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Pharmaceuticals Policy and Law 15 (2013) 51–69 51 DOI 10.3233/PPL-130361 IOS Press

The pharmaceuticals industry in trouble

José Luis Valverde Chair Jean Monnet of the EU, University of Granada, Granada, Spain E-mail: [email protected]

Health spending accounted for 9.3% of GDP on average across OECD countries in 2011. The Pharma- ceutical expenditure, as a percentage of total expenditure on health, accounted for 15%. The pharmaceuti- cal sector is highly regulated. On describe the major characteristics of the world pharmaceutical industry as one increased globalization, changing structure of competition and increased competitiveness. This are growing pressures on discovery and development. Drug liabilities become more frequent and more costly. The pharmaceutical industry is under immense pressure by external and internal stakeholders. Govern- ment and National Health Services are monopsonic practices. Pharmaceutical companies are criticised for high prices, over-intensive sales and marketing activities, presents to medical doctors, clinical trials and industry – government alliances. Lawyers, medical journals, physicians, politicians, and the media use product liabilities and marketing activities to denounce pharmaceutical companies as culprits. The phar- maceutical sector needs to demonstrate responsibility and take steps to increase awareness. Transparency would increase the credibility of the pharmaceutical industry. Corporate governance will prevent corrup- tion by being in compliance with the legislation and establishing their own internal policies designed to prevent corruption. All firms will act more responsibly. In order to rebuild the trust the industry needs to work together and quickly.

Keywords: Pharmaceutical industry, pharmaceutical expenditure, innovation, marketing activities, liabi- lities, corruption, monopsony, social responsibilities

1. Introduction: Health spending in the OECD

According to a World Bank projection in January 2012, world economic growth will be truncated to 3.1% in 2013, as compared with a projection of 3.6% in June 2011, following the financial turmoil in Europe and weak growth prospects in emerg- ing nations.

While health spending grew on average by close to 5% year-on-year, from 2000 to 2009, this has since been followed by a sluggish growth of around 0.5% in 2010 and 2011. Current expenditure on health grew by 0.7% in both years. This trend shown in OECD Health Data 2013, was similar in 2012 and figures, for some countries, suggest a continuation of this trend in 2013. Health spending accounted for 9.3% of GDP on average across OECD countries in 2011.

The drop has been primarily driven by a collapse in the growth of government health spending since 2009, recording close to zero growth in both years on aver- age. Private health spending also slowed down. Away from Europe, health spending growth also slowed. In the United States, the share of health spending to GDP has remained at 17.7 percent between 2009 and 2012, after years of steady increases.

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Pharmaceutical spending has been a prime target, with spending falling slightly in 2010 followed by deeper cuts in 2011 and 2012. Many countries have increased cost-sharing for pharmaceuticals, reduced prices and coverage, and promoted the use of generics. In 2011, Portugal, Greece and Spain reduced spending on prescription pharmaceuticals by 20%, 13% and 8% respectively. In Spain, the share of generic drugs (in the total volume of consumption) more than doubled between 2006 and 2011. These are some of the short- and long-term trends shown in OECD Health Data 2013.

In many countries, governments have also decided to cut their spending on pre- vention and public health, although these typically represent only a small share of their overall health budgets.

2. One global vision of the pharmaceutical industry

The global pharmaceutical market is expected to earn over a trillion dollar in re- venues by 2012 according to “Global Pharmaceutical Market Forecast to 2012”. Nevertheless, it is estimated that the world pharmaceutical market will grow by an average 4% (Compounded Annual Growth Rate) till the year 2018. The United States will remain the single largest pharmaceutical market, and reaching $320–$330 bil- lion in sales.

The market will witness a number of changes impacting its course of growth. These include the shift of growth from the developed markets to the emerging ones, increasing focus on biotech-based drugs, fewer new drug approvals, and a strong growth in the prevalence of generics.

The Latin American and Asian markets grew most strongly, while Europe re- mained stable. China, one of the most dynamic markets, may soon surpass Germany and France to become the world’s third largest market (behind the USA and Japan). Compared with other countries, Germany’s per-capita expenditure is in the average range, although it ranks lower than other European countries in terms of innovation. In 2009, only 4.4 percent of overall pharmaceutical costs were spent on innovations launched on the market in the past 5 years.

The trends shown in OECD Health Data for Pharmaceutical expenditure, in $, in the years 2011 are: France, 641.1; Germany, 632.6; Japan, 652; Spain, 535.8; United Kingdom, 375; United States, 995. And for the Pharmaceutical expenditure, as a percentage of total expenditure on health: France 15.6%; Germany, 14.1%; Japan, 20.3%; Spain, 17.4%; United Kingdom, 11.4%; US, 11.7.

Following the global financial crisis in 2008–2009, and the subsequent European debt crisis in 2011, global pharmaceutical manufacturing companies have accele- rated their focus to reduce the cost of drugs leading to a renewed evaluation of op- portunities in the outsourcing of manufacturing activities. These incidents favour the growth of the pharmaceutical market in emerging economies.

China, Brazil and India are the important emerging markets to offer growth in 2013. Market uncertainty, price pressure, rising competition and regulatory changes are the leading business concerns for the global pharmaceutical industry in 2013.

