Korean A-7 Prices Compared to U.S. Prices

by Julie Patel

CPTech was asked by Heeseob Nam to compare prices in the United States (U.S.) and Korea for the certain medicines (in this case cancer drugs), including Iressa (for lung cancer), Velcade (for blood cancer), Gleevec (forchronic myeloid leukemia) and Temodar (for brain cancer), for which we were able to obtain US and Korean prices.

One objective is to compare the prices that the US government pays for medicines to the prices that the Korea government is obligated to pay, under the so called A-7 Pricing Agreement.

The A-7 pricing agreement was recently described by USTR as follows:

"In 1999, the United States and Korea reached agreement on how new innovative drugs were to be priced (based on A-7 pricing or the average ex-factory price of A-7 countries, i.e., United States, United Kingdom, Germany, France, Italy, Switzerland, and Japan) and reimbursed (based on Actual Transaction Price [ATP]). Since its implementation, anomalies have surfaced. A June 2004 industry survey revealed that A-7 prices have only been granted to 33 percent of new products since April 2000. Because of Korea’s restrictive application of the A-7 pricing methodology, U.S. drug companies have decided not to introduce at least nine new products in Korea from 2000 to the present. In December 2004, the United States proposed that Korea issue a one-page justification for when it decides not to provide A-7 pricing for new medicines. The proposal is currently under discussion."

2005 Trade Policy Agenda and 2004 Annual Report of the President of the United States on the Trade Agreements Program. Office of the United States Trade Representative. Section III. Bilateral and Regional Negotiations (full document available here)

We looked at three different measures of US prices, and compared them to the Korean A-7 prices, provided by Mr. Nam.

1. The U.S. Big 4 price which is only available to Veterans Administration, Department of Defense, Public Health Service (Indian Health Service), and U.S. Coast Guard customers and are based on pricing calculations outlined under the U.S. Public Law.
2. The U.S. Federal Supply Schedule Price which is multiple award, multi-year federal contract that is available for use by any Federal Government agency. It satisfies all Federal contract laws and regulations. Pricing is negotiated based on how vendors do business with their commercial customers. The FSS program also provides additional opportunities for savings to the customers with negotiated quantity and tier discounts.
3. The U.S. retail price as offered by Drugstore.com, for someone who does not have insurance. This price is normally higher than the prices paid by US consumers who have private insurance or other methods of obtaining negotiated prices.
   
4. The Korean prices determined by a 1999 A-7 pricing agreement.

PRELIMINARY CONCLUSIONS

For all products for which we have data, the prices paid by the US government, under the "big four" or FSS schedules, were always lower than the prices that Korea must pay under the A-7 pricing agreement. In some cases, the differences were very large. Compared to the "Big 4" prices, the A-7 prices were 20 to 84 percent higher.

Prices for four drugs
(price per year or completed treatment)

Drug	Big 4	FSS	A-7
Iressa	$14,516	$18,775	$23,696
Velcade	$47,991	$47,991	$57,685
Gleevec(600)	$28,654	$43,898	$52,831
Temodar	$16,935	$16,935	$20,255

As a share of income, the differences are even more clear. In the table below, current prices are expressed as a percentage of 2004 per capita GNI ($14,000 in Korea, and $41,440 in the U.S.), illustrating the relative hardship that Korea faces with the A-7 pricing agreement.

Prices as a share of income

Drug	Big 4	FSS	A-7
Iressa	35%	45%	169%
Velcade	116%	116%	412%
Gleevec(600)	69%	106%	377%
Temodar	41%	41%	145%

For the three products available from drugstore.com, A-7 prices were higher for two, and lower for one. The Drugstore.com prices are prices faced by uninsured persons.

Prices
(price per year or completed treatment)

Drug	Drugstore.com		A-7
Iressa	$21,964		$23,696
Velcade	na		$57,685
Gleevec(600)	$48,769		$52,831
Temodar	$28,523		$20,255

<------------Data on the four drugs-------------------->

IRESSA
Iressa is indicated as monotherapy for the continued treatment of patients with locally advanced lung cancer. The recommended daily dose of IRESSA is one 250 mg tablet with or without food. Treatment is continued as long as the patient continues to benefit.

For patients receiving Iressa (250mg/day) it will cost per day, month, and year:

• U.S. Big 4: $39.88/day, $1,116.64/Mo, $14,516.32/Yr
• U.S. FSS: $51.58/day, $1,444.24/ Mo, $18,775.12/ Yr
• U.S. Drugstore.com: $60.34/day, $1,689.52/ Mo, $21,963.76/ Yr
• Korean A7: $65.10/day, $1,822.80/ Mo, $23,696.40/ Yr

VELCADE
Velcade is used to treat a type of blood cancer called multiple myeloma. It is a cancer of the plasma cell, an important part of the immune system that produces antibodies to help fight infection and disease.

Velcade is given by injection into the bloodstream twice a week for two weeks (days 1, 4, 8, and 11) followed by a 10-day rest period (days 12-21). This three week treatment schedule is considered as ONE CYCLE of treatment. A physician will decide how many cycles a patient will receive depending on their particular stage of cancer.

