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sidney taurel
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Sidney Taurel is the chairman, president and CEO of Eli Lilly. In this interview he talks about alternatives to expanding Medicare to include drug coverage, the problems with Canada's price controls, Maine and Oregon's measures for cutting drug costs, and the benefits of direct-to-consumer advertising. This interview was conducted on Nov. 20, 2002.

The price of prescription drugs as a fraction of health care has been rising sharply. What are the drivers of this rise?

Pharmaceuticals have come to be used more and more as we have made a lot of progress in pharmaceutical innovation and have come up with new products which prolong life, improve the quality of lives, improve productivity. So it is this increase in demand, rather than any price increases, which have driven the share that pharmaceuticals represent of total health care costs.

What we have to beware of is systems ... where a commission or bureaucrats decide that this drug is better than that drug for every patient in the state or country. That simply does not work.

This being said, I'd like to put that in perspective, because pharmaceuticals still today represent only 9 percent of total health care costs, which is the lowest percentage of any developed country in the world. As a percentage of gross domestic product, we Americans spend about 1.4 percent of GDP on pharmaceuticals, a percentage which is very similar to other countries in the world.

Are you saying you're the victim of your success? Certainly, pharmaceuticals are used more than they were.

Yes, very much so. I believe that it is actually a good thing for the health care of Americans in general that more pharmaceuticals are being used, because very often pharmaceuticals will help avoid much more invasive, costly, and painful types of medical interventions.

For example, we no longer have very many ulcer operations, thanks to anti-ulcer compounds. To show another example of cost-beneficial treatments, the new antipsychotics, new generation of products against schizophrenia, help avoid hospitalization, which today it is estimated that the schizophrenic may cost society up to $100,000 a year in treatment costs, mostly because there is a lot of hospitalization involved. With the use of these newer agents, at a fraction of that cost, we keep these people, not only off the hospital, but also many of them are capable of starting again a very productive life.

Part of the problem you face is that consumers are starting to see the price of drugs. Why would a pharmaceutical product be so expensive?

The problem is really that, even though pharmaceuticals represent only 9 percent of total health care costs, for consumers, it appears to be more, because their out-of-pocket expense is higher. For consumers, out-of-pocket pharmaceuticals represent about 30 percent of out-of-pocket expenses. Why? Because we have different insurance systems and different co-pays, different deductibles for pharmaceuticals than we have for the rest of health care.

That is not logical. Since pharmaceuticals help avoid hospitalization, surgery, and so on, there actually should be incentives for the usage of pharmaceuticals, not disincentives -- which these higher co-pays and deductibles represent.

So it's not fair. But since they see it, they ask why it's so expensive.

Yes. First of all, let me make a point. Should all the profits of the pharmaceutical companies be eliminated, we would make a dent -- and a very temporary dent -- of 1 percent in total health care costs, and would not stop the growth of these health care costs. Those costs increase because populations are aging, because we have more and more revenue, and therefore more and more access to innovation, and because people have more access to information about innovation, and therefore demand that innovation.

The cost of pharmaceuticals is very affected by the cost of research. The research into pharmaceutical products is long, is expensive, and is risky. It takes 12 to 15 years between the time we develop a concept to the time we have a product on the market. We have to start with several tens of thousands of molecules before we get to what is called a lead. Once we have that lead, only one out of 20 leads or so will get you a molecule, which is then going through clinical development. And only one product out of 10 which starts clinical development will make it to the marketplace. Finally, only three products which reach the marketplace out of 10 will recoup their costs of R&D.

So it's a very, very, very risky business. As a result, investors expect high returns to compensate for the high risks of this business.

It appears that this industry is more profitable than any other industry over the last 20 years -- with a 20 percent return. Is that true?

If you look at the 2001 figures, the industry as a whole had an 18 percent return, so you're pretty close. But within that 18 percent, one company lost money, and a couple were below 10 percent.

In 2002, we are seeing a significant reduction in those returns, because we have patent expirations of a number of products, and the expected fruits of the genomics revolution are taking a little longer to arrive. That illustrates, really, the risks of this business.

It takes a very, very long time and a lot of money to bring a product to market -- 12 to 15 years, in terms of the development cycle. A very, very small percentage of the products that we start with make it to the marketplace. A very small percentage of them actually recoup their costs. The costs have escalated from about $200 million per molecule, 15 years ago, to about $800 million today, as per the latest studies. Therefore, this is a very, very high-risk business.

When you look now at the patent system, patents are valid for 20 years. But this starts from the time when the patent issues, which is typically the very beginning of the development process. Once the product is on the market, it is protected effectively for a much, much shorter period of time, which today is like 10-12 years, maximum.

