising costs, increased attention to adverse reactions, and to “lifestyle treatments” and less attention to serious diseases. Government policies vary regarding drug price controls, enforcement of safety laws and post-market monitoring.

Since 1980, Germany’s historically dominant pharmaceutical industry has declined, even compared to Switzerland and the UK. During the same period, the US’s industry has flourished. Both countries have “advanced technologies, significant” government and insurance “spending on biomedicine, support for new therapies and large patient markets”. The important differences Prof. Daemmrich identifies are the role of government regulation and the role of patients as actors. The US Food and Drug Administration centralizes safety regulation while Germany has a “network of physicians, industry and government officials”. In the US, disease-based organizations affect innovation and regulation. Not so in Germany.

Despite having research done in many countries, the pharmaceutical industry creates great benefits for the home country, through high-paying, skilled jobs and tax revenue. The home country itself also has greater and earlier access to the resulting new drugs. These companies are viewed as “national assets.”

Drugs are regulated on a national basis: research, “testing, marketing and pricing”, and these regulations vary widely from country to country. Other influences on drugs are also organized on a national basis: oversight of “the medical profession, pharmacists, and organizations” representing patients. Countries differ on how they “define “the patient” (who benefits from safe, effective, affordable therapies)” and “the consumer” (who desires protection and choice).

Prof. Daemmrich identifies a tension between (a) the influence of consumers on regulation and (b) the responsibility of consumers to seek out their own information on pharmaceuticals, treating prescription drugs like other consumer goods. He rejects studies which show that the industry is moving to countries with lower labor costs and weaker regulatory systems. The industry remains concentrated in the US and Europe, where barriers to drug approvals are high.

Prof. Daemmrich looks at how the US and Germany reacted differently to “a new disease (HIV/AIDS), demands by terminally ill patients” for “new drugs and personalized medicine”. The US changed its regulations in response to these forces, becoming more consumer-oriented, while still retaining “procedure-based decision processes”. In contrast, he thinks Germany’s more complex system “of shared authority (the medical profession, other “peak associations” and the state)” combined to weaken Germany’s pharmaceutical industry. This tension between regulation and innovation were decisive in shifting the industry from Germany to the US.

HISTORY: In the 1970’s the US pharmaceutical industry was on the decline. The causes were regulatory caution, the costs of clinical testing and weak innovation. In 1974, 5 of the top 10 pharmaceutical firms were located in Germany or Switzerland. Only one French firm and no UK firm were in the top 15. By 2005, 9 of the top 15 were based in the US and only one – Boehringer-Ingelheim – was in Germany. Furthermore, the sales by the largest firms have increased rapidly since 1988, partly through merger, but largely through innovation as “pharmaceuticals …become high-demand consumer products.” The size of the US market is not determinative – 3 of the top four firms are based in Europe. The same trend is evident in spending on research. In the 1970’s the US spent much less than European firms on research. Now US pharmaceutical firms spend three times what European firms do, a growth rate of 6 times. This is not a simple matter of European cost containment. German and French firms also introduced fewer new chemical entities. From 1997 through 2007, US firms had 40% of all FDA approvals and Germany only 6%.

2007 US pharmaceutical sales totaled $663.5 billion, but only $32.2 in Germany, $29.6 in France and $17.4 in the UK. In 2008, the US had “twice as many clinical trials” as in the EU. A.T. Kearney ranks countries in terms of their attractiveness for clinical studies: US, China, India and Russia, with Germany number 10. Dr. Daemmrich ties clinical studies closely to research, investment and market approval. Germany’s weakness in this area (clinical studies) is due to the country’s high costs, low patient population and difficulty in recruiting participation (possibly due to the ready availability of drugs to all economic classes in Germany – RSH). More attractive are the Czech Republic, the UK, Poland and Hungary.

Of course price controls “in Europe and their absence in the” US play a significant role.

Bain notes three advantages in the US: “government support for basic biomedical science, investors’ risk tolerance in supporting new” companies and cooperation between industry and university scientists. Bain put the cost to Germany at $5 billion due to lowered access to drugs and jobs, jobs which went to the US.

RECENT US DEVELOPMENTS: In the 1960’s the US was greatly affected by equality of access and protection from dangerous compounds such as thalidomide (Contergan). But US public attitudes shifted back towards more risk tolerance in the 1980’s. New disease-based interest groups pressured Congress for more funding and monitored it more closely. The internet increased the size of these groups and their effectiveness. Groups interested in HIV and breast cancer in particular exerted pressure for research, lower drug prices and regulatory review. The debate in Europe was focused more on prices, equality of access and protection from dangerous compounds. A new, “consumer mode” of regulation took hold in the US, while administrative approaches continued in Europe.

