John J. Castellani at 2011 PhRMA Annual Meeting

John J. Castellani
PhRMA President and CEO
delivered these remarks at the
2011 PhRMA Annual Meeting
April 14, 2011

As you might imagine, I have been looking forward to this annual meeting, my first as CEO, since I joined PhRMA last year; and it has already been a wonderful experience. It’s terrific connecting and re-connecting with the many people --members, researchers, patient advocates and others -- who I’ve gotten to know in the last eight months, and having an opportunity to meet so many others of you for the first time, face to face. And of course, it’s an added bonus to be here in Jersey City, which is just 2000 feet from the Statue of Liberty.

This meeting marks eight months since I’ve been chief executive – time enough to learn where the bathrooms and kitchens are, and which are the best places for lunch near Pennsylvania Avenue and F Street in Washington.

I thought I would begin today by talking about some of the much more important things I’ve learned in the last 250 days …. two key lessons gleaned from you and all of our stakeholders, which I believe can serve as guideposts for the path PhRMA will take going forward.

The first is that challenges are great. That of course was not a surprise. I knew what we faced when I started, though I must admit there certainly is a difference between reading and hearing about challenges from the outside, and experiencing them first hand.

The second lesson did come as a surprise, and a very pleasant one. As I spoke to member companies, appeared before audiences, and met with patient advocates, physicians and researchers, I learned that the promise of the research we are doing is even greater than I had imagined.

Albert Szent-Gyorgyi, who won the 1937 Nobel Prize for Medicine, said “Discovery consists in seeing what everyone else has seen and thinking what no one else has thought.”

Clearly, our researchers are thinking in profoundly new ways.

We are not only finding cures for diseases that run the gamut from terrifying disorders that strike small numbers of people, to chronic conditions that sap the health of millions and could bankrupt our health care system. We are also a breathtakingly powerful research and development engine … one that can provide exactly the kind of innovation boost America’s economy needs in the 21st Century.

Those are the lessons, and here is the conclusion I draw from them: we need to do a much better job of using that tremendous promise to meet those serious and growing challenges.

In particular, the stunning things we‘ve already accomplished, the remarkable benefits we are providing the nation, and the amazing potential of our research means we don’t have to be on the defensive. Our industry must be able to create the innovative medicines the nation needs to cure diseases, boost the quality of life, and dramatically improve health care. To accomplish that, manufacturers, patient groups, and other stakeholders should not have to constantly defend against poorly thought out short-term budget cuts and regulations, which raise long term costs and put the brakes on progress.

In fact, I’ll go farther and say that unless we can move beyond defense, we’ll be left trying to fend off attacks on an island that gets smaller each year. We could even become a lot more like a regulated utility than the dynamic creative, competitive industry we are today.

Instead of playing defense against whatever challenge the government or insurers throw our way, we need a forward-looking strategic approach. We have to demonstrate to our stakeholders -- patients and health care workers, policy makers and planners, the media, the labor and business community – the unique and vital role we play in the fundamental issues Americans care most about: saving lives and improving the quality of life, boosting the performance of the healthcare system, and creating an economy that produces sustained economic growth.

Instead of responding to attacks we need to take the initiative, framing the debates on key issues and setting the policy agenda.

Having said all that, I’ve worked for many years in a city -- Washington, D.C. -- that is famous for high flying rhetoric… and those great words are sometimes not matched by concrete action. Put another way: talk is cheap.

Rest assured that the board and I will be putting this new approach into action over the next few months. And today I want to give you a preview of what lies ahead for PhRMA.

I believe four key strategic issues will define our industry in the coming months and years.

The first is reimbursement and how it affects our ability to innovate.

The second is changing the regulatory model to encourage innovation instead of promoting risk aversion.

The third is improving the public understanding and reputation of our industry.

The fourth is to better position ourselves as the powerful strategic and innovation engine that all of you know we are.

Today, I’m going to focus on just one of these issues – reimbursement – to illustrate the kinds of changes I think we need to drive.

