*(Thanks to Thirukumaran Balasubramaniam for his assistance in researching this paper).
First draft: October 18, 2000
Revised October 19, 2000
Nearly every effort to lower prices of medicines or other medical technologies eventually leads to debates over the need to provide economic incentives to fund health care R&D. Efforts to provide lower prices, shorter patent terms, compulsory licensing, reform the orphan drug act, or countless other initiatives are confronted with the inevitable question: will this reduce R&D efforts for new therapies, and if so, do we want the lower levels of health care R&D?
This, however is only the most superficial level of the debate. Market incentives for health care R&D are not efficient. This paper explores the mechanisms available to governments (and donors) to enhance R&D efforts.
A few of the many relevant market failures are:
None of these shortcoming by themselves justify the elimination of patents or other aspects of intellectual property system. Even with flaws, the protection of intellectual property creates benefits, and increases R&D levels. However, there are clearly justifications for an active government role in promoting health care research. The pharmaceutical industry is itself a strong supporter of a large public sector role in promoting R&D, backing a wide range of government interventions to support higher levels of R&D.
The purpose of this paper is to explore the relative merits of different public approaches to increase R&D.
The International Federation of Pharmaceutical Manufacturers Associations (IFPMA) and its member organizations are frequent proponents of various government subsidies, tax breaks or other financial incentives that are designed to increase private R&D. Among the typical set of incentives are:
"If . . . the Secretary determines that information relating to the use of a new drug in the pediatric population may produce health benefits in that population, the Secretary makes a written request for pediatric studies . . and such studies are completed within any such timeframe,"
the FDA extends the Orange Book patent exclusivity, Hatch/Waxman data exclusivity and orphan drug marketing exclusivity by six months. Under this program, a company can file even a useless study, and trigger a two month extension of exclusivty, because that is the period to review the application. If the study is accepted as having value, the firm gets the entire six month extention of exclusivity, even when the study was small, and the economic value of the exlusivity extention is large.
Extensions of marketing exclusivity can be worth a lot to the drug companies. AstraZeneca is reportedly seeking a six month extension for its Losec product, which generates more than $16 million per day worldwide. Prices for Losec in the US market are $3.52 per pill, while generic copies of the drug sell for as low as $.07 to $.17 per pill in some markets. The costs of a pediatric clinical trial may be relatively small. According to a recent CPT survey, the typical cost of outsourcing clinical trials for pharmaceutical drugs are in the range of $2,000 to $7,000 per patient, numbers which are consistent with data from the National Cancer Institute (NCI). At $5,000 per patient, a trial involving 500 patients would cost $2.5 million, or less than 4 hours of Losec sales.(6)
The US program for pediatric studies would make more sense if the Secretary could negotiate the term of the extension, up to the maximum of six months, and also require disclosures of the costs of the additional studies, in order to facilitate a cost benefit analysis of the program, and to provide some measure of the relative advantages of the government funding its own studies.
What would make a program like this more interesting would be some type of market mechanisms to get the maximum public health benefits for the minimum cost to the public. Alternative approaches might involve bidding or negotiations on a variable that was linked to the extension of exclusivity. For example, such mechanisms might include bidding for:
There is also the issue of the intellectual property rights from the R&D. Under a program of grants or contracts, governments can negotiate or mandate a share of the intellectual property rights in the R&D, or set public interest conditions on issues such as pricing or access, as was done recently, for example, in South Africa for an AIDS vaccine research project.(7) If the public is in fact paying for the R&D, indeed, paying several times over for the R&D, it is reasonable to ask that the public obtain rights in the research that they have already paid for.
The ODA market exclusivity can be broader than the rights granted under a patent, and in some cases will block the introduction of products that are protected under different patents(8). Companies frequently use the ODA marketing exclusivity provisions as a weapon against entry by generic products, for example, as BMS did in the case of the IVAX application to market generic paclitaxel for Kaposi's sarcoma. In this case, BMS and IVAX both applied for ODA marketing exclusivity, but BMS beat the IVAX application by just six days.
