The Impact of Financing Policies on R&Dand Pharmaceutical Firms’ StrategiesJorge Mestre-FerrandizOffice of Health Economic...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• Context• Supply Side Issues• The R&D process...
The impact of financing policies on R&D and pharmaceutical firms’ strategiesStructure3Time£Supply Issues• R&D process• Cos...
The impact of financing policies on R&D and pharmaceutical firms’ strategiesThe pharmaceutical market ‘virtuous’ cycle4
The impact of financing policies on R&D and pharmaceutical firms’ strategiesPharma ranks highest in R&D intensity5
The impact of financing policies on R&D and pharmaceutical firms’ strategiesHighest R&D investment in absolute terms6
The impact of financing policies on R&D and pharmaceutical firms’ strategiesPharma accounts for large shareof countries’ R...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• Supply is R&D intensive, which implies:• Int...
The impact of financing policies on R&D and pharmaceutical firms’ strategies1. R&D costs of successful new medicines (incl...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• In the US, the regulatory framework still re...
The impact of financing policies on R&D and pharmaceutical firms’ strategiesContext 3: Increased payer influence11Source: ...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• The EMA explicitly acknowledges potential di...
The impact of financing policies on R&D and pharmaceutical firms’ strategiesTaxonomyContext 5. PBRSA13Source: Garrison, L....
The impact of financing policies on R&D and pharmaceutical firms’ strategies• Originally, schemes were more complex and va...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• Context• Supply Side Issues• The R&D process...
The impact of financing policies on R&D and pharmaceutical firms’ strategiesUnderstanding the R&D process16PhaseIVREGULATI...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• A patent is a set of exclusive rights grante...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• A patent provides the right to exclude other...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• Applies to pharmaceuticals• But ‘effective p...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• Most new medicines are developed by the priv...
The impact of financing policies on R&D and pharmaceutical firms’ strategiesDevelopment of follow-on and first-in-class dr...
The impact of financing policies on R&D and pharmaceutical firms’ strategiesPeriods of marketing exclusivity have been shr...
The impact of financing policies on R&D and pharmaceutical firms’ strategiesConsider the therapeutic ratings that the US F...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• Pharma has high fixed R&D costs (and associa...
The impact of financing policies on R&D and pharmaceutical firms’ strategies 25Mestre-Ferrandiz, J., Sussex, J. and Towse,...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• How much it costs to research and develop a ...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• Published estimates of the mean (average) co...
The impact of financing policies on R&D and pharmaceutical firms’ strategiesThe cost of an NME is rising28Source: Mestre-F...
The impact of financing policies on R&D and pharmaceutical firms’ strategiesKey studies29Source: Mestre-Ferrandiz, Sussex ...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• Out-of-pocket costs• Discovery research and ...
The impact of financing policies on R&D and pharmaceutical firms’ strategiesOut-of-pocket costs• Out-of-pocketdevelopmentc...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• Commercial reasons have been increasingly im...
The impact of financing policies on R&D and pharmaceutical firms’ strategiesCriticisms RebuttalsData – confidential, comes...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• Published estimates, including ours, that re...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• Important variations around the mean cost pe...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• On-going debate: does public and charitable ...
The impact of financing policies on R&D and pharmaceutical firms’ strategiesTwo estimates of how much private R&D isstimul...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• Mechanisms facilitating the transmission ofk...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• What is the case for specific incentives for...
The impact of financing policies on R&D and pharmaceutical firms’ strategiesR&D incentives: ‘push’ and ‘pull’Key distincti...
The impact of financing policies on R&D and pharmaceutical firms’ strategies‘Push’ incentivesPush initiatives: pay as you ...
The impact of financing policies on R&D and pharmaceutical firms’ strategies‘Pull’ incentivesPull initiatives: pay for fin...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• US Orphan Drug Act (1983)Contains two main i...
The impact of financing policies on R&D and pharmaceutical firms’ strategiesCase study: impact of EU orphan druglegislatio...
The impact of financing policies on R&D and pharmaceutical firms’ strategiesInfluence of EU OMP legislation in shaping com...
