In recent decades, U.S. and foreign biopharmaceutical companies (makers of drugs that are based on chemical compounds or biological materials, such as vaccines) and medical device manufacturers have been responsible for many cures and advances in treatment that have benefited patients’ lives. New cancer treatments, medical devices, and other medical discoveries are being made at a rapid pace.

The biopharmaceutical industry is also a major generator of American economic growth and a high-technology leader.[1] The U.S. biopharmaceutical sector directly employs over 810,000 workers, supports 3.4 million American jobs across the country, contributed almost one-fourth of all domestic research and development (R&D) funded by U.S. businesses in 2013—more than any other single sector—and contributes roughly $790 billion a year to the American economy, according to one study.[2] American biopharmaceutical firms collaborate with hospitals, universities, and research institutions around the country to provide clinical trials and treatments and to create new jobs. Their products also boost workplace productivity by treating medical conditions, thereby reducing absenteeism and disability leave.

In short, the biopharmaceutical sector and the related industries that produce medical devices are great American success stories.

Under current law, before they can be offered to patients in the United States, biopharmaceutical products and medical devices must first be tested and approved by a federal agency, the U.S. Food and Drug Administration (FDA). Properly tailored and limited regulation in this area is clearly important to public safety, but FDA regulations as currently designed hinder and slow the innovation process and retard the diffusion of medical improvements. This is a serious problem because the cost of developing a new FDA-approved drug is astronomical: “[I]n part because so many drugs fail, large pharmaceutical companies that are working on dozens of drug projects at once spend $5 billion per new medicine.”[3] When they do bring forth pharmaceutical treatments, drug companies must recoup the hundreds of billions of dollars in costs that they have absorbed in pursuing unfruitful as well as successful R&D.[4]

Reducing the burdens imposed on inventors by the FDA (for instance, by streamlining drug approval processes without sacrificing safety) would allow more drugs to get to the market more quickly and give patients the opportunity to pursue new (and sometimes potentially lifesaving)[5] treatments. Implementing creative ways to reform FDA regulation is therefore critically important to the enhancement of public health, particularly at a time when genetic testing and new therapeutic treatments hold out the promise of major improvements in health care results.

Federal Drug and Medical Device Regulation and the FDA Through 1990

Federal regulation of foods and drugs dates back to the early 20th century.[6] Following a scandal involving contaminated smallpox vaccines and diphtheria antitoxins that led to tetanus outbreaks, Congress enacted the Biologics Act of 1902, which required the federal government to grant pre-market approval for all biological drugs (a category including vaccines, blood and blood products, and cell extracts) and for the facilities producing such drugs. Congress later applied this same pre-market regulation to animal biological drugs in the Virus, Serum, and Toxin Act of 1913.

In 1906, following publication of The Jungle, Upton Sinclair’s exposé of filthy conditions in the meatpacking industry, Congress passed the Pure Food and Drug Act, which included provisions against the misbranding of drugs.[7] A drug was deemed “misbranded” if it contained alcohol or other listed dangerous or addictive drugs and its label failed to specify the proportion or quantity of such drugs. The 1906 act applied only to labeling, not to advertising.

The Harrison Narcotics Act of 1914 placed a tax on the production, sale, and use of opium and required prescriptions for products exceeding the allowable limits of narcotics. It also mandated more detailed record keeping for physicians and pharmacists who dispense narcotics. Federal regulatory functions regarding drugs, narcotics, and foods were carried out initially by a federal Bureau of Chemistry, which was reorganized to become the Food, Drug, and Insecticide Administration in 1927 and renamed the Food and Drug Administration in 1930.

Prior to 1938, pharmaceutical firms could market drugs without advance federal approval for safety and effectiveness. In 1938, a year after over 100 Americans died from ingesting a toxic drug, elixir sulfanilamide, Congress enacted the Federal Drug and Cosmetic Act (FDCA), which required that drugs must be federally approved for safety, but not for effectiveness, before being introduced into the market.

Under the FDCA, the FDA approved drugs for general distribution as long as they were demonstrated to be “safe under conditions proposed for their use in the labeling,” even when the evidence did not support a manufacturer’s therapeutic claims. This standard led to a certain amount of misleading drug advertising. More dramatically, the introduction of a new sedative, thalidomide, by a West German manufacturer led to widespread serious birth defects that were widely reported in the international press. (Fortuitously, although the FDA had not suspected that thalidomide caused birth defects, it had delayed approval of the drug in the United States.)

