But drug approval process could bog down.

THE recent judicial decision imposing large punitive damages on Merck for an adverse Vioxx event has important implications for the health care system and the drug development process.

The number of drugs approved by the Food and Drug Administration has been decreasing each year since 1997, despite the fact that the number of new drug applications filed each year has increased. Candidate drugs are failing at a higher rate and at later stages in the development process. That means that larger costs of failures must be compensated by the revenues provided by fewer successes.

For the most part, drugs such as Prozac, Vioxx and Celebrex have been withdrawn from the market in response to the liability described above. Surely, the FDA mandate is to focus on safety. But there must be a balance between the economic risks of approving an unsafe drug--that may exhibit some infrequent adverse drug reaction--against an equally significant cost of not approving that drug, making potentially valuable drugs unavailable to certain patient populations.

As the combined costs of drug development, manufacturing, launch and distribution make bringing a new drug to market increasingly more expensive--the current risk-adjusted cost of taking a drug from the identification of a new chemical compound to FDA approval is estimated at $800 million--drug companies only invest in a drug if they think it could be a so-called blockbuster (revenues exceeding some $2 billion a year).

Thus, large pharmaceutical companies have to target drugs that must be both expensive and benefit a very large population. So they tend to be lifestyle drugs, not smaller-market life saving drugs. The development decisions are increasingly made by the marketing department of a drug company, not the research or science departments.

With a lifestyle drug, clinical trials are directed toward symptomatic patients, as opposed to patients who have a definable disease. As the population sample grows larger and more diverse, and the patients with a certain symptom become more diluted, the efficacy of the drug is greatly reduced. That increases its chances of failure in the eyes of the FDA.

This is also consistent with the fact that more drugs are failing later rather than sooner in late stage clinical trials, where the costs of drug approval programs are greatest. Add in the liability and punitive damage risks and the costs of drugs will escalate further.

It then becomes a vicious cycle: As pharmaceutical companies continually look for even bigger blockbuster drugs, they increase the likelihood of failure because they necessarily have to broaden the target market population. This ultimately increases the risk-adjusted cost of the drug.

If the cost of bringing a new drug to market keeps increasing and the FDA continues to be so risk averse, the drug approval processes will slowly bog down. Fewer drugs will be approved. People with Alzheimer's, cancer and other life-threatening illnesses may be driven to go outside of the U.S. to get life saving experimental drugs if they can afford it.

Jay Leno recently joked on "The Tonight Show" that President Bush was happy to visit Canada because he could get all his prescriptions filled. But this is no laughing matter. Merck's problems with Vioxx may not impact many of us directly today, but we will certainly feel the effects in the not-too-distant future. Solving this problem will take visionary thinking from policy leaders who realize that the future of our health care system depends on it.

Richard C. Hsu is a partner at the law firm of Townsend and Townsend and Crew LLP in Palo Alto. Edwin P. Ching is a patent attorney in Woodside.