The impact of financing policies on R&D and pharmaceutical firms’ strategiesCapital markets: cost of capital is highStudy ...
The impact of financing policies on R&D and pharmaceutical firms’ strategiesCapital market imperfections• Limited availabi...
The impact of financing policies on R&D and pharmaceutical firms’ strategies• Context• Supply Side Issues• The R&D process...
The impact of financing policies on R&D and pharmaceutical firms’ strategiesReduced incentives for innovationmeans less in...
ReferencesDiMasi, J. et al. (2003) The price of innovation: New estimates of drug development costs. Journal of Health Eco...
The impact of financing policies on R&D and pharmaceutical firms’ strategiesTo enquire about additional information and an...
Upcoming SlideShare
Loading in...5
×

Impact of Payer Policies on Pharmaceutical R&D

3,021

Published on

This comprehensive presentation examines the most important incentives and disincentives for innovation in the pharmaceutical and biotech industries, discussing their effect on decisions about R&D direction/targets.

0 Comments
3 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
3,021
On Slideshare
0
From Embeds
0
Number of Embeds
5
Actions
Shares
0
Downloads
0
Comments
0
Likes
3
Embeds 0
No embeds

No notes for slide

Transcript of "Impact of Payer Policies on Pharmaceutical R&D"

  1. 1. The Impact of Financing Policies on R&Dand Pharmaceutical Firms’ StrategiesJorge Mestre-FerrandizOffice of Health EconomicsImperial CollegeLondon • 23 May 2013
  2. 2. The impact of financing policies on R&D and pharmaceutical firms’ strategies• Context• Supply Side Issues• The R&D process and patent system• Economics of the R&D process: dynamic competition• R&D costs: what makes up the cost of an NME• Interaction between the public/charitable and private sector inmedical research: complementarity vs. substitutability• R&D incentives: ‘push’ vs. ‘pull’ (with key examples)• Capital and the ‘market for technology’• Final remarksAgenda2
  3. 3. The impact of financing policies on R&D and pharmaceutical firms’ strategiesStructure3Time£Supply Issues• R&D process• Cost of an NME• Public/privatecollaborations• R&D incentives• Capital marketNature of competition• Follow-on compounds(dynamic)Competition in theoff-patent segmentDemand / Regulation• Role of HTA• Uptake drivers• Prescribing Incentives• Demand vs. Supplycontrolst0t1t2 t3LaunchPatentexpiry
  4. 4. The impact of financing policies on R&D and pharmaceutical firms’ strategiesThe pharmaceutical market ‘virtuous’ cycle4
  5. 5. The impact of financing policies on R&D and pharmaceutical firms’ strategiesPharma ranks highest in R&D intensity5
  6. 6. The impact of financing policies on R&D and pharmaceutical firms’ strategiesHighest R&D investment in absolute terms6
  7. 7. The impact of financing policies on R&D and pharmaceutical firms’ strategiesPharma accounts for large shareof countries’ R&D expenditure7
  8. 8. The impact of financing policies on R&D and pharmaceutical firms’ strategies• Supply is R&D intensive, which implies:• Intellectual property rights (patents)• Long lead times• High risk• Dynamic competition is as important as static competition• Generic competition after patent expiry• Demand is regulated – governments and social insurers aremajor buyers of medicines• Prices are regulatedCharacteristics of medicines markets8
  9. 9. The impact of financing policies on R&D and pharmaceutical firms’ strategies1. R&D costs of successful new medicines (including drugs that fail to reach the market) have increasedover the last four decades2. Drug companies have traditionally focused their evidentiary development around regulatory (i.e. FDAand EMA) requirements3. Decision-making power of public and private payers has grown and payers in rich and emergingeconomies are becoming interested in evidence of value by using health technology assessment (HTA)to inform health care resource allocation decisions4. The methods being employed by companies to demonstrate evidence of product value (notablyeffectiveness) to payers are moving them away from the (placebo-controlled) randomized controlledtrial traditionally used to demonstrate product efficacy and safety for regulatory approval5. There is a significant and growing interest among both the payers and producers of medical productsfor agreements that involve a “pay-for-performance” or “risk-sharing” element9Context for a changing R&D andevidentiary environment
