On the topic of
Transparency, cost benefit analysis and de-linkage of cost of R&D from price of the products.
Knowledge Ecology International
4 August 2010
Knowledge Ecology International (KEI) is a not-for-profit nongovernmental organization with offices in Washington, DC, and Geneva, Switzerland. KEI conducts extensive research and policy analysis on the subject of research and development of new medical technologies, as well as on the subject of access to those technologies.
Detailed information about KEI is available on our web page at http://www.keionline.org.
Over the years, the U.S. Congress has addressed in different ways a variety of mechanisms to stimulate the development of new medicines for rare and neglected diseases, including, for example, the funding of research by the National Institutes of Health and other federal agencies, the orphan drug tax credit, which provides a subsidy of up to 50 percent on qualifying clinical trial expenditures, priority review vouchers, and the extension of both patent and non-patent market exclusivity for products.
To the extent that each of these measures results in new treatments for rare and neglected diseases, the public benefits, including those patients whose lives are saved or transformed by the development of a new treatment.
There are of course costs of these measures, in terms of the money to finance the grants, the tax revenues lost from the tax credits, the costs to patients and the employers, governments, or others who provide insurance or reimbursements for treatments, the negative impact of some incentive mechanisms on innovation itself, and the harm to access that may in some cases be caused by high prices for products.
The challenge for Congress is to weigh all of these factors, and to design mechanisms to stimulate medical R&D that are effective, efficient, consistent with the goal of promoting continued innovation, and which do not create unnecessary or unfair barriers or burdens for access to those technologies by patients.
In this context, KEI offers the following comments and suggestions to Congress.
Transparency and evidence-based policy making
For Congress to consider creating or strengthening incentive mechanisms to promote drug development to treat rare and neglected diseases, including those concerning pediatric patients, it is essential that Congress and other relevant stakeholders and policy makers have the capacity to evaluate the effectiveness and efficiency of the different proposals and mechanisms.
In evaluating the efficacy and efficiency of various R&D incentive mechanisms, it is essential to have basic information and data about the R&D investment flows and the use of these mechanisms, including those relating to the subsidies and incentives that innovators receive as intellectual property rights implemented as patent monopolies, or other rewards, such as tax credits or the priority review voucher.
The companies and other actors that benefit from incentives to promote drug development often have few incentives to be transparent or share information with the general public, relevant policy makers or even the US government.
The result is that there is, unfortunately, insufficient transparency, and therefore too little data concerning several economic aspects of investments and returns in the development of new medicines. For example:
- For no good reason, the patent landscape on medicines is often a mystery to the general public and to relevant stakeholders, such as the organizations that pay for treatment. While there is useful reporting on patents on pharmaceutical drugs in the FDA Orange Book, there is no similar public disclosure of patents on biological products, or many medical devices, including important diagnostic tools. Globally, is often next to impossible to identify patents on important medicines in developing countries, despite the fact that transparency and disclosure are touted as major benefits of the patent system.
- There is considerable underreporting of US government rights in patent applications, due in part to the lack of any enforcement of this obligation by the NIH and other federal agencies. A recent review of several NIH grants for Fabry’s disease suggests that several NIH funded inventions were patented without sufficient disclosure of the US government’s rights.
- The royalty rates and royalty payments for licenses to use patents or other intellectual property rights developed with public funds are not a matter of public record.
- There is no easily available public data on the prices charged for products, or the revenues generated from those products. There is little rationale for secrecy in this area, as such data is available from expensive private sector publishers, such as IMS Health, and annual revenue figures are generally known by competitors, and disclosed on SEC filings when material to the valuation of a company.
- In recent years there has been recognition of the benefits of greater transparency of clinical trials, including in particularly the nature of the scientific results from those trials, and the financial sponsorship of the trials. Unfortunately, the reporting for such trials does not extend to economic data relating to the trials, such as the costs of trials. In general, we have very little public data on drug development costs, even though assertions about development costs are often used to justify various subsidies or high product prices. There are no strong rationales for secrecy. Investments in clinical trials are often done by third parties, where prices and costs are well understood by competitors. Policy makers should not have to rely upon inaccurate assertions of drug development costs by public relations specialists from companies, when it would be possible to mandate transparency and standard reporting of costs to the FDA for approved products.
- One of the incentives for drug development that the U.S. Congress has created for orphan products is a tax credit — investors may receive tax credits equal to 50 percent of the cost of qualified investments in clinical testing of products. The public and policy makers lack information on when this tax credit is actually used, or how much of a subsidy a company has received from the tax credit for a particular product.
When the U.S. Congress creates or modifies subsidies or incentives for drug development, it should build-in requirements for transparency.
Unfortunately, on June 25 2009, the United States government missed an opportunity when it opposed a proposal at the Pan American Health Organization (PAHO) to hold a meeting that would:
“. . . develop, with input from Member States, a possible standard for disclosure of economic data for drug registered for sale, including disclosures of the costs of R&D, the prices of products, and the annual revenues from the sale of products.”
