John J. Castellani at NY Pharma Forum

John J. Castellani
PhRMA President and CEO
delivered these remarks at the
NY Pharma Forum
March 23, 2011

I am pleased to be with you today and I look forward to meeting with representatives of so many great Japanese pharmaceutical and biotechnology research companies as well as representatives of the Japanese External Trade Organization’s (JETRO) New York Office.

I want to open by saying that –  like all Americans – I and everyone at PhRMA have been deeply touched by the events in Japan over the past two weeks.

No one can watch, read or hear about the devastation in Japan without being moved by the suffering of the victims as well as inspired by the resiliency of the Japanese people and their determination to meet the incredible challenges they face and to persevere.

To all of you here with family and friends in Japan, let me say on behalf of PhRMA and all our member companies that you have our deepest compassion in this difficult time.

I also want you to know that our member companies – like millions of Americans and institutions and organizations across America – are doing all they can to help the Japanese people and aid in the recovery.  I can assure you that this support is to both help meet immediate needs as well as the long-term recovery. 

We are also very grateful for the work that the Japanese Pharmaceutical Manufacturing Association (JPMA) is doing to help coordinate on the ground and help our industry’s work with the appropriate Japanese government agencies.

Going forward, we will continue doing all we can to help ensure a stable supply of the world’s best medicines to Japanese patients.

Please know that our companies are working flat-out to help maintain both normal supplies of medicines throughout Japan as well as emergency supplies to the affected areas.

As you can imagine, the logistical problems have been enormous – including rolling blackouts that have affected factories where production of particular medicines cannot be stopped without spoiling the entire production run.  Also, we are confronting fuel shortages for trucks transporting product to affected areas as well as importation difficulties because of damage to Narita airport and the port in Yokohama.

PhRMA Japan is working closely with the Japanese government to assess the impact of the disaster on the Japanese supply system and to pinpoint where our industry’s help will be most effective.  For example, they are working with the Ministry of Health to get exemptions for 22 pharmaceutical factories from rolling-blackouts – these are not just PhRMA member company facilities but all are important in the medicine supply chain.

We are also working with the government to disseminate information on where delivery trucks can get fuel.

Though the toll from the earthquake, the tsunami and its aftermath are still being assessed, I want to assure you that PhRMA Japan is helping to share critical information among our member companies.

Additionally, Rx Response – a coalition assembled by PhRMA to help ensure the steady supply of medicines during a U.S.-based disaster – is also assisting in these efforts. Rx Response partners include the drug and biotechnology manufacturing and distribution industries, hospitals, community pharmacies and the America Red Cross.

Rx Response is working closely with crisis managers in the U.S. government who reached out to Rx Response with requests for information about potential supply chain impacts.

For those of you who may be interested in donating to organizations that are contributing to relief efforts, you may wish to consider members of the Partnership for Quality Medical Donations – a list of members responding to events in Japan is available on the PQMD website.

Finally, as some of you may know, individual PhRMA member companies are also pledging significant funds to relief organizations supporting disaster relief in Japan, including the American Red Cross, Save the Children and Americares.

Where appropriate, our member companies are working with the Health Ministry to provide medicines and supplies for the people in affected areas. So far, PhRMA member companies have individually pledged over $37.5 million in direct and indirect aid.

I am extraordinarily proud of the leadership that all our companies – American, European and Japanese – have shown during this difficult time.  They are all working under very difficult circumstances to solve incredibly tough logistical, production and human problems.  They have our support and our admiration.

All of which is to say that our thoughts are with the people of Japan.

Unfortunately, there is no easy segue from talking about the sad events in Japan to talking about the challenges confronting America’s pharmaceutical and biotechnology research industry and PhRMA’s agenda.  So, please excuse any awkwardness in the transition.

Let me start by talking broadly about some of the structural and economic challenges this industry faces and PhRMA’s innovation agenda to address these issues.

It is increasingly clear to me – as it is to many industry observers – that America’s biopharmaceutical sector is at a crossroads.  Where we end up depends entirely on decisions now being made by pharmaceutical and biotechnology research companies as well as by the increasing number of stakeholders in our health care system.

I think it is fair to say, that we all start from a place where the decisions being made must recognize that health care now represents nearly one fifth of United States’ GDP.  This means that medicines – especially innovative new medicines and health care technologies – can and must play a vital role in helping to solve the health care challenges ahead.

The big question is whether this industry can adapt to a changing scientific, technological, regulatory and economic environment so that U.S. leadership in medical innovation can continue.  Or: will it be relegated to decline and dispersal to more welcoming economic and policy environments?