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The pharmaceutical industry has faced changing pressures in recent years. The regulatory system has developed in all the countries, healthcare systems have reor- ganised, a tighter focus on healthcare budgets is apparent.

Commentators have signalled the need for the pharmaceutical industry to adapt to new paradigms and rethink their marketing and selling strategic [1].

Policy-makers responsible for publicly-funded drug programmes face continual pressures between the demand to accommodate a steady stream of new and more effective drugs and the ongoing requirement to control costs.

In the face of these pressures, a growing number of OECD countries are applying pharmacoeconomic assessment to new drugs to guide decisions about accepting such products for reimbursement under their public programme, or to inform negotiations about pricing.

The major characteristics of the world pharmaceutical industry can be described as one increased globalization, changing structure of competition and increased com- petitiveness, lack of new products, fast consolidation and concentration, develop- ment of new therapeutic fields and technologies, ageing of the world population and ope- ning up of new therapeutic fields and quick development of world generic mar- kets [2].

The biggest impact came from the Legal, Political and Regulatory domain which embraced the restrictive legal backdrop, and government initiatives and policies re- lating to interaction with the National Health Services or other systems.

Individual legal factors encompassing the national and international regulatory framework, reimbursement and pricing and the related intellectual property rights scored the highest in this domain, closely followed by the high impact government controlling policies of healthcare budgets and evidence-based medicine.

The pharmaceutical industry is evolving. Over the past thirty years the industry has been attacked by societal, legislative, structural, competitive and technological changes [3].

Strategic alliances are becoming increasingly important in the pharmaceutical in- dustry. That the trend will continue. It is one period of great and profound changes in this industry sector.

3. The U.S. pharmaceutical industry

The United States is the world’s largest market for pharmaceuticals and the world leader in biopharmaceutical research. U.S. firms conduct 80 percent of the world’s research and development in biotechnology and hold the intellectual property rights to most new medicines.

The markets for biologics, over-the-counter (OTC) medicines, and generics show the most potential for growth and have become increasingly competitive. Generic drug sales in the United States were valued at $78 billion in 2010.

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The U.S. market is the world’s largest free-pricing market for pharmaceuticals and has a favourable patent and regulatory environment. Product success is largely based on competition in product quality, safety and efficacy, and price. U.S. government support of biomedical research, along with its unparalleled scientific and research base and innovative biotechnology sector.

The marketplace for medicines in the U.S. is uniquely structured to balance access and long-term affordability. Medicines are mostly purchased in a national market by very large, powerful, sophisticated purchasers (i.e. insurance plans) who specialize in buying medicines and making aggressive use of various tools to achieve savings, driving utilization to the medicines for which they can negotiate the lowest prices. As a result of these market dynamics, and generic drug utilization, which is projected to account for 87 percent of all prescriptions filled by 2017, costs are growing more slowly than other health care costs. In fact, IMS Health projects that future growth in prescription drug spending will remain at historically low levels, and will continue to grow more slowly than overall health spending through 2017.

The U.S. leads the world in drug discovery and development, which is a result of unique U.S. public policies that encourage an innovative environment. America’s biopharmaceutical companies have invested over $550 billion in research and devel- opment since the year 2000, including nearly $49 billion last year.

Developing a new medicine is challenging and the chances of success are ex- tremely low, particularly in recent years. The 44 new medicines approved by the U.S. Food and Drug Administration (FDA) in 2012 represented the highest total in 15 years, a proud landmark for an industry whose mission is to save and improve lives.

Other good result of the US Pharmaceutical industry are the fighting of Rare Di- seases. The years 2013 marks the 30th anniversary of the enactment of the Orphan Drug Act, which was pivotal in creating incentives for the development of new treat- ments for rare diseases. The Act transformed the landscape of drug development for rare diseases: more than 400 medicines have been approved to treat rare diseases since 1983, compared with fewer than 10 in the 1970s.

Researchers have made tremendous progress against rare diseases in recent years. In fact, the FDA notes that approximately one-third of all new medicines approved in the last 5 years have been designated as “orphan drugs”. In 2012, 13 orphan drugs were approved by the FDA.

In US poor use of medicines is a widespread challenge throughout the health care system. Because of the broad scope of the problem, there is a significant opportu- nity for improving patients’ health and the efficiency of the health care system. It is estimated that the cost of suboptimal medicine use including non adherence, un- der treatment, administration errors, and under diagnosis is between $100 and $290 billion annually [4].

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4. The pharmaceutical industry in Europe

Europe is at a critical point in its history. Over the last few years Europe has experienced the deepest depression since the 1930s. The Eurozone crisis has shaken the foundations of the European Project.

Over the last decade, medicines expenditure in Europe has grown at a third of the rate of overall healthcare expenditure. The combination of cost controls and more competitive off-patent markets has led to an average decrease, albeit in absolute terms, in the unit costs of medicines, relative to a rise in the consumer price in- dex in many markets of up to 20–30%. Overall, medicines usage represents less than 15% of total healthcare costs.

