Addressing Increased Drug Costs -- A Proposal

By Kevin E. Noonan --

The New York Times in a recent video (see "'Could You Patent the Sun?'") has returned to its theme against patenting, particularly with regard to patents for life-saving drugs.  This time the paper invokes the meme of Jonas Salk and his response to a question during an interview by Edward R. Murrow that patenting his polio vaccine would be like "patenting the sun."  He certainly said that, and he certainly meant it, and the sentiment has a visceral appeal that echoes the success of the ACLU's anti-gene patenting campaign.  But a closer look at the circumstances in which Dr. Salk could make this statement, and the realities facing drug development today, points out again how dangerous facile pronouncements made in the media (social or conventional) can inhibit rational debate by masking the real differences (and associated challenges) between those times and our own.

As set forth in Jane S. Smith's 1990 book "Patenting the Sun: Polio and the Salk Vaccine," Dr. Salk operated under conditions that gave him the luxury of not having to worry about patents.  One was the famous "March of Dimes" campaign of the National Foundation for Infantile Paralysis, which was created specifically to address polio by President Roosevelt (himself a polio sufferer) in 1938.  The disease, virtually unheard of before the turn of the last century, created a popular panic wherein tens of thousands of children were incapacitated annually, and the grassroots efforts of the March of Dimes generated more than $200 million for research and patient care.  Salk's work (as well as that of Albert Sabin on what would become the preferred form of the vaccine) was funded by March of Dimes money, circumstances very different from how science is funded today.

Other differences involve the regulatory environment and the costs such regulations impose on drug development.  Of course, these regulations are also responsible for protecting (albeit sometimes imperfectly) the American public from ineffective or dangerous drugs, and so the societal costs need to be balanced with increased barriers to new vaccines and other drugs.  But as Ms. Smith sets out, Dr. Salk was able to test early prototypes of his vaccine on children in a nearby institution caring for mental retardation, and the force of the fear regarding polio was such that the propriety of this testing was not questioned.  Moreover, Salk did his work prior to the thalidomide tragedy that led to changes in FDA laws and regulations that greatly increased the stringency (and thus the cost) of obtaining approval.  While a great deal of the cost of drug development can be laid at the feet of other aspects of this endeavor (the cumulative costs of many failed drugs for each successful one, for example), much of the increased costs of bringing new drugs to market since Dr. Salk's day has to do with this increased (but societally desirable) regulatory burden.

But even in view of these realities, the basis for an increasing amount of political pressure on drug companies is higher drug costs, particularly (and ironically) for biologic drugs which have significant advantages in addressing otherwise intractable diseases and which can have a specificity unknown for conventional drugs.  It is easy but incorrect to attribute these costs to patents, but it is equally unavailing to ignore the political power of the many memes relating to failures in American capitalism that permit these seeming cost imbalances to arise.

If the future appears to contain even more expensive drugs and a political backlash against them, then a clear-eyed assessment of that future can provide at least three alternatives.  The first is that the drugs will exist but that their availability will be stratified, between those who will be able to afford them on their own (either out-of-pocket or through so-called "Cadillac" health insurance plans) or through government-sponsored programs for select groups (veterans, for example) and those (perhaps the majority of Americans) who will not.  The second is that these drugs will not be developed in the U.S., due to changes in patent or regulatory law that provide disincentives to development (such as further erosion of patent eligibility by the Supreme Court or a reduction in market exclusivity for biologic drugs as sought after by the Obama Administration).  Neither of these alternatives is palatable, socially or politically.

A third course that may have the ability to address the growing problem of unsustainable increases in drug pricing would be some sort of cost control (presumably by the Federal government, analogous to systems in place in Europe and elsewhere), but to be practical there would need to be an economic incentive for the biotech and pharmaceutical industry to acquiesce.  One quid pro quo in this calculus would be a reversal in the current regime that the FDA imposes user fees on applicants for regulatory approval, and instead to have the government pay the costs of its regulatory requirements.  There is precedent in the negotiations leading to passage of the "Obamacare" healthcare overhaul to have government and the pharmaceutical industry come to an agreement over new ways to reduce healthcare costs.  Such a tradeoff could reduce a significant proportion of the costs of new drug development and thus eliminate the economic pressure for legitimate recompense that is likely not economically sustainable (see, e.g., Picchi, "The cost of Biogen's new drug: $750,000 per patient").  And it might also attenuate the FDA's requirements for approval, wherein the agency as a Federal bureaucracy might have incentives to balance its mandate to ensure safety and efficacy of approved drugs with the realities of drug development, to make both more realistic.