So it is a high-risk business, a small time to recoup the investment. As a result, investors demand a higher return.

Are other countries with more restrictive pricing as innovative as the United States in developing new drugs?

Many countries outside the United States have a form of price controls, and those price controls have affected tremendously innovation. I know, particularly the case of France, where I lived for eight years. Thirty years ago, because of the quality of its pharmaceutical scientists, France was number two in pharmaceutical innovation in the world. Today, after 30 years of price controls, it is number nine. All modern economists know that the one predictable outcome of price controls is to reduce the availability of whatever is being supplied. In the case of pharmaceutical products, what is being curtailed is the production of new innovative medicines.

We've seen that, again, not only in France, but in Japan, in Italy, in Spain, in Canada. Really, most of the pharmaceutical innovation is now concentrated in the United States. More than 60 percent of new drugs are invented and developed in the United States. Why? Because we have a free pricing system, which allows rewards for innovation to be determined by the marketplace.

What do you feel about the federal efforts to address the lack of a prescription drug benefit for seniors?

I think it is very, very important that this country adopts a prescription drug benefit plan for seniors, and that this prescription drug benefit be integrated in the total Medicare system. When Medicare was developed back in the 1960s, pharmaceuticals were a very, very small part of the total -- maybe 5 percent or so. Today it is a larger part, with close to 10 percent of total health care. For seniors, [it is] probably even a little bit more than that. So it's very important that seniors have access to reimbursed pharmaceuticals, so in turn, that will help them prevent some worse forms and more expensive forms of intervention.

One-third of seniors do not have any drug benefit at all. So it's important for us as a nation to address this. It's very important that the way we address this ensures that there is a free market at play, so that the benefits and costs of pharmaceutical products can be assessed, first, in relation to each other, but also in relation to the other forms of intervention. Again, as pharmaceuticals only represent less than 10 percent of the total health care, what you can save through the better use of pharmaceuticals can really be assessed in the 40 percent of health care which is spent on hospital care, or the 20 percent spent with physicians, and so on.

In principle, Medicare can do this kind of tradeoff. Are they very good at it?

What's happening is that we have a fee-for-service system, which is not the best environment in which to make those tradeoff analyses. When you administer separately hospitalization, doctors' fees, drugs, labs, and so forth, you do not optimize the sum of all of that. Managed care is trying to do that in the private sector -- not always with the best results, from a quality standpoint -- and this needs to be improved. But they have been able to control costs and provide some amount of quality. The organizations which have been around for the longest period of time provide typically the best quality. They are doing that by focusing on the needs of the individual patient, rather than focusing their management on each separate element of the system.

You're not in favor of expanding Medicare to offer a prescription drug benefit?

… What we think would be the best system would be to reform Medicare. There was a bipartisan Medicare commission that President Clinton convened about three or four years ago, and which did not get the super-majority that was required on that commission. But their proposal was a premium support system, whereby Medicare beneficiaries would receive an amount of money with which they would buy a health plan from competing health plans. The various health plans would be competing on the basis of cost and quality, and those plans would include a drug benefit.

Why do you think this would do a better job than expanding Medicare?

It would do a better job for both patients and for the economy by ensuring that the tradeoffs between the use of pharmaceuticals and the use of other forms of intervention -- that those analyses are made. Also, by having this based on a system of choice and free market, we would continue to reap the benefit of a free market system, while at the same time enhancing consumer choice.

What would you say to Maine seniors, who question why Canadians pay less for pharmaceuticals?

The answer is very simple: Canada has price controls, and the United States does not. The implications of that are two-fold. For innovative products, the prices are generally lower in Canada because of these price controls. But then when the drug goes off patent, then there is no free market in Canada, and therefore the prices do not come down as quickly as they do in the United States. As a result, Canadians spend ... significantly more than Americans for generic drugs, or for off-patent drugs. In total, in both countries we spend 1.4 percent of GDP on drugs.

The difference isn't because some people are uninsured? Wouldn't we use more drugs if we had better access?

The figures do not show that Canadians use more drugs relative to their economy than Americans. The difference between the two systems is that the very high level of price competition which occurs after a patent expiration in this country forces pharmaceutical companies to constantly innovate. Lilly, for example, faced the patent expiration of Prozac last year. The only way for us to continue to survive and thrive as a company was to come up with new products to make up for this. Indeed, we have now eight new products to be launched over the next couple of years.

What I'm saying is that this system really fosters innovation, both by rewarding it when the patent is there, but also by ensuring that when the patent expires, the economic viability of the product goes away completely, so that that forces you to continuously come up with new products. The Canadian system does exactly the opposite. As a result, there is very little pharmaceutical innovation in Canada, or for that matter in most European countries.