For patients receiving Velcade (3.5 mg) 2x/week for 2 weeks will cost per month (about 1 cycle), and per year (about 17 cycles):

• U.S. Big 4: $2,823/Mo, $47,991/Yr
• U.S. FSS: $2,823/Mo, $47,991/Yr
• U.S. Drugstore.com: Unavailable
• Korean A7: $4,807.04/Mo, $57,684.48/Yr

GLEEVEC
Gleevec is indicated for the treatment of patients with chronic myeloid leukemia (CML) in blast crisis, accelerated phase, or in chronic phase after failure of interferon-alpha therapy. CML is a type of cancer in which the bone marrow produces an excessive number of abnormal white blood cells. These abnormal cells suppress the production of normal white blood cells, which act to protect the body against infection. In time, the abnormal cells spread to sites outside of the bone marrow.

The recommended dosage of Gleevec is 400 mg/day for patients in chronic phase CML and 600 mg/day for patients in accelerated phase or blast crisis. The prescribed dose is administered orally, once daily with a meal and a large glass of water. Treatment is continued as long as the patient continues to benefit. Gleevec is sold in 100mg tablets.

For patients receiving Gleevec (400mg/day) will cost per day, month and year:

• U.S. Big 4: $52.48/day, $1,469.44/Mo, $19,102.72/Yr
• U.S. FSS: $80.40/day, $2,251.20/Mo, $29,265.60/Yr
• U.S. Drugstore.com: $89.32/day, $2,500.96/Mo, $32,512.48/Yr
• Korean A7: $96.76/day, $2,709.28/Mo, $35,220.64/Yr

For patients receiving Gleevec (600mg/day) will cost per day, month, and year:

• U.S. Big 4: $78.72/day, $2,204.16/Mo, $28,654.08/Yr
• U.S. FSS: $120.60/day,$3,376.80/Mo, $43,898.40/Yr
• U.S. Drugstore.com: $133.98/day,$3,751.44/Mo, $48,768.72/Yr
• Korean A7: $145.14/day, $4,063.92/Mo, $52,830.96/Yr

TEMODAR
Temodar is used to treat adults newly diagnosed with a form of brain cancer (glioblastoma multiforme) while also being treated with radiotherapy and then used as a maintenance treatment. The daily dose of Temodar capsules for a given patient is calculated by the physician, based on the patient's body surface area (BSA) which is based on a person's height and weight. The resulting dose is then rounded off to the nearest 5 mg. Patients continue to take Temodar until their physician determines that their disease has progressed, up to two years, or until unacceptable side effects of toxicities occur.

On average patients newly diagnosed with this type of brain cancer are administered Temodar orally for 42 days concomitant with focal radiotherapy followed by maintenance Temodar for 6 cycles, in which each cycle consists of 5 days of treatment and 23 days of rest, with varying dosages dependent on a person's BSA and response to treatment. This treatments constitutes at one treatment procedure and will be the basis for our calculations.

For instance, a man who is 6 feet tall, weighs 190 pounds and has a BSA of 2.1 would have the following drug course and cost per TREATMENT PROCEDURE (includes initial 42 days of 160mg Temodar treatment and 6 cycles (Cycle 1 with 315mg and Cycles 2 through 6 with 420mg of Temodar) thereafter):

Cost per treatment procedure (72 days of actual treatment):
U.S. Big 4: $16,935.06
U.S. FSS: $16,935.06
U.S. Drugstore.com: $28,523.38
Korean A7: $20,255.06

Collective (total) milligrams (mgs) of Temodar taken by a person per treatment procedure is 18,795 mgs.

Bio-generics and prize systems

by Aidan Hollis

Salon has a recent article on the difficulties of creating an approval process for bio-generics. The problem is that "large molecule" drugs may be very difficult to replicate, unless the entire process is perfectly known and the mechanism for creating the molecule can be exactly duplicated.

The result of this is that even after the expiry of all relevant patents, generic firms may not be able to show bio-equivalence, which would mean that they would have to go through exactly the same clinical trials to be able to sell their product; and even then it is not obvious that they would be able to claim bio-equivalence.

Large molecule drugs, in this situation, may be able to retain their monopoly for a very long time, until a better drug comes along. This is good for encouraging investment in new large-molecule drugs. But if that were optimal, we should have a system of patents with no expiry date. Instead, most countries have adopted a system of patents with durations of approximately 20 years, to balance the incentive for more innovation against the benefits which come from lower prices. So we probably don't want firms to enjoy monopolies forever, even if it increases investment into R&D.

How would a prize system deal with large molecule drugs? A key aspect of a prize system is that the reward for innovation is separated from the price of drug, which should be based on manufacturing costs. But if there are no competitive manufacturers, the drug price will be based on willingness to pay, not cost to produce. Then the manufacturer could charge a high price, and it would earn profits from high prices in addition to whatever reward was due to it under the reward system.

I suggest here a couple of solutions.

Solution 1: Base rewards on some dollarized version of therapeutic value less the cost of the drugs. Then the reward is reduced the higher is the price of the product.