In the wake of this publicity, Congress enacted the Drug Amendments of 1962 (1962 Amendments), which require manufacturers to demonstrate that their drugs are both safe and effective for their intended uses before they are approved for distribution. Specifically, before a drug is distributed, the FDA must approve a “new drug application” (NDA) that documents the drug’s safety and efficacy through a series of pre-clinical and clinical trials and indicates the proposed labeling and advertising for the drug. The 1962 Amendments expanded the FDA’s power and spawned regulatory delays, given the inherent difficulty involved in proving efficacy, but they did not eliminate the possibility that drugs could be introduced before serious unanticipated harmful side effects for certain sub-populations (such as pregnant women in the case of thalidomide) were uncovered.

From the 1960s through 1990, Congress enacted a variety of more narrowly focused food and drug statutes:

• The Animal Drug Amendments Act of 1968 mandated pre-market approval of new drugs and food additives for animals.
• The Toxic Substances Control Act of 1976 contained a provision requiring FDA pre-market notification for new chemical substances.
• The Medical Device Amendments of 1976 (1976 Amendments) expanded the definition of a medical device and authorized the FDA to categorize all medical devices into three classes. Class I and Class II devices are relatively basic products (for example, tongue depressors are in Class I, while Class II products are a bit more complex) subject to reporting requirements and Good Manufacturing Practices (GMP) rules. Class III devices are very complex and risky products (for example, artificial hearts and angioplasty catheters) that must pass FDA pre-market approval processes similar to those required for new drugs, including proof of safety and effectiveness in clinical trials. Each new device is given Class III treatment, regardless of actual risk, unless it is shown to be “substantially equivalent” to a product in existence before passage of the 1976 Amendments.
• The Infant Formula Act of 1980 prohibited the marketing of infant formula without prior FDA approval (an unneeded response to a problem with a particular infant formula product that had quickly been cured through a voluntary recall), making it more difficult and expensive to get infant formula approved.
• The Drug Export Amendment Act of 1986 allowed American manufacturers to export non-FDA-approved drugs if their approval is being sought and they are being exported to jurisdictions that meet certain “good quality” regulatory standards.
• The Nutritional Labeling and Education Act of 1990 required that food manufacturers include nutritional labeling on most food products.
• The Safe Medical Devices Act of 1990 significantly raised reporting requirements for medical devices, including requiring device users to report adverse events to the FDA and to the device manufacturers. The act has been criticized as “requir[ing] extensive and costly paperwork often with little value.”[8]

Several major laws enacted during the 1980s and 1990s focused on creating new incentives for competition and innovation in pharmaceutical markets by granting greater flexibility to drug producers:

• The Orphan Drug Act of 1983 sought directly to encourage the development of drugs to treat “rare” diseases (those with fewer than 200,000 cases in the U.S.). Few such drugs had been developed because the market for treating individual rare diseases had been insufficiently large to cover the high fixed costs and long delays associated with the FDA drug approval process. Instead of focusing on lifting FDA regulatory impediments, the Orphan Drug Act granted subsidies, tax preferences, and special exclusivity privileges to orphan drug developers. In particular, it granted an orphan drug producer seven years’ protection from entry into the market of any other drug having a similar effect.
• The Drug Price Competition and Patent Term Restoration (Hatch–Waxman) Act of 1984 was designed to increase competition among the makers of branded drugs whose patents had expired and generic drugs that had the same chemical composition as the branded drugs. It did this by allowing producers of generic drugs to avoid costly and unnecessary safety and efficacy testing before entering the market. All the maker of a generic had to do was file a short Abbreviated New Drug Application (ANDA) that showed its product to be “bioequivalent” to the established branded drug. At the same time, Hatch–Waxman helped branded drug owners by extending their patent terms up to five years to make up for time lost during FDA review and clinical testing. (A branded drug’s total patent term was also capped at 14 years from the date of FDA approval.) A central premise of Hatch–Waxman was that the ANDA process would accelerate entry and competition among branded drugs and their generic substitutes, thereby containing the cost of medications.

• The Prescription Drug User Fee Act (PDUFA) of 1992 directly targeted delays in FDA drug reviews by requiring a manufacturer to pay a mandatory $200,000 user fee at the time of its application with the aim of reducing processing times. The FDA then hired many new employees, and within five years, average processing times had fallen by half, to 18 months. Noting this success, Congress renewed the user fee provision and increased user fees in 1997 and reauthorized the act in 2002. The FDA now has targeted some of the user fee funding to address post-market safety concerns.

