Global Governments' Growing Embrace of Big Pharma

Global Governments' Growing Embrace of Big Pharma

June 25, 2012
Originally published in RealClearMarkets

As the pharmaceutical industry wrestles with multiple existential threats-from price controls to patent cliffs to dwindling pipelines-calls are growing for deeper government-industry cooperation. As private investors flee, the guiding hand and bottomless pockets of government technocrats are somehow supposed to conjure up the twin genies of innovation and efficiency.

The examples of Amtrak and the U.S Postal Service notwithstanding, this has a certain internal logic to it. Government is already deeply involved in the drug development process-funding most basic scientific research; approving products before they are allowed to ship, setting prices; dictating how products can be marketed, sold, and consumed; and paying the pharmacy bills for a growing majority of citizens. So why not go all the way and leave no part of the process unstimulated?

Big Pharma executives will be happy to go along as long as they are allowed to privatize gains and socialize losses. After all, someone has to pay for all those failed clinical trials! .

How this is supposed to work as governments around the world run out of other people's money remains to be seen. But signs are growing that the industry has begun feeding on itself in unsustainable ways.

The BIO International Convention in Boston, which I attended last week, is a case in point. I was shocked by what I saw. Spread across the giant convention center floor-which once teemed with a bevy of diverse private companies-was the biggest array of government-sponsored regional development association booths I have ever seen.

It seems that as pharmaceutical companies cut back on convention participation as they merge and downsize, every city, county, state, duchy, and country in the developed world has decided to go all-in promoting its own region as "the" place to set up a pharmaceutical company.

California, Massachusetts, Virginia, Arizona, Delaware, Georgia, Kansas, Kentucky, Maine, Minnesota, Michigan, Oklahoma, West Virginia, Texas, North Carolina, Montana, New York, New Hampshire, Phoenix, San Francisco. I lost track of the states trying to steal each other's pharmaceutical companies. Hong Kong, Brazil, India, Sweden, Spain, Russia, Argentina, Australia, Chile, Belgium, Ireland, Italy, Israel, Poland, Malaysia, Mexico, Turkey, France, Catalonia, (Catalonia?). The country booths were even bigger and more splendidly appointed.

Music, food, and drink abounded, served out of booths with carpets so plush you had to watch your footing. Each was copiously staffed with representatives flown in from around the world busy selling ... well, what? To whom? Using whose money? Toward what end?

Not being shy, I walked around and asked. The answers I got may surprise you.

"Come to France!" cried the barker from the swankiest booth display on the show floor. Why would I do that, I asked, if you have to pay astronomical taxes, your employees are not allowed to work more than 35 hours a week, and once you hire someone they become a liability for life?

Because, explained the good natured representative of better living through subsidy, if you hire a freshly minted French Ph.D. the government will pay for 60% of his salary! And for everyone you put on the payroll anywhere in the EU, the French people will cut you a check for 40% of that employee's salary the first year, 35% the second year, and 30% in perpetuity. All you have to do is set up your head office in France.

Wait, I asked. Can I open an office in Paris, put one person there, hire 300 people in Ireland, and French taxpayers will write me checks to cover a third of my payroll? But of course! Those are the harmonized rules. We are all Europeans now.

I pondered the broader implications of that proposition, images of Greek flames dancing in my head, as I ambled over to the New Hampshire booth. It was a sad little pop-up affair that could easily be packed into the back of a station wagon. While unmanned, undoubtedly because the representative from New Hampshire was somewhere else swilling free wine and cheese, a small sign told the whole story. It read: "No Use Tax, No Sales Tax, No Inventory Tax, No Capital Gains Tax, No Personal Income Tax, Low Corporate Income Tax, No Insurance Premium Tax." Let it not be said that competitive differentiation is dead.

This all comes down to the fact that governments around the world have swallowed the cargo cult concept that the pharmaceutical industry is both a sign of prosperity and a source of wealth, so they all have to go get some. Senior pharmaceutical executives didn't rise to the top by being stupid, so they have no compunction about taking advantage of bureaucrats who are. As health care budgets tighten, the name of the game for profit-making companies is maximizing their share of pie while minimizing out-of-pocket costs.

Genzyme was quite forthright about its approach, having baked the concept of cost shifting into its business model. While it requires some cold, hard policy decisions, the logic is impeccable. In order to justify spending more and more money on smaller and smaller patient populations, patients unfortunate enough to have a disease that doesn't match an effective treatment will be cut off from treatments that experts deem ineffective, of which there are many. In this way, otherwise wasted dollars can be diverted to Genzyme's bottom line. I heard this approach works great in the Netherlands. Apparently, so does euthanasia.

As the age of the blockbuster drug fades, this narrower-is-better focus is gaining traction among companies hoping to milk the orphan drug regulations. Personalized medicine advocates looking to micro-segment the market are heading down much the same path.

And where will cost effective, broadly applicable, once-and-done cures come from after half the industry runs off to pursue $50,000-per-year chronic disease treatments while the other half of the industry hunkers down to manufacture commodity generics? Only your booth barker knows for sure.