Drug pricing is again a hot topic in the 2016 U.S. presidential campaign. One way in which this discussion differs from past election-year arguments, however, is the focus on off-patent pharmaceuticals. A New York Times cover story about Martin Shkreli, a controversial drug company CEO, and a 5000 percent price hike for an AIDS-related medicine brought scrutiny to an emerging business model. Investors have bought the rights to make older medications and exploited reduced competition in U.S. generic drug manufacturing to tack up prices. Joshua Sharfstein of Johns Hopkins Bloomberg School of Public Health and Alex Tabarrok of George Mason University join CFR’s Thomas Bollyky to discuss the role that generic drug regulation might play in addressing off-patent pharmaceutical pricing concerns.

BOLLYKY: Great. Well, we'll get started. In case anybody didn't notice, another U.S. presidential election is upon us, and U.S. drug pricing again is a hot topic in the debate.

One way the current discussion, though, has been different from past election-year discussions of old people traveling to Mexico to buy their prescription drugs or whether we should import cheaper drugs from Canada is this year, the drug pricing discussion has focused much on off-patent drugs.

And for this, we can thank Martin Shkreli, the controversial former CEO of Turing Pharmaceuticals, whose 5,000 percent price increase of an AIDS-related drug made international news and drew direct responses from U.S. presidential candidates.

Mr. Shkreli, or "Pharma Boy" as he's less-than-affectionately known...

(LAUGHTER)

... may be the most hated man in America now, but his company is really just one proponent of a larger trend and emerging business model to purchase the rights to make older, off-patent, specialty drugs and exploit the lack of competition in the U.S. generic market to jack up prices.

One of the few happier consequences of this phenomenon, though, is that is has broadened the conversation a bit on U.S. drug pricing, which for many years has been entrenched in fights over patents and transparency around U.S. pharmaceutical R&D [research and development] costs.

More people, both on the political right and left, have started to look at generic drug regulation and the tools it may offer as a way of trying to lower prices, increase availability of drugs.

Senators Ted Cruz and Mike Lee recently proposed a bill to overhaul the FDA approval process, allow U.S. consumers to use drugs and devices if they were approved by a defined list of trusted countries. The Atlantic called the bill Ted Cruz's best idea. Now, that may be faint praise from the Atlantic given their general liberal readership.

(LAUGHTER)

But still, there has been a broader willingness across the political spectrum to engage on regulatory drivers and fixes to the generic drug problem.

Today we really have the two ideal people to speak about this issue. To my immediate right, we have Josh Sharfstein, who is the associate dean of public health practice and training at Johns Hopkins School of Public Health. He formerly led Maryland's Department of Health and Mental Hygiene and he is also a former principal deputy commissioner of the FDA. He is also a coauthor of a recent piece in JAMA on the role of the FDA and the affordability of off-patent pharmaceuticals.

To his right is Alex Tabarrok who is the Bartley Madden chair in economics at George Mason University. He is the coauthor of what is truly one of my favorite blogs, which is Marginal Revolution. And he writes a lot about law and economics, including issues related to health and regulation. His work on reciprocal drug approvals, he and his work were cited by name by Senators Cruz and Lee as inspiration for their recent bill.

I'm going to ask them both to speak for ten minutes, starting with Alex, and then Josh, after which I will ask a couple of questions and then turn it over to you in the audience.

Like all CFR events, we will end promptly on time at 1:30.

Before I get started, like all conversations about the FDA, this one comes with a few warning labels. First and foremost among them, this conversation is for attribution, so anything you say or do will be used against you. Please turn off your electronic devices and refrain from leaving early.

And with that, let me turn it over to Alex.

TABARROK: OK. Thanks very much, Tom.

So I want to do three things: First, cover some background on Daraprim, this drug we've all been talking about, and on generic drug price increases more generally; second, I want to discuss some solutions in this particular case; and then third, raise some broader issues about generic drug prices and generics. And that'll actually let me end up on a positive note.

So beginning with Daraprim, this is a brand name for pyrimethamine which is an old drug that was approved in the United States in 1953. It's no longer under patent. It's mostly used in the world to treat malaria. And for that reason, it's actually on the WHO's list of the world's most essential medicines.

In the United States, we don't have such a big malaria problem, but here it's used to treat toxoplasmosis which actually is fairly rare, a fairly small market.

Daraprim, of course, came under notice when Turing Pharmaceuticals bought the marketing rights and jacked up the price from $13.50 to $750 a pill.

Now, how is Turing able to do this, especially if it is a non-patented drug? Well, basically, what Turing did was they scoured the universe of drugs in the United States looking for something with three qualities. One, the total size of the market was quite low, so there wasn't a lot of competition to begin with. Second, the drug treated a serious illness. And third, there wasn't a very good substitute. So even though the market was small, the value to the patients in this market was really quite large.

So Daraprim met all three of these considerations and Turing bought the marketing rights and jacked up the price.

Finally, they needed one other thing, which was that to enter this market and compete, a competitor would have to go through the FDA's process for an abbreviated new drug application [ANDA], which is what you need to sell a generic.

Now, despite the name "abbreviated," this can actually be a relatively expensive process. It can take between three to ten million dollars to get through this process. And right now, there's a backlog of nearly three thousand ANDAs at the FDA's Office of Generic Drugs. So in recent years, it's been taking three to four years to get an ANDA approved.

So Turing knew that it had several years at least before another firm would enter this market. And it's actually a little bit more complicated than this. There's a slight twist because Daraprim was approved in 1953, as I mentioned. This was before—this was when FDA was evaluating safety only, so this was before the '62 law with safety and efficacy.

