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The Hidden Culprit Behind High-Priced Drugs

By Dr. George Huang
Friday, February 29, 2008

Tell 100 people you think the pharmaceutical industry is on the right track, and 97 of them will tell you where to stick it.
Only 3% of the general public holds a favorable view of the drug sector. The industry falls behind lawyers, politicians, and even the media in national trustworthiness polls. In other words, Big Pharma companies are among the most hated in corporate America.
One of the public's biggest gripes is the outlandish cost of prescription drugs. Take a friend of mine who suffers from migraines... Unwilling to pay for Imitrex, a branded migraine medication that costs as much as $25 a pill, she got a prescription for generic Vicodin, an addictive narcotic painkiller that costs about $1 a pill. Of course, Vicodin doesn't treat the underlying cause of the migraine, and when the drug wears off, the pain rebounds with a vengeance.
My friend blames the pharmaceutical companies for charging so much for patent-protected medicines. So do most Americans. But despite what you might think, drugmakers aren't the guilty party – not the only one, anyway. Today, I'll share with you the invisible culprit behind this price-gouging scheme...
It takes about 10 years and $1 billion to bring a new drug to the market. Out of every 10,000 new chemicals that hope to become the next blockbuster, only one ever makes it to pharmacies.
The gatekeeper in this long, costly, and arduous process is the U.S. Food and Drug Administration, the FDA.
The FDA is the most overlooked and underappreciated contributor to today's skyrocketing drug prices.
The FDA requires three stages of clinical testing before a drug company can even submit a new drug for approval.
The first two stages of clinical testing, Phase I and II trials, are small and designed to explore safety issues and look for signs the drug works as planned. Later-stage Phase II trials nail down the correct dose to test the drug in pivotal Phase III.
A Phase III trial can span several years and cost close to $500 million in some cases. What's more, every possible new drug must go through at least two Phase III trials. Then, and only then, can drug companies apply for FDA approval... assuming the trial data is positive, of course.
The process was always long and expensive, but it worked well enough... until the Vioxx debacle hit the media in 2004.
As you know, top drug company Merck (MRK) was forced to withdraw its popular arthritis and pain-relief drug, Vioxx, when it was shown to increase the rate of heart attacks and stroke. The FDA had approved Vioxx with flying colors, and the agency took a beating in the press.
The FDA reacted by sprinting in the opposite direction. Today, the agency is overly cautious about the safety of new drugs. It requires drug companies to conduct more, larger, and costlier clinical trials. As development costs increase and time to approval lengthens, the prices on new drugs will soar.
The FDA doesn't want to be seen as "soft" on safety, and it doesn't want to give the appearance of being in bed with the drug industry. The result? The agency is approving fewer and fewer drugs each year. The numbers don't lie...
Last year, the FDA approved only 19 novel drugs, the lowest in 25 years! The FDA approved an average of 28 novel drugs a year between 1999 and 2004. However, after Vioxx, the average number of approvals dropped to 20, a 30% decline.
The situation has gotten so absurd, the pendulum will eventually swing in the other direction and the FDA will loosen restrictions. That will be great news for drugmakers, for patients who will benefit from new drugs, and for people – like my friend – who struggle to pay soaring prescription bills.
In the meantime, though, a gun-shy FDA has created some promising opportunities. The market will crush a pharmaceutical company that finds itself on the wrong end of an FDA decision, in some cases leaving shares cheaper than the cash on the company's balance sheet.
It can be risky jumping in after negative news, and it takes some skill to find the stocks worth buying, but the rewards can be more than worth it.
Good trading,
George Huang

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