But it is clear that something must be done, if only to ensure that our ability to produce more effective drugs does not founder on soundbite-driven, simplistic solutions to the problems of providing efficient incentives for doing so.

Comments

[Dan Feigelson]

Good write-up, Kevin. It's disappointing, but unsurprising, that the NYT allowed this vido out, with its various half-truths and unreported facts.

[EG]

Hey Kevin,

A very thoughtful article on the drug pricing issue, as well as the unfortunate politics in it. In particular, let's not forget the shameful efforts by certain members of Congress to improperly "twist the arm" of NIH to exert "march-in-rights" under Bayh-Dole as a means to control drug prices, something that Birch Bayh in particular has said is not permitted by the statute that bears his for the very reasons you've noted in this article.

[Paul F. Morgan]

Some recent huge price increases in old widely-used UN-patented (but sole-source) drugs or drug delivery systems, especially by purchasers of such companies, are publicly tarring the entire industry, and thus ignored at its peril.

[Edmund Pitcher]

There is some gouging going on in the drug industry: Witness Epipen (a consumer-friendly injector for epinephrine) and Asacol (a simple anti inflammatory for treatment of IBD) which both are off patent but approximately 15 times as expensive as they were 20 years ago. Both present opportunities for profitable generics with nothing but a trip through the FDA approval process standing in the way. Are there generics in the pipeline? if not, why not? Answer: The bureaucracy of the FDA.

The FDA should lighten up on efficacy of new drugs. While avoidance of dangerous toxic substances being sold to the public is a valid government function, proving efficacy in the target population with the high statistical significance required by the agency is very expensive, and I believe counterproductive to public health. The FDA should not ignore efficacy lest we return to the era of elixirs sold from street carts, but even the best drugs don't work on everyone. Why not let the market - doctors and patients - decide on efficacy? Note the essentially unregulated "nutraceutical" products sold at GNC stores help many people every day and are profitable yet far less expensive than drugs.

[Paul Cole]

One of the remedies, I suggest, would be a greatly increased term for patents in the medical and vetinerary field, and indeed in other fields subject to regulatory approval of the present type. That would give patentees a longer term within which to recover their research and development investment, and would permit lower prices especially in the early post-launch period. Such a longer term might permit a greater overall cost recovery for the patentee whilse not subjecting the public at any particular time to excessive prices, whereas the present regime effectively provides only a brief post-approval recovery period and high prices as a practical necessity.

A side benefit of longer patent protection would be that the patentee would "own" the drug for a longer period and would during that time have a continuing incentive to monitor safety and efficacy. It is a common experience in the UK of those receiving generic medicaments to receive different products from the various generic suppliers each time a prescription is given, the supplier on each occasion being the cheapest, which is not necessarily confidence inspiring.

Given the level of investment to bring a drug to market, a 50-year term would not be unreasonable.

[Matt McFarlane]

Kevin -- really enjoyed this perspective, and think your third course proposal is worthy of serious consideration. Thanks for keeping the focus on potential solutions.

[GrzeszDeL]

I think that this is a well-reasoned post and I agree with it in almost every respect, but there is one point in here that I find confusing.

"[T]hese drugs will not be developed in the U.S., due to... further erosion of patent eligibility by the Supreme Court..."

Why would a company make its decisions about where to *develop* a drug based on patent eligibility? Patents control one's rights to *sell*, not rights to *develop*.

I can well believe that a company might decide "if we cannot get patent protection in the U.S., it is simply not worth developing this drug at all, because the U.S. is such an important market." In other words, I can believe that the Supreme Court's erosion of patent rights could cause a company to scrap a given project altogether.

I cannot understand, however, why a company might think "it is worth developing this drug, but let's do the R&D in Europe, because we can get patents there." One can get patents in Europe even if the development work is done in the U.S. (or Mexico, or Canada, or China, etc).

You do the R&D where the scientists live, or (in some cases) where the law allows you to do the work (e.g., small Caribbean islands in the case of human cloning work, U.S. instead of EU in the case of transgenic crop research, etc). What rational reason is there for patentability concerns to enter into the calculus of where to site the R&D?

[GrzeszDeL]

"I suggest... greatly increased term for patents in the medical and vetinerary field, and indeed in other fields subject to regulatory approval of the present type."