  A 2002 General Accounting Office (GAO) study of the PDUFA presented mixed results. It reported a significant fall in FDA average approval times for non-priority drugs (27 months to 14 months) between 1993 and 2001 but no change in average approval times for priority drugs (six months). At the same time, it found that the FDA might be rejecting applications that might otherwise have been eventually approved in order to reduce average processing times.[9]

  Two highly positive scholarly studies in 2005 and 2006 determined that the PDUFA raised manufacturing profits and reduced review times, producing gains to consumers equivalent to 180,000 to 310,000 life-years without a diminution in safety.[10] A 2012 GAO study presented an equivocal (at best) assessment of FDA efficiency, finding that FDA review time for new drug applications increased slightly from fiscal year 2000 through fiscal year 2010, even though the FDA met most of its performance goals for reviewing drug applications during this period.[11]

• The Dietary Supplement Health and Education Act (DSHEA) of 1994 was enacted in light of an FDA history of seeking to regulate as drugs, and therefore prevent the distribution of, dietary supplements of which it did not approve. Specifically, the act authorized the manufacturers of such supplements to make substantiated “statements of nutritional support” without being subject to FDA control. Nevertheless, the DSHEA barred them from making claims regarding disease without going through the FDA drug approval process, even if the manufacturers could point to scientific evidence supporting such claims. Thus, while the DSHEA has somewhat limited the FDA’s ability to block the introduction of dietary supplements, it also has limited the rights of manufacturers to engage in honest commercial speech promoting their products—speech that certain consumers might find beneficial.[12]
• The FDA Modernization Act of 1997 (1997 Act) accomplished only modestly helpful reforms. It reauthorized PDUFA user fees and provided a special financial incentive (six months exclusivity added to any existing statutory exclusivity or patent protection) to manufacturers who conduct FDA-requested studies of drugs for children. The 1997 Act also codified a variety of already established FDA practices, including the use of FDA-appointed expert panels to assist the agency in new drug evaluation; the (optional) rule that only one adequate and well-controlled clinical study could be the basis for approving a new drug (a power that the FDA still does not invoke frequently); FDA rules that severely (and harmfully) restricted the dissemination of information regarding off-label uses of drugs (rules later limited by the courts); exemption of most Class I and Class II medical devices from pre-market approval; increased physician authorization to use experimental medical devices; and miscellaneous minor procedural streamlining.

• The Biologics Price Competition and Innovation Act (BPCIA) of 2009[13] deals with incentives to create and generate competition among “biological products,” more commonly referred to as “biologics,” which are new cutting-edge products that differ substantially from drugs derived from specific chemical compounds. According to the FDA:

  Biological products include a wide range of products such as vaccines, blood and blood components, allergenics, somatic cells, gene therapy, tissues, and recombinant therapeutic proteins. Biologics can be composed of sugars, proteins, or nucleic acids or complex combinations of these substances, or may be living entities such as cells and tissues. Biologics are isolated from a variety of natural sources—human, animal, or microorganism—and may be produced by biotechnology methods and other cutting-edge technologies. Gene-based and cellular biologics, for example, often are at the forefront of biomedical research, and may be used to treat a variety of medical conditions for which no other treatments are available.

  In contrast to most drugs that are chemically synthesized and their structure is known, most biologics are complex mixtures that are not easily identified or characterized. Biological products, including those manufactured by biotechnology, tend to be heat sensitive and susceptible to microbial contamination. Therefore, it is necessary to use aseptic principles from initial manufacturing steps, which is also in contrast to most conventional drugs.

  Biological products often represent the cutting-edge of biomedical research and, in time, may offer the most effective means to treat a variety of medical illnesses and conditions that presently have no other treatments available.[14]

  The BPCIA creates 12 years of market exclusivity for a biologic from the time it receives FDA approval. It also creates an abbreviated licensure pathway for biological products that are demonstrated to be “biosimilar” to or “interchangeable” with FDA-licensed biologics.[15] Specifically, the BPCIA provides that a drug may be demonstrated to be “biosimilar” to an already approved biologic if data show, among other things, that the product is “highly similar” to that biologic. A biosimilar may be licensed to enter the market and compete with the biologic no earlier than 12 years after the original biologic was licensed for sale. Promoting competition between biologics and biosimilars to treat specific illnesses is designed to contain new drug costs in this fast-growing segment of the pharmaceutical market, similar to the approach taken by the Hatch–Waxman Act for traditional chemically based drugs.

• The FDA Safety and Innovation Act,[16] enacted in 2012, reauthorized PDUSA, authorized producers of generic drugs and biosimilars to pay user fees for expedited FDA review, granted the FDA additional authority to review applications more expeditiously, and reauthorized the FDA’s authority to compel companies to conduct pediatric clinical trials. Its impact on FDA’s operations remains to be evaluated.