Early and appropriate use of medicines reduces the need for much more expensive healthcare interventions. Over the last 60 years Europe has made huge strides in improving health outcomes. Medicines have played a key role.

The number of Europeans over the age of 65 will increase by 75% over the next 50 years. In addition to an ageing demographic, degenerative diseases are becoming the next major challenge for most healthcare systems across Europe [5].

The EU have one very good regulation system. 2012 saw some important develop- ments in this field. Regulations were agreed which will see the creation of a unitary patent, and an agreement was reached to create a unified patent court which, after a transitional period, will have exclusive jurisdiction throughout most, and perhaps eventually all, of the EU for European and unitary patents. The aim of these initia- tives is to reduce the cost of obtaining patents in the EU and facilitate resolution of patent disputes. The new system of intellectual property (IP) protection, encom- passes patents, trademarks, designs, copyright and related rights as well as regulatory data protection and other regulatory exclusivities. The IP system is a key enabling factor of pharmaceutical innovation, as it provides necessary incentives to research and develop new medicines, thereby addressing global health needs.

The EU have one general regulation but one fragmented market. Pricing and re- imbursement policies are very different. The more important national market is Ger- many.

In Germany, pharmaceutical coverage is comprehensive, with a high level of public funding, and ensures access to treatments. Germany does not regulate ex- manufacturer prices of pharmaceuticals at market entry. On the other hand, maxi- mum reimbursement amounts (known as reference prices) are set for products which can be clustered in groups of equivalent (generic) or comparable products. Maximum reimbursement amounts are in effect for a large part of the pharmaceutical market covered by statutory health insurance funds (representing 44% of value and 70% of volume in 2006), putting pressure on prices of clustered products.

In addition, across-the board price reductions or freezes have occurred on sev- eral occasions, and rebates have been regularly imposed on manufacturers. These measures, along with incentives influencing physicians’ prescriptions, have helped

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Germany to contain the growth of pharmaceutical expenditures. All the same, Ger- man pharmaceutical prices have been found to be among the highest in OECD, both for patented and generic drugs, when considered at either the ex-manufacturer or the retail level.

The 2007 reform introduced two important changes with the aim of ensuring value for money in pharmaceutical expenditures. First, statutory health funds are allowed and encouraged to contract with manufacturers to obtain lower prices in exchange for a “preferred status” for their drug on their formulary. Second, the Institute for Quality and Efficiency in Health Care will assess the benefits and costs of new drugs with the aim of capping reimbursement prices of new entrants if necessary to ensure that their use is not less efficient than existing therapies. Though these reforms may encourage price erosion in some market segments, they will not address all issues: health insurance funds will remain price takers for new drugs without therapeutic alternatives and losses in transparency will be significant [6].

5. Market structure and innovation

The pharmaceutical industry, has been deeply affected by a large variety of institu- tional factors and policies, ranging from different forms of regulation as procedures for product approval, price controls, etc. in addition to patents, and organization of public research systems.

This sector is usually considered as strongly science-based. In the recent past the advent of the molecular biology has had a dramatic impact on industry structure, the organization of innovative activities, and the competitiveness of firms and countries.

The industry is characterized by fragmented demand, no economies of scope, lim- ited cumulativeness of technical advance, strong competition between innovators and imitators, firms diversification in many submarkets, quasi-random search process by firms and innovations protected by patents. As a result of this, the industry has a low overall level of concentration that is maintained throughout its evolution, but a much higher level of concentration in a single therapeutic area.

Search, development and marketing activities are expensive and take time. The development of a drug takes eight or more years. The relative costs of search,

development and marketing broadly reflect the costs currently observed in the indus- try.

Patent duration is set equal to 20 years. The number of submarkets (TCs) is also very high [7].

6. The economic dimension

Because of its crucial role in healthcare and the ever growing cost in developing new drugs, the pharmaceutical industry has been the focus of many studies around

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the world. The pharmaceutical industry currently spend heavily on R&D in order to remain competitive [8].

A recent research report about cost structure shows that roughly 27 percent of the companies’ revenues are absorbed by the manufacturing cost of goods sold, 35 percent by marketing and general administration, 13 percent by research and devel- opment, 7 percent by taxes, and 18 percent by reported after-tax accounting profits.

Products are the most important factor and the main drivers for growth and devel- opment of the world pharmaceutical industry. Pharmaceutical companies strongly compete on products’ characteristics and tend to invest heavily into marketing acti- vities in endeavour to gain prescribers/patients loyalty and to compete as well di- rectly with other pharmaceutical companies.

Development of brand new drug (NAS-New Active Substance) is today estimated to need investment over 1.3 billion $ and takes over 12 years to bring it as a fin- ished, legally registered and approved product to a market place. This is at the same time very complex, comprehensive and highly risky job with no final guarantee that a new product might succeed onto the market and bring start-up investment and rev- enues back. Leading ten pharmaceutical companies invested cumulative 58.7 bn $ into R&D activities in year 2009 in endeavour to develop and bring new products to the market; scarcely managed to launch cumulative only 16 new products to world market; this on average represents 18.7% of their cumulative pharmaceutical sales revenue.