Solution 2: Given the structure of the reward system, it might be possible to require licensing of all the technologies -- not just patented ones -- involved in the manufacturing process, as a condition of participating in the reward system. This would enable bio-generics to be genuinely bio-equivalent. (Note, however, than in some markets with large economies of scale in production, you might not want to have multiple manufacturers, which brings you back to solution 1.)

It would be valuable to hear others' comments about the feasibility of either of these work-arounds, as well as about other problems which might be foreseen with respect to large-molecule drugs.

Off-label prescribing and rewards based on observed value

by Aidan Hollis

NY Times, July 22 2006 has a story by Alex Berenson -- who is doing very worthwhile reporting on drugs -- on off-label prescribing.

“The case has put the spotlight on the murky financial relationships between drug companies and the physicians they use to promote their medicines. Companies cannot directly advertise drugs for purposes not approved by the Food and Drug Administration. But getting drugs prescribed for unapproved uses can increase a drug’s sales, so companies often skirt the rules by sponsoring seminars where doctors are paid to make presentations promoting their drugs, including the “off label” uses.
For doctors, these and other payments they receive for discussing drugs can be very lucrative. Dr. Gleason acknowledges that he received more than $100,000 last year alone from Jazz Pharmaceuticals, which makes Xyrem, the narcolepsy drug he has promoted.”

There is nothing illegal off-label prescribing – doctors are entitled to prescribe drugs for a condition even when official labeling does not include that condition – but it is not legal in most jurisdictions for a company to promote a drug for off-label purposes.

Off-label prescribing is one way that firms and doctors find out about the possible uses of a medicine. I have the impression that it is particularly common for drugs treating mental health.
When drugs are used off-label the firm makes profits, and this gives incentives for promotion of off-label uses. This is particularly problematic if the off-label uses are in fact of low value, comparatively. For example, suppose that drug A is approved for condition X, and is reimbursed accordingly. But a doctor prescribes it for condition Y, which already has an available treatment. Perhaps drug A is slightly better for condition Y, or perhaps not. The price, however, basically relates to the use of drug A for condition X.

An insurer may refuse to reimburse, since not for the approved use, or it may reimburse at a price which has little to do with the value of the drug in use Y.

How would a prize system treat off-label prescribing? The obvious approach is simply to reimburse according to incremental therapeutic value, given the evidence on the uses for which the drug has been prescribed. If the evidence on the value of the drug for treating condition Y is weak, the reward for the times the drug was used for condition Y would be accordingly small, but need not be zero. The trick is that the reward is determined based on the value of the drug in the way that it has actually been used.

This highlights a general advantage of a reward system: it rewards based on observed therapeutic value, rather than based on a price which is set before it is observed how much value the drug actually generates.

PhRMA says industry wide R&D outlays on medicines were $51.3 billion in 2005

by James Packard Love

In this press release, which is on the front of its web page, PhRMA pegs global industry R&D outlays on new medicines at "$51.3 billion in 2005, according to a Burrill & Company analysis for PhRMA." IMS puts global pharmaceutical sales at $602 billion for 2005. That would put R&D spending on new medicines at 8.5% of global sales.

The press release reports a much higher percentage for member R&D investments. They use a number from the PhRMA 2006 Industry Profile, for PhRMA member US R&D spending, divided by US sales, which gives them 19.2 percent. Since most of their members spend the majority of their R&D in the US, this gives a big number.

The figures in the PhRMA survey that look at the combination of the US market, plus sales or R&D from "abroad," are 15.8% invested in R&D. This too is higher than the 8.5% calculated above, for the whole world market.

Part of the difference concerns the way the data is collected for the PhRMA Industry Profile. As noted in Table 6, PhRMA's report of "Sales Abroad" excludes sales generated abroad by the foreign divisions of foriegn owned PhRMA members. So too does it exclude R&D abroad by foreign divisions of foriegn owned PhRMA members. It is likely that these exclusions are more important for sales than for R&D. PhRMA only reports $86 billion in "sales abroad" for 2005 -- a year when the global pharmaceutical market was more than $600 billion. On the other hand, the $39.4 billion in reported member R&D is 77% of the estimated $51.3 billion in global R&D, by PhRMA and non-PhRMA members combined. A more inclusive reporting of PhRMA member foriegn sales and R&D would likely have given a much lower rate of R&D spending for PhRMA members, but certainly higher than the 8.5% number for the industry as a whole.

PhRMA Press Release: R&D Investments by America's Pharmaceutical Research Companies Near Record $40 Billion in 2005

Washington, D.C. — New statistics released today show that R&D investments in new medicines by PhRMA's biotechnology and pharmaceutical research member companies reached a record $39.4 billion in 2005 (up from $37 Billion in 2004), according to PhRMA's Annual Member Survey. The increased investment in biomedical R&D in 2005 continues 25 years of strong growth in R&D investments by America's research-based pharmaceutical companies – up from $2 billion in 1980. When factored together, the total investments in biotechnology and pharmaceutical R&D by both PhRMA member companies and non-PhRMA members reached a record $51.3 billion in 2005, according to a Burrill & Company analysis for PhRMA.