The answer to that question is not yet clear and the stakes are high.  But I think that the fact that the stakes are so high actually works in PhRMA’s and the pharmaceutical and biotechnology research industry’s favor.  It means, for example, that PhRMA’s strategy for coping with market change is now highly focused and thus easy to explain.

To begin with, PhRMA’s 45 members represent the single biggest driver of innovation in the United States’ healthcare system.

They develop both life-enhancing medicines and also, increasingly, services and processes that achieve four critical ends:

• Enhance healthcare quality;
• Increase patient access to medicines they need;
• Save money and help to control health care costs; and
• Improve the efficiency and effectiveness of many complimentary technologies.

For these reasons, PhRMA’s priority is to make the innovation case to our stakeholders – patients and health care workers, policy makers and planners, the media, the labor and business community – and to help them better understand how this industry benefits both patients and our economy over both the short- and long-term.

Specifically, we must better communicate how innovation fits into the broader economic cycle.

Every one here understands that you cannot escape the economic cycle, no matter which industry you are in.  When demand for medicines is down due to a poor economy – that has a short-term impact on resources available for innovation.

But what is particularly notable about this industry is that even in a difficult economy, it continues to invest for the long-term.  Our members are making a significant new investment in R&D – just as they have done over the last thirty years.  These commitments, by the way, far exceed the annual budget of the entire National Institutes of Health.

And, importantly, these investments in innovation can actually help reverse the economic cycle and speed recovery.

What is critical to understand is that few other industries have such long lead times in how they spend money and their expectations for results.  In pharmaceutical and biotechnology research, you simply don’t see positive results until the end of the development cycle.

Thus it is essential for our stakeholders, particularly policy makers and planners, to take a longer view when thinking about the health care challenges ahead and the role that this industry can play in helping to solve those challenges.

Let me cite one example of where a long-term view is needed.

A new report from the Alzheimer’s Association found that on our current trajectory, Alzheimer’s disease in adults over 65 will cost $1 trillion per year by 2050 and a total of $20 trillion over the next 40 years.  Today, there are few good options for patients confronting Alzheimer’s disease.  There are no treatments and even diagnosing the disease is difficult.

However, the Alzheimer’s Association projects that a new treatment that could delay onset of the condition by 5 years would both reduce the growth of new cases by 43 percent and save $447 billion by 2050.  There is no such treatment yet.

Now, there are significant health care and economic implications of Alzheimer’s disease.  Finding solutions will require a large investment in R&D to find new and better diagnostic tools and treatments.

But one thing seems certain:  Innovation is the only way forward in the fight against this horrible disease.  That means creating an economic and policy environment that rewards innovation, rewards investment and rewards risk taking

Along with better communicating about how to promote a pro-innovation economic and policy environment, we must better communicate about the changes taking place in science.

The science is complex and medical innovation can be a costly proposition.

Many of you are already familiar with the bottom line. Bringing a potential new medicine from the laboratory all the way through to FDA approval for patient use takes, on average, between 10 to 15 years and costs around $1.3 billion.

The risk of this investment is enormous. Only about five of every 10,000 compounds explored as a potential new medicine makes it all the way to clinical trials with patients and submitted for FDA approval.  And, even after that, we know that only two of ten approved medicines ever recoup their average cost of development.

But, while the process can be both risky and costly, it is important to understand that the science is transformative.  Every step – even failure – creates opportunities for insights that in turn can lead to new discoveries and practical uses for the science and the technology created.

Importantly, in this industry success is not predetermined and the process of discovery and development is hard to institutionalize through the standard organization chart.  Capturing the assets derived from good science requires a different, far more flexible, network and open ended model for organizing the business.

It also requires policy makers and regulators to understand the special challenges of fostering innovative science-based industries such as the pharmaceutical and biotechnology research sector.

As I see it, innovation is shaped equally by three contending socio-economic forces:  the patients’ desire for accessible and affordable healthcare; government payers seeking more fiscal responsibility; and investors seeking to maximize their return on investment.

While too often these forces are seen as at odds with each other, I believe that in this case these three objectives actually complement each other.  This means that companies have to be smarter and more efficient in the way they manage drug development and discovery because there is no longer one fixed way to achieve pipeline success.

This also means that PhRMA must be a voice for the science of discovery.

The scientists in our industry have to be mobilized to help shape the policy and regulatory environments where innovation takes place.  Drug regulation is one example of where there is a growing need for greater understanding of the science and the process.  The regulatory process is no longer a technical sidebar for a few industry specialists.  It is a strategic priority that done right can reduce time, cost and uncertainty in drug development.