As Pharmaceutical companies are not able to research and develop sufficient num- ber of new products need establishing a research and development co – operations with other pharmaceutical companies or to acquire other pharmaceutical company to get its R&D potential.

Other important dimension are the dissemination of pharmaceutical information. The pharmaceutical industry spends more time and resources on generation, col- lation, and dissemination of medical information than it does on production of medicines. This information is essential as a resource for development of medicines, but is also needed to satisfy licensing requirements, protect patents, promote sales, and advise patients, prescribers, and dispensers. Such information is of great com- mercial value, and most of it is confidential, protected by regulations about intel- lectual property rights. Through their generation and dissemination of information, transnational companies can greatly influence clinical practice.

We may say that the world pharmaceutical industry has been in the intensive pro- cesses of the concentration and consolidation for a period of over 15 years.

Companies of today with a fast changing competition, in conditions of the chan- ging world trade policies, marketing are the decisive factors of strategic business success for the pharmaceutical companies in the highly globalised and ever-changing world market place.

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7. Development of the biotechnology

Pharmaceutical industry is currently moving from chemically based medications to targeted treatments based on biology. The implications of the development of the so-called third biotech generation (r-DNA techniques) for the pharmaceutical indus- try represents an important discontinuity in the knowledge base used by pharmaceu- tical firms. Biotechnology, which essentially depends upon advances in molecular biology, and pharmaceuticals, which was mainly based on chemistry and microbio- logy, were previously distinctively specialized and separate. They are now facing a context which drives the knowledge of these firms and sectors towards convergence.

In relation to the new biotechnology has been changes in the regimes of property rights. Evolution in intellectual property rights’ regimes or, more largely, in all the related constraints, largely affects the innovative working of the pharmaceutical in- dustry. These changes started developing in the late 1970s. The scientists’ mode of operating changed during the 1980s as regulation about intellectual property rights was modified. What appears to be particularly an issue was the possibility of patent- ing life. Early court decisions in the USA paved the way to unresolved controversies in various research domains. Recent debates about the legitimacy of reproductive or therapeutic cloning or about the methods for producing stem cells, constitute exam- ples of domains where legal decisions will have a profound influence on the future development of the pharmaceutical industry. After the mid-1990s, a huge change occurred as patenting gene fragments (ESTs) became possible.

The current evolution in property rights issues also raises issues of consumer awareness. Considerable anxiety has been caused by the ethical implications of re- cent and possible future innovations in this field [9].

8. Regulation and political criticism

Relations between the drug industry and academic physicians in the time are fre- quent tensions.

The history of the relationships between the pharmaceutical industry and the med- ical profession after World War II sheds important light on pharmaceutical politics in the United States today. This history of the pharmaceutical industry in USA had conformed the pharmaceutical policy in other countries, even European.

In the 1938 Food, Drug, and Cosmetic Act for the first time required manufacturers to prove the safety of their drug products before the FDA would approve marketing of those drugs, was passed following the death of 107 people who had taken the sulfa drug Elixir Sulfanilamide.

Since the war, the American drug industry had been riding a wave of public and political support. By the mid-1950s, however, the political tide was beginning to turn on the industry, with the public and Congress growing increasingly disillusioned as several new drugs were found to cause adverse reactions, and as the industry’s

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advertising practices, its high profits, and the high cost of prescription drugs came under fire [10].

The 1960s was a decade of crisis for the American pharmaceutical industry. In Congress and the press, the industry was berated for its high profits, its marketing strategies, the high cost of drugs.

In the late 1950s and early 1960s, Senator Estes Kefauver turned the full force of Congressional inquiry on the pharmaceutical industry and captured national atten- tion. The industry was belaboured unmercifully while the Senator and his investiga- tion remained prominently on display in the news until his death in 1963.

The thalidomide tragedy spurred congressional and public support for pharmaceu- tical reform, with the passage of the Drug Amendments to the Federal Food, Drug, and Cosmetic Act in October 1962. The amendments required that a drug firm pro- vide proof of safety and efficacy to the FDA [11].

At about the same time, Senator Russell Long introduced a bill to impose price controls on drugs and establish a national formulary. Although it received a lot of attention in the Senate, it was not enacted.

Senator Gaylord Nelson initiated his inquiry on 1967. For over 10 years, Nelson attacked practically every aspect of the pharmaceutical industry. Nelson’s hearings generated a great amount of publicity critical of medicinal products, promotional practices, individual companies, and the industry in general.

In 1973, were the hearings conducted by Senator Edward Kennedy. The Sena- tor’s challenge was to develop a better system for detecting and reporting adverse reactions in the use of prescription drugs, promotional practices, and hearings, in- vestigations.

Senator David Pryor introduced a bill in 1990 over uniform rebate formula based on “best price”, referenced to the Consumer Price Index. The result was the enact- ment of the Medicaid Drug Rebate bill.

Congressman Dingell, on 1991, introduced a bill in Congress, which, impose strict new requirements and penalties on the generic industry.

The changes in the regulation in the follows years was important. The Infant For- mula Act of 1980 was passed after thirty-one children were diagnosed with problems relating to a chloride deficiency in a particular brand of soy-based infant formula.