"America's research-based biopharmaceutical companies once again lead the world in investing in the hunt for new cures and treatments. It is the most research-intensive industry in America, and we are proud of the longstanding commitment to meeting patient needs shown by PhRMA member companies‘ R&D investments - investments that far exceed those of the international pharmaceutical industry and the National Institutes of Health," said PhRMA president and CEO, Billy Tauzin. "We are working everyday to save lives, end disease and relieve pain. The R&D investment made by PhRMA member companies is one reason that Americans today live longer, healthier and more productive lives. In 2005 there were more than 2000 compounds under development by pharmaceutical companies."

The steady growth of R&D investment continues to support important advances in better medicines and new treatments for patients made by research scientists and physicians. The over $39.4 billion invested in R&D in 2005 represents a 6.5% increase over 2004 expenditures. In 2005, PhRMA member companies invested a record 19.2 percent of domestic sales on U.S. R&D.

The Pharmaceutical Research and Manufacturers of America (PhRMA) represents the country's leading pharmaceutical research and biotechnology companies, which are devoted to inventing medicines that allow patients to live longer, healthier, and more productive lives. PhRMA companies are leading the way in the search for new cures. PhRMA members alone invested an estimated $39.4 billion in 2005 in discovering and developing new medicines. Industry wide research and investment reached a record $51.3 billion in 2005.

Size of trials by status (S or P) - Some 2004 FDA and Parexel data compared

by James Packard Love

This note is a follow-up to discussions stimulated by Michael Palmedo's note on 2004 FDA NME drug approvals. In particular, it follows discussions on ip-health by Joe DiMasi and myself on a fairly narrow question -- are clinical trials trials larger for Standard (S) FDA NME drug approvals than for Priority (S) approvals?

The following table reports the size of clinical trials for 5 priority and 8 standard FDA NME drug approvals. The products are the union of those reported by Michael Palmedo for 2004 FDA approvals, and data from Parexel. These are the data that Joe DiMasi referred to in his June 14 post to ip-health.

Drug	Rating	Size, FDA letter	Size, Parexel
Clolar	P	66	138
Lyrica	P	1,508	9,100
Prialt	P	1,434	1,634
Sensipar	P	1,146	2,000
Tarceva	P	1,837	6,000
Apidra	S	2,467	4,093
Cymbalta	S	1,850	6,100
Enablex	S	1,454	8,830
Fosrenol	S	2,357	2,697
Ketek	S	2,016	5,900
Lunesta	S	2,100	2,909
Spiriva	S	2,663	3,168
VESIcare	S	3,027	3,327

Below are the mean and median , for the FDA and Parexel data, reported by (P) and (S) drugs.

	Mean-FDA	Median-FDA	Mean-Parexel	Median-Parexel
Standard Approvals	2,242	2,229	4,628	3,710
Priority Approvals	1,198	1,481	3,774	2,000
Difference	1,044	854	795	1,710
% larger	87%	55%	23%	86%

Two quick points. First, Parexcel reports more patients for every trial. Second, the number of data points is pretty small (5 P and 8 S drugs), so one has be careful about drawing conclusions.

Joe notes that when you look at means from the Parexel data, the trials for Standard approvals (S) are only 23 percent larger than for the Priority products. Joe notes that by comparison, when looking at the FDA data, the mean size of the trials for Standard approvals were 87 percent higher, suggesting a possible bias when looking at FDA data.

However, I would add, that when looking at the MEDIANS of the Parexel data (for the 13 products), the differences between the size of standard and priority drug trials are quite pronounced. For the Parexel data, the median size of trials for the Standard drugs is 86 percent larger than the size of the median trial for the priority drugs -- actually higher than the 55 percent difference (in medians) that Michael reported, looking at FDA data for the same drugs.

Ultimately, this is too small a sample to say that much. We'll take a look at a larger sample, and report that. But before doing so, it is also interesting to look at the differences between the FDA data and the Parexel data. Parexcel always reported more patients in the trials than did Palemedo, looking at the FDA approval letters. In some cases, much more. Pfizer's Lyrica, for example, was reported by Palmedo as 1,508, and Parexcel as 9,100. Enablex, reported by Palmedo as 1,454, is reported by Parexel is 8,830. In looking further at this issue, we will also look closer on these differences. One person suggested the initial FDA approvals may not report parallel trials in the works for other indications (Lyrica is now approved for 3 indications, for example). Another comment is that some of the "trials" reported by Parexel may be of lesser scientific importance (possibly having value for marketing purposes), or may be un-reported by the FDA other reasons. People may speculate or offer some evidence on these points in the comments to this note.

This issue has generated some debate with Joe DiMasi, because we have questioned his repeated finding (in 1991 and 2001/2003) that priority products are more costly than standard drugs, at least in terms of the important area of clinical trials. Our reviews of the data, on a couple of different occasions, have suggested that priority drugs consistently have smaller clinical trials than do standard approvals (findings borne out here again). If priority drugs have smaller trials and quicker approvals, they would seem to be less expensive, all other things being equal. Joe's comments have been informative and constructive, and we will revisit the issue, incorporating both a broader analysis of the Parexel data, and a closer look at the differences between the FDA and Parexel data, as well as other evidence on this topic.

