Current situation: bad pharma or bad
patents?
• Inefficiencies through the patent protection
process
• Return to patent protection rewards pharma
profits
– Marketing same level as pharma R&D
• Government regulation costly
– But still necessary for safety, efficacy &
reimbursement
We know on the pharma side R&D productivity
slipped (until 2015 when NCEs took off again)
Figure!1!(source:!Health!Affairs,!2015).!
!
!
The!high!fixed!cost!of!drug!development!is!contrasted!with!the!low!variable!cost!of!
!
What do we know?
(about pharmaceutical firms and optimal R&D levels)
Very little other than a lot of “facts”
• Top 10 Fortune pharma companies earned more than the rest of the Fortune
500
• $870 billion global market (28% USA; 15% Europe; 12% Japan)
• $161 billion merger activity 2009; $51 billion 2010
• $71million (R&D/new drugs) or $360 million (Berndt et al, 1995) cost to
develop new drug to market
• 1 year delay over market authorization costs £22million (EU DG Enterprise,
2009)
• Price discrimination
– Court cases in USA
– Variation in prices across markets
• R&D : 13% of expenditure (up from 0.05% in 1950s, 0.1% in 1960-80s, 0.15%
1990s-2000s)
– Promotion costs 25% of expenditure;
What do we know?
(about pharmaceutical firms and optimal R&D levels)
• Pharmaceuticals gain large rents
– Scherer & Ross (1990) Pharma profit 2-3% higher than other industries
during 1980s
– Arora et al (2003) 10% patent premium on pharma products compared
to that earned by other companies
• Rate of return to R&D low (McGuire & Raikou, 2012)
• Scherer (2001) pharma industry best seen as a virtuous rentseeking model
– As profit expands, companies compete by increasing R&D (&
promotional costs) until increase in costs dissipate supranormal profit
at INDUSTRY level
– R&D endogenous in this case
– Firms can use to establish market power
What do we know? (about patents)
• Welfare effects of patents (very little: Tirole, 2002)
– If patents are strong then we get duplication of effort in R&D as winner takes all
– R&D competition may lead to technologies with wide variance as winner takes all
– With infinitely long lived patents firms may have too much incentive to engage in
R&D
– Patent gives an appropriability effect which, given winner takes all, means that
too little or too much R&D
– Business stealing effect
• Firm introducing new product does not internalise the loss in R&D
investments to other firms so (socially) overinvests in R&D
• Increased R&D effort by firm increases probability of success so (privately)
overinvests
– Adoption lags for pharmaceuticals in more heavily regulated markets
• Static efficiency may improve at cost of dynamic efficiency
• Welfare loss of late adoption (Danzon et al, 2005; Kyle, 2007; Varol et al,
2010)
• Reduced NPV of R&D investments
What do we know? (about patents)
Surplus
Realized
C
A
0
B
1
% Benefits Awarded in Patent
•
•
If society not generous enough (tends to 0) risk of losing surplus from R&D
investments
If society too generous (tends to 1) encourages erosion of societal surplus from
R&D through wasteful R&D competition
Bad Pharma or Bad Patents?
• Science/information should be public good
– No restriction to use, everyone consumes
– Incentive problem: Who Funds?
– Charity
• Free rider problem
– Governments
• Other objectives than R&D : long-term gets crowded
out
Market access issues remain: once R&Ded
still need marketing, distribution, etc
• Risk-sharing contracts
• FDA schemes
– Accelerated Approval
– Priority Review
– Fast Track Designations
– Breakthrough Therapy
• EMA
– Conditional Marketing Authority
– Adaptive Pathways Pilot
Viable Alternatives to patents?
• Various proposals to de-couple
price/reimbursement decisions from R&D
incentives
– Tax credits
– Prizes
– Patent Auctions
– Priority Review Vouchers
– Advance Purchase Agreements
Future
• Increasing tension in regulation?
– Efficient regulation has to give consistent signals and be
transparent
• More exceptions?
– Evidence on social weightings remains weak
• Lack of transparency?
– Patient access schemes/risk sharing
– Discounts
• De-coupling of price/reimbursement decisions from R&D decisions?
– Current patent/price system liable to remain in place
– Further route changes on market access
– Increasing emphasis on value
• More CONDITIONALITY?
– Conditional approval
– Conditional pricing to establish innovative benefit