Speeches & Communication

John J. Castellani on Innovation

PhRMA April 8, 2011

John J. Castellani
PhRMA President and CEO
delivered these remarks at the

N.Y. Bio Annual Meeting
Thursday, April 7, 2011

Thank you for that kind introduction and thanks to Kadmon Pharmaceuticals for sponsoring this lunch.

Kadmon, like so many of the companies here today, is working on the frontiers of the biopharmaceutical sciences and applying the latest science and technology and knowledge about biology and genetics to solving some of the toughest problems we face. You are changing how we approach disease and expanding the potential solutions for patients.

The biopharmaceutical research sector is still a relatively young and still figuring out the right business models needed to succeed. It is still proving itself every day to patients, to investors, to policy makers and regulators.

And, while not every venture will succeed, every venture – even the failures – teaches us things that can make another business or research program successful.

That is how good science works. It is also how good business works.

Many of you are understandably focused on your individual companies and its potential. But I know that you are also all very aware of the business and economic environment in which you operate.

More to the point, I am certain that you each understand both what policies and regulations can do to help your companies grow – and that help may be as simple as staying out of your way – to what policies and regulations can do to stifle your enterprises

And so, what I want to talk about today is PhRMA’s innovation agenda and how we support, build and change policies and the economic environment in which we operate.

But before detailing some of the practical, structural and economic challenges the sector faces, let me first address the atmospheric challenges we face with two quick stories.

The first may be well known to some of you. Back in 1898, there was a commissioner of the U.S. Patent Office named Charles Duell. He likely would be little remembered today save for one thing he said. Four years before the Wright brother’s flight at Kitty Hawk, three years after Henry Ford pieced together his first automobile in his garage in Dearborn, Michigan, and two years after Marconi sent the first wireless broadcast over the ocean, Mr. Duell had the profound insight that: “everything that can be invented has been invented.”

I like the quote not merely for its obtuseness but also because of its smug complacency.

But I revive Mr. Duell from well-deserved obscurity because when it comes to medicines and health care, I fear there exists – if not as outrageously expressed – a similar complacency.

By this I mean that there’s been enormous medical progress in the last 50 years. People are living longer and healthier lives. Many once deadly diseases like heart disease, diabetes, some cancers, HIV/AIDS can now be managed as chronic conditions.

Yet, with the exception of patients and the visionary scientists in our industry, too often policy makers seemly subscribe to an unfortunate belief that the medicines we have today are good enough.

It is short-term thinking.  Because a health care system founded on the status-quo of generic medicines simply isn’t good enough.

Policy makers must understand what patients confronting not only heart disease, stroke, diabetes, HIV/AIDS, cancer and other conditions already know: More must and can be done.

In short, everything that can be invented has, of course, not been invented. We’ve a long way to go in the fight against many common conditions and as well as a rare diseases.

Now, the other story I want to share occurred just the other day. I was at the Washington Economic Club luncheon where so-called movers and shakers talk about the issues of the day.

The speaker was Jeff Immelt, General Electric’s CEO. One thing he said struck me. He said that for GE to be successful over the long-term, it had to invest more than 5% of its gross revenues into new research and development. He was proud that GE was making this investment and certain that it could lead to significant innovation and new products.

Not to take anything away from Mr. Immelt or GE’s accomplishment, but I thought to myself: PhRMA member companies, on average, invest about 19 or 20 percent of revenues annual on R&D.

The point is that no industry or sector in the U.S. invests as much in the future as this industry does. Close second isn’t even close. Sadly, we don’t seem to get much credit for this effort.

But how this industry invests, its commitment to the future, to patients, to jobs and to the communities where we operate makes it a national resource.

It is something we all need to understand and also repeat again and again when talking with patients, policy makers, the public and the media.

So, with that, let me talk broadly about some of the structural and economic challenges we face 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 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 need to recognize that health care today is nearly one fifth of United States’ GDP. This means that medicines – especially innovative medicines – can and must play a big role in solving the health care challenges ahead.

The big question is can this industry adapt to a changing scientific, technological, regulatory and economic environment in order to maintain U.S. leadership in medical innovation?

The answer is not yet clear and the stakes are high. But I think that the fact that the stakes are so high works in PhRMA’s and the biopharmaceutical 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 U.S.’s 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.

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

Every one here understands that you cannot escape the economic cycle. When demand for medicines is down in a poor economy, it has a short-term impact on resources available for innovation.

But what is notable about this industry is that even in a difficult economy, it invests for the future. Our members continue investing in new 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.

But what is also critical to explain is that few other industries have such long lead times in how they spend money and their expectations for results

This means that our stakeholders, policy makers and planners need a longer view when thinking about the role this industry can play in helping to solve the health care challenges ahead.

Let me cite just 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 no treatments and even diagnosing the disease is difficult.