Finally, we remind people that neither the Parexel nor the earlier (2001, 2001/2003) DiMasi et all data claim to present data for all drug approvals. Most importantly, DiMasi has said that "It should also be noted that our study was based on the R&D experiences of major traditional pharmaceutical firms," in contrast to "small biotech and niche pharmaceutical firms." This is not a criticism of the DiMasi studies, as any analysis is going to be limited in some way. It is rather a reminder that some of the estimates provided by DiMasi are based upon particular samples that may not be representative of other drug development efforts. Indeed, DiMasi's 2001/2003 paper, which is now so widely quoted, drew important conclusions about relative investments in priority and non-priority drugs from just 10 priority products and 14 standard products (DiMasi 2003 page 172). His estimates of out-of-pocket outlays were also more than twice as high as the previous PERI study involving 117 drug development projects (Project Management in Pharmaceutical Industry: A survey of Perceived Success Factors 1995-1996, PERI), raising some questions about the nature of the sample he studied. To deepen the understanding of these issues, people have to look at more data, and do some modeling of their own.

Bayh Dole Rights, Size of Clinical Trials, 2004 Approvals.

by Mike Palmedo

CPTech has looked at the patents for New Molecular Entities (NMEs) that came to the market in 2004.

Excluding antibiotics, which do not have Bayh-Dole listings in their patents, the FDA approved 19 NMEs in 2004. Nine of these received priority status for approval, meaning they were found to have significant therapeutic gain over existing medicines. The remaining 10 NMEs were given standard approvals.

For the products for which data was available, I looked up the number of patients cited by the FDA in approving the medicines. (I had to exclude three of the priority NMEs approved in 2004 for which the label did not include the number of patients) The average (mean) number of patients in the clinical trials on which the FDA approvals were based was 1073 for priority drugs and 1840 for standard drugs. The median numbers of patients in these clinical trials were 1290 for the priority drugs and 2058 for the standard drugs. These figures are considerably lower than the average size of clinical trials used by DiMasi in his often-cited research on the cost of drug development – 5,303 patients.

The Orange Book lists 45 patents on the 19 NMEs. Three of these patents include clauses citing government funding and subsequent Bayh-Dole rights to use or license the patent. These three patents cover two of the nine drugs which received priority approval – two patents for Clolar (a leukemia drug sold by Genzyme) and one for Lyrica (a diabetes drug sold by Pfizer).

A spreadsheet with the drugs, patents, and size of trials is online here:
http://www.cptech.org/ip/health/rnd/2004nmes-07102006.xls

Mike Palmedo

Some Resources on Innovation Prizes and Related Mechanisms

by Michael Ash

Thanks very much to Jamie for initiating this discussion and for including me.

I am going to post several links to resourcesf or key papers in the field, and I hope that they are useful. Maybe it would be possible to create a static page with these and other useful resources.

Consumer Project on Technology's page on H.R. 417 The Medical Innovation Prize Fund Act including a link to the text of the act
http://www.cptech.org/ip/health/hr417/

An Efficient Reward System for Pharmaceutical Innovation (Aidan Hollis)
http://econ.ucalgary.ca/fac-files/ah/drugprizes.pdf

Patent Buyouts: A Mechanism for Encouraging Innovation
(Michael Kremer, The Quarterly Journal of Economics, Vol. 113, No. 4. (Nov., 1998), pp. 1137-1167. Link requires JSTOR access.)
http://links.jstor.org/sici?sici=0033-5533%28199811%29113%3A4%3C1137%3APBAMFE%3E2.0.CO%3B2-D

Rewards versus Intellectual Property Rights
(Steven Shavell and Tanguy Van Ypersele)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=145292
http://www.law.harvard.edu/faculty/shavell/pdf/44_J_Law_Econ_525.pdf

CPTech comments on the APC/AMC approaches

by James Packard Love

The debates over the various version of the Advanced Purchase Commitment (APC)/Advanced Marketing Commitments (AMC) proposals have a fairly long history (since the late 90s). Most of the people in the debate are sincerely motivated to address extremely important gaps in R&D for persons living in poverty in developing countries. There were, particularly in the beginning, ideological aspects of the debate, as some proponents of the APC/AMC approaches presented the issue in such as way as to understate the importance of public sector directed medical research and overstate the efficiency and benefits of the patent system -- which they claimed, "worked fine" so long as people had sufficient purchasing power, which the APC/AMC sought to remedy. (Views emphasized by the IFPMA, for example). This led to a backlash against the proposals by persons who saw other flaws in the patent system, or wanted to defend the importance of "push" funding by governments and PPPs, and to call attention to the potential "crowding out" problems if massive funding went into APC/AMC proposals.

There have also been a host of practical issues raised about the proposals, including the specifications of the qualifying products, rewards for follow-on R&D, and many other issues.

CPTech has viewed the APC/AMC proposals as having the most appeal in the context of vaccines or other products where it is particularly useful to tie the incentive to innovate to practical plans to insure that patients actually have access to and benefit from the new products. Our concerns about the APC/AMC proposals are several, including those about the crowding out of other R&D funding possibilities, but more importantly, we question whether or not the fundamental approach of structuring commitments to buy products that meet particular standards is the best approach.