  10. 10. The impact of financing policies on R&D and pharmaceutical firms’ strategies• In the US, the regulatory framework still relies on stringent placebocontrolled trials to obtain precise and reliable efficacy information.• Comparative trials are relatively unusual in submissions to the FDA.o But seeing a changing trend already• The legal framework in the EU is more complex than in the US.• Current legislation provides for the EMA to request companies toconduct active comparator studies: “In general, clinical trials shallbe done as ‘controlled clinical trials’ if possible, randomised and asappropriate versus placebo and versus an established medicinalproduct of proven therapeutic value; any other design shall bejustified”.Context 2: Focus on regulatory requirements10
  11. 11. The impact of financing policies on R&D and pharmaceutical firms’ strategiesContext 3: Increased payer influence11Source: McClearn and Croisier (2011)• Health care payers increasinglyrequire some level of HTA aftermarketing authorization to assessthe new benefits of anintervention including demandingmore evidence of comparative orcost effectiveness for new drugs• Focus on ‘value for money’ not anew phenomenon, especially inEurope• But recent health care reformsand cost containment areprobably making ‘value formoney’ even more important
  12. 12. The impact of financing policies on R&D and pharmaceutical firms’ strategies• The EMA explicitly acknowledges potential disconnect betweenregulatory and HTA needs: “In contrast to the benefit-riskassessment carried out by regulators, HTA bodies compare therelative effectiveness of medicines and take their financial cost intoaccount. This can lead to differences in the types of studies neededto support the assessment carried out by regulators and HTAbodies”.• In addition, evidentiary needs across payers may differ. A key issuehere revolves around the choice of the appropriate comparator(s)for assessment purposes, where the comparator in a multi-nationaltrial may represent standard therapy in some countries, but not inothersContext 4. Methods12
  13. 13. The impact of financing policies on R&D and pharmaceutical firms’ strategiesTaxonomyContext 5. PBRSA13Source: Garrison, L. et al. (2013)
  14. 14. The impact of financing policies on R&D and pharmaceutical firms’ strategies• Originally, schemes were more complex and varied in nature; now, the trend istowards simple discounts, due to confidentiality agreements.• Two-thirds of schemes are for cancer and one quarter for immuomodulatingbiologics (mainly TNF’s).14Context 5. PBRSA, cont’d
  15. 15. The impact of financing policies on R&D and pharmaceutical firms’ strategies• Context• Supply Side Issues• The R&D process and patent system• Economics of the R&D process: dynamic competition• R&D costs: what makes up the cost of an NME• Interaction between the public/charitable and private sector inmedical research: complementarity vs. substitutability• R&D incentives: ‘push’ vs. ‘pull’ (with key examples)• Capital and the ‘market for technology’• Final remarksAgenda15
  16. 16. The impact of financing policies on R&D and pharmaceutical firms’ strategiesUnderstanding the R&D process16PhaseIVREGULATIONTIME (YEARS)PHASES OFDRUGDEVELOPMENTPhase IIIDevelopment researchFinal patentapplicationMarketingapplicationPost-mktgresearch2002-7Discovery researchInvestigational newdrug application (US)1999Phase Phase IISynthesisBiological testing &pharmacologicscreening2008Marketingapproval/product launch2010RegulatoryreviewBasicresearchShort-term animal testingLong-term animal testingToxicology and pharmacokinetic studiesChemical developmentPharmaceutical developmentATTRITIONRATESCOST
  17. 17. The impact of financing policies on R&D and pharmaceutical firms’ strategies• A patent is a set of exclusive rights granted by a state(national government) to an inventor or their assignee for alimited period of time in exchange for a public disclosure of aninvention.• Patents have a dual function:1. To put information in the public domain2. To incentivise research by conferring time-limitedexclusive rights to exploitation of inventions.• For pharmaceuticals: high R&D costs, but low productioncosts. Patents prevent copies from competing on the marginalcost of production; no incentive otherwise to develop newdrugs.• Thus, patents aid dynamic efficiency.Dual role of patents17