And ever since the '62 law, the FDA has been going back and revisiting all of these drugs which were approved pre '62, and even there's quite a few which were approved pre-1938 when you didn't require a new drug application at all. So FDA has been going through all of these drugs trying to get them re-approved under the new, higher standards.

So it's actually not even clear that the FDA would give, would allow a generic manufacturer to make a simple ANDA request for Daraprim. A bit mysterious.

So this actually illustrates two things. First, to discover this kind of hidden diamond mind, I think we have to credit Shkreli, Martin Shkreli with a kind of genius, an evil genius perhaps, OK, but there was some entrepreneurial alertness there to discover amid all of these drugs this one drug where he could really jack up the price.

Second, this is not easily duplicated. OK? And this is not—this is not—representative of the larger field of generic drugs. And I'm going to come back to that.

So before I do, however, let me say a little bit about what we can do about this. First of all, the FDA should immediately say that they would be delighted to receive an ANDA for Daraprim. That would be very simple. As I said, it's on the WHO's list of the world's most essential medicines, that you should stop messing around and say we'd be delighted to have an ANDA.

Second, this drug is widely available in the world. We could easily import as much of this drug as we want. So you can buy this drug in India today for five cents a pill. OK? Those are prices today. Seven hundred fifty dollars a pill in the United States, five cents a pill in India, there is nothing stopping us from buying as much as we want.

Now, some people are worried, maybe, you know, quality level standards, maybe you don't want to buy from India. OK, fine. This drug is also available in Canada, it's available in Europe. OK? We could buy this drug from Germany, France, Great Britain and so forth. So in my view, we actually ought to have a reciprocity rule that if a generic is available in a, you know, well-developed country, in Germany and France and so forth, we ought to immediately allow this drug to be sold in the United States.

You know, my rule, if it's good enough for the Germans, it's good enough for me, OK?

And indeed, more generally, this is getting a little bit off topic, but I'll just mention, since Tom mentioned the Cruz-Lee bill, but more generally, I think, as a question not of price, but of access, that any American ought to have access to any drug approved in any developed nation in the world.

You know, if you lived in Germany and your doctor prescribed you a drug, would you ask your doctor, oh, but I don't want to take it unless you tell me that this has also been approved by the American FDA? No, people in Germany don't say that. OK? And if you lived in Germany you wouldn't say that either.

So this indicates to me that there's no reason for Americans to be limited to the drugs approved of by the FDA. The FDA is just one source of information about drugs, and it's certainly not the only source.

OK. Returning to the issue of price, I want to issue a few cautions and then offer some good news.

So the caution, which I already have sort of mentioned, is that Daraprim made the news because of the suddenness of the price increase and because Shkreli is like, you know, a villain from central casting, right? He's like a—he used to run a hedge fund, OK, he's part of the 1 percent, he's a Wall Street guy, he's kind of a smart ass, so all of this. He likes to talk, except to Congress.

(inaudible)

Yes, he bought the—he tries to buy music albums with the Wu-Tang Clan. I mean, he's just, you know, he's a character, right? So this is what made this issue salient for the media.

Now, it is true that there are other examples of price increases for generic drugs, some quite large, some of them for reasons similar to this, others for reasons having to do with the FDA, others for supply shocks. OK?

What all these kind of things share, however, is that the markets where the price increases have been large, they're all small. OK? And that makes sense because it's only the small markets where there's a handful of players that some of these Shkreli-like shenanigans, as well as random events, can really have a big force in mind.

But keep that in mind. The markets with the big price increases, they're small, so in a way this is a limited problem.

Now, here's the big news and the good news. The generic market in the United States is a big success. Some 85 percent of prescription drugs purchased in the United States are generic. And overall, generic drug prices are falling. So let me say that again: Generic drug prices are falling.

As I mentioned, the FDA faces an ANDA backlog, but they are addressing that backlog. Under GDUFA, which is the Generic Drug User Fee Act, which was passed in 2012, the FDA has got more resources to hire reviewers, which they have been doing, and review times have been coming down.

And indeed, one of the best signs that we have that things are actually moving in the right direction is the ANDA backlog. Well, how can that be? Well, one reason for the ANDA backlog is that the FDA has lacked resources, has been slow and so forth. That's bad.

But the other reason for the ANDA backlog is that the number of applications has gone up. I would be much, much more worried if the number of applications had gone down. The fact that the number of ANDA applications has gone up indicates that drug firms still believe that despite the user fees, despite some increase in regulation from the FDA and so forth, they still believe that this is a vital, important market in which they can make plenty of decent profits, OK, and in which there is lots of opportunity for investment going forward. So all of that is very, very good.

So to sort of sum up, I think we can address the relatively minor price hiccups in the generic market by opening up more to world suppliers. Overall, however, we shouldn't let these price hiccups detract attention from the fact that the generic drug market is competitive, vibrant, and thriving and we want to keep it that way. Thank you.

BOLLYKY: Great. Josh?

SHARFSTEIN: Great. Thanks so much. And it's very interesting to hear those comments.

Thanks, Tom, for inviting me to the Council on Foreign Relations for this topic.

I think I can start right where Professor Tabarrok ended, which is that the generic market is incredibly important to American medicine and generally has worked for a long time. That was not the case originally. And I've had the benefit at the Johns Hopkins Bloomberg School of Public Health of working with Jeremy Greene who is a historian and physician who wrote the book Generic. And so I read the book Generic. Eventually, I started to get embarrassed that I was going to meetings with Jeremy and I hadn't read his book. This is part of my acculturation to academics.

