Health

The Failure of Pharmaceutical R&D: Policy & Markets (4/4)

This is the conclusion of a 4 part series (Read part 1, part 2, part 3).

Global pharmaceutical R&D has failed, and continues to fail, the world’s poor. The reason is simple. Investments in R&D follow potential drug sales. This is the underlying logic of the 10/90 gap, explains why drug development in neglected diseases takes longer (due to poor capital allocation), and why drug molecules with low sales prospects never make it beyond the initial stages of research.

Policy mechanisms have been employed to overcome this deficiency. Push mechanisms include legislation such as the US Orphan Drug Act which provides incentives for investments in ‘orphan’ disease research. Other responses include public-private partnerships and philanthropic or public investments in developing world disease R&D.

At the other end of the spectrum, pull mechanisms have included advanced market commitments, and differential pricing. However, such mechanisms work only where the market has purchasing power. Therefore, AMCs must be guaranteed by the developed world, and differential pricing still cannot provide drugs to the many that cannot pay cost-price.

A Failure of Market & Policy
The inability of these many responses to provide a sustainable solution highlights that this is not simply a market failure. Rather, it is both a policy and market failure.

Historically, healthcare research policy has been driven by the belief that markets provide largely appropriate incentives. Research has been seen as a private good, investments have been made by those with means, for those who can afford care. And for the most part, this has worked very well in the developed world, where the industry has helped raise healthcare standards significantly.

This approach of health as a private good, however, condemns a large proportion of the world without sufficient purchasing power to avoidable death. During the days of colonization, this may have been morally acceptable, but it no longer is. Healthcare research today needs to be viewed not as a private good, but as a global public good.

The market failure is aggravated by another policy response – the patent system. This system provides companies with a necessary monopoly on drugs. Yet, this monopoly is not sufficient to correct market deficiencies. First, it can only deliver when a market exists. When it does not, it creates incentives that discourage the highest-risk investments, such as R&D in vaccines for Malaria or TB, while rewarding the industry to search for relatively lower-risk alternatives such as drug modifications. Second, even when a market exists, should this monopoly be unregulated? Patents are a contract with government that provides companies a set of rights. But what obligations does it impose on them in return? None.

Matching Means and Incentives
For a sustainable response, the only player with the means to solve health research deficiencies is the pharmaceutical industry itself. However, it does not have pressing market incentives to put that money into developing world diseases. How can the two be reconciled?

A good model to look for answers is non-profit drug development partnerships. The IPPPH lists 24 such partnerships between academia, pharmaceutical companies, NGOs and the public sector and a further 18 in vaccine research.

First, the incentives that drive these ventures are social, not market. Many, for instance, sign agreements that drugs will be made available for free, at-cost, or at a reasonable markup. Other requirements are also placed, for instance the Gates Foundation’s insistence that recipients of its $287 million in grants share the results of their research.

Second, these partnerships leverage the strengths of the pharmaceutical industry, while addressing its concerns. For instance, some use molecules developed by the pharmaceutical industry but never exploited commercially. In order to do this, they certify that their products will not compete with those of the company.

This is extremely important in pharmaceutical research. Success in drug development is, essentially, a matter of probability and trial and error. The only way to increase the chances of finding an effective drug are to increase the number of experiments being conducted, and the number of people looking at the results.

These two points together, form a good start to the obligations that can be placed on the industry, in lieu of the patent system. Companies should be required to make available research that they themselves do not consider profitable. Second, they should - voluntarily or forcibly - invest in developing world diseases, for instance through an industry wide R&D fund.

These responses are not easy to institute, largely because the beneficiaries are far removed from those that pay, and because they raise several questions. For instance, where should such legislation occur - at the WTO in TRIPS, or at national levels in Europe and the USA? Who is to manage such a fund? How are the industry’s concerns regarding competition to be managed? Finally, there is also an ethical dilemma because these policies legitimize free-riding by the developing world.

These are, however, practical questions with multiple choices. They do not affect the principle - that health research is a global public good - but only its implementation. Nor do they affect the profitability of the industry. Yes, a fund that takes (say) 5% of profits would affect cash flow. But since all companies would be equally affected, it would not affect their share prices.

Conclusion
There is an understandable resistance to regulating or imposing obligations on an industry that is highly profitable, politically strong, and has for the most part delivered on the promise of better health for its constituents - the populations of the developed world.

Today, however, the apparent constituents of the industry have changed. It still serves patients in the developed world. However, due to changes in public morality and NGO advocacy the industry’s normative role in society is being questioned. The profitability of the industry makes it an easy target for such questions. Yet, such criticism ignores the fact that this profitability exists precisely because the industry has so far avoided the developing world where its current business model does not apply.

The industry has, in its defense, experimented with new business models, such as differential pricing. These are, for the most part, still experiments and cannot be considered self-sustaining to the point that they generate significant profit. However, one cannot fault the industry for the failure to find such a sustainable model, when the policymakers themselves have created this situation.

A policy response is also tricky because it raises moral questions. Most imporatnt, does the developed world really have a moral obligation to prevent death where it can? The answer will depend on one’s perspective, but the existence of development aid and philanthropy already seems to have answered the question in the affirmative, at least in principle.

All that remains then is for the developed world to put that principle in practice, and put its money - and its laws - where its mouth is.

Related Reading

1. Trouiller, P., et al. (2002). Drug development for neglected diseases: a deficient market and a public-health policy failure.The Lancet, Vol 359: 2188-94.
2. Sharp, D., (2004). Not-for-Profit Drugs – No Longer an Oxymoron. The Lancet, Vol 364: 1472-4.
3. Lehmann, V., (2001), “New models for public-private partnerships in drug development.” Biotechnology and Development Monitor, No. 46: 2-7.

© 2006 The Discomfort Zone.