In addition, the pharmaceutical and biotechnology industry must be seen for what it is: a key to meeting patient needs and expectations that is also playing an increasingly important role in our national economy.

First, there is the research itself. This industry is one of the most research intensive industries in the United States with companies investing five times more in research and development, relative to sales, than the average manufacturing firm.

Last week, in fact, PhRMA announced new R&D investment numbers that show that despite the difficult economy, industry R&D investments continued to rise.

In 2010, America’s pharmaceutical and biotechnology research companies:

• Invested an estimated – and record – $67.4 billion, up from $65.9 billion in 2009;
• PhRMA member companies directly invested an estimated $49.4 billion, an increase of $3 billion over 2009; and
• U.S 2010 R&D spending was 20.5 percent of U.S. sales –which means that R&D investment continued at a level that is consistent with where the average has been in recent years at around 19 percent.

PhRMA member companies make these investments because even though the science is more complex than ever before, there is genuine excitement about what we are learning about disease from biology and genomics and for using that knowledge to both fight disease and to develop an ever more personalized medicine.

But we all need to recognize that the industry’s approach to R&D is evolving.  In addition to traditional in-house research, PhRMA member companies are increasingly supporting new R&D through the use of instruments like corporate venture capital funds, licensing agreements with other companies, and partnerships with academic institutions

In addition to the investment in research, the industry has been and can continue to be an engine for economic development – in other words: jobs.

Pharmaceutical and biotechnology research companies today employ nearly 650,000 Americans.  Each of these jobs helps to create an additional three indirect and induced jobs economy-wide.  This accounts for over 3 million jobs in this country, 2.4 million of which are in other sectors.

It seems obvious to me that policy makers developing a national economic strategy to grow the economy and create jobs need to see the pharmaceutical and biotechnology research sector as an anchor for their efforts.

Policy makers also need to understand that America’s pharmaceutical and biotechnology research companies role as the leaders in medical innovation is no longer a given.

Global competition is increasing and R&D investment will flow to countries that appropriately reward risk-taking.

While the U.S. today is still the global leader, other countries are racing to build successful pharmaceutical and biotechnology research sectors and attract research now done in the U.S. to their shores.

Currently, there are still some significant advantages to doing R&D in the U.S.  As a result, more medicines are in development here than anywhere in the rest of the world.  U.S. companies hold the intellectual property rights to the majority of new medicines and 80 percent of the world’s biotech R&D is currently conducted by U.S. firms

Countries with fast-growing economies are working hard to compete and attract the sector, along with the good jobs and economic impact it brings.  The biotechnology sector was one of five sectors identified by the Chinese government as a key to China’s future economic growth.  The Indian government has pledged to develop more than 20 biotech parks and committed more than $1.7 billion to grow the sector.  And Singapore’s vision is to be “bioplois” of Asia, an international science cluster aimed at advancing human health.

The larger point is that the benefits that a strong, innovative pharmaceutical and biotechnology sector brings to patients and the U.S. economy can be lost to competition, over-regulation and a failure to take a long-term view.  We at PhRMA recognize that we have a lot of work to do to bolster and grow appreciation for this industry and we are focused on making sure that the United States remains the global leader in medical innovation.

I’ve spent some time talking very broadly about the challenges we confront as well as what PhRMA and the industry is doing to enhance and improve the economic and innovation environment for our sector.  But let me spend a few minutes talking about some of the issues on the immediate horizon.

First, the big, on-going challenge we face is the issue of reimbursement.

It is the issue that ultimately binds all of our issues together.  Reimbursement, for example, is central to the four points I noted earlier that are central to PhRMA’s mission.

Reimbursement also drives the fundamental questions we face in American healthcare:  How to establish value in the delivery of healthcare, and in the case of this industry, by giving providers the flexibility and access in prescribing medicines that leads to the best outcomes for patients?

We have not as a society resolved this question, despite the fact that the U.S. today, for example, faces a tidal wave of chronic disease.

And that leads to the second issue, the fight against chronic diseases.

Raising awareness of the cost and impact of chronic disease on both patients and the economy is an over-arching priority for PhRMA and this industry.

A simple statistic says it all: drugs currently constitute only a little more than 10 percent of total health spending, yet account for upwards of 40 percent of what the average patient has to spend out of pocket for healthcare each year.  In practice, this means that patients will be driven to rely on acute care services that cost less rather than on medicines that are more effective for dealing with a problem when you look at the treatment costs system wide.