So I read the book. It's a terrific book and it talked about the history and how “generic” was initially a bad word. It was like a slur. The industry kind of fought for credibility. There was a major breakthrough when bioequivalence as a concept was developed and the FDA established strong scientific standards. And then the Hatch-Waxman Act, or as we like to call it on the Waxman staff the Waxman-Hatch Act, was passed that really codified those generic standards.

It is about 88 percent of all prescriptions are generics. Confidence in generics is rising. The market has made it through a bribery scandal at the FDA, as well as some very serious quality issues that pop up from time to time. But generally, the generic enterprise is moving forward.

The problem now, it's like the horror movie where it says, you know, the phone call is coming from the inside. I would say that the challenge that's facing the generic industry is coming from inside the house.

(LAUGHTER)

And as was amply demonstrated. Let's see. Wait a second.

FEMALE: Maybe Apple's encrypted something.

(OFF-MIKE TELEPHONE CONVERSATION)

(LAUGHTER)

BOLLYKY: We have a call-in line and I think they're piping in is the wrong line. Hopefully this will be fixed.

SHARFSTEIN: So I'll just continue. Just let me know.

So I think that this is a different kind of challenge and it's one that goes to the real core benefit of generics, which is lower price for high-quality drugs, that there are these enormous price increases.

And you know, it's hard to say how big a problem it is. The reason that we perceive it as a big problem isn't just, you know, one guy on the front page of the New York Times, but there are other companies that are making this their business model to kind of pick off little suppliers and just try to get as much money as they possibly can.

Maryland pays its hospitals in a unique way. We are the only state that generally gives global budgets for the care of Maryland residents, to incentivize the reduction of preventable admissions. And the hospitals have to manage within a budget, and that's a whole other topic.

But one of the things the hospitals are experiencing are totally unpredictable, actual increases in important generic drug costs that are really hurting their bottom line. For the rest of us, we just might see it lost in our premium increases. But we can see it maybe a little bit earlier in Maryland; nitroprusside from $44 to $830 a vial, isoproterenol $38 to $1,387.

And I'm not sure I totally agree that it's just small-market drugs. Naloxone is very widely recommended now and has gone from about one to fifty dollars per vial, which is a huge increase and has actually been a major issue for public health authorities and the Congress in its investigations. So you have this issue.

And my suggested set of solutions—I shouldn't say my, the team that we're working with and others out there—the solutions that I support are around the theme of supporting a strong generic market in the United States and not undermining the generic market. What's going on now is undermining the generic market.

So how do you support a strong generic market? You've got to get rid of the business strategy of essentially price gouging. And the attorney general in Maryland has proposed a price-gouging law drawn around the common law principles of you just can't go out in a hurricane and buy up all the water and charge a thousand dollars per gallon. You know, there are laws that even aren't in common law, that deal with that. That could be one potential way to deal with a company that swoops in, adds no value and just jacks up the price to, you know, make it really hard for people to get.

But there are other ways to protect the market. We recommended in our JAMA piece that FDA have a priority approval process to move quickly on applications where the market looks unstable or where somebody is increasing the price quite dramatically.

And we even suggested that during a period that the FDA is reviewing an alternate application, it could authorize, if appropriate, temporary import of medications if it investigated and found that to be a reasonable thing to do.

Or even, under, again, a separate analysis, that FDA could do permit compounding if it were appropriate just for that period of time.

The purpose of those additional measures would be to support a strong generic market. You want competition. You want to invalidate the business case for basically just exploiting consumers.

And the goal of having a set of tools that FDA could deploy is prevention for the most part. That if, you know, we're all sitting inside some hedge fund somewhere, we just don't think it's a great idea to try this strategy, because we know we can get cut off at the pass, and that instead the generic market works like it's supposed to. That's what I think.

Now, why not go further? I think that is a reasonable question posed by the remarks.

So you know, I look at FDA, having been there, I think I see both the strengths and some of the challenges of the agency. But it has some enormous strengths. FDA is the only drug approval agency in the world that gets the raw data and looks at it for new drug approvals.

There are many, many examples of safety and efficacy and other insights that the scientists at the FDA have that are not shared around the world. And people look to the FDA because it is the premier agency. And many of the key policies are developed historically at the FDA first.

In addition, the inspections and the understanding of regulatory manufacturing processes are very sophisticated at the FDA. So you know, I think that while it may be a temporizing measure to strengthen the U.S. generic market, I wouldn't support at this point just saying, well, if it's on the market in some other country it automatically gets in here, because then what you have is you could wind up with all the drugs being approved there and all the strengths of the FDA really lost and the benefits to the American people.

I think I'd be remiss if I didn't point out the reason for the 1962 law that was just mentioned. It was a drug approved in Germany. It was a drug that caused very severe birth defects in Germany. It was a drug where the manufacturer came to the U.S. Food and Drug Administration and said, how come you're not approving this? It's on the market in Germany, why isn't it as good for U.S. consumers if it's on the market in Germany? And that was thalidomide.

And the reason we have an FDA, the reason I absolutely would look at the FDA—I don't think maybe people in Germany don't know to look at the FDA, but I sure would, particularly for a new kind of medicine under certain circumstances— is because I really do believe that the FDA does it better.

Having said that, I do think that there is room to move in terms of establishing common standards. The WHO process we could probably talk about some more. But I think for this discussion on generics, my point would be, if we agree that the generic market is doing a really good job and people are entering the market and there's room for R&D, that just, you know, really just blowing it apart by saying you can just go to any other country and get an approval is too radical a solution for the problem that ails the patient.

BOLLYKY: Great. Great sets of comments. I have a couple of questions.