The Orphan Drug Act of 1983 was created in an effort to reduce drug loss for “rare” diseases. The Orphan Drug Act gave tax breaks, subsidies, and special exclu- sivity privileges to sponsors of drugs for rare diseases.

The 1984 Drug Price Competition and Patent Term Restoration Act, known as the Waxman-Hatch Act, served for the liberalization of generic drug approval and for the patent term adjustment. Waxman-Hatch extends patents for time lost during FDA review and for one-half the time lost during FDA-required clinical testing.

In 1992, the Prescription Drug User Fee Act (PDUFA) authorized the FDA to col- lect user fees from the biopharmaceutical industry to hire additional drug reviewers and safety specialists. The FDA Modernization Act of 1997 merely codified what was already FDA practice.

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In recent years Congress also acted to make two provisions affecting paediatric research permanent. Too, the FDA opened its first overseas office in Beijing, China, in November 2008. The FDA plans to create additional overseas offices in India, Central America, Europe, and the Middle East. This is very important. Some 80% of the bulk ingredients used by US drug makers are produced overseas, many of them in China and India.

All these discussions in the Congress of US generated a great amount of publicity critical of medicinal products.

The oversight and investigative powers of Congress are formidable. Given the vast scope of federal legislative authority Congress can mould public and customer perceptions, and policymakers can be vital for successful performance of the phar- maceutical sector.

Whether it’s product recalls, pharmaceutical sales practices, drug pricing issues or questions about product manufacturing and supply chain integrity, when Congress gets involved with an investigation, it’s a big deal for the reputation of the pharma- ceutical sector.

A series of aggressive investigations by the US Congress into malfeasance by the pharmaceutical industry and lack of regulatory oversight is setting the stage for one permanent reform of the Food and Drug Administration.

The spate of drug recalls over the past few years, from Vioxx to the blood thinner heparin, has brought so much negative publicity to industry.

The Congress, have been calling for more intensive scrutiny of drug-industry prac- tices in areas ranging from clinical trials to advertising to overseas manufacturing.

The FDA’s repeated lapses were highlighted in a hearing that Congress held about the drug Ketek, an antibiotic manufactured by Sanofi-Aventis that had been linked to severe adverse effects, including liver damage. Alert legislators have dug into allegations of malfeasance in the clinical trials, and of a possible whitewash by the manufacturer and the FDA.

The most recent in the series of scandals, revealed in the Journal of the American Medical Association, was that Merck, the maker of Vioxx, planted studies in medical journals under the pretence that they were written by independent researchers. Merck has denied any wrongdoing [12].

In this days, the Congress may prove to be one of the most challenging ever for pharmaceutical and biotechnology manufacturers. From comprehensive health care reform to negotiated drug pricing under Medicare, to massive cuts in reimbursement, to permitting the dangerous importation of products from foreign countries, to allo- wing follow-on biological products, the pharmaceutical and biotechnology industry is under greater scrutiny than ever before.

The Pharmaceuticals industry have denunciated that industry is and has been suf- fering from the fallacy that bureaucrats make better commercial judgments than busi- nessmen, that the activities of consumers and producers are susceptible to detailed, centralized planning, and that market forces can be limited, if not decreed out of existence, without social losses [13].

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9. Risk management and production processes

Risk management is the process whereby decisions are made about whether an as- sessed risk needs to be managed, and the means for accomplishing that management, for the protection of public health and environmental resources. Risk management is of particular importance in the pharmaceutical industry. No active drug is without risk, and product liabilities have brought to the forefront the notion of risk-benefit. The risk-benefit analysis is central to the act of prescribing. It distinguishes pharma- ceutical product liabilities, where risk and benefit are linked, from other liabilities, where only the notion of risk is considered. Supply Chain Risk Management is as- sessing and mitigating the risks due to deviations or disruptions in the supply chain.

The pharmaceutical sector is highly regulated. This makes the pharmaceutical sup- ply chain a complex and sophisticated entity. Assessment of risks has become the most important part of the supply chain planning and reverse supply chain. The risk analysis in reverse logistics is very crucial for a company to maximize profit by min- imizing loss due to product returns and product recall.

A recall occurs when a product is removed from the market because it is either defective or potentially harmful. The United States (U.S.) are the single largest phar- maceutical market. This makes the pharmaceutical supply chain a complex and so- phisticated entity.

With the increasing number of product recalls, the reverse supply chain of pharma- ceutical companies is even more complex. In US, in 2011, there were a record 1,742 drug recalls with the vast majority related to manufacturing quality and tes- ting. The cost are onerous, and beyond the economics are significant product-liability and regulatory-compliance issues.

Recently, product recalls have become a major issue in the pharmaceutical in- dustry. Risks involving adverse medical complications, legal complaints filed by the consumer, loss of market share, uncertainty and sudden inflow of products have be- come a big challenge for the pharmaceutical industry and its supply chain [14].

The pharmaceutical industry are extensively criticized either in the related scien- tific literature or even more widely in the mass media for suffering from a series of symptoms falling into two major categories: the technical, which rooted to its current manufacturing practices are realized through the corresponding poor performance indicators, and the ethical.