The United States Government has also failed to publicly recognize the benefits of a proposal by several developing countries to consider in the context of a possible biomedical R&D treaty, a discussion of:
6. Norms and measures regarding the transparency of global medical innovation, including but not limited to:
(a) Agreements on the required disclosures of clinical trials, including results, in publicly accessible registries;
(b) Requirements for greater disclosure of the costs of R&D inputs, such as the costs of clinical trials;
(c) Standards for reporting and sharing information on resource flows used to support R&D; and
(d) Greater transparency of the terms under which intellectual property rights are licensed, including, for government funded research, disclosures of licensing provisions regarding access to inventions.
The Senate HELP committee may want to consider a hearing solely focusing on possible mechanisms to increase transparency of R&D investment flows, intellectual property rights, and the benefits from the commercialization of medical products.
The High Costs of Monopolies
Today the main incentive for investments in new medicines are legal marketing monopolies, enforced independently through patents (20 years, or more with extensions), exclusive rights in test data used for product registration (for pharmaceutical drugs, five years for new molecular entities and three years for new indications; 12 years for biological products), seven years for exclusivity for orphan products; and six months for pediatric testing.
While there is little systematic evaluation of the costs of such monopolies, they are clearly very high. Globally, the costs of legal monopolies on pharmaceutical drugs are probably higher by more than $.5 trillion per year. For particular drugs, particularly those for rare diseases, the prices are often very high. For example, for treatments for Fabry’s disease, many adult patients pay more than $700 per day at current prices – for treatments that they take every year during their whole life. The costs of treatments Pompe’s disease are very high for pedantic patients, and increase with the weight of the patients as they mature. As an adult, a patient receiving Genmyzem’s Lumizyme may incur bills exceeding $500,000 per year. The extremely aggressive pricing of orphan products is explored by Mathew Herper in a February 22, 2010 article in Forbes.com, titled “The World’s Most Expensive Drugs.”
In the past, the costs of orphan products were arguably constrained by the insurance company caps on cumulative reimbursements. With the elimination of these caps in the new health care reform, prices for orphan products, including those for pediatric patients, will predictably increase, as investors become more aggressive in demanding returns. It is difficult to predict how aggressive can they be– given that at least nine products now cost more than $200,000 per year, and prices are trending higher.
High prices create barriers and burdens for the patients, employers, governments, or others who provide insurance or reimbursements for such treatments in the U.S and abroad. In developing countries, there is virtually no access to many expensive orphan treatments. In higher income countries, employers, including those who are self insured, may seek to avoid responsibility for high priced treatments, through a variety of measures that restrict access, or share costs on those least able to pay.
There also other consequences and costs of monopolies that are important to patients and the U.S. Congress. In a number of cases, orphan drug exclusivity or other exclusivity associated with intellectual property rights has been used to keep competing products off the market that may be better for some patients, or have superior delivery mechanisms. In the case of Fabry’s disease and Gaucher disease, the legal monopoly held by Genzyme for the manufacturing and sale of Fabrazyme and Cerezyme created barriers to the supply of the products, when Genzyme experienced a series of production failures. In the case of Fabrazyme – a product now rationed to patients at 1/3 the normal dose, Genzyme enforced its Orphan Drug exclusivity and the exclusive rights granted by the patent to a NIH funded patented invention, even after it was clearly unable to supply patients with the medicine.5
Monopolies are also associated with barriers to access to knowledge, particularly when secrecy can be used to block competitors or enhance the prospects of winning “patent races” or other cases where scientific progress by rivals imposes a private cost on one firm, or a lost opportunity to monetize knowledge.
Lack of Cost Benefit Analysis
Unlike many other areas of government regulation, there is almost no serious cost benefit analysis of various R&D incentive mechanisms. For example, we do not have estimates of the costs to consumers and taxpayers of the seven year orphan drug marketing exclusivity, or the six month pediatric exclusivity.
We do not estimate the number of trials, enrollment in said trials, or costs of the investments in the trials subject to the orphan drug tax credit.
We do not know how much it costs consumers and taxpayers to grant exclusive rights in government owned or funded patent rights, or if there are alternatives that would cost less and induce the same or more R&D investments.
U.S. Congress should require and consider cost benefit analysis and evaluation of the existing incentives mechanisms, as well alternative mechanisms, for stimulating medical R&D.
Paying twice of products
When the public sector provides grants, tax credits, the PRV or other subsidies or rewards for drug developers, it is typically without strings attached in terms of pricing or access. This approach is of course popular with drug developers, and does not discourage participation in government programs, but it is ultimately expensive. To the degree that there are finite limits of the ability of the public to pay, directly or indirectly through high prices or the grant to special privileges like the PRV,, there are disadvantages in programs that explicitly allow the public to pay twice – first as uncompensated investors or donors in the the development of the
product, and second as consumers – facing monopoly prices.