Excessive Costs of Current FDA Regulation

Current FDA regulation imposes an enormous burden on the American economy in terms of forgone, prohibitively costly, and delayed improvements in medications and an excessive reliance on inflexible and outmoded regulatory approaches that do not reflect modern developments in science.[17] Several reform proposals have been advanced recently in response to these regulatory excesses.[18] In addition, proposals have been advanced to deal with the application of state tort law to drug and medical device–related injuries and illnesses—the one area where a lack of deference to FDA regulation harms pharmaceutical innovation.

Forgone, Excessively Costly, and Delayed Improvements in Medications. Following implementation of the 1962 Amendments, FDA drug approval times soared (particularly compared to shorter foreign approval times);[19] new FDA-imposed testing procedures generated major delays in drug development and production; and the average number of new drugs introduced each year dropped significantly—by 60 percent, according to a 1973 study by prominent University of Chicago economist Sam Peltzman,[20] who also found little evidence of a decline in the proportion of inefficacious drugs.[21]

Another economic study covering a longer time span similarly found that FDA regulation had raised drug costs and reduced the number of new drugs.[22] Average NDA regulatory approval times rose from seven months to 30 months between 1962 and 1967 and continued to rise during the 1970s, though approval times improved somewhat in the 1980s and 1990s. Even worse, a 1985 analysis concluded that regulatory delays in new drug approvals contributed to hundreds of thousands of deaths (not to mention the millions of illnesses associated with delay).[23]

Whatever benefits the 1962 Amendments yielded must therefore be weighed against major costs in the form of a reduced supply of new drugs, higher costs, delayed introduction of drugs, and related health consequences. While the post-1962 federal laws described above have sought in various ways to encourage new drug production and competition, they have not dealt seriously with the problem of FDA regulatory overreach.

Excessive Reliance on Inflexible and Outmoded Approaches to Regulation. Delays, excessive costs, and reductions in the flow of new medications are the products of inflexible and outmoded FDA approaches to regulation. In recent years, litigants and scholars have highlighted the nature of these problems and advocated possible solutions.

FDA Informational Restrictions on Off-Label Drug Uses. After a drug is approved, a licensed physician may lawfully prescribe a drug for both FDA-approved and non-FDA-approved (off-label) uses. Off-label prescriptions are quite common, and the therapeutic, life-saving benefits of off-label uses are widely recognized. In cancer therapy, for example, drugs approved to treat one type of cancer have often proved effective in treating a different, off-label cancer strain. Recognizing this, in 2009, Medicare began to cover off-label cancer treatments.

The FDA nevertheless has long sought to bar the promotion of off-label uses, reasoning that such promotion constitutes “misbranding” under 21 U.S.C. § 331(a), a law that establishes criminal liability for “[t]he introduction or delivery for introduction into interstate commerce of any…drug that is adulterated or misbranded.” Under this theory, the FDA in recent years has secured criminal misbranding convictions for off-label promotional activities by various drug companies.

Serious First Amendment issues are raised, however, when the off-label promotional materials are true. In 2012, in United States v. Caronia,[24] the U.S. Court of Appeals for the Second Circuit vacated a pharmaceutical sales representative’s conviction for conspiring to introduce a misbranded drug into interstate commerce, based on his having promoted off-label uses of Xyrem, a prescription drug manufactured by Orphan Medical, Inc. The court stressed that the promotional speech at issue was truthful and that fraudulent or misleading speech would be denied First Amendment protection.

Although the FDA did not appeal the Caronia decision, it interpreted it very narrowly and did not change its policy of opposing truthful off-label promotional activities as “misbranding.”[25] In Amarin Pharma, Inc. v. U.S. FDA,[26] Amarin wished to make truthful statements regarding a widely prescribed off-label use for the triglyceride-lowering drug Vascepa (statements largely derived from an FDA-approved study). In an August 2015 ruling, the U.S. District Court for the Southern District of New York invoked Caronia and agreed with Amarin that the FDA’s threat of a misbranding action threatened to chill Amarin from engaging in constitutionally protected truthful and non-misleading speech. The court therefore granted Amarin relief, declaring that the company had the right to engage in truthful and non-misleading off-label communications regarding Vascepa.

The Caronia and Amarin rulings, although important, do not definitively remove the cloud surrounding truthful speech regarding off-label drug uses.[27] In principle, the FDA could still seek to challenge off-brand statements in other federal courts located outside the Second Circuit. To remove this cloud, the FDA by rule, or (preferably) Congress by statutory amendment, should specify that truthful speech concerning off-label uses is perfectly legal and will not be the subject of FDA enforcement actions.

