Written submission U.S. Senate Committee on Health, Education, Labor, and Pensions (HELP) Hearing on Treating Rare and Neglected Pediatric Diseases: Promoting the Development of New Treatments and Cures, On the topic of Direct funding, subsidies and incentives for the development of rare and neglected diseases.
James Love
Knowledge Ecology International
4 August 2010
Knowledge Ecology International (KEI) is a not for profit non governmental organization with offices in Washington, DC, and Geneva, Switzerland. KEI conducts extensive research and policy analysis on the subject of research and development of new medical technologies, as well as on the subject of access to those technologies.
Detailed information about KEI is available on our web page at https://www.keionline.org.
Over the years, the Congress has addressed in different ways a variety of mechanisms to stimulate the development of new medicines for rare and neglected diseases, including, for example, the funding of research by the National Institutes of Health and other federal agencies, the orphan drug tax credit, which provides a subsidy of up to 50 percent on qualifying clinical trial expenditures, priority review vouchers, and the extension of both patent and non-patent market exclusivity for products.
To the extent that each of these measures results in new treatments for rare and neglected diseases, the public benefits, including those patients whose lives are saved or transformed by the development of a new treatment.
There are of course costs of these measures, in terms of the money to finance the grants, the tax revenues lost from the tax credits, the costs to patients and the employers, governments, or others who provide insurance or reimbursements for treatments, the negative impact of some incentive mechanisms on innovation itself, and the harm to access that may in some cases be caused by high prices for products.
The challenge for the Congress is to weigh all of these factors, and to design mechanisms to stimulate medical R&D that are effective, efficient, consistent with continued innovation, and which do not create unnecessary or unfair barriers or burdens for access to those technologies by patients.
In this context, KEI offers the following comments and suggestions to the Congress.
1 Transparency
In evaluating the efficacy and efficiency of various R&D mechanisms, it is useful to have basic information about the mechanisms, including those incentives implemented as intellectual property rights, such as patent monopolies. There is, unfortunately, insufficient transparency concerning several economic aspects of investments in the development of new medicines. For example:
- For no good reason, the patent landscape on medicines is often a mystery to the general public. While there is useful reporting on patents on pharmaceutical drugs in the FDA Orange Book, there is no similar public disclosure of patents on biological products, which are also often the most expensive treatments. Globally it is often next to impossible to identify patents on important medicines in developing countries, despite the fact that transparency and disclosure are touted as major benefits of the patent system.
- There is considerable underreporting of US government rights in patent applications, due in part to the lack of any enforcement of this obligation by the NIH and other federal agencies. A recent review of several NIH grants for Fabry’s disease suggests that several NIH funded inventions were patented without sufficient disclosure of the US government’s rights on the patent.
- The royalty rates and royalty payments for licenses to use patents or other intellectual property rights developed with public funds are not a matter of public record.
- There is no easily available public data on the prices charged for products, or the revenues generated from those products. There is little rationale for secrecy in this area, as such data is available from expensive private sector publishers, such as IMS Health, and annual revenue figures are generally known by competitors, and disclosed on SEC filings when material to the valuation of a firm.
- We have very little public data on drug development costs, even though assertions about development costs are often used to justify various subsidies or high product prices. There are no strong rationales for secrecy. Investments in clinical trials are often done by third parties, where prices and costs are well understood by competitors. Policy makers should not have to rely upon inaccurate assertions of drug development costs by public relations specialists from companies, when it is possible to mandate transparency and standard reporting of costs to the FDA.
- For orphan products, investors may receive tax credits equal to 50 percent of the cost of qualified investments. We do not know when this tax credit is actually used, or how much of a subsidy a firm has received from the tax credit for a particular product.
Unfortunately, on June 25 2009, the United States government opposed a proposal at the Pan American Health Organization (PAHO) to hold a meeting/1/ that would:
“. . . develop, with input from Member States, a possible standard for disclosure of economic data for drug registered for sale, including disclosures of the costs of R&D, the prices of products, and the annual revenues from the sale of products.”
2 The High Costs of Monopolies
Today the principle incentive for investments in new medicines are grants of marketing monopolies, enforced through patents (20 years, or more with extensions), exclusive rights in test data used for product registration (for pharmaceutical drugs, five years for new molecular entities and three years for new indications; 12 years for biological products), seven years for orphan products, and six months for pediatric testing. While there is little systematic evaluation of the costs of such monopolies, they are clearly very high. Globally, the costs of legal monopolies on pharmaceutical drugs are probably higher by more than $.5 trillion per year. For particular drugs, particularly those for rare diseases, the prices are often very high. For example, for treatments for Fabry’s disease, many adult patients pay more than $700 per day at current prices – for treatments that they take every year. The cost of treatments for some adult patients for Pompe’s disease are twice that. The extremely aggressive pricing or orphan products is explored by Mathew Herper in a February 22, 2010 article in Forbes.Com, titled “The World’s Most Expensive Drugs.”/2/
In the past, the costs of orphan products was arguably constrained by the insurance company caps global on reimbursements. With the elimination of these caps in the new health care reform act, prices for orphan products will predictably increase, as investors become more aggressive. It is impossible to know how aggressive – given that at least nine products now cost more than $200,000 per year, and prices are trending higher.
High prices create barriers and burdens for the patients, employers, governments, or others who provide insurance or reimbursements for such treatments. In developing countries, there is virtually no access to many expensive orphan treatments. In higher income countries, employers, including those who are self insured, may seek to avoid responsibility for high priced treatments, through a variety of measures that restrict access, or share costs on those least able to pay.