De-Linkage of R&D Costs from Prices
In some cases the costs of monopolies are an acceptable trade-off, when compared to an alternative of no incentives, and no innovation. However, in recent years, there is a growing interest in new paradigms for drug development that de-link R&D costs from prices.
Inspired in some respects by the revolutions in information technologies associated with the Internet, many economists and public health groups are asking governments to consider new incentive mechanisms that de-link R&D incentives from drug prices. During the hearing, Surie Moon from MSF emphasized the importance of de-linking the costs of R&D from the prices of products. As the Committee now knows, the World Health Organization is considering a number of proposals to consider de-linkage of R&D costs from drug prices, including in particular, proposals for medical innovation inducement prizes for Chagas disease, donor supported markets for medicines for AIDS, TB and Malaria, a rapid point of care diagnostic test for tuberculosis, for priority medicines and vaccines, and for cancer treatments in developing countries.
In 2008, the World Health Organization adopted resolution WHA 61.21 containing a Global Strategy and Plan of Action on Public Health, Innovation and Intellectual Property. Among the commitments made by the U.S. government are to:
“(a) explore and, where appropriate, promote a range of incentive schemes for research and development including addressing, where appropriate, the de-linkage of the costs of research and development and the price of health products, for example through the award of prizes, with the objective of addressing diseases which disproportionately affect developing countries” (element 5.3.a)
The Priority Review Voucher
By creating a new Priority Review Voucher (PRV), Senators Brown and Brownback have stimulated much interest in the development of new products for certain neglected diseases, and there is an interest in extending this program to rare pediatric cancers. In a sense, the PRV program is an implementation of an incentive mechanism that de-links of R&D costs from drug prices – at least to the degree that the incentive is not tied to high prices for products. On the other hand, the new incentive is not tied to promises of low or affordable prices, or agreements to license patents and other intellectual property rights, in order to enable generic competition or more efficient procurement of products. There is also a lack of transparency of the value of the voucher, for cases where the voucher is sold to third parties. The fact that the first PRV was awarded to a product that already existed shows that the incentive mechanism is subject to abuse, and would benefit from improvements in its design.
Funding R&D for Rare Pediatric Diseases
When biomedical R&D incentives are linked to drug prices, it is often necessary to have high prices for the resulting treatments for rare diseases, at least for a certain period of time, in order to recover R&D costs. Significant elements of product development costs are unrelated to the number of patients who will be treated, and even accounting for cases where the size of clinical trials are small, relative to other products, these fixed costs are important, and must be paid out of the expected profits from the commercialization of the product. That said, governments, patients and entities that pay for treatments do not have to issue a blank check to drug developers, or accept a system without transparency of the economics of development costs and commercialization benefits.
The U.S. Congress should consider a new approach to stimulating R&D in treatments for rare diseases that more fully implements the principle of de-linkage of R&D costs from product prices. Rather than a program of non-transparent tax credits, unconstrained market exclusivity provisions, and unconditioned PRV privileges, Congress should create a prize fund for rare diseases that provides for large cash rewards for new product development, in cases where the development of the product would have been unlikely in the absence of the reward, and the drug developer provides open licenses to the underlying intellectual property rights, including manufacturing know-how for pharmaceutical and biological products.
In considering the prize fund approach for rare diseases, Congress should evaluate the costs of the current system to taxpayers and employers, and fund the prize rewards out of the savings that would be obtained by shifting from monopoly to competitive supply of the products themselves – including the savings that will be obtained over time, when the products are available to patients.
The prize fund approach also enables greater freedom in the design of the incentive mechanisms, including for example, to reward R&D efforts to adapt existing products for pediatric uses, or to reward new delivery mechanisms that enable more appropriate dose or delivery mechanisms for products.
Given as a context the enormous outlays for expensive orphan products sold as monopolies, it is possible to create very large rewards for the development of new medicines that completely de-link R&D costs from drug prices, while insuring that the sustainable supply of the products benefits from competition.
1. June 25, 2000, US guts transparency clause in PAHO R&D resolution, /blogs/2009/06/25/paho-guts-transparency
2. Bangladesh, Barbados, Bolivia and Suriname Proposal for WHO Discussions on a Biomedical R&D Treaty, April 15, 2009.
4. April 15, 2010, Andrew Pollack, “Genzyme Drug Shortage Leaves Users Feeling Betrayed,” New York Times.
5. See: Fabrazyme March-In Request, http://www.keionline.org/fabrazyme; August 2, 2010, Andrew Pollack, “Patients Want Patent Broken on Genzyme Drug,” New York Times; August 4, 2010, Richard Knox, “Fabry Patients Want Drug’s Patent Eased,” NPR.