That also galls these seniors. "We pay for the innovation here, but the Canadians benefit. It's not fair."

I like to think that Americans benefit first from innovation. When you look at the gap that there is because of price controls, in access that Canadians have to innovation, you can see that we first reap the benefits of innovation here as Americans.

Why do you allow the Canadians to sell it for less?

We really do not have a choice. The Canadian provinces … impose a price on the pharmaceutical industry. What is our choice there? … The only one we have would be to make our products available without reimbursement -- [that] is a possibility which has been used in a few cases -- or to not make our products available in the Canadian market. But there we face two problems.

One is that the law enables the Canadian government to force what is called a compulsory license. If we refuse to make a product available in Canada, the government basically can force us to license another company to do.

Two, we also have moral and ethical problems when we come up with a lifesaving product like a drug for sepsis, Xigris, that we launched last year in this country. If we do not make them available to patients who are dying around the world, we do have obviously some very significant moral and ethical issues.

With regard to the Maine Rx program, what is the problem of taking 12 million-17 million seniors and getting them a discount?

First, I understand the issues that governors are facing in trying to combine in a difficult economic environment; balanced budgets, which by law they have to have, with ensuring that their Medicaid population, particularly, receives appropriate treatments.

I think to deal with it through imposed rebates or other forms of limitations on the use of pharmaceuticals, such as the use of prior authorization, limiting the choices that physicians can have in terms of which pharmaceutical product to prescribe to their patients -- all of that will result in not as good care for patients, and not necessarily lower costs. The reason is: If you do not use the appropriate product, you will pay the consequences in terms of more hospitalization and so forth.

Instead, we are working with many governors around the country in looking at improving the overall Medicaid performance and controlling budgets by attacking, not just pharmaceuticals, which, again, is only 10 percent of the total, but the other areas as well. Things such as the treatment of chronic diseases, such as depression, diabetes, asthma and so forth, can be improved tremendously through disease state management programs. Also, through better deployment of information technology, you can significantly reduce costs.

When you look at total health care costs, you have something probably in the range of 20 percent of $1.2 trillion which is related to the cost of insurance, liability insurance. So some kind of tort reform or change in the malpractice laws would go a long way to reducing this. This is more than twice what we spend in total on pharmaceuticals. There is also another 20 percent estimated which is due to the cost of administration. Through better deployment of information technology, we can simplify all of that and eliminate a lot of duplications. So what we are doing in states like Colorado or Arkansas right now is to help with disease state management programs to find better solutions, more effective solutions, but which do not destroy innovation through price controls.

If Maine Rx is copied by other states, how serious a problem would that be?

If the Maine program was adopted by other states, it could have very dire consequences for the pharmaceutical industry, because all of the Medicaid part of our business, which is 15 percent or 20 percent of the total market, would be significantly affected by price controls. But the Maine program also leveraged rebates for Medicaid beneficiaries to other populations.

The seniors?

Yes, which is an extension, if you will, of the state-dominated rebate system. Therefore, if it were adopted on a national basis, that would put more than 40 percent of the total pharmaceutical market under some form of state control. There I have to go back to the examples that we have seen in other countries -- what their nationalized health care system does to innovation.

So, in a nutshell, it would grow the government part from 25 percent to 40 percent?

Yes. Probably in excess of that, because seniors represent about 25 percent, Medicaid is about 15 percent, and besides that, there are some other programs, the VA and others.

So the market would still have private parts, but it would be less private.

Correct. Much less private.

The industry has been criticized for gaming the patent system to extend patents and keep generics out. You feel this industry is treated unequally, as regards patents?

I think some of the criticism of the industry regarding patents is linked to the so-called 30-month stay and the use of several 30-month stays, which is provided in the current patent law. …The criticism of the industry has come from a perceived abuse of the system by using several 30-month stays, and also by so-called late patent listings. But I want to give you a little bit of what the facts are.

Since 1984, when the Hatch-Waxman law passed, there have been about 8,000 so-called abbreviated NDAs, which are the generic applications for new products. Out of those 8,000, only in eight cases have we seen multiple 30-month stays. Also, those 30-month stays really occur before the patent expiration. They occur during the life of the patent. In no case has this resulted in an extension of the patent.

So you think some things about patents have been exaggerated?

Yes, I believe that very, very few cases have occurred -- eight out of 8,000.

... In the case of Eli Lilly, we have never had more than one 30-month stay. In terms of late-listed patent, we did have that opportunity in the case of Prozac -- to license a patent which issued one month before the Prozac patent expiration. But we decided not to, because we felt that this patent was not really a valid one. Even though there were some pressure from some investors that this would bring Lilly some economic benefit in the short term, we felt it was not ethically right to do.

