Better ways to pay for research

Better ways to pay for research

A treaty aimed at improving the way that medical research is funded gathered significant momentum, before it was derailed at a World Health Organization meeting last November. Despite this setback, there are some reasons to hope for progress.

Photo by Samantha Reinders, courtesy of the Treatment Action Campaign Archive
Photo by Samantha Reinders, courtesy of the Treatment Action Campaign Archive

What is wrong with the current system?

The current system of medical innovation relies mainly on incentives created by the patent system. International laws oblige member countries of World Trade Organization to provide a minimum of 20 years of patent protection for any patented invention. Patents may cover new chemical entities, but depending upon national laws, also new uses for older drugs, improved methods of formulation, new doses, and other small innovations.

Patents are often filed on new compounds before many of the related trials are conducted and the products are brought to market. The actual term of the effective patent monopoly varies, but it may be as short as 10 years, or longer than 20 years, depending upon when patents were filed and the number of patents on the product.

For example, the antiretroviral (ARV) drug raltegravir, a new HIV integrase strand transfer inhibitor, was first approved for sale in the US on October 12, 2007. Raltegravir is the subject of four patents that will expire between the years 2022 and 2029, 15 to 22 years after market approval.

There can be little doubt that in some cases the patent system does incentivise research. Estimates of the risk- and capital cost-adjusted overheads of drug development vary dramatically – from less than 100 million USD to over a billion USD. These figures do not take into account various subsidies such as government research grants or special tax credits for R&D. Whatever the cost, the investment is significant. The prospect of market exclusivity certainly makes it easier for companies to contemplate making these investments. As we’ll see later though, other incentive mechanisms are also available.

When it comes to delivering new medicines, the current patent system falls short in two broad areas.
Firstly, as underlined in a recent report by the United Nations Development Programme, the current international patent system does not provide sufficient incentive to invest in research into diseases of the poor. So, for example, until the recent registration of bedaquiline* there had been no notable new tuberculosis medicines registered for over 40 years. Development of child-friendly ARVs and other less lucrative pharmaceutical products have also lagged. As a result, research into such drugs relies on public funding, philanthropy, or public-private partnerships. These are often ad-hoc and insufficient.

Secondly, some aspects of the patent system contribute to a dramatic ballooning of prices. Most large pharmaceutical companies report spending 10 to 15% of revenue on research. For the industry as a whole, however, less than 8 percent of turnover is reinvested in R&D. Typically, large pharmaceutical companies spend over 30% of revenue on marketing and have hefty profit margins and administrative costs. It could be argued that some large pharmaceutical companies are primarily marketing entities that engage in research and development only as a secondary function. Put another way, most of the high overheads of brand name medicines are attributable to marketing, rather than research.

‘Me too’ drugs

A related inefficiency of the current patent system arises from the fact that many ‘new’ medicines are really just variations on existing medicines (so-called ‘me-too’ drugs). Money spent on researching and marketing such me-too drugs could arguably be more usefully spent on researching drugs that are truly innovative.

[box] The current international patent system does not provide sufficient incentive to fund research into diseases of the poor. [/box]


An R&D treaty

Some developing countries have changed their patent laws to limit the proliferation of me-too drugs. The US and EU, however, still encourage such patents – presumably as a result of pressure from the powerful pharmaceutical industry lobby.

The abovementioned problems with the way we pay for research and development of medicines are well-recognised. Various attempts have been made to explore potential solutions.

One of the ideas to have gained the most momentum was a so-called R&D treaty. Such a treaty would involve countries contributing a small percentage of GDP to research into diseases that are common in the developing world. Typically these are diseases neglected under the patent system. Whether the contributions would be compulsory or not remains debatable. Similarly, whether or not to expand the research to include antibiotics and diseases that also impact rich countries as well is also still up for discussion.

Including diseases prevalent in rich countries was conceived as a way to make such a treaty more attractive to wealthy nations. After all, recent years have seen many such countries failing to meet their commitments to the Global Fund to Fight AIDS, TB and Malaria and with austerity measures added to the mix, rich countries would have little interest in signing up to a treaty with few direct benefits for their own populations. On the other hand though, including more diseases would also make the treaty a greater threat to the current patent-based stranglehold that pharmaceutical companies have on drug development.

Backing down

These and other issues were discussed at a number of WHO regional meetings and at a WHO meeting in Geneva in late November last year. For the treaty to have come so far at the WHO is notable. However, at the Geneva gathering the US and EU managed to stall any short-term progress on the treaty. They effectively removed it – bar symbolic protests – from the WHO’s 2013 schedule. This doesn’t mean that the treaty is dead, only that meaningful progress will now only be possible in 2016.

African countries, including South Africa, failed to take strong positions to support the treaty. At the African regional meeting before the Geneva event, it emerged that most countries had not properly considered the treaty proposal. Only eight out of over 50 countries submitted written responses. This was shocking, given that African countries stood to gain significantly from such a treaty. Kenya, the one African nation that had previously showed strong support for the treaty, backed down under pressure from the US.


Push and pull mechanisms

This article mainly addresses so-called pull mechanisms. These are incentives created to encourage research without funding it directly. Both patents and prize funds are pull mechanisms.

Although not covered in this article, push mechanisms are also hugely important for the advancement of medical science. Push mechanisms usually take the form of grants or subsidies. Such research grants are particularly important for ensuring the viability of institutions engaged in basic research.



Innovation inducement prizes

A number of prominent economists have argued for prizes to incentivise innovation (also called prize funds) as a solution to the inefficiencies of the patent-based system of medical research. The idea is to offer prizes for qualifying innovations, rather than rewarding the originator with patent or regulatory monopolies. So, for example, a company that develops a new FDA approved medicine for HIV would win a large financial award. The size of the reward would depend upon evidence that the new medicine provides significant benefits over existing medicines.

Since the prize would replace a patent monopoly, generic manufacturers would be able to enter the market as soon as they were able to register generic copies of the medicine. Within months this would drive down prices to levels that would otherwise only be possible after the expiry of a patent monopoly. In this way the cost of research would be separated from the cost of medicine – a concept known as delinkage.

The advantage of innovation inducement prizes is that governments and private health insurers end up paying mainly for the actual cost of research and production – the prior through the prize fund and the latter through the purchase of generic medicines. In this way wasteful spending on pharmaceutical marketing, legal fees, and R&D on me-too drugs could be dramatically reduced.

In 2011 US Senator Bernie Sanders introduced two prize fund bills in the 112th Congress. One of these was S.1138, the Prize Fund for HIV/AIDS Act, described as “A bill to de-link research and development incentives from drug prices for new medicines to treat HIV/AIDS and to stimulate greater sharing of scientific knowledge”. During a hearing on S.1138 in 2012, the Nobel Prize-winning economist Joseph Stiglitz endorsed the bill, as did professors Lawrence Lessig and Suerie Moon from Harvard, and others who testified during the hearing. Both bills will be re-introduced in 2013.


Thank you to James Love of Knowledge Ecology International for commenting on a draft of this article. The author takes sole responsibility for all views and errors.

By Marcus Low

* Note: Half the cost of the clinical testing of bedaquiline was offset by the US Orphan Drug Act Tax Credit subsidy.