However, the Alzheimer’s Association projects that a new treatment that helps delay onset of the disease by 5 years could both reduce the growth of new cases by 43 percent and save $447 billion a year by 2050.

Clearly, there are significant national and global health care and economic implications of the disease.

But one thing seems certain: Innovation is the only way to solve the Alzheimer’s challenge. This means creating an economic and policy environment that rewards innovation, rewards investment and rewards risk taking.

We must also better communicate about the changes taking place in science.

The science is complex and medical innovation is 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 can cost around $1.3 billion.

The investment risks are 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 is submitted for FDA approval for patient use. And, even after that, we know that only two to three out of every 10 approved medicines ever make their investment back.

Most importantly, success is not predetermined. Policy makers must recognize that the processes of discovery and development is hard to institutionalize on a 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 that policy makers and regulators understand the special challenges of fostering innovative science-based industries.

This is no small problem.

The astronomer Carl Sagan once said: “We live in a society exquisitely dependent on science and technology, in which hardly anyone knows anything about science and technology.”

This rings especially true for the biopharmaceutical research sector. Too many policy makers have only a surface understanding of the science, the business models and the benefits that can flow from biopharmaceutical research.

And, I fear many compartmentalize that understanding. By this I mean that they see efforts to foster the biopharmaceutical research sector in small pieces -- changing a tax policy here, amending a zoning regulation there and maybe throwing-in some seed funding and grants.

Certainly, these can and do help lay the foundation for short- and long-term success. But it is the rare policy maker who sees further than a year or two down the line.

What we know, and what we must do a better job of explaining is that this is not how the science works. Nor is it how the biotechnology research business works.

As I see it, innovation is shaped equally by three contending socioeconomic 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 seem 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 must mobilize 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.

Tow weeks ago, 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 biopharmaceutical 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%.

Let me remind you again that GE’s Jeff Immelt said that GE was investing 5% of sales in R&D and how critical he viewed that investment to GE’s long-term success.

But we must also 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.

Second, in addition to R&D, the industry is an engine for economic development – in other words: jobs.

Biopharmaceutical 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.

Here in New York, this means nearly 50,000 direct jobs and an additional 152,000 indirect and induced jobs – a total of over 200,000 jobs. These are jobs that build and grow strong communities just as the technology builds and grows new businesses and industry.

It seems obvious to me that any national strategy to grow the economy and create jobs must see the biopharmaceutical research sector as an engine for this effort.

Third, policy makers also need to understand that America’s biopharmaceutical research predominance is no longer a given.

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 else in the world. U.S. companies hold the intellectual property rights to the majority of new medicines and 80% of the world’s biotech R&D is currently conducted by U.S. firms.

But global competition is increasing and R&D investment will flow to countries that appropriately reward risk-taking. Other countries are racing to build successful biopharmaceutical research sectors and attract research now done in the U.S.

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 the Chinese government identified as key to its 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 biopharmaceutical research 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.

Now, I’ve talked broadly about the challenges we confront as well as what PhRMA is doing to enhance and improve the economic and innovation environment. Let me turn now to 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 seemingly cost less than more effective medicines.

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

Our goal is to turn this debate about costs on its head. Stakeholders and policy makes simply must think more logically about our reimbursement system.

We have a number of initiatives under way designed to both 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 right now.

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

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 and, improve the science and technological expertise needed to review medicines. We must also use the opportunity to look for greater efficiencies to help move innovative medicines and treatments through review and on to approval for patient use. We are nearing the end of the beginning and hope to review an agreement next week.

Let me conclude by again reflecting on the over-arching challenges the industry faces 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 and growing.

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 these mounting economic pressures, 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 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.

So where does that leave us?

As I said earlier, we are at a crossroads.

Will we choose policies that help us re-imagine a reimbursement system that better measures the value of healthcare services, puts meeting patients’ needs first and better recognizes medical innovation?

Will we embrace a 21st Century regulatory system that marshals the latest, best science, scientist and technology to help protect patients, provide the greatest possible medical choices and fosters the emergence of new technologies like genetic and more personalized medicines?

Will we strengthen the economic rewards and incentives that have both helped to promote investment and that have made this country the global leader in biopharmaceutical research?

Or, alternatively, will we choose – and it is a choice – to change our frame of reference about innovation and health care, and view the medicines we have as good enough and our health care delivery system as little more than a public utility?

The answer, I hope, is obvious.

Public utilities work. They meet many basic needs and do so reasonably well. But they are not innovative or transformative institutions. And, ask yourself this: when was the last time you walked into a post office and said: “ah, that’s what the future looks like?”

But the patients we serve and who wait and hope for a better treatment or even a cure deserve our best efforts. They deserve the best that our science and our efforts can deliver. That means a robust, competitive biopharmaceutical research sector that pushes the bounds of science and medicine in the search for new answers.

And our task – both in our enterprises and in our public advocacy – is not just to see the future but “to enable it.”

Thank you very much.