  18. 18. The impact of financing policies on R&D and pharmaceutical firms’ strategies• A patent provides the right to exclude others frommaking, using, selling, offering for sale, or importing thepatented invention for the term of the patent.• Incentives depend on respect of intellectual propertyrights.• Under the World Trade Organizations (WTO) Agreementon Trade-Related Aspects of Intellectual Property Rights(TRIPS), patents should be available in WTO memberstates for any inventions, in all fields of technology.• The term of protection available should be minimum 20years.The patent system generally18
  19. 19. The impact of financing policies on R&D and pharmaceutical firms’ strategies• Applies to pharmaceuticals• But ‘effective patent life’ for pharmaceuticals is shorter due tothe lengthy R&D and regulatory (market authorisation)process required before a new medicine can be madeavailable• Protection time can be increased by a further maximumperiod of five years in the US, Japan and Europe• Europe: Supplementary Protection Certificates (SPCs)introduced in 1993 in some countries, and later extended toall of them. SPCs cannot come into force until the relevantpatent has expired. SPCs were designed to compensate forthe lengthy R&D process.The patent system and medicines19
  20. 20. The impact of financing policies on R&D and pharmaceutical firms’ strategies• Most new medicines are developed by the private sector.• Patents do not guarantee monopoly power.• The “innovation race” produces competition betweenpatent-protected medicines treating the same, oroverlapping, patient groups.• Being the first in class does not imply being the best inclass.• Efficient R&D and achieving the right mix and quantity ofR&D depend on the right rewards being available forsuccessful innovation.Economics of the R&D process:monopoly and competition20
  21. 21. The impact of financing policies on R&D and pharmaceutical firms’ strategiesDevelopment of follow-on and first-in-class drugs often occurs almost simultaneously.Since much R&D in the pharmaceutical industry is simultaneous, is difficult tomeaningfully distinguish between R&D that is directed to the first available treatmentfor any particular indication and follow-on products.The innovation racePercentage of follow-on drugs approved in the US from 1960 to 2003 that were first tested in humans anywherein the world or had an IND filed prior to that for their first-in-class compound (for therapeutic classes where thefirst-in-class drug was approved in the US from 1960 to 1998).In a substantial number ofcases in recent periods, thefirst drug in a class to reachthe US marketplace was notthe first to enter clinicaltesting either in the US oranywhere in the world.21Source: DiMasi and Paquette (2004)
  22. 22. The impact of financing policies on R&D and pharmaceutical firms’ strategiesPeriods of marketing exclusivity have been shrinking for first-in-class medicines as aresult of therapeutic competition from follow-on medicines.Innovation race brings competitionAverage period of marketing exclusivity for first entrants to a therapeutic class (time from first-in-class approval to firstfollow-on drug approval) by period of first-in-class US marketing approval.The data show a sharp declinein the period of marketingexclusivity for first entrantssince the 1970s. The meanlength of the marketingexclusivity period fell 78%from the 1970s to 1995-8(from 8.2 to 1.8 years).22Source: DiMasi and Paquette (2004)
  23. 23. The impact of financing policies on R&D and pharmaceutical firms’ strategiesConsider the therapeutic ratings that the US FDA has assigned to follow-on drugs.Approximately one-third of all follow-on drugs have received a priority rating from theUS FDA. In addition, 57% of all therapeutic subclasses have at least one follow-on drugthat received FDA priority rating.First in class ≠ Best in classFDA therapeutic ratings for follow-on drugs Sub-classes with at least one follow-on with a priority rating23Source: DiMasi and Paquette (2004)
