Christoph Westphal

A shared spiral down

By Christoph Westphal
December 20, 2010

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THE PHARMACEUTICAL and newspaper businesses are surprisingly similar. That opening sentence you just read is not a typo, but reflects my view that there are eerie similarities shared by the two industries. Both newspapers and pharmaceutical companies are currently under intense cost pressure and locked in a downward spiral.

It is common knowledge that newspaper companies have had a very tough decade, with a number going bankrupt, and almost all shedding jobs and circulation with depressing regularity. However, it may come as a surprise to many that the research-based pharmaceutical industry has had a similarly bleak decade. Research-based pharmaceutical and biotech companies are in a fight for survival in the current environment, with many having already been swallowed whole by competitors whose main focus is to decrease overall costs in an industry with rapidly contracting profitability. One need only look at recent mergers between Merck and Schering, and Pfizer and Wyeth, where the respective CEOs have promised reductions in research and development of 30 percent or more, in order to sell these mergers to investors.

Newspapers have struggled in an era where information is essentially free. In a parallel development, the “content’’ of pharmaceutical companies, namely drugs, has also increasingly lost pricing power. The last decade has brought a profound shift from branded, patent-protected drugs, to generic (and much cheaper) medicines.

Many drugs prescribed 10 years ago were protected by patents. Today, the majority of prescriptions are written for generic drugs. A number of factors have contributed to this trend: the development of new, patent-protected drugs has become more expensive and protracted; the number of new medicines being approved by the Food and Drug Administration has decreased; and generics companies, which produce copies of innovative medicines, have become more skilled.

Another parallel marks newspapers and pharma companies. The production of high-quality content by professional and educated journalists has come under pressure, given the eroding profits of newspaper companies. Similarly, many pharmaceutical and biotech companies are finding it difficult to support a large workforce of highly-skilled scientists and doctors in developed countries. Increasingly, the earlier stages of drug discovery are being outsourced to developing countries, in an effort to rein in the unsustainable cost of drug development. Many major pharmaceutical companies are building and growing large global research centers in countries such as China.

Consumers have chosen to increasingly access news for free online, and this has led to decreasing newspaper circulations and revenues. In an analogous development, governments in Europe and the United States (the payers for most medicines) have imposed price controls on a number of new medicines or used collective bargaining to control the cost of patent-protected medicines. In the non-medical economy, companies such as Apple set the price that they believe will maximize the profits for their products. This process is completely different for new medicines. Typically, long and drawn-out negotiations take place between governments or large insurance plans and pharmaceutical companies to determine what those nations or insurance plans (not consumers) are willing to pay for an innovative medicine.

Of course, winners have emerged in the new world for newspapers and pharmaceutical companies. Google, which aggregates rather than produces content, has created enormous value. Similarly, in the new world of pharmaceuticals, generic drug companies such as Teva, which generally do not search for improved new drugs, instead copying old drugs, have emerged as the winners.

Perhaps I am old-fashioned, but I believe that society risks a profound loss if world-class journalists and newspapers go out of business, leaving the world bereft of a vibrant source of high-quality and trusted news. I do not believe that society is aware that, in a similar way, we risk losing a generation of important new drugs for devastating diseases such as Alzheimer’s or cancer.

If things do not change, many large research-based pharmaceutical companies will continue to significantly cut their research and development for important new medicines. Sadly, just as we seem not to worry about starving world-class newspapers and investigative journalism, we seem also not to be concerned that we are on a path towards damaging the ability of pharmaceutical companies to discover and develop important new cures for devastating diseases.

Christoph Westphal, a biotech entrepreneur in Boston, can be reached at www.twitter/ drcwestphal. His column appears regularly in the Globe.