The costs of orphan drug exclusivity to consumers can be very high. For example, Oxandrolone is an anti-wasting drug that had been on the market for decades, with a generic price of $.30 per pill. Bio-Technology General (BTG) received an orphan drug designation for the product in 1995, for use in treating wasting of AIDS patients, an old use for a new illness, qualifying as a new indication, and raised the price to $3.75 per pill. The cost of the drug at the higher prices was estimated to be $5,475 to $43,800 per year in one analysis.(9) BTG responding to criticisms of the higher price by capping the price at $15,000 per year for any patient, but the use of the medicine was greatly reduced by the higher price.
Given the high cost to consumers of marketing exclusivity, one has to ask about the value of this approach, in terms of incentives for R&D, particularly when the drugs are also eligible for patents and data exclusivity. Investors receive 20 years of exclusive rights under patents when there is an invention, and 5 to 10 years of data exclusivity in the US and Europe, when they invest in data needed for registration of new drugs. The ODA marketing exclusivity is most important when:
The ODA basically rewards companies that have done very little. Supporters of the ODA say it rewards investors for investments in research associated with new uses of an older drug, or for the start-up costs of marketing a product, but it is important to appreciate the limits of the companies contributions when the drug is not new, and when the company cannot claim a patentable invention.
A review of the early history of the orphan drug act illustrates the paucity of the new private sector investments in clinical research for orphan drugs. From 1983 to 1993, the total amount claimed under the orphan drug tax credit was $107 million. This represents half of the cost of claimed expenses for human use clinical trials for orphan drugs, or $213 million before the credit. During this period the US FDA gave marketing approval to 93 orphan products, including blockbuster products that generated hundreds of millions in annual sales. The cost of the marketing exclusivity, in terms of higher prices to consumers, was several multiples of the $213 million in private investment in orphan drug clinical trials. For example, Amgen used its orphan drug marketing exclusivity to build a thicket of process and indication patents to bar future competitors for EPO, a drug that now generates more than $4 billion globally in annual sales.
In 1999, there were seven US orphan drug approvals. Of the seven, four have FDA orange book listings for patents, and three do not. None of the seven drugs are marketed by the inventors. The number of patients in clinical trials referenced in the drug approval ranged from 152 to 1,281, with an average of 588 patients. The prices for the orphan products are high, running as much as $72 thousand for temozolomide, a drug sold by Schering-Plough for the treatment of refractory anaplastic astrocytoma. Temozolomide was approved on the basis of a clinical trial involving only 162 patients. Even at $10 thousand per patient, which is 60 percent more than the average for the fy 1999 NIH DCP cancer trials(10), the cost would have been 1.6 million, half of which would have been offset by the US orphan tax credit.
As flawed as the US ODA is, it has become the model for similar laws, pushed by the industry and some patient groups, in Singapore, Australia, Japan and the European Union.
The data exclusivity provisions are irrelevant in cases where there is a patentable invention, and it is also worth noting that for products with small client populations, there is strong marketing exclusivity now under US and EU orphan drug laws, so the protections are for non-inventions that serve large populations.
Again, programs like this would make more sense if there was a clearer connection between the benefits to society and the company's investments. A starting point would be to routinely require public disclosure of the costs of data collection, and to link the protections to some measure of cost recovery (including opportunities for competitors to share costs) rather than providing a flat 5 to 10 year period of exclusivity.
A different approach than those described above would be government mandates or strong linkage to promote public R&D objectives.
The government can also raise money from one part of the economy to address entirely different needs. For example, in 1997 Senator Specter sponsored legislation (S. 435) to create to create a "Healthy Children's Trust Fund," to provide funds so that eligible children could get vouchers to purchase state health insurance. The funding for the trust fund was to come from an auction of spectrum for wireless telecommunications.