  24. 24. The impact of financing policies on R&D and pharmaceutical firms’ strategies• Pharma has high fixed R&D costs (and associated costs ofcapital) and relatively low marginal costs (MC) of production.• Therefore, MC pricing would not enable break-even.• Patents enable price > MC, if competition from othermolecules is weak.• Hence price/profit regulation imposed to control the price onthe assumption that competition is ineffective in doing so.• Defining an appropriate margin is theoretically and empiricallyproblematic.• R&D is a global joint sunk cost—it is the same whatever thenumber of users internationally. Hence, it is practicallyimpossible to attribute R&D costs to particular users, or evento particular national markets.R&D costs24
  25. 25. The impact of financing policies on R&D and pharmaceutical firms’ strategies 25Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office ofHealth Economics. [Available at: www.ohe.org]
  26. 26. The impact of financing policies on R&D and pharmaceutical firms’ strategies• How much it costs to research and develop a successfulnew medicine has been an important policy issue atleast since the 1960s.• Cost estimates matter not just because of intellectualcuriosity or for industry understanding of itsperformance, but because they are a key aspect of theinternational debate about the reasonableness ofpharmaceutical prices and the magnitude of the long-term investments involved.• Moreover, a related debate continues about whether theresearch and development (R&D) productivity of thebiopharmaceutical industry has fallen.R&D costs – why important?26
  27. 27. The impact of financing policies on R&D and pharmaceutical firms’ strategies• Published estimates of the mean (average) cost of R&D pernew medicine that is launched on the market suggest anincrease in cost over the last decade -- from the estimate ofUS$1.0bn (£600m) by DiMasi et al. (2003), expressed in 2011price terms, to US$1.9bn (£1.2bn) by Paul et al. (2010).• Our new estimate is US$1.5bn (£900m) and therefore liesbetween the DiMasi and Paul estimates.• Estimates of mean R&D costs per new medicine, andcomparisons between such estimates, must be treated withcaution: studies differ in both methodology and data used.Key studies27
  28. 28. The impact of financing policies on R&D and pharmaceutical firms’ strategiesThe cost of an NME is rising28Source: Mestre-Ferrandiz, Sussex and Towse (2012)
  29. 29. The impact of financing policies on R&D and pharmaceutical firms’ strategiesKey studies29Source: Mestre-Ferrandiz, Sussex and Towse (2012)
  30. 30. The impact of financing policies on R&D and pharmaceutical firms’ strategies• Out-of-pocket costs• Discovery research and preclinical developmentcosts• Clinical• Clinical success and phase attrition rates• Capitalisation costs• Development times (long)• Cost of capital (high)Determinants of the cost of an NME30
  31. 31. The impact of financing policies on R&D and pharmaceutical firms’ strategiesOut-of-pocket costs• Out-of-pocketdevelopmentcosts, beforeadjusting forfailures, appearto have increasedover time. Similarestimates fortotal out-of-pocket devel-opment costs butless consistentacross clinicaltrial phasesSuccess rates• Cumulativeclinical successrates appear tohave decreasedover time. Theprobability isshrinking that acandidateentering Phase Iclinical trials willin due course beauthorised to belaunched ontothe marketDevelopment times• The total timetaken to progressthrough allphases of clinicaltrials and marketauthorisationappears to haveremained rela-tively unchangedsince the early2000sCost of capital• The long time-scales of pharma-ceutical R&Dmean that thecost of capital hasa major impacton the final costper drug and sothe estimateddevelopment costper successfuldrug is highlysensitive to thecost of capitalapplied. An 11%real annual cost iscommonly used.Determinants of the cost of an NME: evolution31Source: Mestre-Ferrandiz, Sussex and Towse (2012)
  32. 32. The impact of financing policies on R&D and pharmaceutical firms’ strategies• Commercial reasons have been increasingly importantfor discontinuing projects.• Since 2000, companies have been focusing more on highrisk, high premium areas with a lower ‘expectedprobability of success’ (POS), such as:• Chronic diseases (Alzheimer’s disease, diabetes, obesity,rheumatoid arthritis) compared to acute diseases (6.9% vs8.8%)*• Potentially lethal diseases, mostly cancer and someinfectious diseases (5.5% vs. 9.7%)*.Attrition rates: reasons for failure32*Source: Pammolli, F., Magazzini, L. and Riccaboni, M. (2011)