From the business point of view, what is it like to lose a patent before you expect it? Is that pretty serious?

Yes. To lose a patent before you expect to is a very traumatic experience for a company, especially when your product represents a significant percentage of your sales. Fortunately, in the case of the Prozac patent expiration, we had done very significant planning and contingency planning beforehand. So we were ready, based on various potential scenarios of when the patent would expire. We are ready with a number of new products to launch to the market shortly after the patent expiration.

Some state governors say the pharmaceutical market is dysfunctional, because they don't have the data to make informed choices. Do you have any sympathy for that view?

I believe that everything that can be done to make the health care market in general more transparent, with more information on quality, is very important. Everything that can be done to move consumers from being patients -- in the full sense of the word, i.e., patiently waiting for somebody else to make decisions for them -- to being more active consumers of health care products and services by shopping around and ensuring that their capacity to choose is fully exercised. If we can move in that direction, that will be best for everyone.

What we have to beware of is systems which are run by states or by the federal government, and where you have a commission or bureaucrats who decide that this drug is better than that drug for every patient in the state or in the country. That simply does not work. The decision-making power has to remain in the hands of the treating physician, because different patients have different reactions to different products. Therefore, to have a choice of potential products at the disposal of the practicing physician is very, very important.

This being said, both the physician and the patient, and the payers have to have as much information as is humanly possible to gather on the cost and on the effectiveness of these products.

With pharmaceuticals, most of the information physicians get is from detail people. Now we have direct-to-consumer advertising. This information comes from an interested party, so there's an issue of credibility.

Research on pharmaceuticals can only be funded by the pharmaceutical industry. There are no public funds or private funds of other sources to really do the necessary research. What gives physicians confidence in the data that they see, coming from research funded by pharmaceutical companies, is the names at the bottom of the article: who participated in the study, the fact that you have ethical review boards which review the protocols of the studies in every institution around the country. When those study results are published, it is usually in a peer-reviewed journal. Therefore, you have an objective expert assessment of the results. All of that gives confidence to physicians as they assess those results. This being said, they will always use their own judgment.

As to direct-to-to-consumer advertising, first of all, I'd like to put things in perspective. I think there has been a criticism of the industry that we are spending more on DTC than we do on the rest of marketing, or more importantly, on R&D. In fact, in 2001, the total expenses for direct-to-consumer advertising was $2.4 billion for the whole industry, versus $30 billion on R&D.

I think direct-to-consumer advertising has some very important public health benefits. One is, you can see for the majority of the products which are advertised, that they deal with conditions which, according to medical experts and the data available, are under-treated -- diseases such as depression, such as diabetes, such as hypertension, such as high cholesterol. All of these areas are today under-treated, and direct-to-consumer advertising helps educate patients and bring them to the doctor's office. The most expensive disease is the one which is not diagnosed or treated.

The other benefit of direct-to-consumer advertising, from a public health standpoint, is that, according to surveys of both physicians and patients, one out of five, approximately, says that to see the advertisement helps that patient remember to take his or her medication. Non-compliance is a very, very serious issue.

If you look at statins, for example, the products for high cholesterol, after two years of treatment, more than half the patients do not comply with the treatment. They are not taking their medications as prescribed. For antidepressants, we have seen studies that patients who have been prescribed an antidepressant stop taking it after four months, while studies show that longer-term usage results in less relapses and less problems, and therefore economic as well as clinical outcome.

So I see those two benefits coming from direct-to-consumer advertising. And we have to remember that the doctor always has the last word. The doctor is the one who will prescribe or not prescribe product A or B.

One problem that HMOs and states find is that doctors are poorly informed about drugs. Some states are looking at head-to-head comparisons within therapeutic classes. Isn't this a legitimate exercise?

In general, I think the more information physicians have about the benefits of drugs and their cost, the better they are going to be. Where I object is when this results in saying, "Drug A is the only one that you can prescribe to all your patients. If you prescribe Drug B, you have to get an approval from a bureaucrat." That is where the problem arises, because if you take the example of mental health products, for example, mental health affects the whole life of a patient, as opposed to some physical ailment. And the treatment of mental health involves pharmaceuticals but also … [for] medical, psychiatry care, social care.

If you use the wrong product, or if you stop using a given product just because it happens not to be on the formulary which is approved by the state, you can set that patient back several months, or even years. Therefore, it is very, very dangerous to take away from the individual physician the decision-making power as to what is best for this or that patient, and how the drug being used is integrated with the other forms of health care.