As you mentioned, Alex, there has been a big surge in abbreviated new drug applications in the FDA. To put some numbers behind that, in 2002 it was 361 in one year, in 2012 it was 1,103. That’s a threefold increase within the space of a decade. As you mentioned, there has also been a big increase in fees through the GDUFA Act to address that surge in applications although it may be a pretty slow process to catch up.

With all this progress, why do we need to go as far as having reciprocal drug approvals? Why not have something along the lines of a more abbreviated approval process, like Josh suggests? Why must it be reciprocal? Why do we have to go that far for a solution to generic drug pricing to come about?

TABARROK: OK. So let me say first a few words on PDUFA and GDUFA, because you mentioned that, and I'm a big proponent of both of these. These are the user fee acts, first used for drugs.

It's been incredibly successful. And I want to indicate one reason why it's been successful, it's because this was completely a failure of Congress. So here we had for drug approvals, that these pharmaceutical companies have got millions, sometimes billions of dollars on the line, OK, American patients want to get access to new drugs, and they're being delayed at the FDA, sometimes just sitting there on the shelf because there's not enough reviewers, there's not enough staff.

So this is a complete, total waste of time and resources and energy. And why? Because Congress utterly failed to fund the FDA at reasonable levels to get these drugs through the process.

So PDUFA was, OK, let's make a deal that because Congress is failing we'll have the drug companies pay some user fees and then we'll use those user fees to hire more staff to get things through quicker.

The same thing was done for the generic drugs in 2012. And it's worked incredibly well with the brand-name drugs, and I think it's also very good for the generics.

Now, turning to reciprocity, so, you know, unlike Josh, you know, the FDA is not the gold standard, it is not a world leader. It is just a regular kind of American bureaucracy. Sometimes it's OK, sometimes it's not OK. A lot of times it's far too slow. There is a big trade-off with any drug approval process, and that is the longer it takes to approve a new drug and the more testing that you do, the more investigation that you do, the greater the expense.

This means we have fewer new drugs. So there are two problems. There's drug lag and there's drug loss. And those apply to good drugs as well as to bad drugs.

So when we have an expensive, time-consuming FDA process, good drugs take longer to reach the market and we get drug loss. There are drugs which the FDA process renders uneconomic, unprofitable to produce. That is a big, big cost which I think the FDA does not look at anywhere near enough.

Reciprocity seems to me just a very, very minor and trivial, common sense approach in that if a drug is approved by a reasonable, developed country, you know, France, Germany, England and so forth, there's no reason why Americans should not have access to their drugs.

Again, if you lived in Great Britain, you would not ask, I don't think, has the FDA approved this drug? That is not what people in Great Britain ask. And to think that you would, this is just sort of a, kind of, a nationalistic approach which really does not bear scrutiny.

And I can tell you that because when I tell this to people in Germany or Britain, they say, oh, no, no, no, we need our European medical agencies, we don't trust the FDA. Well, one of them has got to be wrong. And you know, why should it be the American one, I mean, why we should we even stop at America, like, why, for example, don't we have a Virginia drug approval process or a Maryland drug approval process, you know? Where we put our nationalism is just an arbitrary boundary.

So I'd be completely happy with any drugs approved by the European Medical Agency [EMA]. They're at least as good as the FDA. And sometimes the FDA simply gets it wrong. There are drugs approved in Europe, which are world-class, best-standard drugs, which physicians in the United States would like to use, but which they do not have access to because the FDA has not approved them. There's not a lot, but there are some of those drugs.

BOLLYKY: Great. Josh, I want to give you a chance to defend the honor of the FDA.

SHARFSTEIN: Sure.

BOLLYKY: But I did want to ask a question that came up. Janet Woodcock is the head of the Center for Drugs at the FDA and she testified on this recently. And she pointed out all the great things that have been happening in terms of working on this generic drug approval backlog and to increase FDA funding for that.

But she said one problem that keeps coming up is the quality of applications. So many abbreviated new drug applications need to be refiled. That's the thing that she pointed out as the lingering dynamic that is holding back fixing this generic drug approval problem. Basically, she says, it's the generic drug industry's fault, that the quality of applications are such that they have to keep refiling, refiling. Is there's something that seems wrong about that being a persistent problem. If these refilings are still going on, shouldn't there be some fix in the ANDA process for that as well?

But first, your defense of the FDA as the gold standard.

SHARFSTEIN: Well, I guess what I would say, separate from the defense of the FDA, I think that there's one thing that I would very, very strongly disagree about, which is I don't think it's a minor change to do reciprocity. I hope we could all agree to that.

You're basically saying you don't have to go to the FDA to get on the U.S. market. That's not a small change, it's an enormous change. It would be an earthquake-type change to the generic market, to the brand-name market. So whether or not we think it's a good change or a bad change, it's a huge change.

And then the question is, you know, why would you do it? FDA is in fact the only agency that reviews the raw data, as far as I'm aware. They get the actual raw data in particular ways, they redo their own analyses. If you read the FDA reviews of data, you understand that they're not even looking sometimes at the way that companies have put it together. They're putting it together based on what they know.

And the people who work at FDA, who are absolute experts in that area, are incredibly smart, dedicated and have access to information that other regulators don't have.

I'll give you a really specific example. When H1N1 hit, I was the acting commissioner of FDA. And there was an immediate question about how to appropriately use Tamiflu. Well, it turns out at FDA you have the best pharmaco, kinetic, you know, the label, it had never been studied in small children. And of course, H1N1 was picking off small children. It was a flu.

And all the world's regulatory agencies were looking, well, what do we do? Nobody had really thought about the dosing. And it was FDA that had the team, that had the experts that were able to figure it out, that it was, you know, it was then adopted around the world.

