In Favor of Patents: the Case of the Pharmaceutical Sector

In Favor of Patents: The case of the Pharmaceutical sector Kupka, Daniel Leal, Fernanda Rodríguez, Rodríguez Javier MESI Barcelona GSE David Pérez-Castrillo

Contents 1. The pharmaceutical industry: An Overview 2. A market analysis of the pharmaceutical industry 3. 3 Why are patents crucial in the pharmaceutical industry? 4. 4 Conclusions Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 2

“The pharmaceutical industry is a complicated beast to vivisect“ (Boldrin & Levin 2008) ( ) Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 3

The Competitive Structure of the Pharmaceutical Industry (1/2)  Global industry: thousands of firms!  „Big Pharma“  Biotechnology  Generic drug producers  Non-drug producers („alternative or „complementary“ medicine) Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 4

The Competitive Structure of the Pharmaceutical Industry (2/2)  Overall market: highly dynamic, frequent entry and departure of firms, rapid change in year-to year sales  Pharmaceutical market: dominated by major pharmaceutical companies 1. Mergers 2. Increased concentration of top selling-drugs Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 5

Table 1: Worldwide Sales of Pharamceuticals by 10 largest Manufactures, 1995 and 2003 , Source: Th E S The Economist (2002) & sellers (2004) i t ll Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 6

The Emergence of the Biotechnological- Pharmaceutical Industry (1/2)  Application of biotechnolical techniques in pharmaceutical industry  First substance for therapeutic use (1982): `human`insulin human insulin  Biopharmaceutical p p products ( (1991-1995: 13.4%; 1996- ; 2000: 18.2%) Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 7

The Emergence of the Biotechnological- Pharmaceutical Industry (2/2)  Advancement of biotechnology impacts the pharma value chain in two ways:  critical mass in order to compete directly with the pharma companies across the value chain  access through licensing and alliances with biotech companies  400 and 500 new alliances between pharma and biotech every year since 1996; Nature of alliances varies Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 8

Pharmaceutical Research and Development (1/4)  Most important characteristic of pharmaceutical industry: p p y high R&D investments  Shares of sales that is reinvested into R&D:  1970: 11.4%  2001: 18.5%  Leads other industries in the share of sales revenues allocated t R&D ll t d to Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 9

Table 2: R&D Expenditures as a percent of sales by industry, industry 1980-2000 Source: NSF (1992), Pharmaceutical R S (1992) Ph ti l Research and M h d Manufactures of A f t f America (2002) i Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 10

Pharmaceutical Research and Development (3/4)  Stages of research are complex, expensive and time consuming  Cost per approved drug is high -> most ideas never result in an approved drug Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 11

Figure 2: Productivity of Biopharma R&D Fi 2 P d ti it f Bi h Source: FDA CDER, PhRMA & PricewaterhouseCoopers analysis 2009 Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 12

Pharmaceutical Research and Development (3/4)  Stages of research are complex, expensive and time consuming  Cost per approved drug is high -> most ideas never result in a approved drug  Only 3 out of 10 drugs generate revenues y g g Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 13

Pharmaceutical Research and Development (4/4)  Pharmaceutical innovation:  Increasing R&D costs  Declining p drug p g per g productivity ( y (R&D Input/R&D Output) p p )  Long development times  (Growth of generics) Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 14

Which is the main problem of the pharmaceutical industry? “investment in research and development in and of itself does not indicate the efficient production of innovations of value to society” (Morgan, Greyson, Henley and Kinney : 2006) Free- Risk Prod. Prod riding detering decline Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 16

How could patents become a solution?  Patents = Market Distortion  Patents = Intellectual Monopoly  Monopoly = Socially Inefficient  Therefore, patents are an imperfect mechanism to reward innovation when compared to perfect competition Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 17

How could patents become a solution?  Perfectly competitive market requieres competitive y p q p supply and demand in order to be efficient itself  Any market imperfection jeopardizes social optimality  Patents accused by the misdemeanors of monopolies monopolies, but what if perfect competition was impossible?  What if the pharmaceutical market was imperfect by and on its nature? Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 18