Klein and Tabarrok Reform Proposals

George Mason University economics professors Daniel B. Klein and Alexander Tabarrok have outlined six types of reforms designed to combat FDA regulatory shortcomings.[28] They have advanced these proposals not as ideal, fully formed solutions, but as topics for debate in order to refine thinking on the direction future legislation might take.

Split Product Labels. The first proposal relates to the lack of consumer information and control related to drugs and supplements. Because of FDA prohibitions on non-FDA-approved claims, consumers typically do not receive adequate information about the nature or attributes of drugs and nutritional supplements. The authors recommend a product label that would consist of a part for FDA-approved health and nutrition claims and a part for “Not FDA Approved” claims. Although retaining FDA certification for those who want assurance from the FDA, the split-label approach increases the amount of information available to the consumer, thereby in principle raising consumer welfare. (Admittedly, enhancement of consumer welfare would require that at least a core group of consumers read and act upon any new claims.)

A “second best” alternative would be to return to the U.S. Federal Trade Commission (FTC) the authority it had until 1962 over drug promotion and advertising. The FTC, which has a large economics staff, is attuned to the benefits of disseminating truthful information and “was instrumental in allowing food manufacturers to make substantiated health claims regarding food, with notable improvements in the health of consumer food products as a result.”[29]

Access to Non-approved Investigational Drugs. The second proposal arises from the fact that:

[T]he FDA may deny seriously ill patients—those facing morbidity or death from their illnesses—the use of unapproved drugs. This FDA intervention has resulted in incidents where physicians were unable to provide experimental or unapproved treatments despite the terminal nature of their patients’ illnesses.[30]

The individuals who are denied access (often because they have not been allowed to participate in clinical trials) may suffer unnecessarily or die prematurely. Unenacted legislative proposals introduced in previous Congresses would have established a special program granting such patients access to non-approved investigational drugs and would have immunized drug companies from prosecution for any claims resulting from their use by the patients or physicians.[31]

Nongovernmental Drug Certification. The third, developed by Stanford Professor Henry I. Miller,[32] would allow nongovernmental drug-certifying bodies to oversee new drug development. These bodies “would compete with one another for hire by companies developing a new drug. The hired drug-certifying body would oversee investigation, help develop the NDA, and then make an initial decision on the application.”[33] The FDA would have 90 days to approve or disapprove a body’s drug certification, and any disapproval would be appealable to a board of experts reporting to the Secretary of Health and Human Services.

Although Miller’s plan would create new competitive mechanisms rather than one centralized bureaucracy to consider the merits of proposed drugs, it would still ultimately retain FDA approval over drug quality and safety standards and the certification of bodies. Such FDA control could place a substantial brake on the innovativeness of the new system.

International Reciprocity in Drug Approval. The fourth would allow U.S. drug companies to submit NDA-equivalent applications to drug regulatory agencies in specified countries. If the foreign agency in question approved the drug, it would automatically be approved for sale in the U.S., based on a principle of reciprocity. This would require the U.S. government to enter into agreements on reciprocal new drug approval with specified foreign partner governments. (High standards of regulatory review by a foreign agency would undoubtedly be required for enactment of such arrangements.) As Tabarrok and Klein point out, “[i]nternational reciprocity would eliminate the FDA’s monopoly on drug approval…. Thus, the FDA would have to compete for business. It would have to shape up or lose out on the fees that come with NDAs.”[34]

Elimination of Statutory Proof of Efficacy. The fifth would eliminate the statutory “proof of drug efficacy” requirement instituted in 1962 and require only proof of drug safety. According to Tabarrok and Klein, “[t]hat simple reform would greatly expand the range of drugs developed (in particular for rare diseases), increase the speed with which they get to market, and significantly reduce costs and drug prices.”[35]

Voluntary Testing and Certification. The sixth and most radical reform would make FDA drug testing and certification voluntary. As Klein and Tabarrok envision it:

Drug companies would be welcome to submit applications for voluntary certification by the FDA. If doctors and patients were assured of quality and safety apart from FDA certification (as they are now with respect to off-label drug uses), they would be free to purchase the drug clearly labeled “Not FDA Approved.” On the other hand, if FDA certification is as valuable as the FDA claims, patients and doctors would avoid non-FDA-certified drugs and rely on FDA certification. Under this plan, the FDA would become a genuinely voluntary institution, much like Underwriters’ Laboratories.[36]

Specifically, the FDA would compete with U.S. research institutions and companies, as well as (conceivably) foreign regulatory agencies, to provide certification services. Klein and Tabarrok have developed this concept further, arguing that a voluntary assurance system, backed by robust private tort remedies for consumers who have been harmed or cheated, would meet the demand for quality and safety assurance.[37] The practicalities of, and cost-benefit considerations related to, the implementation of such a market-based certification system merit careful evaluation.