The idea of formularies is not very controversial. Health plans do it. Why is it different if a state does it?

Well, typically, we see very, very few closed formularies. What we have is tiered payments, where, for example, if a generic is being used, there is no co-payment, and if product A is being used, there is a co-payment of so much, and product B, it's a co-payment of another level. Those are techniques which are being used in the private sector. But knowing that patients have the choice between plan A and plan B, they can decide whether plan A is too restrictive in terms of the choices of products versus plan B.

In the public sector, it's different, because it's not the patient's own money.


So in the public sector, what's wrong with the state using its money in the most wise, efficient way possible? Oregon -- while Lipitor lowers cholesterol, there is no evidence it reduces heart attacks, so they prefer the other drugs. What's wrong with that?

Again, I think what formularies in general do is ignore the individual differences between individual patients. Again, different patients react differently to different drugs. … Physicians should have the final word as to which product should be used based on the needs of each individual patient.

But make all that information available to physicians, rather than have a commission or bureaucrats decide what's good for everyone.

This would incentivize pharmaceutical companies to do this kind of post-market research.

There is absolutely no question that pharmaceutical companies should do everything in their power to understand the benefits and the disadvantages of the drugs that they put on the market. A lot of this research occurs before the launch; a lot of it needs to occur after the launch, as we learn more in practice about those drugs. So I'm totally in favor of pursuing more clinical research. If incentives can exist to do that, that's fine.

I don't see what the states are supposed to do. If you're against price limitations, quality is the only way they can go. They have to use an evidence-based approach. They don't have any other sources of money. All they can do is throw people off Medicaid. What else would a state governor do?

[I] think if I were a state governor, I would not focus exclusively on something which represents 10 percent of my total expenditures. I would really look at what are the other things I can do with the other 90 percent. I would also look at the 10 percent, of course. But I would try to make sure that whatever I do with that 10 percent will not hurt the other 90 percent, and what are the many things that can be done with the 90 percent.

Again, simple case management can improve costs and outcome tremendously. Improvement in malpractice laws can improve the costs tremendously. For example, we estimate that 40 percent of all lab tests performed in this country are either duplicative or unnecessary. I would deploy information technology better in order to avoid a lot of this paperwork, which represents a very high percentage of the total cost.

[I'd] do all of this without putting in danger this very fragile balance that we have in this country -- of continuing to foster innovation with pharmaceuticals -- which, again, offer tremendous hope in terms of bringing to patients products which will not only cure and treat diseases for which we have no solution today. [And] also with the advent of the genomics revolution and new technologies in pharmaceutical R&D, it will enable us to predict and prevent a lot of diseases. So we have to keep that very delicate balance between making sure that we spend what's affordable, and that we continue to bear the fruit of the medical revolution which is underway.

Some state governors have said, "Why couldn't the pharmaceutical industry be a partner with us in solving what is a real problem? Why do they have to lobby, and block and block?" Why not work together more?

We are trying very, very hard at Lilly. We have created an organization B2G, business to government, and are working very hard with each of the various states in trying to find solutions which are win-win. In the case of Colorado, we have a pilot program going on with diabetes. In the case of Arkansas, we have also a pilot program. I hope that this will spread, and that we will help states master their Medicaid expenses, while not taking measures which can really emasculate innovation in pharmaceuticals.

Is this a critical time for this industry?

This is a very challenging time for the industry. We have, on one hand, trends of aging populations, more information available to people, which makes them want access to innovation. [We have] a pharmaceutical and medical, biomedical revolution which opens up all kinds of new opportunities for treatments and cures for diseases for which we have no solution today, from Alzheimer's to stroke to cancer to AIDS, and so on.

On the other hand, we have payers, both public and private, who are concerned about increasing health care costs. Again, I think that looking at health care as an investment, an expenditure which brings benefits to society, rather than as something which needs to be curtailed, is something which will be very important for the future.

I believe that, over the next one or two decades, we will see a reversal of the trend towards earlier and earlier retirement. I think people will stay active longer; maybe not fully active, but active nonetheless. Therefore, good health care, which has enabled people now to really become very vital and vibrant at age 50, 60, and 70 -- those advances in health care will allow us to have people remain productive longer, and that will be good for the growth of our economy.

Is there a limit to the amount of innovation we can have, given that we have so many people without access to vaccinations or antibiotics?

This is a choice that we would have to make as a society, obviously. But if you talk to any patient with Alzheimer's, or rather, their children or dear ones, and ask them, "Should we suppress research into Alzheimer's, and not have the hope for that patient to have a cure one day?" I think the answer would be clear.


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posted june 19, 2003

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