It is my contention that the Economy of the US will not recover until our expectations improve. Consumer spending is low and companies or individuals with money have no incentive right now to take a risk with so much uncertainty and regulation waiting for them. Fiscal and Monetary policy alone aren’t going to set us on the path to recovery unless we improve expectations which means eliminating regulations that stifle economic growth and are innefective at protecting US citizens. The Department of Justice (DoJ), Environmental Protection Agency and the Food and Drug Administration (FDA) are preventing business growth and as I’ll show you here, some of these regulations are actually killing Americans.
This article shows how the FDA has finally approved a replacement heart valve that was approved for commercial use in Europe 4 years ago. Tens of thousands of Americans, who were unable to travel to Europe and get these devices, have died during this FDA review period. The longer review cycle in the US is attributed, in part, to a decision by the FDA to treat medical devices like drugs. But this isn’t the methodology used in Europe and there is a good reason to provide a regulatory approval path for medical devices that is different to drugs. Medical Devices are often iterations of previously approved devices and therefore don’t need the rigor of animal trials and other such toll gates before they are proven safe for human use. As we would expect, corporate America is reacting to this excessive regulation – Since 2008 the number of newly started medical device companies plummeted from 118 to 60 in 2010 (a 49% drop). While the recession has something to do with this, another large part has to be the increased regulation which requires longer approval times and greater risk that the products will never see the market. The article finishes with an appropriate quote:
“This is no way to run a regulatory process if the FDA is serious about promoting medical innovation and advancing the public health.”
This article shows how drug companies are struggling to keep up with demand and this supply shortage is causing hospitals to ration the use of these critical life saving drugs. This situation is forcing physicians to make the very difficult decisions about who gets the medicine and who does not which is basically deciding who lives and who dies. According to the graph in the article, drug shortages have started to increase after 2006 and they continue to get worse. What are the possible causes? According to the FDA, 75% of the delays can be attributed to manufacturing (not enough capacity and quality control issues). That is a very convenient skapegoat for the FDA since assigning blame to the hundreds of manufacturers would be nearly impossible to verify.
Pharmaceutical Manufacturers have some of the most stringent quality control systems that you’ll find in the manufacturing world and I can’t see quality and manufacturing issues accounting for a doubling of drug shortages within the span of 1 year. Manufacturing capacity hasn’t been a problem for companies since the recession and factories are now operating at 77% of capacity which is well below their historic average of 80%.
What if companies stopped seeing a benefit to fight the regulation and decided to move on to less regulated industries? The FDA has always been a tough toll gate to pass (as it should be) but companies have lived with that inconvenience because their products could still get to market in time to recoup their R&D costs and make a nice profit. Could there have been a shift at the FDA from 2006 to 2007 that caused this supply shortage (i.e. increased inspections, reduced product approvals, more red tape, etc.)? What happened to Government in 2007 that enabled the FDA to increase its regulation pressure? Could it be correlated to the fact that after the 2006 elections Democrats took control of both the House of Representatives and the Senate?
Sudden Cardiac Death (SCD) kills over 900 Americans every day and the most reliable safeguard against death from SCD is an implantable Cardioverter Defibrillator (ICD). The ICD monitors the heart and when a tachycardia event happens it shocks the heart back to normal rhythm and then follows up with critical pacing of the heart to ensure the patient survives. Early in 2011, the DoJ decided that doctors were implanting too many of these and they started an investigation against the doctors and hospitals. Because of this on-going investigation, doctors across the country have been very apprehensive about implanting ICDs because they want to avoid being on the DoJ “hit list” so the market for these devices has shrunk and people are dying every day because they can’t get these life saving medical devices.
So here we have numerous real world examples showing Federal regulatory agencies over stepping their authority and not only stifling economic growth but killing innocent Americans. When will this stop?
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Regulations aren’t creating this – free market capitalism is. Hospitals face rising costs and rising uncollectables due to the recession, and increasing need to provide care for more and more uninsured. In turn, they demand lower and lower prices from their vendors. The same equipment required to manufacture a reasonable-margin brand drug is needed to make a margin-squeezed generic – and the majority of injectable drug shortages are in those generic categories. Generic injectables are not the province of the top Rx drug manufacturers – that space has been occupied for years by smaller firms. They can make those drugs only in large, defined batches. As margins drop, and hospitals are reluctant to commit to large inventories, the pressures on those companies are greater and greater. Supply-demand kicks in – and affluent hospitals and wholesalers snap up all the production these small firms can produce, at high prices. That leaves many hospitals out in the cold when they attempt to use “just in time” ordering. They can end up having to pay $900 for a vial of drug that used to sell for $12 five years ago, and was purchased by a wholesaler for $100 in today’s market.
Demand is so great that, as predictably as fake tickets at a SuperBowl, fake drugs are entering the market. One convicted criminal was purchasing 10,000 unit vials of Procrit and relabeling them as hard-to-find 40,000 unit vials. Then he found a supplier of vials much like those used for Procrit, and started filling them with Miami tap water (found later to contain deadly psuedomonas organisms).
Dug companies need to be assured of a stable, reasonable price to justify investing in the production capacity needed to meet the demand generated by an aging population for these generic injectables. Why is it that Congress can pay price supports for commodities but not for the drugs that hospitals need to keep patients alive? Perhaps, because I am in the industry, I can see more clearly the value of the tight GMP (good manufacturing procedure) regulations, compliance with which keeps our drug supply safe.
The problem isn’t regulations – it’s demand that cannot affordably be met without investment that can’t be rationalized at today’s competitive generic injectables prices. It’s not the FDA’s fault, and it’s not the manufacturer’s fault. Blaming “regulations” is just a hack, political position. We saw what happened when regulations were relaxed in investment banking. Imagine what would happen if regulations were relaxed enough to allow imported drugs from China – responsible for the heparin disaster of a few years back – to fill the demand? Under those conditions, go long on the funeral home and casket business.
Thanks Mel so much for your very detailed comments.
Your comment seems to contradict itself though. In one statement you say that drug companies can’t afford to use equipment for low margin products then you say hospitals are willing to pay top dollar for high demand/low supply drugs. The Free Market will solve that problem wiht companies recognizing this and making the high demand/low supply drugs. Right?
I too am ‘in the industry’ and also see the value of GMP. I’m not arguing that point. But I do see a regulatory climate with the FDA that is much different than it was many years ago and the roadblocks don’t make sense.
The article on how the FDA is preventing innovation makes the case and is in the post above. Here it is again:
Click to access 06.2011-Mandel_How-the-FDA-Impedes-Innovation.pdf
I appreciate your arguments but we’ll have to agree to disagree on this one.
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