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In February 2011, the Financial Times published an article entitled “Drugs Com- panies Have Lost Far More Than Their Health,” presenting several relevant cases around the belief that the existing industry model is broken.

Production processes, operate far behind the level met by other consumer products manufacturing practices. Manufacturing defects were found to be responsible for almost 75% of all drug product recalls, in the US between 2000 and 2004. The cost of manufacturing is almost twice the cost of R&D, while the financial risk due to non-compliance for the top 30 Pharma industries has been estimated at US$40–60 billion. Moreover, poor manufacturing performance costs the industry US$90 billion per year, which is considered equivalent with the current development cost for 80–90 new drugs [15].

10. Product liability

The laws related to injuries caused by pharmaceutical defects are unique and deal with drug and health laws and state and local regulations. These laws and regula- tions detail the inherent responsibilities of pharmaceutical manufacturers to ensure the products they sell are safe for consumers. They also govern what compensation victims of injuries caused by Pharmaceutical defects may receive.

Drug liabilities become more frequent. They impact patients’ perception, physi- cians’ practice, clinical research, and medical communication. Liabilities are fre- quent, 4.3 per company, and predominate in the United States. Plaintiffs always al- lege the company failed to inform users properly about drug risk. Liabilities spread across therapeutic classes. Company costs ranged from US$62 million to US$ 21 bil- lion. Trends indicate an increase in liabilities and associated costs. New plaintiffs are third-party payers and company shareholders. Liabilities spread outside the United States and may include lack of efficacy claims [16].

Manufacturers need to know the rules if they are to make their products safe. Otherwise, instead of taking risks in innovation, they will be forced to continue ac- counting for courtroom uncertainties in their risk budgets. Responsible innovation and change should be encouraged by the law [17]. The analyst said that what is needed is a national, uniform, and clear position.

In 2005 the $253 million verdict rendered against Merck & Co. in the first Vioxx lawsuit was one clear signal that this verdict certainly not improve availability and af- fordability of product liability insurance for pharmaceutical companies. The verdict underscores the need for tort reform.

Liabilities occur in multiple countries but predominantly in North America. In the last decades ten liabilities take place too in Europe, most frequently in the United Kingdom. The rofecoxib liabilities was the most widespread. Liabilities were fre- quently ongoing for many years, for example, clioquinol (17), fenfluramine and dexfenfluramine (8), or bromfenac (18). Some, such as the diethylstilbestrol liabi- lities were ongoing for more than 20 years.

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Three product liabilities amounted to more than US$1 billion: olanzapine $1.07 billion, cerivastatin $1.15 billion, and fenfluramine and dexfenfluramine $21.1 bil- lion. These result illustrate the dramatic effect of product liabilities.

Lawyers, medical journals, physicians, politicians, and the media use product lia- bilities to denounce pharmaceutical companies as culprits that need to be punished. The rofecoxib lawsuits represent the first global product liability. Hence, the dissem- ination of liabilities across multiple countries represents a significant risk for the future. The basis of any product liability is a lack of transparency position [18].

11. An industry under increasing criticism

The pharmaceutical industry is under immense pressure by external and internal stakeholders. The industry itself now recognizes that it faces an impending economic crisis. The future of this industry is changing dramatically. First and most important, it is under increasing price pressure from various national health services. Second, the pharmaceutical industry, is very affected by the legal and regulatory systems un- der which it is framed. Health professional are increasingly facing exposure to the marketing strategies of the pharmaceutical industry, such as gifts, perks, and educa- tional programs. The literature suggests that prescribing behaviour is influenced by exposure to such marketing practices [19]. The issue of undue influence on medi- cal practice by the pharmaceutical industry is highly contested by stakeholders in medicine and pharmaceutical manufacturing and by recipients of health care ser- vices.

Finally, are growing pressures on discovery and development. The lack of a suffi- cient number of new products emerging from R&D suppose one declining produc- tivity in laboratories [20].

The soaring cost of developing and launching new products is another. And that situation we will consider and increased therapeutic competition as a result of patent expirations, which in turn permitted generic alternatives that led to rapid declines in revenues and profits.

The industry is responding to these pressures in various ways, primarily through outsourcing and mergers and acquisitions.

The cost effectiveness of treatments has become a major issue. In an effort to tackle ever increasing health expenditure, regulatory bodies and governments are putting in place a number of actions: they are, for instance, encouraging practitioners to prescribe generics, supporting pharmacists into substituting prescription medicine for their generic equivalent, and in developed countries, increasingly using Health Technology Assessment (HTA) to assess the cost-benefit ratio of treatments This will have a particular impact on issues such as corruption and transparency.

A growing number of people also are influencing product choices. Where once it was just the physician who made the prescribing decision, health care payers, phar- macists, and patients themselves are now increasingly involved. As the same time

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competition, both from decreasing periods of exclusivity and from patent expira- tions, is intensifying [21].

The buyers are represented not only by patients but also by practitioners, govern- ments and associations. Health agencies can also impose a global recall of a product based on an incident or the suspicion of a potential harmful effect of the drug on patients.

Finally, the threat also still comes from regulators which tend to request more and more clinical trials and more and more proof of quality, effectiveness and safety before allowing a new product a marketing license.