Professor Daemmrich next cites (1) HIV-AIDS, (2) terminally ill patients and (3) personalized medicine (drugs based on individual genetic makeup and efficacy) as important factors in the recent development in US drug regulation. These three factors are discussed below:

  1. With the outbreak of HIV-AIDS in the US, pressure for faster approval of drugs could be focused on one central body, the FDA. The German system shares “regulatory authority among government officials, the medical” profession and industry, so there was no one physical or administrative site where pressure could be exerted. Germany’s more comprehensive medical care also reduced pressure for change. In contrast, under pressure from gay activist groups, the FDA approved the first anti-AIDS drug in only 107 days. The agency began to issue rules to expedite availability of experimental drugs. The standard of approval changed to “reasonable basis” for concluding that a drug would not expose patients in clinical trials to “significant additional risks”. In 1992 “AIDS patients who were not” participating in clinical trials got access to those drugs. Pressure further changed FDA rules regarding the minimum number of clinical trials, patient screening, placebo use and restrictions on trial participants. The FDA also approved drugs based on indicators other than long term survival, such as changes in T-cell count. In contrast, German gay men and supporters worked on prevention and education. One organization, Deutsche AIDS-Hilfe, became the sole representative of AIDS patients and a “quasi-public” administration. Being part of the establishment, it did not use “confrontational techniques to bring about” change. The German government wanted one organization with which to deal, to operate within official channels. It focused on public education, insurance and daily assistance to patients. The few confrontational organizations in Germany were not taken seriously. The German government decided that the 1976 Drug Law anticipated new diseases like AIDS and did not have to be changed. The German Federal Health Ministry (BGA) focused on reducing duplicate tests and time spent on animal testing. Professor Daemmrich sees this response as one limited to technical details. The boundaries between experts and patients remained unaffected. Germany’s failure to test its blood supply led to splitting the BGA but not to bring about a confrontation “between insiders and external critics”. The newly formed government agencies operated like the old one. The public put little pressure on the German network of physicians, regulators “and the pharmaceutical industry”.
  2. In the US, drugs may be used as prescribed by doctors, whether or not approved for that use by the FDA. Still, the drug must be approved for at least some use before it is available outside clinical trials. Furthermore, requirements that drug companies report and investigate adverse reactions and fatalities complicate matters. The courts played a role in policy making here. A suit was brought to require access to medications whose safety and efficacy was still questioned. The appeals court then held that the testing traditional procedures – involving large, double-blind, placebo-controlled studies – were required. The efficacy of studies was dependent on patients volunteering as subjects and that efficacy would be undermined if patients had uncontrolled access.

    In contrast, in Europe access to pre-approval drugs is “the responsibility of physicians and pharmacists, with” the government playing a smaller role. Professor Daemmrich suggests that the greater tension in the US between the government and the patient has resulted in affirmation of the importance of clinical studies. The European procedure permits compassionate use but leads to less certainty for pharmaceutical companies.

  3. Regulators in the US and Europe are looking for “biological markers” as a means of judging the efficacy of new drugs in individual patients, an aspect of “personalized medicine”. Although a subject of debate in both areas, the public reimbursement programs in Europe make cutting off funding and therefore access to some drugs more uniform.

    The US has developed the Critical Path Institute, a non-profit organization to coordinate among the FDA, industry and academia, to develop new biomarkers. Professor Daemmrich predicts that the European equivalent, the Innovative Medicines Initiative, will spend more of its funds on “brain disorders and metabolic disease than” on biomarker development and the development of new clinical trial methods. He says that the FDA is taking a more active role in this process than European agencies.

    Finally, the US and Europe are taking different paths regarding drug delivery. In the US, the trend will be towards “genetically based diagnostic tests and personalized, targeted” pharmacological treatments. In Europe, discussions are more technical and focus on healthcare cost savings which could result from new testing methods. In Europe, drug accessibility is an “all or none” proposition.

CONCLUSION: The emergence of the US as “pharmacy to the world” results from well-recognized factors such as US “intellectual property policies, “funding for biomedical research” (NIH), “absence of government” price controls and “the availability of venture capital”. Professor Daemmrich adds to this list the regulation of clinical trials and its reform.

Government regulations reflect “a country’s innovation concept”, but also cultural differences. In the US, regulations shifted from protecting the consumer from the effects of capitalism to providing “greater access to drugs and speedier approvals”. US policy makers also recognized the importance of “the pharmaceutical and biotech sectors”. The “boundary between testing and marketing” has been softened. The regulatory process in the US has moved from the “medical profession to the state” and now to a “new consumer/patient oversight model.”

In contrast, in Germany, “the medical profession exercised a near-monopoly over” the concept of “the patient.” There, “drug laws codified existing power-sharing arrangements”. The German state did not claim “authority over pre-market testing”, but rather was only one member of a network. The German medical profession maintained and “expanded its authority to speak for the” patient. Few disease-based organizations even tried to change the regulatory system. Hence, the drug approval process seldom is a subject of debates regarding “national competitiveness or industry” motivation.

The recent emergence of a US “consumer/patient regulatory mode has driven increased use of prescription drugs”. This avoids the “cost vs. life decisions” confronted in England. One risk in the US is patient groups which are really formed by industry and subject to industry manipulation. Another risk is the focus on diseases “prevalent in wealthy countries, to the” neglect of third world diseases.