I’ve chosen to focus on it today because reimbursement is central to some of the most important things we do:

• Enhancing healthcare quality;
   
• Increasing patient access to medicines they need;
   
• Saving money and helping to control health care costs; and
   
• Improving efficiency and effectiveness

It also drives two fundamental questions facing American healthcare in the 21st Century: how to establish value in the delivery of healthcare, and how to ensure providers have the flexibility in prescribing medicines that leads to the best outcomes for patients?

Others will answer these questions for us, if we fail to act strategically. In particular, we have to question the current reimbursement model, which was constructed when medicines were fewer and treated a narrower set of conditions, when the practice of medicine focused on acute care, and when wellness and prevention were not really thought about too much.

Back then, reimbursement was meant for patients who got sick, or developed a condition, went to a doctor or hospital, and received an acute treatment for that disease. When I was growing up people all around me had ulcer surgery to deal with stomach problems; those with circulatory problems often had to amputate a limb, and people with mental health issues were confined to an institution.

If we confine ourselves to developing tactics for an acute-care-first playing field, we risk putting the health of patients and their families in jeopardy.

We’ll lose because the current system distorts the value of medicine in two ways. First, the current reimbursement system makes the cost of medicines appear much higher to consumers than it actually is.

Medicines currently constitute only a little more than 10 percent of total health spending. Yet they account for upwards of 40 percent of what the average patient has to spend out of pocket for healthcare each year. That makes us a very big, very tempting target.

The second way the current system distorts the value of medicine is the most important: it creates perverse incentives for patients.

While patients have to come up with cash for their medicines, the current system makes acute care seem “free.” So reimbursement pays for a diabetic’s amputation rather than the insulin that would prevent it. It is much more likely to pay for chemotherapy than for smoking cessation. It pays for dealing with a heart attack, but won’t pay for managing the Type 2 diabetes that could cause the heart attack.

In practice, this means that patients will be driven to rely on acute care services because they appear to cost less. The costs of medicines that are effective for dealing with a problem long term, are visible, the benefits sometimes are not.

Everyone here today, and every other health care expert in the nation, knows that these twisted incentives are not just worrisome. At a time when chronic diseases are the most prevalent and costly health care challenges in the United States, the current incentives can be deadly.

After all, chronic disease accounts for about 75 percent of the nation's aggregate health care spending. Just five of them – heart disease, cancer, stroke, chronic obstructive pulmonary disease, and diabetes – account for more than two-thirds of all deaths. And many chronic diseases severely degrade the quality of life not only for patients, but also of their families, caregivers, and others.

Instead of being relegated to arguing about reimbursement rates, we have to take the lead in shifting the debate. We have to move it toward creating a system more focused on chronic care, that more honestly analyzes the true costs of treatment both long term and short term, and which gives a true accounting of benefits and risks. We can’t afford to continue a system that, like Oscar Wilde’s description of a cynic, “knows the price of everything and the value of nothing.”

The good news is that there are more and more opportunities for us to lead the way to a new approach to reimbursement.

For example, national awareness of the growing menace of Alzheimer’s has increased dramatically in only a few years. That awareness is due to the hard work of groups such as the Alzheimer’s Association, and to the tragic fact that a growing number of families are struggling with the disease as parents and grandparents get older.

Currently, a person in the U.S. develops Alzheimer's disease every 71 seconds. If current trends continue this will increase to every 33 seconds by the middle of this century – that’s the time it took me to say the last three sentences. That could mean there will be 15 million Americans with Alzheimer’s by 2050. The cost of their care? More than $1 trillion per year.

Our members are working on new treatments. A medicine that could delay the onset of the condition would be wonderful, a godsend for patients and families. But what if it comes with a high, short-term price tag? Suppose its one-year cost approaches $11 billion, the all-time annual price tag for a blockbuster medicine.

Under the current system used to determine health care costs, my fictitious $11 billion per year would be viewed only as a cost to the system – a huge cost. And, in an era of ever-tightening budgets, there would be a lot of pressure to cut that cost.

Yet the Alzheimer’s Association study projects that a new treatment that delayed the onset of the disease by five years could reduce the growth of new cases dramatically and save $447 billion a year by 2050. But our current system highlights the $11 billion cost, not the $447 billion saved. Of course, the current system doesn’t quantify the emotional impact of this terrible disease on the patient, their families and caregivers.