Pharmaceutical corporations have a moral obligation to society to provide the peo- ple, with affordable medication. Pharmaceutical companies are criticised for high prices, over-intensive sales and marketing activities, presents to medical doctors, clinical trials and industry – government alliances [22].

Another major criticism is that there has been a general lack of transparency and, in particular, a paucity of honest and credible information [23].

In response, some within the industry maintain that many of these negative per- ceptions are ‘unfair’ and not based on ‘reality’.

The marketing practices of the pharmaceutical companies have received harsh cri- ticism. News media have reported indictments against major pharmaceutical firms, such as Schering-Plough, on charges that their marketing programs violated anti- kickback statutes.

The representatives of the pharmaceutical industry frequently have respond at the critics. Recently the Pharmaceutical Research and Manufacturers of America (PhRMA) have Responded to New York Times, in the mid of October 2013. The President and CEO John J. Castellani in one statement said that “Elizabeth Rosen- thal’s New York Times article, “The Soaring Cost of a Simple Breath,” selectively reports facts, misrepresents the role of medicines in health care and fails to identify the underlying challenges facing patients with asthma and other chronic conditions”.

Mr. Castellani added that “the article focused on conspiracy theories, such as the false notion that pharmaceutical companies choose to sell medicines as prescriptions rather than over the counter so that insurers can pick up the bulk of the cost”. The article also mischaracterizes patents and patent settlements [24].

12. Concern for social responsibilities

In today’s changing business world, companies cannot be measured on profits alone. The external environment can play a major role in the perceived value and success of an organization. Managers should be concerned about social responsibili- ties. Several outside stakeholders may influence the development of an organization’s mission and goals. In general, the external stakeholders demand the company act in the best interest of the greater good of society. The inside stakeholders have the re- sponsibility of balancing the competing claims of the outsiders against one another to

J.L. Valverde / The pharmaceuticals industry in trouble 65

protect the company mission; the internal stakeholders include the executives, board of directors, stockholders, and employees.

Companies neglecting their CSR can become an easy target for criticism by NGOs, journalists or consumer advocacy groups.

Customers, governments, and the general public are among the most demanding outside stakeholders that affect the industry.

The pharmaceutical sector in general needs to demonstrate responsibility and has taken steps to increase awareness of Corporate Social Responsibility issues and clear structures for managing them.

Typically management of pharmaceutical companies not only follow their legal obligations regarding business ethics, they have found that the obligations derived from responsibilities associated with the discovery, development, manufacturing, and marketing of medical supplies and services inherently involve questions of ethical dilemmas that must be answered.

Social responsibility in the pharmaceutical industry provides a sustainable com- petitive advantage. Innovative responsible strategy, exceeding government require- ments and considering multiple stakeholders, as a long-term objective.

The pharmaceutical industry must take into account the ability to be socially res- ponsible to the external stakeholders. The prolonged advantage of corporate social responsibility ensures sustainable economic advantage of any organization [25].

13. The challenge for rebuilt credibility

The peculiarity of the pharmaceutical industry is its ‘moral imperative’ to deliver affordable cure to all in need. Not fulfilling this mandate can lead to fierce public criticism. This ethical mandate necessitates a review of the very business model of pharmaceutical companies. All firms will act more responsibly.

Health professionals work should be based on established scientific knowledge. The doctor are ethically obligated to be critical consumers of any information sup- plied by a pharmaceutical company and to be vigilant that their treatment decisions are not based on misinformation or the persuasion of a marketing tool [26].

Corporate social responsibility measures, that is voluntary actions that go beyond those required by law, are well designed to tackle the issue. Strong business ethics and socially responsible business practices are among the most powerful tools in the toolbox.

Transparency would increase the credibility of the pharmaceutical industry. With the lack of regulation, the pharmaceutical industry should engage in actions of self- regulation that go beyond doing what is legal, but rather address what is the right thing to do. Overcoming insufficient regulatory guidelines to distinguish compliance (doing what’s legal) and ethics (doing what’s right).

The reputation problem facing the industry is now too big for any one company to address. Therefore, in order to rebuild the trust the industry needs to work together and quickly.

66 J.L. Valverde / The pharmaceuticals industry in trouble

14. Preventing corruption

Corporate governance will prevent corruption by being in compliance with the le- gislation and establishing their own internal policies designed to prevent corruption. Internal audit system is designed to enable to identify and deal with infringements of these policies. The internal polices also allows to appropriate disciplinary action against any employee or supplier that violates their corruption policy.

Since many R&D activities are extremely regulated throughout the world, there must be internal standards and a working relationship with regulators and policy makers to ensure that they comply with global regulations and legal requirements.

Corporate governance attempts to maintain an impeccable public image through demonstrating its adaptability to social developments. These efforts will be recog- nized by industry leaders, politicians, scientists, and society, therefore, increasing public perception [27].

The Health-Care Budget Fraudulent practices cost the U.S. Government billions of dollars each year. It the same for other countries. The current system to deter contractor fraud has proven to be insufficient and fails to deter future misbehaviour.