Like the proponents of the APC/AMC proposals, we are convinced that some significant public funding should be devoted to so called "pull" mechanisms, that reward successful drug developers. In terms of the R&D incentive aspects of the proposals, we would reduce the complexity of the AMC proposal by replacing the purchase commitments with large prize fund like rewards that were tied to positive health care outcomes. We proposed such systems in 2002, in the context of a broader separation of the markets for innovation and products. Others, particularly Aidan Hollis, have elaborated on how this might be done in the context of neglected diseases.

The APC/AMC proposals essentially link together the R&D incentives with the delivery of products to patients. We would prefer if these were not tied together, and rather that developers would be rewarded regardless of who markets, sells or delivers products. We (as others) would also prefer that rewards be tied more generally to health outcomes, rather than specific product standards, so that drug developers would have more flexible targets -- the more general, the better, in our view. Perhaps this could be also tied to the voluntary licensing of patents to a patent pool that faciliated generic competition for products.

That said, we do appreciate and agree with the point made by APC/AMC proponents that it is important to fund also the systems that deliver products to patients. We would not link this so closely in practice to the R&D issue, however.

Jamie

Here are a few links for some background documents on the G8 discussions on Advanced Marketing Commitments


Proponents and explainers of the AMC proposals

http://www.dfid.gov.uk/consultations/amc-report-tremonti.pdf
Advanced Market Commitments for vaccines, A new tool in the fight against disease and poverty, Report to the G8 Finance Ministers, Giulio Tremonti, Minister of the Economy and Finance, Italy, December 2, 2005

http://www.dfid.gov.uk/pubs/files/amc-consultation-report.pdf
Advance Market Commitments, Results Of UK Consultation, February 2006

http://www.cgdev.org/section/initiatives/_active/vaccinedevelopment/overview
Making Markets for Vaccines (one of many of the CGDev papers on this)

http://www.ifpma.org/News/NewsReleaseDetail.aspx?nID=4762
Advanced Market Commitment (AMC) Proposal an Important Step in Right Direction to Develop & Provide Access to New Vaccines, IFPMA, Geneva, Switzerland, 4/24/2006

Critics of AMC approach

http://www.slate.com/id/2133355/?nav=fo
Run-AMC: The latest idea in vaccine funding won't cure AIDS and malaria.
By David Dobbs, Dec. 29, 2005, which makes refers to:

http://www.economics.ox.ac.uk/members/andrew.farlow/CIPIH1May2005.pdf
Concerns Regarding the Center for Global Development Report, "Making Markets for Vaccines," Submission to the CIPIH, 29 April 2005. Andrew, W.K. Farlow, Donald, W. Light, Richard, T, Mahoney, Roy Widdus.

AMCs and the G8

by Owen Barder

The latest news on advance market commitments is that it not clear whether the Heads of State will announce a pilot program The Wall Street Journal reports that it wider politics may be an obstacle. If a pilot program is not agreed at St Petersburg, it is possible that the idea may be taken forward by a coalition of interested governments outside the G8 process.

AMC mention in July 10 Pre Summit Statement by G8 Finance Ministers

by James Packard Love

This is the mention of the Advance Market Commitments for vaccines in the July 10 pre-summit statement by G8 Finance Ministers:

"We thank the World Bank and GAVI for their technical work on Advance Market Commitments for vaccines and look forward to a successful launch of the AMC pilot project by the end of this year."

http://www.fin.gc.ca/activty/g7/g8100606_e.html

June 10, 2006 Pre Summit Statement by G8 Finance Ministers

We met and discussed today a number of global economic issues in preparation for the annual Summit of G8 Heads of State and Government in St. Petersburg. We also had productive discussions with colleagues from Australia, Brazil, the People's Republic of China, India, the Republic of Korea and Nigeria.

[snip]

5. We re-iterate that the risk of an avian flu pandemic requires preparation through facilitating cooperation across countries in drafting contingency plans, including for the financial sector. We appreciate the work undertaken by the IMF in promoting the common elements of business continuity planning and encourage further efforts in helping countries elaborate their own plans. We take note of the progress on innovative financing mechanisms. We thank the World Bank and GAVI for their technical work on Advance Market Commitments for vaccines and look forward to a successful launch of the AMC pilot project by the end of this year. We also call for mobilization of additional support to close the financing gap for polio eradication activities.

Simulating prize fund rewards

by James Packard Love

At a meeting last year at Columbia, Barry Nalebuff suggested we consider testing the prize fund approach by simulating payoffs, beginning with past drug approvals, to look at how a particular system might have worked, given the drugs that were approved. We intend to do some of this.

Data
Data on drug approvals is easy to get. Excellent data exists on usage -- privately collected and owned by IMS. But IMS data is very expensive, even for older data. We might use data from medicaid outlays or some other public sorce, to get a sense of market shares (as measured by units), as well as relative prices of products introduced in a given year or time period.

The main point of this exercise would be to see how differnent approaches, such as those proposed by Aidan (directly related to QALYs), as well as others (such as this) might work.

Any suggestions regarding data or approach are appreciated.