If we can change the reimbursement paradigm, if we can show that the long-term costs of an Alzheimer’s treatment prevents much higher costs to the health care system and the economy, we can show our stakeholders what a bargain, what a great investment that new medicine can be.

There is another and equally insidious accounting regime we also must question. It is perhaps best illustrated in a report of the Congressional Budget Office study done late last year which found that if we reduce obesity in the U.S. by 20 percent we will increase health care costs by 59 percent because reducing obesity would increase life expectancy and older people tend to spend more money on health care.

I believe we must challenge this “pay me now or pay me later” mentality if we are to have a health care system that recognizes the value of wellness prevention and treatment and the role innovative medicines can and do have in that system. We must move from static, one-year accounting for costs to a dynamic assessment of long-term costs avoided and the broad economic benefit a healthier population brings. Absent that, we may find ourselves relegated to a “what we have is good enough” health care system.

After eight months here, after having experienced the promise our research holds, seeing first hand that we know more about how medicines can cure disease and how they can be delivered best, I know that we can change the debate.

I want to conclude by underscoring our role in innovation and economic growth, because that is another area where a more strategic approach can be successful.

Listen to a couple of recent statements from some prominent political figures about innovation and growth.

The first is: “The key to our success [in the global economy]– as it has always been – will be to compete by developing new products, by generating new industries, by maintaining our role as the world’s engine of scientific discovery and technological innovation. It’s absolutely essential to our future.”

The second: “The countries which innovate the most effectively are the wealthiest, the strongest, the safest, and the healthiest. And innovation in that sense has been the key to the progress of the human race for all of recorded history. It is still the key…”

You might have guessed that the first quote is from President Obama – he’s all about innovation these days. The second is from someone who disagrees with the President on pretty much everything else – Newt Gingrich.

This broad – Democrat/Republican, left/right – consensus on the importance of innovation presents a tremendous opportunity to frame the debate on economic growth and point out the contributions our industry is making and can make – not only to recovery, but to sustained economic progress.

It will be a challenge. The bad news is that most political and opinion leaders don’t mention us when they talk about innovative industries. That’s despite the fact that, as the Congressional Budget Office has pointed out, pharmaceutical firms invest as much as five time more in research and development than the average U.S. manufacturer.

It’s also overlooked that last year our R&D investments continued to rise, despite the difficult economy.

I was reminded of that when I recently heard GE CEO Jeff Immelt speak in Washington. He said that in order for companies to succeed in the future, they had to be the smartest companies in their industry. In order to do that, he said, a company has to do a better job of investing in research and new technology. In particular, he proudly pointed out that GE had achieved the lofty goal of pushing its R&D budget up to 5 percent of gross revenues.

That’s a great goal and a great achievement. But the fact remains, as many of you know, our industry’s R&D spending was at 20.5 percent of revenue last year.

Despite the challenges we face, biopharmaceutical companies continue to be at the forefront of discovering new treatments for patients.

• Today, there are more than 3,000 medicines in clinical trials or before the U.S. Food and Drug Administration and under review for patient use – an increase from 2,400 in 2005.
   
• Medicines in development for rare disease have rapidly increased from 303 in 2007 to 460 today.
   
• There are currently more than 800 drugs in development for cancer and 300 for heat disease and stroke – the three leading causes of premature death in the United States.

Facts like these underscore the real strengths of the biopharmaceutical research sector. They also demonstrate the continuing contribution this industry makes to improving patient health and to improving the economy.

Finally, they paint the picture of an industry that is meeting not only its immediate challenges – both domestic and global – but also an industry with a vision for long-term growth and success.

I’ve loved my first eight months with PhRMA, but I’m absolutely convinced that the best is yet to come for the industry.

In the early 20th Century, a physician and philosopher, Orison Swett Marden said, “There is no medicine like hope, no incentive so great, and no tonic so powerful as expectation of something better tomorrow.”

We have been producing better tomorrows since the start. We have the knowledge and the people to keep doing it. We need to use resources to take the initiative, to act strategically. If we do, we can win for the patients we serve and the industry we represent.

Thank you.