A Note to The Pharmaceutical Industry Upon The Re-Election of Barack Obama

By: Matthew Herper, Forbes Staff, mherper@forbes.com

I’ve covered the drug industry for 12 years, long enough to know that it is no monolith but a collection of hardworking scientists, marketers, and business people, most trying to make a living and make a difference. For a few of you, your jobs are just business, but the vast majority of you do what you do in the hopes of advancing science and helping patients.

No single political position accounts for the hundreds of thousands of people working at drug companies, but I know some executives were hoping that Mitt Romney would win. That would have meant that Obama’s rethink of the health insurance system would have been re-thunk yet again, and it might have meant that a lot of pro-pharma ideas on the right, including faster, easier drug approvals and fewer pressures on pricing, would come to pass. But some of this political thinking is inertia, because for decades, on issues like the roll-out of generic drugs, the regulatory climate, and strong protections for intellectual property, drug companies were clearly better off with the pro-business Republican party. It was no accident that Donald Rumsfeld, one of the most prominent Republicans of the past decade, was a former drug company executive.

But the drug industry doesn’t have a real friend in either party these days. It hasn’t since 2008, when Mitt Romney told John McCain during a primary debate not to “turn the pharmaceutical companies into the big bad guys,” and McCain replied: “They are.”

The bad news is that right now you still have no friends in politics. The good news is that the drug industry was right to bargain with Obama over the shape of healthcare reform (the medical device industry is suffering for not having done so) and that, in many ways, things are looking up, toward what could be one of the better runs of pharmaceutical innovation in years.

The Food and Drug Administration has been approving new drugs at a fast clip. New medicines for cancer and rare diseases are still being reimbursed at very high prices. Even when medicine is much more socialized than what we’re going to get in the US, some drugs can thrive. As hedge fund manager Martin Shkreli, who is bullish enough to have founded his own company, Retrophin, against orphan diseases, likes to point out, BioMarin is able to sell a drug that costs hundreds of thousands of dollars per patient per year in Turkey and Celgene, maker of multiple myeloma drugs, gets more revenue in the tough markets of Europe than in the US. Truly innovative, life-saving medicines will have a place in any future pharmaceutical market. And the innovations that have come from the study of human genetics are actually starting to result in new drugs, more than a decade after the human genome project.

Obviously, the biggest short-term threat to the industry is sequestration – the fiscal cliff. Starving either the Food and Drug Administration or the National Institutes of Health would be disastrous for the industry, cutting off the flow of new products to the market and the flood of new ideas from academia to industry research labs. But as long as Obama and congress can make a deal, the next big question is which vision or visions of the pharmaceutical business will play out. Talking to executives around the drug industry, I really hear about three visions for the future. They are:

The Traditional Model: Drug companies will work on a wide variety of medicines to make patients feel better and live longer, focusing on common diseases such as mental illness, heart disease, and diabetes, but also on cancer and some rarer ailments. They’ll market these medicines widely, with most profits coming from markets where patent protection is strong and either insurers or government health plans are willing to pay a premium for new treatments. This is obviously the vision under the most stress, but I think that many executives still hold to basically this model, even at supposedly disruptive biotechnology companies. And it is possible that it will basically hold up, that is, things won’t change that much. This is how Merck, Pfizer, and even Novartis were built, and it may be that things really are not changing.

The Diamond Hunters: These executives view research in many common diseases to be too risky and unlikely to really change patients’ lives – even if you’re targeting Alzheimer’s or schizophrenia. In fact, even traditional “orphan” diseases, those that used to be so small pharmaceutical companies ignored them, may actually be too crowded and are going to be facing price pressure. The future, in this vision, is in medicines targeted to specific, deadly gene mutations, such as in rare diseases, and against cancer. Medicines will have to be highly effective, actually making people live longer for dramatic periods of time. In return, these drugs will cost tens of thousands or hundreds of thousands of dollars per patient, commanding enormous pricing power that individuals could never pay but that governments and health plans will jump at because of the number of years of life they save. Drugs that make you sleep better, or slightly reduce your risk of a heart attack? Forget about it.

The Vision of Access: This idea is mostly whispered, and I have not heard a single industry executive spell out clearly how it would work. But it is in the air. Maybe there is way to make innovations broadly available across the world, to all the people that need them, and to make money in the process. The idea is that innovative medicines for common diseases, like heart disease and diabetes, could be monitized even in countries that are just beginning to use pharmaceuticals on a big scale, and that the traditional views of public health will win out in new ways. This is the flip side of the diamond hunter idea.

The real big picture question for the pharmaceutical industry is which of these is true (it’s quite possible that all of them are) and how that vision interfaces with the changing face not only of the US health system, but healthcare systems all over the world. There is a real possibility that the drug industry is entering a new period of growth and innovation. But there are also big challenges that need to be solved that go beyond who is in the White House. That’s where everyone’s focus should be.