In 2012, Joshua C. Snow, wrote one article that provide a brief discussion of how manufacturers contract with the Government and how they engage in fraudu- lent practices. This analyst affirm that Pharmaceutical-manufacturer fraud is a per- vasive problem facing the Federal Government. It does not, however, need to be a permanent thorn in the Government’s paw. Rather, a unified and concentrated ef- fort to change corporate culture through close monitoring and a government-wide improvement to tracking methods will help to identify problem companies. In addi- tion, the system of withholding profits from noncompliant manufacturers will help to encourage compliance while allowing manufacturers to continue producing vital pharmaceuticals for America’s patients [28].

In EU the legal system and the judicial practice do difficult the exigency of liabili- ties. Is the same for the persecution of corruption. The administrative organization of the Government give extents power of the political responsibles. Not exist sufficient check and control. We would qualifies this situation as generic institutional corrup- tion. The power of the Government and the administrators of the National Health Services is total.

European pharmaceutical markets have two key characteristics. First, the price of patented (and innovative) drugs tends to be regulated. This is because in many national markets pharmaceutical firms face the Government as a single monopsony buyer. This regulation means that firms cannot freely set prices, and in particular cannot increase prices over time even if it is otherwise profitable to do so. On the other hand, firms are usually free to decrease prices when facing stronger competi- tion. Second, these markets are characterised by an unusual structure whereby the ultimate consumer (patient) differs from the decision maker (doctor) and very often from the payer (national insurance service or private health insurance). Because of

J.L. Valverde / The pharmaceuticals industry in trouble 67

this peculiar structure, there is usually very limited price sensitivity on the part of the decision makers.

In economics, a monopsony is a market form in which only one buyer faces many sellers. It is an example of imperfect competition, similar to a monopoly, in which only one seller faces many buyers. Market power is a continuum from perfectly com- petitive to monopsony. This buying power means that a monopsonist can exploit their bargaining power with a supplier to negotiate lower prices. A single-payer health care system, in which the government is the only “buyer” of healthcare services, is an example of a monopsony. As the only purchaser of pharmaceuticals or health ser- vices, the “monopsonist” may dictate terms to its suppliers in the same manner that a monopolist controls the market for its buyers. Monopsony power leads to a market failure. A monopsonist can act as a useful counter-weight to the selling power of a monopolist e.g. the NHS versus the global pharmaceutical companies.

EU have strong power for combat monopolist practices but this powers are not allocated for similitude at the monopsonist practices as the case of the National Go- vernment and the National Health Services.

15. Pharmaceutical industry Self-Regulation

In US, in recent years, state legislators have proposed and adopted numerous statutes aimed at curbing the influence of pharmaceutical gifts in physician practices. In addition, the Department of Health and Human Services Office of the Inspector General (OIG) has weighed in by issuing “guidance” to the industry that spells out what marketing activities might run afoul of existing anti-kickback statutes. The in- fluence of pharmaceutical detailing and industry gifts account for more than 80% of all promotional expenditures [29].

Most countries with major pharmaceutical sectors have voluntary national codes such as those developed by the Association of the British Pharmaceutical Industry (ABPI) and the Pharmaceutical Research and Manufacturers of America (PhRMA). These organisations focus on the marketing activities of drug companies and prohibit companies from giving doctors inducements to prescribe their products in the form of payments, lavish gifts, or hospital equipment [30].

During the past years, oversight of relations between the pharmaceutical industry and physicians has increased dramatically. Even more important, physician-industry interactions have become the focus of intense regulatory oversight by federal and state agenciesChimonas, Susan [31].

In October 2002 the federal government issued a draft “Compliance Program Guidance for Pharmaceutical Manufacturers”. The draft Guidance questioned the legality of many arrangements heretofore left to the discretion of physicians and drug companies, including industry-funded educational and research grants, consul- tancies, and gifts [32].

68 J.L. Valverde / The pharmaceuticals industry in trouble

In June 2011, the European pharmaceutical industry, EFPIA’s General Assembly, has approved the amended Code of Practice on the promotion of prescription-only medicines to, and interactions with, healthcare professionals.

EFPIA and its members are conscious of the importance of providing accurate, fair and objective information about medicinal products so that rational decisions can be made as to their use. The EFPIA Code reflects the requirements of Council Directive 2001/83/EC, as amended, relating to medicinal products for human use. The EFPIA Code fits into the general framework established by the Directive, which recognises the role of voluntary control of advertising of medicinal products by self-regulatory bodies and recourse to such bodies when complaints arise.

The European pharmaceutical industry understands the need to provide a well- managed framework for collaboration that should introduce greater transparency around industry’s interactions with Healthcare Professionals (HCPs) and Healthcare Organisations (HCOs). The General Assembly of 24 June 2013 adopted a new Code on Disclosure of Transfers of Value from Pharmaceutical Companies to Healthcare Professionals and Healthcare Organisations. Concomitantly, amendments to the EF- PIA HCP Code have been approved, which tighten up the rules applicable to gifts and hospitality. Member Associations are required to transpose the revised EFPIA HCP Code into their national codes by no later than 31 December 2013, and in com- pliance with national laws and regulations [33].

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