I have a lot of respect for the EMA. And we worked very closely with EMA when I was at FDA. But I think that there's a reason why I wouldn't say that someone else's agency should be making all the determinations. If you can look -- and I think that there are -- there may be national differences in different aspects of certain regulatory questions. There are different populations of patients in different places.

Is the FDA really failing? More drugs are approved in the United States first. We have record numbers of new drugs approved.

And why do we have an FDA? I think maybe this is more of a general disagreement that we might have. Yes, FDA put in some pretty strict requirements. And yes, that meant a lot of, thousands of drugs were taken off the market because they didn't have adequate evidence. But the patients did a lot better and the companies did a lot better.

And if you look at the growth of the pharmaceutical industry and the rapid advances across many, many diseases, coincided with stronger FDA requirements and very strict regulatory standards.

I just came from another panel where somebody from one of the pharmaceutical companies said, you know, without a regulator we wouldn't be able to distinguish our products as actually working, basically. And that's why we have FDA. That's why the United States should care that FDA is doing a good job.

There are problems in regulation, right? I mean, I have a whole talk where I talk about some of the crazy things that I have had to deal with as a regulator. There are problems at FDA. There are problems at EMA. There are problems all over the place. We should have the ability to fix those problems, right? We shouldn't just be saying that, you know, if there's a problem over at EMA and all our drugs are coming in and there's nothing that we can do.

I think that the reason to have a regulatory entity in a country

that is like the United States and not just blow it apart is because the history of the benefit to the population and the potential for continued benefit is just so great.

I would rather say, and going back to your generic point, that we need to fix what's working. Basically, keep what's working working by fixing it. I think that the relatively modest changes to generic drug approval would go a long way.

But to end where you ended, Tom, I do think that the generic industry has an important role. I think it is -- when I was at the agency, I spoke to the generic companies about certain -- now that they're nearly 90 percent of all prescriptions, I think that that brings a certain set of responsibilities, not only in their applications, but in their post-marketing surveillance, their thoughts about how products can be safely used.

If you look, to give a very specific example, if you look at some of the problems with overuse of opioids, a lot of those opioids are generics. And so there's a lot of focus on the brand-name, latest Oxycontin for kids that will hardly be used. Well, what about the generic opioids that are used by millions of patients? What are the companies' responsibilities there?

I think that there's a lot to be said about the responsibilities of the industry.

BOLLYKY: Great.

I have one last, quick question. In the meantime, the members of the audience should think of yours. When you do, flip up your placard and I'll call you in the order that I've seen you.

So Milton Friedman talked about a perceived problem of drug regulation. He said that there is a natural incentive for regulators to be overly cautious in approving drugs because if something were to go wrong they'd be held to account by the public for that unsafe drug. But regulators don't have the same incentives to be worried about the drugs that they don't approve, because the only people that will get upset are the industry or patients if they have an otherwise incurable disease.

What he's getting at is that this issue of...

SHARFSTEIN: Those aren't two small constituencies there. No, I mean...

BOLLYKY: They are not. They are not.

SHARFSTEIN: ...that's the industry and patients.

BOLLYKY: It's a really fascinating talk actually, and it's worth pulling up. But what Friedman pointed out is accountability creates the incentives that drive drug regulation.

And, this gets at the one thing that has always struck me as odd about the reciprocity argument. The first thing that goes wrong for a product that has been granted reciprocity, and let's say it was approved in Bulgaria and Hungary, which are part of the EU -- can you imagine the firestorm in Congress? Reciprocity has also struck me as somewhat of an odd fit for political groups who are generally fearful of world government deciding matters of sovereignty issues.

So how does reciprocity withstand incentives that come up around accountability for drug safety, even when you just have the FDA? When it’s the U.S., Congress can call Janet Woodcock or Josh when he was at the FDA to come in and yell at them. Who is accountable with reciprocity?

TABARROK: Yeah. So I agree with you there's very much a bias in how errors are perceived. And it's not just the fault of the FDA. The problem is that when a bad drug is approved and, you know, some people die, we know pretty clearly this person died because they got this drug. And that person can then, or their relatives and the family of that person, they then can go on "Oprah" and it's a big disaster and heads at the FDA roll, there's congressional hearings and so forth.

When instead people die because a good drug is not available, because a drug has been delayed in the FDA process or because the FDA has made a drug too expensive to produce at all, to research and develop at all, those people who die, they don't even know that they died -- they don't even know that they could have lived had this better drug been available. Had FDA costs been lower, these people would have lived, who ended up dying.

I call that the invisible graveyard. There's an invisible graveyard of people who are harmed by the FDA, but they're kind of statistically they're hidden. We know that they're there statistically, but it's very difficult to put a face on it.

And this is a problem not just at the FDA, it's a problem for the public. Right? The public is too focused on the issues which are easy to see and doesn't realize the trade-off which is more difficult to see.

So I completely agree with you that this would also be a problem with reciprocity and that if a drug was allowed into the United States that was approved in Europe that there would be a big nationalist outcry, how can we let this happen? So I don't have a solution to that problem, but I think it just does illustrate the problem that the focus would be on the nation, OK, which nation approved it, instead of the process, which could be equally well as good.

SHARFSTEIN: I would just very quickly point out that there is also an invisible graveyard in if you did significantly relax standards, all the problems that you could have as a result of that.

TABARROK: No, that's not invisible, that's very visible because you see the problems when they come up and then you can fix them. So that when you approve a bad drug, you quickly learn about the problem and you can fix it. So it's not at all symmetric, it's very asymmetric.

SHARFSTEIN: But there are people who would be harmed in that process.

