1. Policy Issue #5:
Pharmaceutical Drugs &
Innovation
HLTH 405 / Canadian Health Policy
Winter 2012
School of Kinesiology and Health Studies
Course Instructor:
Alex Mayer, MPA
3. Today’s Lecture
Pharmaceutical Innovation in Ontario:
What is our Willingness to Pay?
• Why does it pharmaceutical policy matter?
• Ontario’s Context
o Failed policies to attract R&D investments
o Failed policies to lower public drug spending
o 2008: The Recession
• Recent Changes to Pharmaceutical Policy in ON/CAN
• Where do we go from here?
o Better Public Drug Coverage Policies
o Better Innovation Policies
5. Pharmaceutical Policy
Matters Because…
It Affects Our Health
o Price of pharmaceutical
products
o OHIP coverage
o Drug approval process
o Treatment and Quality of care
6. Pharmaceutical Policy
Matters Because…
It Affects Our Economy
o International trade
o Manufacturing
o R&D Capacity
o Retail Distribution
o Pharmacies
7. Pharmaceutical Policy
Matters Because…
It Affects Education
o Domestic Expertise
o Quality of education
o Speed of innovation
o Research funding
13. Pharmaceutical Policy in
Canada
o 1987 Patent Act amendment (Bill C-22)
• Patent life of pharmaceutical drugs extended to 20
years
• Additional protections for Canadian Rx brands from
generic competitors
• Established the Patented Medicines Price Review Board
o 1994 TRIPS Agreement (WTO)
• Data exclusivity for minimum of 5 years
o 2006 Food and Drugs Act amendment (C.08.004.1)
• Data exclusivity extended to 8 years
15. Failures of Past
Pharmaceutical Policy
• Past Policies:
o ‚Zero-sum Thinking‛
• Accepted argument that pharmaceutical policy
involves a real tradeoff between affordability of Rx
pharmaceuticals and incentives for R&D investment
o Naturalistic Fallacy
• Looked to policies in jurisdictions with strong pharma
lobbies to try to spur our own industry
o Failed to appreciate global nature of pharmaceutical R&D
investment
o Failed to appreciate the incentives and behaviors
responsible for generic drug price inflation
17. Goals of Future Policy
• Evidence-Based Decision-making
o Considers both the benefits and costs of
strengthening patent rights
o Balances the diverse interests of Canadian society in
setting drug prices
o Promotes R&D innovation that is not just profitable
but clinically valuable
18. Recent Changes
• In Canada
o Federal Secretariat (STIC) to review innovation (2007)
o SR&ED Tax Incentive Program (2012)
o Research Partnership between CIHR and Rx&D (2012)
• In Ontario
o Transparent Drug System for Patients Act (2006)
20. Prescription Drug Coverage in ON
Program Beneficiary Deductible Copay Max Annual
Copay
Ontario Drug Seniors $100 $6.11 N/A
Benefits
Low-income $0 $2 N/A
Seniors
LTC & Home $0 $2 N/A
Care Patients
ODSP/OW $0 $2 N/A
Recipients
Trillium Drug Residents w/ Income-based $2 N/A
Program Catastrophic (For $6k-
Drug Costs $100k
(>4% income) households:
$350-$4,000)
Special Drugs Any OHIP $0 $0 $0
Program beneficiary
21. Perverse Incentives of ODB
Coverage
Poverty Wall
Working Income
Effective
Wage of SA
Minimum
Wage Social Assistance Income
Benefits of Welfare outweigh
Benefits of Employment
22. Inequities in ODB Coverage
• Seniors but not Low-Income People?
o In 2008, ODB subsidized the drug costs of 300,000
Ontario seniors with incomes over $50,000 per year.
o Meanwhile, working-poor families are 3.3X more
likely not to refill their prescriptions due to high cost
and have to spend more than 4% of their total income
on drugs before they get any subsidy at all.
23. ODB’s Generic Price Policy
• Capping generic prices at 25% of Rx
o A price cap may mean that some products only those
drugs whose cost of production is significantly below
25% of Rx will appear on the market.
o Generic drugs with higher costs of production will
not enter the market (there is no profit to be made),
thereby eliminating some potential benefit that
patients would have received from a lower-priced
generic option.
24. Perverse Incentives of Gx Price Cap
Supply
Best Price
Fixed Price 25% Rx Price Cap
Demand
Qty
Under-supply of generics
25. Lack of Balance in Incentives facing
Rx and Gx Manufacturers
• Rx have incentives to claim multiple
(often invalid) patents for the same
pharmaceutical product.
o At worst, the litigation delays introduction of price
competition from Gx products.
o Gx have little incentive to litigate due to the ‚free-
loading problem‛ (subsequent Gx manufacturers will
benefit the same amount at less cost).
27. ‘Better Coverage’ Policy Options
Solution #1:
Using Income, not Age as the eligibility
criterion.
28. Perverse Incentives of ODB
Coverage
Poverty Wall
Working Income
Effective
Wage of SA
Minimum
Wage Social Assistance Income
Benefits of Welfare outweigh
Benefits of Employment
29. Non-Discriminatory ODB Coverage
No Poverty Wall Working Income
Minimum
Wage Social Assistance Income
Constant Incentive to Work
30. ‘Better Coverage’ Policy Options
Solution #2:
Use a declining reimbursement scheme
based on number of market
entrants, instead of a fixed price cap.
31. Perverse Incentives of Gx Price Cap
Supply
Best Price
Fixed Price 25% Rx Price Cap
Demand
Qty
Under-supply of generics
32. Declining Reimbursement Scheme
Supply
Best Price
Fixed Price 25% Rx Price Cap
Demand
Qty
Demand for generics is met at point
that optimizes net social benefit to
taxpayers and Gx manufacturers
33. ‘Better Coverage’ Policy Options
Solution #3:
Reward Generic Manufacturers for
litigating against invalid patents, through a
royalty rate (e.g. 3% of revenue) owed by
subsequent manufacturers to the first-
mover.
34. Effect of Successful Gx Litigation
against Rx Patents
Supply
Rx
Monopoly
Price
Best Price
Demand
Qty
35. ‘Better Coverage’ Policy Options
To increase the scope of public drug
coverage, promote equity and lower insurance
premiums, Ontario should therefore:
1. Use income instead of age for drug benefits eligibility
2. Use a declining reimbursement scheme instead of a
price cap for Gx drugs
3. Reward successful Gx litigants of Rx patents with
royalties from other Gx manufacturers
37. Failures of Past
Pharmaceutical Policy
• Past Policies:
o ‚Zero-sum Thinking‛
• Accepted argument that pharmaceutical policy
involves a real tradeoff between affordability of Rx
pharmaceuticals and incentives for R&D
investment
o Naturalistic Fallacy
• Looked to policies in jurisdictions with strong
pharma lobbies to try to spur our own industry
o Failed to appreciate global nature of pharmaceutical
R&D investment
39. Better ‘Innovation’ Policy
Solution #2:
Subsidize pharmaceutical R&D by
specifically targeting the high failure rate
of many Rx clinical trials.
40. Better ‘Innovation’ Policy
Solution #3:
Introduce a pay-for-performance reward
scheme for Rx innovators; Replace Patent
System with a Licensing System.
41. ‘Better Innovation’ Policy Options
To increase the degree of pharmaceutical
innovation in the province and promote the
design of clinically valuable
products, Ontario should therefore:
1. Use reference-based pricing for public Rx coverage.
2. Subsidize pharmaceutical R&D and facilitate basic
research/knowledge dissemination.
3. Introduce pay-for-performance to reward clinical
innovators that create genuinely beneficial cures.
