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Big Pharma's Last Refuge


By Bill Frezza  

October 4, 2011 | The Skeptical Outsider | In the previous issue of Bio•IT World (July/August 2011), my fellow columnist Ernie Bush posed the question, what are the limits to collaboration among pharmaceutical companies? This same question was faced by the telecommunications industry in 1913, albeit during an era of ascendancy and not senescence. This led to a solution that lasted 70 years. Could history repeat itself? 

As patent cliffs are crossed, research budgets are slashed, and early-stage projects are abandoned, the survivors of Big Pharma’s golden age wonder, which dinosaur will swallow whom? Meanwhile analysts examine opportunities to reduce redundancy and inefficiency by eliminating “wasteful competition.” For example, why replicate the costs of conducting early safety studies to validate new targets when these might be done in a target validation consortium? But as Ernie went on to ask, why stop there? What about collaborating through Phase II and Phase III clinical trials? 

Indeed, why stop there? Once R&D is consolidated, who needs redundant marketing, sales, IT, manufacturing, finance, HR, reimbursement, and investor relations? As the economics of operating independent pharmaceutical companies under centralized price controls and rabid regulatory review get increasingly tenuous, why not go all the way? Why not merge into one big harmonized national champion?  

Welcome to ‘Ma Meds’ 

How would this work? Just dust off the old business model that Ma Bell operated under for decades, from the time AT&T made the famed Kingsbury commitment in 1913, ushering in the concept of universal service, to the breakup of the Bell System in 1984. AT&T’s protected monopoly created an umbrella under which R&D was centralized in the storied Bell Labs, manufacturing was done at Western Electric, and the Bell Operating Companies controlled regional delivery. The government set prices, so consumers had no way of knowing they were being gouged, nor did city dwellers understand the massive subsidies they were providing to rural users. And until deregulation pulled back the veil, almost everyone seriously believed that the Bell System was highly innovative. 

Just think of the benefits for Big Pharma, which already suffers the disadvantages of government price setting without the benefits. How soon will a 12% guaranteed rate of return with no risk of losses become more attractive than any alternative? What executive wouldn’t love to have perpetual access to low cost capital via AAA-rated bonds? How about monopsony purchasing power allowing Ma Meds to drive rock-bottom bargains when acquiring new drug candidates that emerge from the biotech and startup communities, which would be forbidden to sell products to the public just as entrepreneurs were once forbidden to sell answering machines?  

The overall research agenda could be set by regulatory czars in a newly established Federal Cures Commission, sparing executives the responsibility for making strategic decisions. The research budget would go into the approved rate base, as it did for Bell Labs, though lab directors could retain discretion over which individual projects to pursue. Government-industry collaboration could be seamless as there would only be one pharmaceutical company to deal with whose executives could rotate in and out of government. And the Medicare price fixing dance could begin at the outset of a program rather than at the end, eliminating pricing risks. 

99.999% Pure 

All pharmaceutical marketing would be eliminated, as it was in the Bell System. I remember the motto. Bell Labs designs it, Western Electric delivers it, and the Operating Companies install it. They needed a marketing department as much as a train needs a steering wheel. Quality was unmatched and reliability and availability was 99.999%! Woohoo, everyone was thrilled when touch tone replaced rotary dials. OK, so they invented the transistor and tossed it out. And Bell Labs engineers actually wrote learned studies explaining why modem speeds could never be higher than 9600 baud, a true statement if modems had to be guaranteed to work on every single copper line installed since 1913. With no wasteful competition, who knew we needed BlackBerry’s, broadband, text messaging, and all the rest? 

Critics might argue that with profits guaranteed, albeit modest ones, Ma Meds would stop looking for that next blockbuster erectile dysfunction pill. Advocates of government-industry cooperation would call this a plus. And think of how the FDA’s dream of ensuring that all drugs must be 99.999% safe could be realized. A rate-regulated, heavily cross-subsidized Ma Meds would also underwrite universal access, ensuring that no drug is available to anyone unless it is simultaneously available to everyone.  

This scenario would seem bizarre if it wasn’t exactly how the telecommunications industry ran for seventy years. With our health care system heading for a crack-up as fast as the pharmaceutical industry, don’t be surprised to see progress sacrificed on the altar of medical and financial safety. 

Bill Frezza is a consultant and venture capitalist living in Boston. Bill can be reached at bill@vereverus.com.  

This article also appeared in the 2011 September-October issue of Bio-IT World magazine. 
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