When Higher Costs Are a Good Thing

Last week, the Food and Drug Administration proposed its budget for the next fiscal year, including user fees for pharmaceutical companies. Somehow, I don't think GlaxoSmithKline (NYSE:GSK), Merck (NYSE:MRK), and the rest of the industry will complain too loudly.

The fee hike marks one of those rare times where increased costs could actually be a good thing. The FDA is bogged down with New Drug Applications and Biologic License Applications, and it's been missing its goal of reviewing applications within 10 months for standard reviews, and six months for priority reviews. The industry agreed to the fees in the early 1990s to help increase the speed of FDA reviews. To overcome the recent slowdown, more funds for more staffers are needed, just as when the PDUFA went into effect originally.

Companies have an interest in more rapid reviews. The patent clock continues to tick while the FDA dawdles, which costs the companies a considerable amount of revenue. For a drug selling $1 billion annually, every day that the FDA delays an approval costs the company more than $2.7 million. For a drug that might be as large as Pfizer's (NYSE:PFE) Lipitor, a delay in U.S. approval could cost the company $17 million a day! Considering that the PDUFA fee for fiscal 2008 was less than $1.2 million, a small increase for a quicker approval is an easy investment to make.

Generic-drug makers have also been hurt by the FDA's understaffing. Momenta Pharmaceuticals (NASDAQ:MNTA) and Novartis (NYSE:NVS) had to wait 26 months to get a decision on their generic version of sanofi-aventis' (NYSE:SNY) Lovenox, and they're still waiting for a decision on the resubmission of their application. The generic-drug industry should really consider agreeing to similar user fees, but it's understandable that they don't want to cut into their lower margins.

Congress still needs decide on the budget, and some legislators are worried that fees from the industry will give it too much influence over the agency, which has always seemed like a ridiculous argument to me. Anyone who's ever dealt with a building inspector knows that the fees paid for the permits get you absolutely no leverage whatsoever.

Investors surely don't care whether Congress or the companies fund the FDA, as long as it's funded well enough to make quick decisions about drugs.

More user-fee-free Foolishness:

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• A lesson from J&J: Keep your risk minimized.