Manhattan Institute Reform Proposals

In recent years, scholars at the Manhattan Institute have conducted a series of studies on pharmaceutical regulation. These analyses have generated suggestions for fundamental reforms of FDA processes in light of scientific advances.

Tailoring Treatments. One study by Peter Huber and Paul Howard focuses on precision medicine, which involves tailoring treatments to the biochemistry of individual patients based on molecular “biomarker profiles” that differ from patient to patient.[38] Precision medicine, which has emerged over the past decade, is at odds with current FDA review processes, dating to the early 1960s, under which a new drug is approved only if its efficacy has been established through “adequate and well-controlled” double-blind, placebo-controlled clinical Phase III trials. Such trials, which are time-consuming, involve separating patients suffering from a disease into two groups. One group is given an experimental drug, and another group is given a “placebo” having no medicinal value, with individual patients not knowing whether they are receiving the drug or the placebo. This approach assumes biological uniformity among patients, leading to the selection (after multi-year trial periods) of “one-size fits-all” drugs for hypothetical “one-size-fits-all” patients.

Moreover, “[b]y focusing exclusively on clinical symptoms and effects, which often take a long time to surface, these trials are often very slow to reach any conclusion at all.”[39] In fact, many drugs that could help subsets of people based on their biomarker profiles are not approved. Although the FDA’s Accelerated Approval Rule, codified by Congress in 1997, in principle allows the FDA to use “surrogate endpoints” that are likely to predict clinical outcomes, this authority reportedly has had relatively little impact in practice. “[T]he FDA has declined to issue clear qualification criteria for surrogate endpoints, relying instead on an ad hoc—and, therefore, unpredictable—case-by-case analysis.”[40]

The study by Huber and Howard recommends remedying these deficiencies by having expert panels convened by the National Institutes of Health (NIH), the federal government’s medical research organization, to develop substantive standards for the use of biomarkers that reflect the consensus view of the scientific community. These standards would be applied by the FDA to guide drug approval with the aim of improving and accelerating the approval process.

Marshalling “Big Data.” In a related vein, another Manhattan Institute report by Peter Huber recommends marshalling “big data” to improve the drug approval process by relying on biomarker profiles and precision medicine.[41] Specifically, it recommends that, consistent with a study by the President’s Council of Advisors on Science and Technology:

[T]he FDA should use its existing accelerated approval rule as a starting point for developing adaptive trial protocols to be used “for all drugs meeting…an unmet medical need for a serious or life threatening illness.” These protocols should promote the meticulous, data-intensive study of the drug’s molecular performance during clinical trials. And they should use modern statistical designs to choreograph the adaptive trials needed to ascertain when a drug that provides only some degree of clinical benefit to some subsets of patients can become a useful component of complex molecular medicine.[42]

Reducing the Burden Imposed by Phase III Drug Trials. A third study by Avik Roy emphasizes the major cost and risk of Phase III FDA clinical drug trials, which typically account for 90 percent or more of a drug’s development costs.[43] FDA regulation requires that most drugs (all except those for rare diseases) pass through three sequential clinical trial phases before being considered for approval.

• Phase I trials assess a drug’s safety, based on the experiences of a very small group of patients (100 at most).
• Phase II trials evaluate a drug’s safety and how well it works in treating a particular condition, based on a somewhat larger group of patients (100–300).
• Phase III trials test a drug against placebos, as well as currently available treatments, on thousands of people with an eye to identifying side effects and correct for statistical anomalies based on small sample assessments.

An evaluation of drug development in three areas (obesity, adult-onset diabetes, and cardiovascular disease) revealed that the Phase III system burdens pharmaceutical companies with huge and unpredictable regulatory delays; discourages small U.S. biotech companies from competing in the traditional drug market; and perversely encourages more innovation in drugs covering very rare diseases (exempt from Part III) than in drugs for conditions afflicting huge numbers of Americans.

In light of these findings, Roy’s study recommends that Congress amend the law to authorize the limited marketing to patients of drugs that have been found safe and promising in Phase I and Phase II trials. According to the study, this would give patients beneficial early access to new therapies and enable the FDA to collect information on a drug’s safety and effectiveness, and later to revoke a drug’s marketing authorization, if deemed appropriate.