TABARROK: Oh, absolutely there would be people who would be...

SHARFSTEIN: OK. I'm just pointing out that there's a graveyard there.

TABARROK: Right.

SHARFSTEIN: We don't have to say that it's exactly the same...

TABARROK: No, no, no, no, yes.

SHARFSTEIN: ...and it's sort of at the theoretical level, but there's a graveyard.

The FDA approves more drugs fist, is considered the absolute gold standard in reviewing raw data. And if your life depended on it and you could die from taking a medicine or it could save your life, you would want to know what the FDA thinks about it.

BOLLYKY: Great. We have twenty minutes and a lot of questions, which is fantastic, so try to keep it just to one. I'm going to call you in the order that I've seen you: Amanda, then Steve, then Ricki, then Jeremiah, then William, then David, then John.

Amanda?

QUESTION: So you talked about fixing prices. I mean, did I understand that correctly, as an alternative to going overseas to purchase medicines? And I think that sounds a little bit inefficient as well. I mean, could you reflect on the downside of such an approach?

And you know, the other question is, obviously, the ability to purchase overseas would enormously reduce our costs. These are old drugs. You know, can we reflect on that, the cost to the total health system, the trade-off that might have with coverage if we were able to reduce costs and things like that?

SHARFSTEIN: Sure.

BOLLYKY: And I should ask, when you ask your question, please state your name and affiliation.

QUESTION: Amanda Glassman from the Center for Global Development.

BOLLYKY: Great.

SHARFSTEIN: Excellent. So to the first thing, I wasn't really talking about fixing prices. I think the first idea I talked about was prohibiting price gouging. And if you look at the -- we do that for water in an emergency, in a hurricane. Do we fix the price for water? No. So if you think we can do it for water, could we do it for a generic drug where someone, you know, jacks up the price seven hundred fifty times so we can get, you know, music or other -- I think that there's probably a line to be drawn there. And I think the attorney general of Maryland kind of sketched that out. Those standards do exist.

Your second question was on price. I think that the smartest way -- I do think price is very important. The smartest way, in my opinion, to lower prices is to strengthen the generic market because the generic market has done such a good job of that. And the challenge that you have by saying we're going to do reciprocal, you know, purchasing forever is that you could undermine the generic market.

Whereas what we supported was a temporary bridge for the U.S. generic market to get stronger. So we do think that there is a role for that. But we're worried about the sort of too-radical solution for what ails the patient.

BOLLYKY: So one quick question, and I want to get to these other people, but how are both of these statements true: we have a stronger generic industry than we have ever had before and we have this generic drug shortage and specialty drug price-gouging problem. How are both of those statements true?

SHARFSTEIN: I think that, you know, they both can be defended. If you look at the big picture in, say, the role of generics in U.S. medicine, incredibly important and I think we totally agree on that. But these are the risks, the threats that are coming from inside the house. That was kind of my point.

And so we can say that, as a whole, generics are as important as ever and are doing a very important job, but there are real threats. And I think that's what we're talking about.

BOLLYKY: Great.

Steve?

TABARROK: Just very briefly, I'll also just comment on that.

BOLLYKY: Please.

TABARROK: So just on the idea of getting cheaper drugs overseas, I think we need to distinguish two things. One is getting generics, OK? Generics actually in the United States are among the cheapest in the world. So there, we actually don't see that they're much cheaper overseas.

What is cheaper overseas is brand-name drugs, but then we have the issue of the effect on innovation. So when I'm in favor of importing drugs from abroad, I am not talking about re-importation of branded drugs where you have a price control overseas and then you'd go and you'd bring it in over here. What I am talking about is for generics, which already have an open market, they're non-patented in the United States, we should be able to buy those overseas.

Because I would be very, very worried about reducing profits in the brand-name industry, because I think it's incredibly important that we continue to incentivize lots of innovation in research and development for brand-name drugs.

BOLLYKY: And by branded, do you mean only on-patent branded?

TABARROK: Yeah.

TABARROK: I mean on-patent. I mean, we could talk about patents, but there is clearly a trade-off there.

BOLLYKY: Got it.

Steve?

QUESTION: I'm Steve Morrison from CSIS. Thank you both, Alex and Josh.

Looking ahead, it seems pretty clear that the next administration, next Congress is going to take on pricing issues in some form. And there's considerable movement in that direction politically coming from multiple sources.

In your opinion, what are the smartest and stupidest ideas that are going to be on the table come next year? I mean, what is it that you think...

TABARROK: It depends who is elected.

(LAUGHTER)

QUESTION: What do you think should be the priority actions that are feasible politically and would be smart actions, in your view?

I mean, we've heard some of this, but you didn't put your suggestions in the broader context of moving them through in the midst of what seems like a pretty turbulent and mobilized sort of political environment around these issues.

BOLLYKY: So we have...

SHARFSTEIN: Very quickly, I can...

BOLLYKY: ... eight people, and I want to make sure we can get it. So I'm going to take them in twos.

SHARFSTEIN: OK.

BOLLYKY: Ricki?

QUESTION: I'm interested in having Alex respond to the thalidomide issue as to how he could deal with that.

And secondly, I think it is important to understand the balance between safety and access and pricing and how that balance is calculated.

BOLLYKY: Great. Do you want to say your name and affiliation?

QUESTION: Oh, yes. I'm with the Grameen Foundation, I'm Vice Chair Ricki Helfer.

BOLLYKY: Great.

SHARFSTEIN: Just on generics, I would just refer to the JAMA article that was referenced for the pretty specific perspective.