Incentive constituency, surrogate outcomes

by Thomas Faunce

Hi All

Jamie, thanks for the opportunity to be involved in this. Here are some initial thoughts, ranging from nuts and bolts to broad canvas ideas. (1) Changes such as those proposed here to the R&D incentives system require a founding constituency, a sector of champions with an appeal to policy makers. The legislation could facilitate involvement of corporate (multinational) non-profits in this area through tax incentives etc. (2) The prize fund system might reward business plans as well as outcomes in terms of QALYS. (3) Prize gatherers and seekers will probably push for outcomes to involve surrogate markers (decreased viral load, improved white cell count) rather than QALYS on the grounds that its easier to get objective data rapidly. (4) Who will organise the ground rules and funding of the outcome clinical trials? (5) Industry is using restriction in the experimental use exemption (Madey) and grant schemes pushing researchers into linkage projects, to limit the capacity for independent public-funded research to gain patents and become self-sustaining. Perhaps a scheme for private-public sharing of patents would be a good initial step. That is, we may need to think of the logic steps to achieve the full Prize Fund, rather than ask for it all straightaway. (6) At the moment governments allocate R&D funds according to national benefit priorities, one of the few areas where they can continue to discriminate against multinationals working in a specific sector of technology (avoiding TRIPS problems) how to convince them to globalise this? (7) Why not fund the prize from a Tobin tax type tithe on global financial transactions...making the global money markets assist the global burden of disease would be more appealing, but may require (8) removing the anacronistic system of national governance through (industry-targeted and captured) elected representatives, rather than voluntarily registered citizen electronic voting on each important measure

Determining rewards in a prize fund

by Aidan Hollis

James Love has suggested, in his post yesterday, that rewards should not be simple linear multiples of QALYs. I appreciate his points, but think that there are some good reasons why simple linear multiples make sense.

1. Simpler rules are better. Jamie suggests -- and I am not sure how seriously -- a rule such as

Reward = a + b * ( QALYs ^ k ) ,where k < 1.

I don't like that kind of rule because I don't think that putting exponents into regulations is all that great an idea. People don't understand what they are getting. Every economist knows that many contracts and rules could be (theoretically) improved if only they were more sophisticated. But people continue to use simple contracts and rules in many situations, presumably because they value simplicity and clarity.

2. What I have suggested is that a drug's share of the reward fund should be equal to the share of the QALYs generated by that drug. Note that there are two things which increase QALYs: the number of people using the drug, and the average benefit per user. Under Jamie's suggested rule, the reward does not proportionally increase with the benefit. This would mean that a drug which offers half the benefit of another drug, but to the same number of people, would obtain more than half the reward. (Under a simple linear reward, it would get exactly half.) What rationale would there be for this? Jamie's rule could also lead to the following kind of behavior: create one new medicine with two equivalent forms. Market it as two medicines, and increase the reward.

3. I think, if there is to be any adjustment, it should be for drugs which treat diseases and conditions which are relatively rare. I think an appealing, and straightforward solution to the rare disease problem, is simply to create a supplementary reward which is only available to drugs treating rare diseases and conditions. Similarly, a fund could be created for drugs which treat the diseases of poverty, such as visceral leishmaniasis.

4. Adding flexibility is attractive, but also dangerous. The problem with flexibility is that it offers more parameters for games-playing by firms. The greater the discretion of the rewards authority, the more difficult the set of problems it faces, and the more rent-seeking effort there will be. If the only thing that is rewarded is creating measurable health benefits, then firms will focus on creating measurable health benefits. (And who can argue against that?) Adding flexibility can in principle allow the rewards authority to do better: but in practice it creates a whole new set of incentives for firms, many of which may not be desirable.

However, I would certainly agree that HR417 is right in not specifying a particular reward mechanism; and I think that the question of an appropriate reward mechanism is still very open.

Aidan Hollis

Modeling prize fund rewards

by James Packard Love

As a general issue, I an not too keen on prize fund approaches for medicines that focus too narrowly on a specific disease or medical outcome. I think that a broader set of targets and more flexability in terms of earning participation in the rewards is quite important, given the stochastic nature of the R&D process. This note looks at a different issue, the way you structure rewards in different cases.

Aidan Hollis has emphasized the potential role of Quality Adjusted Life Years (QALYs), as a basis for rewards in a prize fund system. I have suggested several times that rewards should not be simple linear multiples of QALYs, as the costs of drug development are insensitive to population size, and high income societies also have strong willingness to pay for inventions that serve small client populations. There are other issues that are important also, such as the importance of developing medicines like antibiotics or medicines used in stockpiles for emergencies, where immediate usage is not the objective, but the medicine is desired as a back-up in cases of resistance, or for emergency use or other contingencies. There are separate issues associated with development of medicines for certain global health problems, like malaria, Chagas disease or visceral leishmaniasis.

These are among the reasons that HR 417 does not mandate a simple reward = QALY system, leaving the actual reward structure up to the managers of the Fund, with a flexiable legal structure that allows some learning by doing.

In thinking about the structure of rewards from a fixed prize fund, such as the one envisioned by the 2005 proposal for the Medical Innovation Prize Fund (HR 417), one can propose various ways of modeling the rewards.

If the rewards are to be based upon the incremental benefits of new (or improved) products, we have to identify the things we value.