Moreover, it is claimed that the effects on innovation could be enormous. Drawing on economic research, a related study by Tomas Philipson and Andrew Von Eschenbach estimates that higher profits accruing to producers in the absence of Phase III trials could bring forth a 100 percent to 240 percent gain in new pharmaceutical products.[44]

An FDA Report Card. FDA internal management processes also have major consequences for public health and the economy. An “FDA Report Card” commissioned by the Manhattan Institute[45] finds wide variations in the productivity of different FDA divisions, with the most productive divisions approving new drugs twice as fast as the agency’s average and three times as fast as the least productive divisions. (Safety, complexity of the task, and resources did not affect these results.)

The Report Card concludes that internal improvements in FDA efficiency could reduce R&D costs by nearly $1 billion a year and that greater FDA efficiency in approving a single generation of drugs would be worth $4 trillion to American patients due to greater life expectancy.[46] The Report Card also suggests that Congress consider requiring annual or biannual FDA updates to Congress on the status of agency quality improvement efforts.

Critique of Proposed FDA Regulation of Genomic Tests

In November 2014, the FDA revealed its intent to regulate thousands of medical diagnostic tests being performed in as many as 11,000 clinical laboratories throughout the United States, focusing especially on genomic medicine.[47] In a January 2015 review of this FDA proposal, Professors of Medical Genetics James Evans and Michael Watson argue that:

[T]he current plan for regulation is unnecessary and, if carried out, could result in the closure of many laboratories, undermine innovation, and potentially limit patient choice. Moreover, the proposed regulation, if unchanged, is likely to lead to thousands of laboratory submissions to the FDA, for which its own staffing capacity is tenuous at best. If implemented, the requirements may have the unintended effect of derailing the long-awaited emergence of genomic medicine.[48]

Many potentially affected parties have commented on the merits of FDA regulation in this area, and the House Committee on Energy and Commerce held a hearing on this topic in November 2015.[49]

Disincentives to Innovate Due to State Tort Legislation Based on FDA-Approved Labels

Once a manufacturer has gone through the arduous process of obtaining FDA regulatory approval for a new branded drug, it faces the additional risk of costly state tort liability based on a jury’s decision that an FDA-approved label failed to include appropriate warnings.[50] In 2009, in Wyeth v. Levine,[51] the Supreme Court of the United States held that FDA approval of a label for a branded drug does not automatically shield a manufacturer from a state tort law liability claim for a failure to warn of potential harm. As Manhattan Institute scholars James Copeland and Paul Howard described the decision:

In its Wyeth v. Levine decision…the Supreme Court allowed a state court jury to substitute its judgment on a safety question for the FDA’s. The side effect produced by the drug in question had been known to the FDA for almost thirty years, and the manufacturer, in FDA-approved language, had clearly disclosed the risk in six different locations on the label. The actual cause of the plaintiff’s tragic injury was the treating physician’s assistant’s obliviousness to the label’s plain warnings. In the aftermath of Levine, we are likely to see conflicting jury verdicts across the fifty states on the same issue or closely related ones. The result will be, so to speak, a race to the bottom, in which the most litigious jurisdictions will, in effect, set drug-labeling requirements for the nation as a whole.[52]

In effect, it is posited that state tort liability for drugs that meet FDA approval increases expected costs associated with release of a new drug by an uncertain amount, thereby disincentivizing drug innovation. Given that reality, Copeland and Howard recommend that Congress preempt state tort law and tie compensation for consumer harm to a manufacturer-specific tax assessed in proportion to the degree of the manufacturer’s new drug-specific commercial activity:

[W]e recommend that Congress broadly preempt state tort lawsuits seeking to hold drugs and medical devices responsible for claimants’ illnesses and injuries. Malpractice actions in state courts now available to plaintiffs would be unaffected by our proposal.

To deal with the consequences of serious and unforeseen drug side effects, we instead urge Congress to create a system modeled on the Vaccine Injury Compensation Program. Congress created VICP in 1986 in response to a wave of “junk science” litigation in the 1970s and 1980s that nearly destroyed the vaccine industry. VICP, while not without its own shortcomings, has since proven itself to be a scientifically credible mechanism for offering timely and fair compensation to the victims of rare vaccine side effects, while incurring much lower transaction costs than the tort system.