For brand-name drugs, I'd say that we're actually quite engaged in that at the Johns Hopkins Bloomberg School of Public Health. On March 8th we're going to be having an event with a three-hour webcast. We're bringing in people from the pharmaceutical industry, the PBMs, patient representatives and others and we're going to be presenting a range of different ideas to address that.

I don't accept the premise that we're in an optimized system both for innovation and for -- I'm not saying you're making that premise, but I don't accept that premise that the current system for innovator drugs is where it needs to be.

I think we've got to figure out some solutions and we're going to be talking about them there.

BOLLYKY: Alex on thalidomide?

TABARROK: Yeah. So on thalidomide, I mean, look, this was, like, over sixty years ago. And I talk about this all the time and everybody always brings that up. Which I understand, but it is amazing that we continue to refer to this one example from sixty years ago while in the meantime, you know, FDA delay has certainly caused hundreds of thousands of people to die who otherwise would have lived. But that is simply more invisible, it's just harder to see.

On this issue pricing, let me raise a somewhat different issue, but one which worries me a lot because I'm very worried about price controls and I'm worried about price controls because of, this is somewhat of a different issue, but of the way the drug market has been changing.

You know, it used to be that we had one drug approved basically for everyone. And now because of better technology, because of DNA diagnostics, OK, drugs are becoming much more targeted. That's great in one respect because it means that now you know you're much more likely to benefit from this drug than previously.

But it also means, OK, so before we would give the same drug to a hundred people, it would only benefit ten of them, now we know which ten it's going to benefit and we only give it to ten of them. So that means that the market science has fallen from a hundred to ten.

That means that the price has got to go up, sort of naively, sort of ten times in order to get the same profit. Now, the drug is much, much better, OK? It's targeted, it's got a much higher chance that it's actually going to benefit you. So the value is actually higher, this is actually a better thing overall.

But people are going to freak out from the sticker shock because drug prices are going to go up. They're going to go up for reasonable reasons, that is the more you target, the smaller the market, the higher the price has got to be to maintain the same incentives for research and development. But when people see these sticker prices, they're going to freak out, they're going to call for price controls. And because of that, I think there's a very large chance of making a big mistake, cutting research and development, cutting innovation.

SHARFSTEIN: Just really fast, I very tentatively stick my toe over to the economics line. But I do think that it's an interesting thing to hear from companies how important a strong FDA is.

And I think that the way I would probably think about that in an economic context is that if you weaken FDA, the value of FDA approval is less and people won't buy the drug. You can't distinguish yourself as easily from other products.

And a strong FDA, as I just recently heard, allows companies to make more money and actually can increase the incentive for companies to be investing in drugs.

So I don't think it's as simple as that if the FDA is weaker then more drugs get to the market. In fact, you may have less understanding of what actually works and companies won't be able to make money on drugs that they can actually prove are really impactful.

On the R&D point, I would say that one of the things we've learned from some of the congressional investigations in the generic world is that the pricing doesn't have a lot to do with R&D. The pricing has a lot to do with what the market will bear.

And thinking about pricing and R&D together, I'm just saying that maybe the current situation isn't optimal. I think there's a fairly strong argument that it's not a perfect correlation.

BOLLYKY: Great. We have Jeremiah and then William. Again, if you can just ask one question and keep it short because we have a lot of people to go through.

QUESTION: Thank you. I'm Jeremiah Norris with the Hudson Institute here in Washington.

I wonder if you would comment on the distinction between manufacturers' pricing and retail pricing. Because last month, the Consumer Reports ran an analysis of five commonly used generic drugs, across eleven different retail outlets. And for instance, on Lipitor for a thirty-day supply, in Costco it was $18 and in CVS it was $146, same drug.

BOLLYKY: That's a great question. There are business models coming out now with apps that will show you what the price of your prescription drug is at different pharmaceutical outlets. So you can look at your app on your phone and that will allow you to do this price discrimination. It's fascinating.

William?

QUESTION: Thank you both for a very interesting debate. Bill Borden, George Washington University.

And I fully agree with the need for innovation, the need to speed drugs to market. I would just put in context, I'm a physician and took a Hippocratic oath to do no harm. And so in that setting, I strongly favor the FDA's safety roles that I can confidently say to patients these drugs are safe and we know what we're getting.

The question is in regards to the current movement towards health-care value. There's been a lot of talk around value-based pricing. So Peter Bach and Steve Pearson recently wrote a piece about this. And I know this relates a lot to brand-name drugs. But I was wondering if you both could comment briefly on value-based pricing for pharmaceuticals.

SHARFSTEIN: Sure. I would say that it's a very interesting and promising area of thinking. It's a good example of an alternative way than the status quo to think about how we might be able to get more innovation, the right kind of innovation out of the market than even we're getting now, while having an appropriate approach to pricing.

So I think it's very interesting. We've met with both Peter Bach and Steve Pearson. It's one of the things we'll be talking about on March 8th.

BOLLYKY: Alex?

TABARROK: Yeah, I agree with that. You know, Great Britain has started a few tests, so I think we'll have to, you know, monitor that. I think there is room for innovative pricing strategies which, you know, might help there.

On the question of, you know, retail and wholesale pricing, there's no argument, the whole system is a complete mess. Right? It's a total disaster, pricing and health care more generally.

Overall, as I mentioned, generics have fallen in price, the AARP did a study of a hundred-or-so retail drugs, generics, again this is generics, Medicare did a study of a whole basket of generics, Express Scripts did another study, all of them found that the prices of generics are coming down, they're actually lowering over time. So that is kind of the big and the good news, that prices overall are actually coming down.

BOLLYKY: Great. David and then John.