On the nature of pharma products  Pharmaceuticals are not ordinary consumer goods y g  “potent inputs into the production and maintenance of the health of individuals and populations” (Morgan et.al.: 2006)  They derive their social value from the impact on a patient’s health  Characteristics to this demand that don’t follow classical assumptions Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 19

On the nature of pharma products  Characteristics to this demand that don’t follow classical assumptions 1. The impact of drugs is uncertain for the patient to determine 2. 2 Agency relationship required sometimes multiple required, 3. Potential misuse and conflicting objectives call for regulation and close monitoring 4. Tremendous willingness-to-pay not always correlated t the 4 T d illi t t l l t d to th value 5. Third party payment, distortion in the cost bore and perceived Pharmaceutical demand is imperfect and potentially inefficient even under perfect market instances Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 20

An analysis of the pharmaceuticals supply market  Beyond the “high research cost” mantra y g 1. Manufacturing represents a large fixed cost, as specialized equipment and p q p personnel are needed 2. Approval and authorization require a big investment which, unlike initial research, produces no public good nor industry standard  Even if the knowledge was freely available, these are strong barriers to competition and potential sources of inefficient supply Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 21

A unique form of competition “Imperfect” information Impossibility to Competition on compare market product promotion effectiveness Limited Lack of price Oligopoly / Technologically sensitivity Monopolistic inherent risk Competition Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 22

A view of the world as a product of a perfect market  A competitive market can foster innovation, rewarding it while providing with socially optimum market constructs. Toshiba Satellite laptop Toshiba Satellite laptop (1995) Lighter (2005) • Processing speed of x20 fast Processing speed of • 0.075 GHz 0 075 GH 1.5 GHz 1 5 GH • 0.5 GB of hard drive • 60 GB of hard drive storage storage x120 storage • 10.5-inch screen • 15.4-inch screen • 7.75 pounds 1/3 price 6.5 pounds • • US$3,500 • US$1,000 Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 23

A view of the world as a product of a perfect market  A competitive market can foster innovation, rewarding it while providing with socially optimum market constructs. Toshiba Satellite laptop Toshiba Satellite laptop (1995) Lighter (2005) Product Sequentiality, Lifecycle vs. • Processing speed of x20 fast Processing speed of • Traceability 0.075 GHz 0 075 GH 1 5 GH Patent 1.5 GHz • 0.5 GB of hard drive Application • 60 GB of hard drive storage x120 storage storage • 10.5-inch screen • 15.4-inch screen • 7.75 pounds 1/3 price 6.5 pounds • market characteristics • US$3,500 • US$1,000 Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 24

Competition as an incentive to innovation  Assumptions that must be met beforehand (Hollis: 2004), Bessen and Maskin: 2006), (Morgan et.al.: 2006), (Schweitzer: 2007) 1 • Consumer preferences must be the best measure of welfare 2 • A consumer’s consumption must have no impact on the wellbeing of others 3 • Associations between willingness to pay and income or other circumstances should be socially acceptable 4 • Consumers must be perfectly informed about the impact of a good on their wellbeing 5 • Consumers must bear the full cost of all purchases Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 25

Competition as an incentive to innovation 1 2 3 4 5  If the five conditions are met, the market demand created by consumers’ willingness-to-pay reflects the societal value placed on them  In an “imperfect” market, products might earn profits that exceed the societal value of the innovation, inducing excessive research and development, or earn profits that are less than the societal value of the innovation, inducing sub-optimal research and development Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 26

How does the pharmaceutical market deviate from those assumptions?

Pharmaceutical market analysis 1 • Consumer preferences must be the best measure of welfare 2 • A consumer’s consumption must have no impact on the wellbeing of others 3 • Associations between willingness to pay and income or other circumstances should be socially acceptable 4 • Consumers must be perfectly informed about the impact of a good on th i wellbeing i t f d their llb i 5 • Consumers must bear the full cost of all purchases Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 28

Pharmaceutical market analysis 1 • Consumer preferences must be the best measure of welfare The societal value of pharmaceuticals is based on their health impacts p • No intrinsic, universal value to consumers. • G i value i Gain l insofar as th effectively t t a given condition f they ff ti l treat i diti Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 29

