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Patents and the pharmaceutical industry. Economics of Health Care April 1, 2004 Group 3: Bernadette, Emmanuel, Inger, Pythagoras What sort of market failure are patents intended to address?
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Patents and the pharmaceutical industry Economics of Health Care April 1, 2004 Group 3: Bernadette, Emmanuel, Inger, Pythagoras • What sort of market failure are patents intended to address? • With reference to the British pharmaceutical industry, explain positive and negative outcomes of patents • Critically assess the role of Government in regulating the industry.
Knowledge-based industries A few characteristics: Rely on the production of ideas (e.g. via innovation, R&D) • Although some discoveries are by chance; most advances require deliberate allocation of resources to R&D • Associated with high fixed costs • Intangible assets • An idea or discovery can (or need) only be „produced“ once
Pharmaceuticals: a knowledge-based industry? • Average R&D cost of a new medicine up to launch = $802 million (DiMasi et al, Tufts Center for the Study of Drug Development, 2001)
Market failure in knowledge-based industries Consider knowledge as a good: • Once an idea has been invented, the marginal cost of using it is zero • Once an idea has been invented, there is a zero marginal cost to producing it (again) • Knowledge or ideas can be viewed as a nonexcludable and nonrival goods (public good) • Free-rider problem How do we exclude other from using our ideas?
Purpose of a patent • Patents provide exclusive rights to marketing and production of a drug for a period of 20 years (although the effective life is much shorter, approx 10 years) • Patents act as a barrier to prevent imitators from free-riding • In economic terms, prevents competition from driving the price down to marginal cost
Positive Correct the free-rider problem associated with public good - excluding others from using knowledge without paying Incentivise innovation – investment of private capital, development of drugs that otherwise could or would not have been produced Not so positive Creates monopoly position –pricing, potential for abuse Stimulating or stunting? Ideas are carefully guarded – publication and sharing of research is limited or postponed – science for the pursuit of higher knowledge versus higher profits Effect of patents
Do patents stunt or stimulate innovation? Heller and Eisenberg and the National Research Council have suggested, however, that recent policies and practices associated with the granting, assertion, and licensing of patents on research tools may now be undercutting the stimulative effect of patents on drugs and related biomedical discoveries. … [They] argue that biomedical innovation has become susceptible to what they call a “tragedy of the anticommons,” which can emerge when there are numerous property right claims to separate building blocks for some product or line of research. When these property rights are held by numerous claimants (especially if they are from different kinds of institutions), the negotiations necessary to their combination may fail, quashing the pursuit of otherwise promising lines of research or product development. Cohen W.M. and Merrill S.A. (Editors), Committee on Intellectual Property Rights in the Knowledge-Based Economy, National Research CouncilPatents in the Knowledge-Based Economy (2003). National Academies Press, Washington D.C.
Regulating patents • Consensus that patents are a necessary and effective way of protecting IP and incentivising R&D but: • How long should they be granted for? • What about markets where patents are not recognised? Can they be imposed? • Potential for abuse – the never-ending patent (Wall Street Journal, June 6, 2002: „Prilosec's Maker Switches Users To Nexium, Thwarting Generics”)
Regulating pricing:in favour of pricing controls • Are pharmaceutical companies abusing their monopoly position? • Pharmaceuticals are the fastest growing component of health care costs, increasing at a rate of about 15% per year in the US • Pharmaceutical industry consistently among the most profitable (Fortune 500 in 2001: 18.5% return on revenues) • Massive advertising and marketing budgets
Regulating pricing:against pricing controls • Price controls could contradict the purpose and incentives associated with granting patents: “By consistently failing to reflect the value of innovative drugs, controlled prices would signal to manufacturers of future innovative therapies that they would not be able to charge prices that represent the contributions of their drugs.“ • Does not fully take into account risk associated with bringing a drug to market: “There is no objective basis for price ceilings, largely because research costs are borne long before the economic and medical benefits of a resaerch stream can be known, a fact that poses intractable difficulties in such matters as taking reasonable account of the risks of research and development.“ (John Calfee on behalf of the PhRMA, Ann Int Med (2001); 134: 1061)
Regulating pricing: how? • How do pharmaceutical firms determine prices? • What form of price regulation is appropriate? • Should we regulate profits or prices? • So far, no company has ever exceeded the (upper) PPRS threshold on profits – is this an indication that the scheme works or does not work?
Regulating consumption • The NHS is the main purchaser of drugs – potential for monopsony power • Lack of coordination, decentralised decision making • Role of the doctor or pharmacist as the decision maker versus making the options available • Caution in using monopsony power given that price controls are in place
Regulating consupmtion via NICE • „The role of NICE is to provide patients, health professionals and the public with authoritative, robust and reliable guidance on current best practice.“ • Regulating cost-effectiveness (NICE) vs effectiveness (MHRA) • Cost-effectiveness as a signal of value for money But to what extent are NICE‘s decisions and guidelines turned into practice?
Example: NICE on Relenza • NICE guidance issued October 1999: “On the basis of its findings and conclusions, the Institute [NICE] advises that health professionals should not prescribe zanamivir (Relenza) during the 1999/2000 influenza season.”
Glaxo’s response • In a letter to Health Secretary Frank Dobson, Glaxo’s chairman (Sir Richard Sykes) told the Government that a decision to ban the use of Relenza would damage the entire British pharmaceutical industry. He has also hinted that Glaxo Wellcome might quit the UK, claiming that the NICE decision "calls into question the suitability of the UK as a base for multinational pharmaceutical operations". • Ministers were warned that leading drugs companies will consider pulling out of Britain if the government adopts an "antagonistic" attitude towards the pharmaceutical industry.
NICE on Relenza revisited • November 2000 (1 year later): • NICE reverses its decision after ‘new data’ is presented • Relenza is recommended for patients ‘at risk’, e.g. over age 65, people with diabetes and immuno-compromised
Concluding remarks We have looked at government regulation in terms of: • Patents • Pricing (PPRS) • Power of the NHS as a monopsonist • Prescribing guidelines (NICE) The government seems is doing a dance with the pharmaceutical industry, acutely sensitive of the danger of stepping on their toes or crossing that line that will cause industry to pack its bags and leave. As long as economic rent continues to be generated by the pharmaceutical industry in the UK, this will continue to exert downward pressure on government-led attempts to effectively regulate the industry.