There also other consequences and costs of monopolies that are important to patients. In a number of cases, orphan drug exclusivity or other exclusivity associated with intellectual property rights has been used to keep competing products off the market that may be better for some patients, or have superior delivery mechanisms. In the case of Fabry’s disease and Gaucher disease, the legal monopoly held by Genzyme for the manufacturing and sale of Fabrazyme and Cerezyme created barriers to the supply of the products, when Genzyme experienced a series of production failures./3/ In the case of Fabrazyme – a product now rationed to patients at 1/3 the normal dose, Genzyme enforced its Orphan Drug exclusivity and the exclusive rights to a NIH funded patented invention, even after it was clearly unable to supply patients with the medicine./4/
Monopolies are also associated with barriers to access to knowledge, particularly when secrecy can be uses to block competitors or enhance the prospects of winning “patent races” or other cases where scientific progress by rivals imposes a private cost on one firm, or a lost opportunity to monetize information.
3 Lack of Cost Benefit Analysis
Unlike many other areas of government regulation, there is almost no serious cost benefit analysis of various R&D incentive mechanisms. For example, we do not have estimates of the costs to consumers and taxpayers of the orphan drug marketing exclusivity and tax credits. We do not estimate the number of trials, enrollment in said trials, or costs of the trials subject to the orphan drug tax credit.
We do not know how much it costs consumers and taxpayers to grant exclusive rights in government owned or funded patent rights, or if there are alternatives that would cost less and induce the same or more R&D investments.
4 De-Linkage of R&D Costs from Prices
In some cases the costs of monopolies are an acceptable trade-off, when compared to an alternative of no incentives, and no innovation. But in recent years, there is a growing interest in new paradigms for drug development that de-link R&D costs from prices.
Inspired in some respects by recent revolutions in information technologies associated with the Internet, many economists and public health groups are asking governments to consider new incentive mechanisms that de-link R&D incentives from drug prices. These new approaches seek to emphasize the benefits of marginal cost pricing of products, and better optimization of the R&D rewards – particularly in terms of the incentives to address important health needs, including such issues as rate or neglected diseases or populations.
Part of this new area of research focuses on innovation inducement prize funds – systems of rewards for innovation that are de-linked from drug prices and which do not depend upon product monopolies.
KEI has considerable information about these issues available on its web page here: https://www.keionline.org/prizes
During the hearing, Surie Moon from MSF emphasized the importance of de-linking the costs of R&D from the prices of products. As the Committee now knows, the World Health Organization is considering a number of proposals to consider de-linkage of R&D costs from drug prices, including proposals for a number of innovation inducement prize funds,/5/ as well as a new global biomedical R&D treaty that would provide a global framework for sharing the costs of new R&D investments, including those for rare and neglected disease./6/
5 The Priority Review Voucher
By creating a new Priority Review Voucher (PRV) Senators Brown and Brownback have stimulated much interest in the development of new products for neglected diseases, and there is an interest in extending this program to rare pediatric cancers. In a sense, the PRV program is an implementation of the de-linkage of R&D costs from drug prices – at least to the degree that the incentive is not tied to high prices for products. On the other hand, the new incentive is not tied to promises of low prices, or agreements to license patents and other intellectual property rights, in order to enable generic competition or more efficient procurement of products. Indeed, the PRV has been criticized in some quarters for not creating any obligations on beneficiaries of the PRV to make products available at reasonable prices. There is also a lack of transparency of the value of the voucher, for cases where the voucher is sold to third parties.
6 Funding R&D for Rare Diseases
When R&D incentives are linked to drug prices, it is often necessary to have high prices for treatments for rare diseases, at least for for a period of time. Significant elements of product development costs are unrelated to the number of patients who will be treated, and even accounting for cases where the size of clinical trials are small, relative to other products, these fixed costs are important, and must be paid out of the expected profits from the commercialization of the product. That said, patients and entities that pay for treatments do not have to issue a blank check to drug developers, or accept a system without transparency of the economics of development costs and commercialization benefits.
The Congress should consider a new approach to stimulating R&D in treatments for rare diseases that more fully implements the principle of de-linkage of R&D costs from product prices. Rather than a program of non-transparent tax credits and unconstrained market exclusivity provisions, the Congress should create a prize fund for rare diseases that provides for large case rewards for new product development, in cases where the development of the product would have been unlikely in the absence of the reward, and the drug developer provides open licenses to the underlying intellectual property rights, including manufacturing know-how for pharmaceutical and biological products.
In considering the prize fund approach for rare diseases, Congress should evaluate the costs of the current system to taxpayers and employers, and fund the prize rewards out of the savings that would be obtained by shifting from monopoly to competitive supply of the products themselves.
Footnotes
1. June 25, 2000, US guts transparency clause in PAHO R&D resolution, http://keionline.org/blogs/2009/06/25/paho-guts-transparency
2. http://www.forbes.com/2010/02/19/expensive-drugs-cost-business-healthcare-rare-diseases.html
3. April 15, 2010, Andrew Pollack, “Genzyme Drug Shortage Leaves Users Feeling Betrayed,” New York Times.
4. See: Fabrazyme March-In Request, https://www.keionline.org/fabrazyme; August 2, 2010, Andrew Pollack, “Patients Want Patent Broken on Genzyme Drug,” New York Times; August 4, 2010, Richard Knox, “Fabry Patients Want Drug’s Patent Eased,” NPR.
5. See in particular proposals for medical innovation inducement prizes for Chagas disease, donor supported markets, a rapid point of care diagnostic test for tuberculosis, priority medicines and vaccines, and cancer treatments in developing countries.
6. See paragraph 2.3(c) of the World Health Assembly’s Global strategy and plan of action on public health, innovation and intellectual property (WHA61.21).