Initially the program should be funded by taxes levied on manufacturers on the basis of their market share. As the relative safety of their respective products emerged, manufacturers would be assessed taxes on the basis of their share of payments to successful claimants, which would be determined by the safety performance of the drugs they make.[53]

This proposal rests on the premise that despite its deficiencies, scientifically based FDA regulation, which heavily (perhaps excessively) weighs potential hazards, is better suited than state law to shaping drug labeling requirements. State tort litigation with jury determinations, focused on a particular plaintiff, threatens large and uncertain jury damages awards without taking into account the benefits as well as risks of particular labeling decisions. Under this system, manufacturers may be forced to produce unnecessarily voluminous labels that may actually do a poor job of truly informing consumers of relative risks.

This negative feature compounds the problem of large jury awards, the result of which may be a slower rate of introduction, as well as higher pricing, of innovative drugs. Thus, the authors posit that, as a substitute for tort litigation, a manufacturer’s tax might be less uncertain and costly, eliminate the problem of overly inclusive labeling, and yet provide injured individuals with reasonable compensation. On the other hand, it is unclear whether such a tax, as the fruit of an inherently imperfect political process, would ultimately prove more burdensome than reliance on tort awards.

Congressional Proposals for FDA Reform

In recent years, Congress has considered a variety of bills aimed at reforming the approval process for drug and medical devices. One comprehensive proposal with bipartisan backing, the 21st Century Cures Act,[54] was introduced in the House of Representatives in May 2015 and passed by the House on July 10, 2015. Specifically, the act would:

• Authorize the FDA to consider alternatives to multiphase clinical drug trials in certain circumstances and establish accelerated approval pathways for certain classes of novel drugs;
• Empower the FDA to accept observational studies, registries, and therapeutic use results, in addition to randomized clinical trial results, as evidence of efficacy;
• Promote the broader use of patient data through support for the development of a nationwide health information infrastructure for the exchange of electronic health information; and
• Establish within the U.S. Department of the Treasury an “NIH and Cures Innovation Fund” dedicated to high-risk research and cures development.

Many other FDA-related legislative proposals dealing with a host of issues pertaining to FDA regulatory review were also introduced in 2015.[55] None is comprehensive.

Most recently, on December 10, 2015, Senators Mike Lee (R–UT) and Ted Cruz (R–TX) introduced S. 2388, the Reciprocity Ensures Streamlined Use of Lifesaving Treatments (RESULT) Act,[56] which would allow for reciprocal approval of drugs. Specifically, it would require the FDA to review and within 30 days to approve or deny drug, device, and biologic applications from sponsors who have products approved and sold in specified “trustworthy” countries (European Union member countries, Israel, Australia, Canada, and Japan). A drug, device, or biologic application would have to be accepted if the product was lawfully listed for sale within a trustworthy country, not banned by current FDA standards, and required to satisfy an unmet public health or medical need. Congress would be authorized to disapprove and override an FDA decision to deny an application by majority vote on a joint resolution.

The legislative outlook for the various FDA-related bills currently before Congress is most uncertain.

Considerations That Should Inform FDA Reform Initiatives

FDA regulation has been scrutinized intensively in recent years, and a wide variety of reform proposals have been put forth. Much of the discussion centers around the concern that FDA regulatory processes, based primarily on lengthy clinical trials designed to approve drugs and devices that have broad application, have not kept up with dramatic changes in biogenetics and information processing that allow medications to be targeted more precisely to individual needs. Many valuable medications that benefit relatively small populations are not approved because of these old methodologies. Risks to individuals who may not derive benefit from particular drugs are given precedence over the harm to the unseen millions of people who are denied new treatments—a result that is at odds with maximizing welfare.

In sum, research indicates that current regulatory norms and the delays they engender unnecessarily bloat costs, discourage research and development, slow the pace of health improvements for millions of Americans, and harm the American economy. One particular reform that appears to be unequivocally beneficial and thus worthy of immediate consideration is the prohibition of any FDA restrictions on truthful speech concerning off-label drug uses—speech that benefits consumers and enjoys First Amendment protection.

These factors should be kept in mind by Congress and the Administration as they study how best to reform (and, where appropriate, eliminate) FDA regulation of drugs and medical devices. FDA reform must be undertaken carefully, with due concern for the multiple interests of patients, manufacturers, scientific researchers, and the medical community.

What is not in doubt, however, is that the existing FDA regulatory system is less than satisfactory and requires substantial and timely reform. Now is the time to begin seriously to explore the contours of such reform.

—Alden F. Abbott is Deputy Director of and John, Barbara, and Victoria Rumpel Senior Legal Fellow in the Edwin Meese III Center for Legal and Judicial Studies at The Heritage Foundation.