Beyond the Ivory Tower: Making Practical Choices

1. March 16, 2009 Beyond the Ivory Tower: Making Practical Choices Stephen M. Maurer Goldman School of Public Policy & Berkeley Law School

2. Introduction Advocate’s View: “Everything’s Great (and We Can Fix It)” This Course (Agnostic)’s View: “Whatever Costs Less” Today’s Lecture: Illustrating the “Sharp Pencil Approach” A Work – and Hopefully a Conversation – In Progress

3. Roadmap Prizes vs. PPPs Overpayment Under E2E Prize Overpayment Under PPPs* Designing a PaYG System PPPs, Access, and Leveraging Resources *PPPs can offer prizes!

4. Prize Overpayments Will Sponsors Overpay? Usual Viewpoint: Reward Amounts “Should be More Transparent.” This Lecture: Smart People Working Very, Very Hard!

5. Prize Overpayments Naïve Calculation: DiMasi et al. $803m ± $115m  14% Average Overpayment DiMasi et al., “The Price of Innovation,” Journal of Health Economics 22: 151-185 (2003)

6. Prize Overpayments A Better Calculation R&D Cost = Net Revenue – Marketing Costs What are the error bars? Berndt et al., “Advanced Markets for a Malaria Vaccine: Estimating Costs and Effectiveness” (2005)

7. Prize Overpayments What is Net Revenue? $2.84bn Limited Data Revenue is Not a Single Number… Uncertainty ~ 10%?? Circularity? Grabowski, et al. “Returns on Research and Development for 1990s New Drug Introductions.” Pharmacoeconomics 20 Supp. 3:11-29 (2002)

8. Prize Overpayments R&D Cost = Net Revenue – Marketing Costs What is Marketing Cost? Published Estimates: 15 - 36%  R&D Expenditure is $1.8bn - $2.4bn.  Implied overpayment = 14%. What Number Do Berndt et al. use?

9. Prize Overpayments • 10% • Rationale: Drug companies will spend less on • promotion (including free samples).  $2.56bn • 18% Overpayment What number do Berndt et al. use?

10. Prize Overpayments • $3.0bn. • Rationale: “[A] malaria vaccine may be more difficult to • Develop than the typical new chemical entity.” • $25% Overpayment Folklore: $3.3bn.  39% Overpayment

11. Prize Overpayments Caveats: Assumes Past R&D Costs Tied to Rich Nation R&D Effort What Does “Overpayment” Mean? Finessing Our Ignorance?

12. Prize Overpayments Caveats: Assumes Past R&D Costs Data are often 15 years old. Real drug discovery costs have risen 7-8%/year since 1970s. And: Clinical grew from 6.1% in 1970s to 11.8% in the 1980s. What does Pharma believe today?

13. Prize Overpayments Caveats: Tied to Rich Nation R&D Effort Berndt et al.: “Would need to pay out $2.56bn to match the average revenue brought in by NCEs.” Global Alliance: TB vaccine would cost $115 - $240m. 8% of Berndt et al. Estimate!!! Global Alliance for TB Drug Development: Economics of TB Drug Development (2001) http://www.tballiance.org/downloads/publications/TBA_Economics_Report.pdf

14. Prize Overpayments Caveats: Tied to Rich Nation R&D Effort PPP estimates show “enormous variability” in input costs, should be approached with “great caution.” Early estimates are being revised… Towse et al., “Estimates of the Medium Term Financial Resource Needs for Development of Pharmaceuticals to Combat ‘Neglected Diseases’” in Widdus and White, “Combating Diseases Associated With Poverty” (Initiative on Public-Private Partnerships for Health: 2004)

15. Prize Overpayments Caveats: What Does Overpayment Mean? Higher Rewards  Higher Effort Not as Bad as “Ordinary” Waste But: Diminishing returns & “Me-Too” drugs. Downside Losing An “Extra” Drug Program For 25% overpayment  “Buy 3 get one free…”

16. Prize Overpayments Caveats: Finessing Our Ignorance Hollis: Racing for Shares in a Pooled Reward (QALYs  Reduced Benefits?) Adjusting the Prize Over Time? Reward Can’t Grow Faster than Internal Rate of Return (11%). Assume Historic 7% Rate… Assume 11.8% Rate… Can’t go below rich nation reward as long as pharma is internally funded!

17. PPP Overpayments Basic Picture: Prizes + Competitive Bidding = Unambiguous Improvement

18. PPP Overpayments Purchasing Power: Enforcing the Best Price Example: Compound Development 15-20% Accounting Profits in Early 1990s Cut by ~ 5% in late 1990s Typical of outsourced costs? Counterexamples: Manufacturing in Asia is 5% cheaper… Does Pharma Know How to Do Trials in LDCs? A much smaller penalty than prizes! But: Are PPPs “less efficient…?”

19. PPP Overpayments Competence and Adverse Selection? Evidence (1) Virtual Pharmas Evidence (2) Pasteur Institute, Fort Detrick, etc. Probes both efficiency and reduced R&D intensity. Are Foundations Good Shareholders? The Big Unknown: Foundation culture Design Issues Multiple Missions, Lack of Competition.

20. Designing a PaYG System

21. Designing PaYG PaYG includes Prizes! Where Do Prizes Make Sense? 1. Setting R&D Priorities? Does Pharma Know More Than the Sponsor… About Disease Burden? About WHO Approvals/Purchasing Procedures? About Uptake?

22. Designing PaYG 2. Pre-Clinical Drug Discovery Ideas Are Cheap A Small Community? Widely Dispersed Knowledge? Proprietary Data Inside Pharma? Early Stage Developments ~25% of Total Costs. Best Efforts Prizes?

23. Designing PaYG 3. Clinical Trials 75% of Costs What Does Pharma Know About Developing World Trials? Is The “Near-Term” Prize Inverted? 4. Approvals and Distribution Sponsors Know More than Pharma…

24. Adding Patents

25. Adding Patents “PPPs have increased drug development” - Suerie Moon

26. Adding Patents How Much Will the Private Partner Invest?

27. Adding Patents Estimating the Prize Amount (Revisited) - Amount of Required Reward - Future Cost Outside LDCs To Gates, Governments - Do PPPs Care? Overpayment Revisited - Extra Effort  Crowding Out

28. Adding Patents Side Issue: Silver Bullet Technologies - If Rich Nations Didn’t Invent This Technology … Nanotechnology? - Counterexample: Amyris Rich nations don’t make medicines from bark…

29. March 16, 2009 Beyond the Ivory Tower: Making Practical Choices Stephen M. Maurer Goldman School of Public Policy & Berkeley Law School