  33. 33. The impact of financing policies on R&D and pharmaceutical firms’ strategiesCriticisms RebuttalsData – confidential, comes from companiesdirectly and cannot be replicatedOther recent studies have either used publiclyavailable information or have used differentconfidential data (like ours)Only self-originated compounds are included andthese represent a small proportion of new drugs –and the most expensive onesDecreasing importance of self-originatedcompounds relative to licensed-in compounds isvalid, but has become so perhaps only recently.More recent estimates cannot differentiate soapply also to a wider universe of compounds, notjust self-originated compoundsEstimates should not be capitalised, given thatcompanies are not investment houses and have nochoice but to spend money on R&DOut-of-pocket costs are merely one part of thetotal cost. Capitalised costs are real costs.Investors require a return that reflects alternativepotential uses of their investmentEstimates are pre-tax, so they do not reflect thefact that R&D expenses are deductibleSocietal perspective when thinking about the costsof R&D of new medicines: total cost of developinga new drug will be the same no matter who pays --tax rebates affect who bears the costs, but not thetotal amountEstimated costs of an NME are controversial33
  34. 34. The impact of financing policies on R&D and pharmaceutical firms’ strategies• Published estimates, including ours, that refer to themean cost of R&D per new medicine are just that:averages• The literature shows that the costs of R&D vary withthe subgroup of drugs included in the analysis• Costs vary according to therapeutic area, firm sizeand whether the molecule is a ‘traditional’ chemicalcompound or a biologicWarning: mean costs may hide important fifferences34
  35. 35. The impact of financing policies on R&D and pharmaceutical firms’ strategies• Important variations around the mean cost per NME fordifferent types of medicines are observable• Significant differences are evident in the cost of R&D for newmedicines across therapeutic areas – can be more thantwofold• Licensed-in compounds tend to be more successful than self-originated NMEs• Drugs with a more validated target and more objectiveendpoints are more successful than drugs with more novelmechanisms of action and less clear cut endpoints• Total capitalised costs for biologics appear to be higher thanfor other pharmaceuticalsKey findings – variations around the mean35
  36. 36. The impact of financing policies on R&D and pharmaceutical firms’ strategies• On-going debate: does public and charitable fundedresearch crowd-out private (commercial) research thatwould otherwise have taken place, or does it stimulateadditional private research to take place, or neither?• Evidence from published literature: supports the resultthat public research is complementary to private sectorresearch and development (R&D) activity. That is,public/charitable research stimulates additional privateR&D that would otherwise not have been carried out.Public and private funding of medical R&D36
  37. 37. The impact of financing policies on R&D and pharmaceutical firms’ strategiesTwo estimates of how much private R&D isstimulated by public medical researchToole (2007): Distinction between basic and clinical research↑ $1 public research Additional private R&D After how many years?Basic $8.38 8Clinical $2.35 3Ward and Dranove (1995)↑ 1% public basic research in a particular therapeutic area (by US NIH)↑ 0.76% in private R&D in sametherapeutic category over 7 years↑ 1.71% in private R&D in othertherapeutic category over 7 yearsIn total, a 1% increase in public basic research across the board will generate upto a 2.5% increase in total private pharmaceutical R&D spend37
  38. 38. The impact of financing policies on R&D and pharmaceutical firms’ strategies• Mechanisms facilitating the transmission ofknowledge from the public to the private sector:• Universities (taken to represent publicly funded research)• Networking and social interactions• ‘Absorptive capacity’ (the ability of firms to assimilate andexploit existing information to create new knowledge).• These different channels through which publicresearch can affect (positively) industrial R&D areeven more important in the pharmaceutical sectorthan in other sectors.Medical research spillovers38