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2. J. Hirshleifer & John G. Riley, The Analytics of Uncertainty and Information, 17 J. ECON. LIT. 1375, 1404 (1979); Partha Dasgupta & Joseph Stiglitz, Industrial Structure and the Nature of Innovative Activity, 90 ECON. J. 266, 279 (1980); Partha Dasgupta & Joseph Stiglitz, Uncertainty, Industrial Structure, and the Speed of R&D, 11 BELL J. ECON. 1, 3 (1980); Pankaj Tandon, Rivalry and the Excessive Allocation of Resources to Research, 14 BELL J. ECON. 152 (1983).
3. Michael A. Heller & Rebecca S. Eisenberg, "Can Patents Deter Innovation? The Anticommons in Biomedical Research," Science, Volume 280 Number 5364, May 1 1998, pp. 698-701; Report of the National Institutes of Health (NIH), Working Group on Research Tools Advisory Committee to the Director, June 4, 1998; Steve Bunk, "Researchers Feel Threatened by Disease Gene Patents," The Scientist 13:7, Oct. 11, 1999; June 4, 1998, Naomi Freundlich, "Will increasingly aggressive licensing terms on research tool patents hurt basic research?", Signals; June 12, 1998, Naomi Freundlich, "Cre-lox controversy divides institutions, prompts NIH panel," Signals; Intellectual Property Rights and the Dissemination of Research Tools in Molecular Biology: Summary of a Workshop Held at the National Academy of Sciences, February 15-16, 1996 (1997); Joint Recommendations of Mouse Genomics and Genetics Subgroup and Mouse Models of Human Cancers Subgroup.
4. The recombinant hepatitis B vaccine, for example, requires fourteen different patents to produce.
5. There is a substantial literature questioning the efficacy of the general R&D tax credit, as well as concerns that firm modify accounting rules to qualify for the credits, without significantly increasing spending. Rachel Griffith, John Van Reenen and Nick Bloom, "Promoting R&D through fiscal incentives: an assessment of the arguments." Institute for Fiscal Studies, Innovation and R&D. August 15, 2000.
6. Based upon a 24 hour day.
7. 5 October, 2000, Pierre Steyn, "SA to pay less for HIV drug than other countries," News24.za.
8. Peter S. Arno, Karen Bonuck, and Michael Davis, 1995, "Rare Diseases, Drug Development, and AIDS: The Impact of the Orphan Drug Act," The Milbank Quarterly, Vol 73,No 2; sThoene, J.G. 1991. Curing the orphan drug. Science, 251:1158_59; Asbury, Carolyn, 1991, "The Orphan Drug Act: The first 7 years." Journal of the American Medical Association 265(7):893_897; James Love, "Comments on the Orphan Drug Act and Government Sponsored Monopolies for Marketing Pharmaceutical Drugs." United States Senate, Committee on the Judiciary, Subcommittee on Antitrust, Monopolies and Business Rights, Anticompetitive Abuse of the Orphan Drug Act: Invitation to High Prices, January 21, 1992, Serial Number J-102-48, pages 259-283; David M. Richardson, "The Orphan Drug Tax Credit: An Inadequate Response to An Ill-Defined Problem," The American Journal of Tax Policy, Vol. 6:135. pp. 135-210, 1987; Patricia J. Kenney, "The Orphan Drug Act--Is it a Barrier to Innovation? Does it Create Unintended Windfalls?" Food Drug Cosmetic Law Journal, Vol. 43, pp 667-679, 1988; James T. O'Reilly, "Orphan Drugs: The Strange Case of 'Baby M,'" Food Drug Cosmetic Law Journal, 42, 516-526; 1987. Donna Brown Grossman, "The Orphan Drug Act: Adoption or Foster Care?" Food Drug Cosmetic Law Journal, 39, 128-151, 1984.
9. 1996, Stephen LeBlanc, Rob Sabados and Don Howard, "Your money or our life, ACT UP's Survey of Unconscionable AIDS Drug Pricing: the story of little orphan Oxandrolone. (http://www.actupgg.org/abs_reps/dpr/gouge.html#Oxandrolone)
10. National Cancer Institute, "DCP Cooperative Group Treatment Trials and Funding, 1993 to 1999." The per patient cost for fy 1999 was $6,202.
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