Pharmaceutical market analysis 2 • A consumer’s consumption h no i ’ wellbeing of others ti has impact on th t the Pharmaceutical use may affect the wellbeing of others • Pharmaceutical consumption is a private matter with respect to both the use of a product and its effects • Nevertheless, cases where the consumption of a medicine has a technical impact on the health of others or their risk of illness (vaccines, antibiotic resistance) Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 30

Pharmaceutical market analysis • Associations between willingness to pay and willingness-to-pay 3 income or other circumstances are socially acceptable Income and vulnerability can inequitably affect willingness-to- pay • A resource often allocated inequitably, supply related to differential ability-to-pay • The potential for extraordinarily inelastic demand—the kind of market that might p be described as “captive” •Orphan drugs: intellectual property rights “…can do little to stimulate innovation in the absence of a profitable market for the products of innovation, a situation which can clearly apply in the case of products principally for use in developing country y pp y p p p y p g y markets” (WHO: 2008) Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 31

Pharmaceutical market analysis 4 •C Consumers are f ll i f fully informed about th i good on their wellbeing d b t the impact of a t f Consumers may have difficulty knowing the impacts of pharmaceuticals • (Four-way) Agency problem: Consumer, Physician, Seller, Third-party payment. •Any course of treatment involves uncertainty and risk: Patient can’t really can t know if he is feeling better because of the drug, nature or other placebo effect. •Credence goods Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 32

Pharmaceutical market analysis 5 • Consumers bear the full cost of all purchases Those selecting pharmaceuticals seldom pay full price • Moral Hazard: More than efficient consumption • Moral Hazard: Rewards for prescription Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 33

Pharmaceutical market analysis 1 2 3 4 5  Pharmaceutical sector fails to meet classical economic assumptions: inefficient resource allocation  Free competitive market is not likely to be the optimal policy objective bj ti  Policy interventions should aim for what economists refer to as the “second best” –the best possible policy given that a free market will second best the be suboptimal  As a temporary market distortion to reward productivity in research rather than compensate costs, patents arise as such option. Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 34

Sequential Innovation in the Pharmaceutical sector  Innovation has a comparatively “discrete nature in the chemical y and pharmaceutical industry” (Glover: 2002), unlike sectors where it is “both sequential and complementary” (Bessen: 2006)  Small improvements in existing products is one of the industry drivers, as it reduces the inherent risk, but incremental improvements are desirable as long as the therapeutic effect is comparatively higher than that of the drug it is substituting (Cf f (Cf. Hollis: 2004).  Me too drugs are a byproduct of this loophole as well as “patent Me-too loophole, thickets” which are used only to extend the patent protection Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 35

Arguments – Pharmacologic R + D Costly Long Risky Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 37

Arguments – Pharmacologic R + D  Costly  $1.2 x 107 (US dollars 2006)  Long  Risky DiMasi, JA et.al, Managerial and Decision Economics; 285, 2007 Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 38

Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 39

Arguments – Pharmacologic R + D  Costly y  $1.2 x 107 (US dollars 2006)  Long  7 9 years i th 60’ t 12 8 i th 90’ 7.9 in the 60’s to 12.8 in the 90’s  Risky DiMasi, JA et.al, Managerial and Decision Economics; 285, 2007 Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 40

1000 10 Compounds Compounds 1 drug Dickson & Gagnon, Nat Rev Drug Disc, 2004 Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 41

 Gráfica Dickson Residence Time Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 42

Arguments – Pharmacologic R + D  Costly  Long  Risky Areas of Uncertainty:  Scientific: > Time of Development = > Prob of competition or less drug utility. g y  Regulatory: Major requirements (Sample size, Special populations, Trials length, etc.)  Economic: Only 30% of all compounds have revenues > investment Plus: Sales are not foreseable, Pharmaceutical policy. IND  NDA: Success rate: 21.5%21 5% DiMasi, JA et.al, Managerial and Decision Economics; 285, 2007 Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 43

“Attrition Rate” Wood,A; NEJM, 355,6; 618; 2006 Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 44