  39. 39. The impact of financing policies on R&D and pharmaceutical firms’ strategies• What is the case for specific incentives for biomedical R&D?• ‘Market failures’ – public-good nature (‘externalities’); lack of effectivedemand/low expected return in some cases (e.g. neglected diseases,orphan drugs)• High level of uncertainty due to significant scientific challenge at earlystage (basic research and pre-clinical) and recurrent risk of failure atclinical phases• Large investment required (vs. other sectors)• Role for ‘public’ intervention/additional incentives• Broadly speaking, incentives can be ‘push’ or ‘pull’The case for R&D incentives39
  40. 40. The impact of financing policies on R&D and pharmaceutical firms’ strategiesR&D incentives: ‘push’ and ‘pull’Key distinction Whether or not the reward is conditional on havinga successful product on the marketPush incentives fund or reward R&D effort ex ante, i.e. regardless ofoutcomePull provides rewards for R&D effort ex post if the outputs of R&Dachieve health gainHybrid approaches:Push funding can be partly conditional on outcome as well as effortPull funding may be staged and reward intermediate outcomes prior todelivery of a product40
  41. 41. The impact of financing policies on R&D and pharmaceutical firms’ strategies‘Push’ incentivesPush initiatives: pay as you go• US National Institutes of Health: funding for specific trials or discoveryprogrammes within broad portfolio objectives• Product Development Partnerships (PDPs): funding for specific trials ordevelopment /discovery programmes within a portfolio to achievelicensed products• Tax incentives to subsidise the costs of R&D: three possible forms: (1)tax credits, (2) tax allowances and (3) tax deferrals• Low interest finance for development41
  42. 42. The impact of financing policies on R&D and pharmaceutical firms’ strategies‘Pull’ incentivesPull initiatives: pay for final deliverable• Advance Market Commitment (AMC): funding to purchase products notyet completed development. The funding includes a return on R&D• GAVI Fund: funding to purchase products already on the market through asupply contract• US Priority Review Vouchers: priority FDA Review as a reward for aneglected disease product• Transferable/roaming intellectual property rights (TIPR): Company isawarded additional IP on a product of its choice in exchange for developinga given (neglected) disease product• Prizes: create a prize equal to the social value of innovation through asystem of patent buyouts42
  43. 43. The impact of financing policies on R&D and pharmaceutical firms’ strategies• US Orphan Drug Act (1983)Contains two main incentives:• Income tax credit = 50% ofclinical trial expenses (lowerscost)• 7 year market exclusivity(addresses low demand)• ODA is regarded as very successfulat stimulating R&D and deliveringproducts for orphan diseases• Impact of tax credits not enoughin markets with small revenuepotential (Yin, 2009)Orphan drug legislation:hybrid ‘push’ and ‘pull’• EU Orphan Drug Legislation (1999)Inspired by US ODA• Mainly ‘pull’ incentive: provides 10-year market exclusivity for approvedorphan products• Additional ‘push’ support:• Easier (and cheaper) marketingapproval process• Provides possibility for a single,EU-wide marketingauthorisation• Deemed also as a good startingpoint43
  44. 44. The impact of financing policies on R&D and pharmaceutical firms’ strategiesCase study: impact of EU orphan druglegislation (1)35 563131471202468101214162001 2002 2003 2004 2005 2006 2007 2008 2009Number of orphan medicinal products in the community register of medicinal productsfor human use, 2001-2009Source: European Commission (2013).NB This is the situation as of 17 June 2010 – by this date, three OMPs had been included in the Community Register in 2010.44
  45. 45. The impact of financing policies on R&D and pharmaceutical firms’ strategiesInfluence of EU OMP legislation in shaping company’sstrategic decision-making in the EUKey features of the EU OMP legislation (ranked ‘Most important’ to‘Third most important’)Average growth in R&D expenditureCase study: impact of EU orphan druglegislation (2)Source: Mestre-Ferrandiz, et al. (2010) for OHE Consulting45