QUESTION: Thanks. David Wertime with Foreign Policy magazine.

On the reciprocity front, just a question about the differing regulatory bodies, FDA versus foreign regulatory bodies. I know there was that one example that's been cited a lot, Alex you mentioned, but how often do the two regimes actually have different outcomes?

So I know FDA apparently the complaints are about the delay. But just a novice question, how often do the regulatory regimes reach different conclusions where a pharm, you know, body says this is safe and the FDA actually says, no, it's not, or vice-versa? How often does it actually happen?

BOLLYKY: John?

QUESTION: I was just wondering if we played out to...

BOLLYKY: I know who you are, but they don't.

QUESTION: Sorry. John Stubbs with Romulus and Harvard's Berkman Center.

If we play out this idea of reciprocity, and it seems to me that there hasn't been much of a counter to the FDA being the gold standard, currently you would create some new system of competition among global regulators and perhaps there would be a new gold standard that would emerge.

But in that environment, how would someone like, you know, Dr. Borden handle his patients in having to promote one medicine over another with what essentially would be some pharmaceutical companies going to the gold standard, paying higher rates, and then you would imagine passing that along to consumers at higher prices, others going to other regulatory agencies and offering at lower prices similar drugs? So how would the patient or how would the doctor manage that environment with multiple drugs being approved from different agencies at different levels of regulation?

SHARFSTEIN: On the question about how often is there disagreement, I'd say that there are many different issues that are handled differently. I can think of two examples when I was there. I think the Europeans took a diabetes drug off the market and we did not take it off the market. We instead gave a warning and some restrictions on marketing. We just looked at the evidence differently. And we actually had tools that they didn't have there.

I don't know, you know, what you would do in that case. You would say, well, they should be able to sell in Europe or they -- you know, if you just have reciprocity, how does that work when two regulators are taking different safety positions?

Another example would be on a vaccine where we had found a safety -- not a safety issue, but a contamination of the vaccine. And we had an alternative supply of the vaccine in the United States that they didn't have in other parts of the world.

BOLLYKY: This is rotavirus?

SHARFSTEIN: Yeah. And we were very sensitive to that issue and particularly because the developing world was using the one that seemed to have a little bit more at least of the contamination problem. And we had a lot of conversations with them. And in the end, we temporarily advised people here to use the other one, but we very quickly, at the same time working with Europe, we made clear we're not saying this is the right decision with a different supply somewhere else.

There were different circumstances that led to different positions, but we worked closely so that in the end it was generally consistent.

BOLLYKY: Great.

Alex?

TABARROK: So I would say on this question, you know, after 1962, drug delay increased in the United States dramatically. So the time it took to get a new drug approved went from, like, a year or two, all the way up to twelve, fourteen, fifteen years.

Particularly in the 1970s, 1980s, Europe was clearly faster on a lot of drugs. And a whole bunch of studies were done comparing U.S. approvals with European approvals. And they all indicated pretty consistently that patients in the U.S. were harmed, that looking at the quality of these drugs, which were later approved typically in the United States, that the delay really did harm a lot of people.

Beginning particularly with PDUFA, the United States then speeded up. And I would say I agree with Josh. They are pretty much equivalent today. So sometimes, you know, FDA is first, sometimes EMA is first, and sometimes you do get some differences, but they're not that large.

There are a few drugs which are available in Europe, which I think physicians would like to use in the United States, and vice-versa.

I would totally support, by the way, somebody in Europe, which Josh ought to agree with me, somebody in Europe ought to be able to say, hey, this drug has been approved by the FDA, I ought to have access to it. That's the gold standard, right? So if someone in Europe can do it, someone in the U.S. should do it as well.

Now, on this question of how do you evaluate if you have multiple agencies, OK, how do you evaluate, how does a physician evaluate what the evidence is? Physicians are dealing with this problem already today much, much more extensively incredibly extensively.

For example, most hospital patients will be prescribed a drug off-label, and that means that they're going to be prescribed a drug which has not been FDA approved for that use. So a cancer patient, an AIDS patient, they will be prescribed drugs. Very, very commonly, the gold standard, the best treatment will be a drug which the FDA has not approved for that use.

So that means already today, physicians are having to judge whether these drugs are good uses, even though the FDA has not approved them for that use. So the FDA actually has much less power over prescribing than people think. And it is simply not the case that the FDA is the only source of information.

Physicians turn to the drug compendia, they turn to pharmacies, the hospital pharmacies, you know, what is on those pharmacies. Physicians at Kaiser, you know, have access to various kinds of information. There's a whole world of peer-reviewed knowledge. Which physicians decide on a case-by-cases basis, is it worthwhile for me to prescribe this patient this drug? What's the cost/benefit, even though it hasn't been FDA approved for this use? That happens every day.

BOLLYKY: We only have one minute left, so I apologize to the last two questioners, you'll have to ask your question after the session. I'll just give Josh this last minute to respond to whether off-label use is a problem or it's simply a problem with FDA.

SHARFSTEIN: I agree with the description of off-label use, but I actually think it might make the point better because it's a very difficult challenge for doctors in that circumstance. And there's a lot of evidence of where that can go wrong.

And so having doctors now have to figure out the relative difference between a Bulgaria approval and a Germany approval or some other approval at the same time on top of that I don't think makes that task any easier.

But the big picture, in the end what we want are a strong regulatory system that allows people to know what works and a solution to products being unaffordable for patients who need them.

And I think that we should be strengthening the successes that we have rather than trying to rethink everything.

BOLLYKY: Great. With that, we're out of time. Thank you all for coming, and I hope you'll join me in thanking the speakers.

(APPLAUSE)

END