I think that this is a very worthwhile suggestion. It would work best with international coordination, however. Something to consider very seriously next time we are negotiating one of these international trade/IP agreements.

[Simon Elliott]

The largest cost in drug development is the clinical trials and accompanying regulatory review. Another large cost is the risk of law suit for adverse effects that were not identified in the clinical trial. These costs are within the control of the government.

A quid pro quo could be reduced profits for a given drug in return for the government paying for clinical trials and indemnifies pharma companies selling the drug. We already have government funded clinical trials, and a clear societal benefit in increasing medical knowledge. We already have indemnnification for vaccines.

But to make this work for the entire pharma industry would be a multi-billion dollar process, such as doubling the entire NIH budget. At least, the costs of drug development would be very clear to all, and the government would have a clear interest in ensuring pharmaceuticals obtained a profit overseas.

[Kevin E. Noonan]

Dear GrzeszDeL: Didn't mean to be opaque but here is the thought. If the U.S. is not an attractive market for developing new drugs (due to patent or regulatory changes that disadvantage drug development in a capitalist system of free enterprise), then they will be developed in other countries where, for example, the state is more involved in drug development. It doesn't have to be China but that is one possibility. Especially if we posit state action and investment, such drugs would then be able to be developed without needing the ROI that makes biologic drug exclusivity so important. And of course most if not all of these countries would prevent Western companies from developing competing drugs (or, these companies will offshore their development efforts).

I understand that we in the U.S. think that our scientific establishment is world class but there are many countries (China, India, Indonesia, Korea, Singapore, Malaysia) where the science is also world class. We saw under the Bush administration that stem cell research went abroad when no Federal money was available (except for mythical half dozen or so "approved" cell lines).

These are preliminary thoughts - I think my point was to address the ever-increasing costs of breakthrough drugs that threatens to defeat further development when fueled by one-sided attacks such as the video in the NYT.

Thanks for the comment.

[GrzeszDeL]

"A quid pro quo could be reduced profits for a given drug in return for the government paying for clinical trials..."

At the risk of seeming like a niggling pest, I would rephrase this slightly. The quid in the quid pro quo would presumably be reduced *revenues*, not reduced *profits*, no? That is to say, if the gov't is picking up the tab for clinical trials, then a company's expenses go way down. The quo in the quid pro quo is that the revenues also go down, because drug prices fall. When those reduced revenues are washed against the reduced expenses, it might well be that the *profits* are the same as in the baseline (current law and policy) scenario.

I wish to emphasize this point because the proposed policy change would presumably look at lot different to the relevant industry if *profits* go down than if *revenues* go down. There is little reason why the industry should get on board for a promise of reduced profits, but I expect that they would be much more interested in a scheme where profits stay the same, but both revenues and expenses fall.

I can see the advantages of the proposal. It would likely lower drug prices, and everyone prefers lower prices, all other things being equal. The down side of having the gov't fund clinical trials, however, is that it means that only politically palatable diseases will see new drugs come to market. In other words, cheaper new drugs for breast cancer or pink eye, but no new drugs at all for birth control or Kaposi's sarcoma.

It is rather a matter of taste as to whether that is a net plus or a net minus.

[GrzeszDeL]

"The quo in the quid pro quo is that the revenues also go down, because drug prices fall."

Whoops, that was an editing mistake. I meant to say that the quo in the quid pro quo is reduced expenses, because the gov't is picking up the tab for the clinical trials.

[GrzeszDeL]

"[M]y point was to address the ever-increasing costs of breakthrough drugs that threatens to defeat further development when fueled by one-sided attacks such as the video in the NYT."

Indeed, and you made it well. Thanks for the well written essay and the thoughtful response.

[Kevin E. Noonn]

I guess when it comes to drugs for less politically favored diseases the old rules could apply (the government doesn't pay, and then the public pays). Which might then proceed political pressure for that disease to be favored.

Clearly lots to think about. Thanks for the discussion.

[GrzeszDeL]

"I guess when it comes to drugs for less politically favored diseases the old rules could apply (the government doesn't pay, and then the public pays)."

I am sure that you could contrive a system with such rules, but somehow I doubt it would make much difference. If there is a list of diseases for which the gov't is willing to pay the clinical trials, I expect that somewhere between 90% and 100% of private R&D capital will be directed to research on those diseases. It will be too hard to justify the risk of going "off list."