  46. 46. The impact of financing policies on R&D and pharmaceutical firms’ strategiesCapital markets: cost of capital is highStudy Real annual cost of capitalHansen, 1979 8%Wiggins, 1987 8%DiMasi et al., 1991 9%OTA, 199310% and 14% downto 10% ‘staircase’DiMasi et al., 2003 11%Adams and Brantner,200611%DiMasi and Grabowski,200711.5%Vernon et al., 2009 14.36%Paul et al., 2010 11%46Source: Mestre-Ferrandiz, Sussex and Towse (2012)
  47. 47. The impact of financing policies on R&D and pharmaceutical firms’ strategiesCapital market imperfections• Limited availability of funding for high risk or smallprojects• Squeezed cash resources – both venture capital and equity• Large pharma seen as major source for fundingbeyond the start-up phase• Hence the growth of numerous joint workingarrangements from licensing to strategic alliances• Known as the ‘market for technology’47
  48. 48. The impact of financing policies on R&D and pharmaceutical firms’ strategies• Context• Supply Side Issues• The R&D process and patent system• Economics of the R&D process: dynamic competition• R&D costs: what makes up the cost of an NME• Interaction between the public/charitable and private sector inmedical research: complementarity vs. substitutability• R&D incentives: ‘push’ vs. ‘pull’ (with key examples)• Capital and the ‘market for technology’• Final remarksAgenda48
  49. 49. The impact of financing policies on R&D and pharmaceutical firms’ strategiesReduced incentives for innovationmeans less innovation• Policy makers understand this for neglected diseasesand orphan drugs• ‘Push’ incentives for R&D• R&D tax credits• Grants• Fast-track approval• Subsidised capital• ‘Pull’ incentives:• Purchase funds• Prizes• Roaming exclusivity• So why not for all medicines?49
  50. 50. ReferencesDiMasi, J. et al. (2003) The price of innovation: New estimates of drug development costs. Journal of Health Economics. 22(2),151-185.DiMasi, J.A. and Paquette, C. (2004)The economics of follow-on drug R&D: Trends in entry rates and the timing of development.PharmacoEconomics. 22(Suppl 2), 1-14.European Commission. (2013) Register of designated Orphan Medicinal Products (by number). Available at:http://ec.europa.eu/health/documents/community-register/html/orphreg.htmGarrison, L. et al. (2013) Performance-based risk-sharing arrangements—good practices for design, implementation, andevaluation. An ISPOR Task Force Report. 16(5): forthcoming.McClearn, C. and Croisier, T. (2011) Big pharma’s market access mission. Cambridge, MA: Monitor Company Group.Mestre-Ferrandiz, J., Garau, M., ONeill, P. and Sussex, J. (2010) Assessment of the impact of orphan medicinal products in theEuropean economy and society. OHE Consulting Report. London: Office of Health Economics. [Available at: www.ohe.org]Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.[Available at: www.ohe.org]Pammolli, F., Magazzini, L. and Riccaboni, M. (2011) The productivity crisis in pharmaceutical R&D. Nature Reviews DrugDiscovery. 10(6), 428-438Paul, S.M. et al. (2010) How to improve R&D productivity: The pharmaceutical industrys grand challenge. Nature Reviews DrugDiscovery. 9(3), 203-214.Toole, A. (2007)Does public scientific research complement private investment in research and development in thepharmaceutical industry? Journal of Law and Economics. 50, 81–104Ward, M.R. and Dranove, D. (1995) The vertical chain of research and development in the pharmaceutical industry. EconomicInquiry. 33(1), 70-87.Yin, W. (2009) R&D policy, agency costs and innovation in personalized medicine. Journal of Health Economics. 28(5), 950-962
  51. 51. The impact of financing policies on R&D and pharmaceutical firms’ strategiesTo enquire about additional information and analyses, please contact Dr.Jorge Mestre-Ferrandiz at jmestre-ferrandiz@ohe.orgTo keep up with the latest news and research, subscribe to our blog, OHE NewsFollow us on Twitter @OHENews, LinkedIn and SlideShareOffice of Health Economics (OHE)Southside, 7th Floor105 Victoria StreetLondon SW1E 6QTUnited Kingdom+44 20 7747 8850www.ohe.orgOHE’s publications may be downloaded free of charge for registered users of its website.©2013 OHE51

×