The role of patents (examples 1/4) Gleevec ® (imatinib mesylate)  TX of CML and GIST  Prior = death rate was 20-30% for CML  With = 2/3 of patients will be in continuing complete cytogenetic response 7 or more years after starting therapy  I 2006 N In Novartis t i d ti tried—and f il d t patent Gleevec in India d failed—to t t Gl i I di  Natco and other “free-riders”  Indian government arguments  Gl Gleevec not “inventive enough” “i i h”  Indian population could not afford it Mueller J; NEJM, 356,6; 542; 2007 Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 45

The role of patents (examples 1/4) Novartis position p Gleevec International Patient Assistance Program (GIPAP) “Safeguarding incentives for better medicines so that patients’ needs will be met in the future.” Reflection  Gleevec = “panacea”? No – We still need better treatments and incentives for companies to continue their research efforts Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 46

The role of patents (examples 2/4)  AIDS treatment  3 years after the discovery HIV in 1984, GSK's Retrovir (zidovudine) became the first drug to be approved for the treatment of this disease  From then on, various drugs have been introduced  HIV infection has become almost a chronic condition instead of a death sentence  This has been achieved greatly in part to  Important stimuli to the pharmaceutical industry  E Expanded access and expedited approval  E.g. E d d d dit d l More time to profit from the existing patent Oversteegen L. et al.; Nature Reviews Drug Discovery 6, 951, 2007 Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 47

The role of patents (examples 2/4) Oversteegen L. et al.; Nature Reviews Drug Discovery 6, 951, 2007 Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 48

The role of patents (examples 3/4)  Patents stimulate drug discovery and development g y p  Where no stimulus exist, no clear advances have been made E.g. Malaria ( g g (neglected disease) )  Well known medical need  3 to 5 million clinical cases of malaria per year  Industry is not competitively engaged  R&D costs are very high, and the malaria market won't support the level of revenues needed to recapture expenses before patent expiry  Until recently, governments have been unable to do something to change the situation Ridley R, AAAS Annual Meeting 2001 Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 49

The role of patents (examples 3/4)  Orphan drugs p g  Efficacy against a disease affecting < 200,000 people in the U.S. or not profitable for > 7 y.  No company was willing to invest in developing drugs for these diseases  Solution  Orphan Drug Act (ODA) – 1982  7 years of marketing exclusivity 10 years 24 years ODA 10 drugs 282 drugs – 14 million patients benefited in the U.S. Haffner M, NEJM 354;5, 2006 Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 50

The role of patents (examples 4/4)  Japan and Canada increased R&D investment and innovation Grabowski, Journal of International Economic Law,849,2002 Sakakibara, M: Rand Journal of Economics, 32,1, 77 2001 Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 51

Challenges  Drug development reform g p  An increasing share of drug discovery and early clinical development is being carried out by small start-up and spin-off companies p  Thanks to venture capital  Once the small companies prove that a drug is relatively effective and safe  Licensing, drug development collaboration agreements, mergers, etc  Amgen Genentech, etc were once small companies Amgen, Genentech  Without patents they would have never existed Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 52

Further evidence  Changes in the hospital models g p  Bolstering applied research  Patent claims  Creation of spin-off companies p p  E.G. Hospital Clinic, Hospital Vall d’Hebron, Hospital de Santa Creu i Sant Pau  Considered the best way to give something else back to y g g society  Economically sustainable  For the hospital  Among other things to support non for profit research Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 53

Changes to the system  The human side of patents  Assuming social responsibility – PATENTS for PATIENTS Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 54

Conclusions  “We must never forget that innovation is an access figure – access with those with unmet medical needs. We W must b l t balance th needs of patients for marketed the d f ti t f k t d medicines today with the needs of patients depending of new medicines in the future.”  Henry A. McKinnell Jr. President, CEO Pfizer 2002 Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 55

Conclusions  Patents are the best system to incentive innovation in the pharmaceutical sector  High inherent risks, imperfect market (supply and demand), demand) high costs, attrition, lenghty authorization costs attrition process  Patients for patents Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 56

Thank you f your attention! for Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 57

The role of patents (examples 2/4) Oversteegen L. et al.; Nature Reviews Drug Discovery 6, 951, 2007 Economics of Innovation Fernanda Leal Pardinas, Daniel Kupka, Javier A. Rodriguez 58

In Favor of Patents: the Case of the Pharmaceutical Sector

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