One thing we want are improved health outcomes, as measures for example by QALYs. And while we certainly value more QALYs than less QALYs, it is not necessarily optimal to have a linear reward structure. One can imagine, for example, that the rewards for QALYs should follow a simple decay function, such as:

Reward = a + b * ( QALYs ^ k ) ,

where k (less than 1) is the decay parameter, and a and b are parameters that reflect the fixed and variable value of new products, both determined within the context of a budget constraint.

Products with larger populations (or greater benefits per patient) would receive more, but less on the margin. It could or could not also be combined with the notions of set-asides for orphan (rare) diseases (or other priorities) that is now part of HR 417.

One can also imagine different values for the parameter "a," depending upon the nature of the new product. For example -- the degree to which the new product itself represents an improvement over existing medicines, regardless of the number of patients, such as the current FDA S and P catagories, or even the catagory for products used to treat severe illnesses.

This is fairly simple, but I present it as an initial illustration of how one might go beyone the reward = QALY approach. I'll return to this later, with a number of other approaches, after a bit deeper look at different ways of modeling efficient reward systems.

In the case of antibiotics that are best used in case of failures of first line regimes, it seems important to think about rewards not tied to current usage of the new products. Use of the current stock of antibiotics can be modeled as a depletion of a resource, and the new antibiotics as replenishment.


In the case of a medicine to be used for a stockpile for a low probability event, such as a bird flu pandemic, SARS, or a bio-terrorism attack, one could imagine different approaches for medicines that have another use, such as Tamiflu, and medicines that would only be used for the low probability event (a vaccine for Bird Flu or Anthrax). I have suggested elsewhere that in the first case, the reward for the stockpiled products should be contingent upon actual use. But in the second case, methods of valuing options would seem more appropriate.

The Mechanics of Direct Public Funding

by Dean Baker

Jamie has prodded me to take advantage of this new tool to get input on an issue with the Free Market Drug Act system of direct public funding of research. To quickly bring people up to speed, the idea is to have the government directly allocate funding for drug development. All research funded under the system must be available to the public as soon as practical and all patents are copylefted. I have a fuller description on the CEPR site.

One difference between the system I outlined there and I how I would currently envision the system is that I think that the research could best be carried through by private companies (possible started by the government) rather government corporations. (Think of FANNIE MAE and FREDDIE MAC as opposed to TVA.) The advantage would be that it would be desirable to ensure that the companies would act aggressively to protect their patents and ensure that publicly funded research remains in the public domain. Private companies that earn profits can lobby Congress and can be vicious assholes in other ways that are not options for public companies.

The general plan is that a small number of companies would act as prime contractors getting substantial grants for substantial periods of time (e.g. $3 billion a year for 8-10 years). They would have the charge of carrying through research and development to promote the public health in a cost effective manner. Presumably they would follow the current Pharma model of contracting out for most of their research, but they could obviously do it in house, if they deemed that more efficient.

The immediate issue that Jamie and I were discussing was how effective this system would be in competition with the existing system of patent financed research. I consider it to be one of the benefits of this system that it allows the drug companies to just continue with what they are doing. It doesn't prevent anyone from carrying through research and getting a patent, as they do now. However, I argued that few companies are likely to do this for long, because they face the risk that they will have a better drug available soon after their drug hits the market (possibly even sooner) and it will be sold at generic prices. I believe that the risk of this happening would hugely reduce the expected to return to patent financed research (if it happens 50 percent of the time, then the return goes from positive 20 percent to minus 40 percent).

Furthermore, I don't see anything wrong with the firms in the system buying up patents and placing them in the public domain, in cases where important patents are held outside the system. The gains to the public of drugs being sold at their marginal cost would vastly exceed the expected profits to a patent holder, especially when there was a substantial risk of near-term generic competition, so I thought that in general drug companies could be persuaded to sell patents at reasonable prices. (Of course, if most funding for patent supported research dries up, then presumably this will not be an important issue.)

Anyhow, there are many questions/issues to be raised on the feasibility of this system and its merits relative to a prize system, but the immediate one is simply a question of whether it is likely that patent holders would sell important patents at reasonable prices. (I also suggested that after a period of time, the copylefting of patents would be a serious problem for anyone looking to develop drugs under the patent financed system, since they would have to negotiate for the use of these patents, which could make their lives quite difficult.)

Prize fund and size of client population

by James Packard Love

A system of incentives for drug development that depends upon marketing monopolies rewards greater utilization in a linear way. The costs of drug development are pretty (but not necessarily unlrelated, due to the possibility of larger trials to address issues of adverse effects) to the size of the potential market. HR 417 now has a set-aside for "orphan" diseases, to ensure that they receive more money per measure of benefit, than would diseases that have larger client populations. I have assumed, however, that it might sense to think about the payoff's having a non-linear relationship to the client population, with products with very large client populations receiving less for the marginal patients than products serving small client populations. We now implicitly accept much high reimbursements for products with small client populations (such as gleevec, as opposed to HAART treatment for AIDS), reflecting I think both the notion that we value orphan products and that costs of drug development are largely insentive to patient populations. Jamie

Purpose of Blog

by James Packard Love

I am creating this blog to discuss various ways of stimulating the development of new medicines.