Unfortunately, the way the reimbursement system now works, the incentive is to pay for a diabetic’s amputation rather than the insulin that would prevent it.  There is no margin for investments in prevention and wellness, which hurts us because medicines are often the first line of treatment in any strategy to help a patient avoid acute care and institutionalized interventions that cost our system billions of dollars each year.

Our goal both at PhRMA and in this industry is to turn this debate about costs on its head.  We need to force stakeholders to think logically about the problem and thereby put more emphasis on the long-term.

We have a number of broad program initiatives under way that involve outreach to other stakeholders.  These initiatives are designed both to raise awareness and seek common-ground on common-sense solutions.

Next, there is the on-going issue of healthcare reform.

PhRMA continues to support all Americans having access to high-quality and affordable healthcare coverage, services and treatments.  Just how we get there is what is being debated in Congress right now.

I think that most Americans recognize that the healthcare reform law is not perfect and that it needs to be improved.  While there are disagreements in Congress on how it can be improved, policy makers have the difficult job of trying to navigate through some tough waters and doing what they believe is best for the future of healthcare in the U.S.

I can tell you that one provision in the law that continues to concern members of Congress on both sides of the aisle – as well as a broad array of healthcare stakeholders – is the Independent Payment Advisory Board (IPAB).  This board will be in charge of slashing Medicare spending, which could result in access restrictions for millions of seniors.  Since the law was enacted, we have said that this provision should be repealed so that seniors don’t have to face cuts to important medical services and treatments.

Fourth, in light of our renewed focus on regulatory issues, we will be spending a lot of time in the next year on the reauthorization of PDUFA – the Prescription Drug User Fee Act.

PDUFA reauthorization provides us with a great opportunity to enhance the regulatory system – something I spoke of earlier – and, improve the science and technological expertise needed to review medicines and to look for greater efficiencies as we seek to move innovative medicines and treatments through review and on to approval for patient use.

Now before concluding and taking questions, I want to spend a few moments talking about a topic that is of particular interest to American pharmaceutical and biotechnology research companies and, I am sure, everyone here today.  I’m talking about U.S. trade with Japan.

Perhaps needless to say, Japan is vitally important to the global pharmaceutical and biotechnology research sector.

In fact, according to a study just release by IMS Health for the fourth quarter of 2010, Japan remains the world’s second largest pharmaceutical market, accounting for 11 percent of worldwide sales – $86 billion – and recording more than 7.2 percent annual growth.

That’s a growth rate that is more than twice the rate here in the United States.

As already discussed, the pharmaceutical and biotechnology research sector – whether based in the U.S. or in Japan – is a key driver of economic growth.  Japan, like a number of countries in Asia, has specifically recognized that this sector is a critical part of its economic growth strategy, and we are committed to support that policy.

As part of its effort to stimulate that economic growth, PhRMA has been working with the government of Japan as well as other stakeholders on how the regulatory and pricing system can be improved.

We were particularly pleased when, last year, the Government of Japan announced a major new pilot project designed to reform pricing of new medicines which included a key component of better rewarding innovation.

I am confident that this pricing policy change will help reduce the drug lag, promote more innovation and investment, and ensure patients have promote access to the world’s newest and best medicines.

I also want to say that PhRMA appreciates the many improvements that have been made in Japan’s regulatory system.  They have helped to increase our industry’s ability to bring the newest and most innovative medicines to Japanese patients.

I want to conclude by reflecting again on some of the over-arching challenges the industry here in the U.S. is facing and how it is responding.

At the same time that the costs and risks of R&D continue to escalate, market pressures are also increasing.  For example, powerful purchasers of healthcare services have successfully used a range of tools such as formularies, prior authorizations and tiered co-pays in order to drive nearly all uses of medicines to generic drugs or preferred brand medicines.  Indeed, generic utilization in this country is now around 75 percent.

Further, competition with generics is now occurring earlier in a product’s life cycle.  While generic copies are an important part of balancing innovation and affordability, it is important to note that it is only because an innovator developed a new medicine that it later available in a generic form.

But even in the face of mounting economic pressure, the industry continues to respond by investing in the future.

• 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 heart disease and stroke – the three leading causes of premature death in the United States.

Facts like these it seems to me are the measure of this industry.  They underscore the real strengths of a vibrant, innovative pharmaceutical and biotechnology research sector.  They also underscore the contribution that this industry is making to improving patient health and, through that contribution, to improving the economy.

They also paint the picture of an industry that is meeting not only its immediate challenges – both domestic and global – but that, like the science it employs, has a vision for long-term growth and success.