Home > Economic policy > Drug Wars: Crosspost from Crooked Timber

Drug Wars: Crosspost from Crooked Timber

May 25th, 2017

I got a preview of Drug Wars by
Robin Feldman and Evan Frondorf
. It’s not about the War on Drugs, but about the devices used by Big Pharma to maintain the profits they earn from their intellectual property (ownership of drug patents, brand names and so on) and to stave off competition from generics. Feldman and Frondorf propose a number of reforms to the operation of the patenting system to enhance the role of generics. I’m more interested in a fundamental shift away from using intellectual property (patents and brand names) to finance pharmaceutical research.

Drug Wars covers devices like product hopping and evergreening. The idea is to make small changes to existing drugs, so that generics aren’t exact substitutes. Ideally, this enables a whole new patent (evergreening). Even if not, the change means that generic copies of the old version can’t be substituted automatically when prescriptions are filled. All of this is backed up by massive advertising directed both at consumers (this is only legal in the US and NZ) and physicians.

The cost is mainly, though not exclusively, borne by the US government and US consumers. Other developed countries like Australia bargain with the drug companies to place their product on a list that can be purchased at low cost. If the price demanded by the company is too high, there’s no subsidy and sales are usually very limited. One of the central US aims in both the US Australia Free Trade Agreement and the Trans-Pacific Partnership (killed off by Trump) was to cripple the Australian Pharmaceutical Benefits Scheme and similar measures in other signatory countries. Less developed countries have also resisted the demands of Big Pharma to charge whatever the market will bear, with a fair degree of success.

Could this be done better. The ideal alternative would be an extension of public funding to cover drug development as well as fundamental research (which currently acts as an effective subsidy to Big Pharma). Some of this could be done on the current model of grants for research, but there could also be “prizes”, that is, payments for the successful development of drugs assessed as beneficial. Research results would be shared publicly, and products would not be patented (or, perhaps, patents would be held by the government that funded the work)

Again, ideally, all the developed countries would contribute, and share the results. But the US is large enough (around half of global sales of pharmaceuticals and half of expenditure by pharmaceutical companies) and does so badly under the existing setup, that it could probably act unilaterally.

Here are some relevant numbers, I’ve found around the place. All provisional, corrections welcomed
* Total research expenditure by pharmaceutical companies $76 billion. US share, about $40 billion
* Marketing expenditure by pharmaceutical companies more than $100 billion.
* US Spending on prescription drugs $425 billion
* National Institutes of Health total funding $33 billion

Looking at these numbers, I’d say that if the US government doubled the NIH budget and allocated all the money to drug development it would generate more new and useful drugs than are currently produced by Big Pharma in the US, given that a fair chunk of the $40 billion being spent is devoted either to competitive duplication in the race for new products or to non-productive activities like evergreening. Given that much of the cost of prescription drugs is ultimately borne by the government, even a 20 per cent reduction in total costs would be enough to offset the cost the government, with a big benefit left over for consumers.

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  1. May 25th, 2017 at 18:34 | #1

    The direct effect of the duplication is compounded by the secrecy. A university model of research would allow competitive exchange of ideas. Harrison’s marine chronometer, funded by the Longitude Prize, was the endpoint of a process of open competition. After the prize was awarded, rivals to Harrison soon developed cheaper solutions. Big Pharma is reluctant to publish the results of clinical trials that give negative results, see Ben Goldacre.

  2. Black cat
    May 27th, 2017 at 12:16 | #2

    The secrecy of failed clinical trials and their many other problems (discussed by Ben Goldacre) can be solved more directly by legislating that all trials are made public + that tests are made public before data is collected. But another advantage of university research is that ideas are shared early (well before there is a final product), which should result in faster and more reliable development.

  3. Malcolm
    May 27th, 2017 at 12:21 | #3

    For some years Jamie Love from KEI has been promoting the “prize” model for pharmaceutical R&D. I think it’s an idea worth trying though it is not as simple as it seems.

    One reason for the massive expense of pharma research is the high failure rate, and failure often comes after many years of work and sunk costs. People who work in pharma also point out that drug R&D expertise doesn’t really exist in the public sector, so start-up times of a pure public effort might be rather slow.

    Academic “drug discovery” is held out as showing how cheap and easy it can be but I agree with critics who say this is often misleading. For example, Ian Frazer did not “discover” the HPV vaccine. His lab demonstrated a new vaccine concept (incidentally, more or less at the same time as others in the field, speaking of duplication), filed a patent, and then pharma did many years of work to design, develop and test actual marketable vaccines.

  4. Andrew
    May 28th, 2017 at 05:00 | #4

    John could you please point to 5 drugs in past 20 years that have been fully developed from pre-clinical to launch by a state actor.

    The reality is that governments are truly terrible at this. Tax payer research can find the easy stuff..that is the basic science. Do you really want the tax payer to pony up 100s of millions on a full clinical development program with a lower than 10% chance of success. Do you think government committees can make the stop/go calls on progression of molecules?

    If you do, propose it. Create your government funded start up and do it. pharma would welcome the competition.

  5. Andrew
    May 28th, 2017 at 05:06 | #5

    And btw, What is your elasticity and what is it based on? Do you truly believe that reducing pharma profits would not result in a change in either of the number or mix of future innovation? If so, why?

  6. Ikonoclast
    May 28th, 2017 at 06:35 | #6


    You obviously haven’t heard the true history of Commonwealth Serum Laboratories (CSL) before it was privatised, that is to say when it was a government organization.

    “… major achievements of CSL include:

    early production of insulin for treatment of Australian diabetics (1923)
    development of a tetanus vaccine (1938)
    development of a combined vaccine for diphtheria, tetanus and whooping cough (1953)
    rapid adoption and production of a polio vaccine (1956)
    development of a multi-purpose animal vaccine covering pulpy kidney (enterotoxemia), tetanus, black disease, malignant oedema and blackleg (1961)
    production of Rhesus (D) immunoglobulin to prevent haemolytic disease in newborns due to Rh factor incompatibility (1966–67)
    pioneering heat treatment to protect blood and plasma products from infection with HIV (1983)

    Only by obscuring and denying history can the lie be promulgated that only private enterprise can do anything in the health arena, the science arena or anywhere else.

    Contemporary, privatised CSL tells its history like this:

    “The Commonwealth Serum Laboratories was established in Australia in 1916 to service the health needs of a nation isolated by war. CSL Limited was then incorporated in 1991 and listed on the ASX in 1994.”

    Notice how the whole era of government body achievement is passed over as if it never existed. Only by telling lies, by omission if necessary, can the fraudulent story be pushed that only private enterprise can achieve anything. Indeed, in many cases private enterprise cannot achieve anything worthwhile at all. Look at the current power supply mess, education mess and health insurance mess (soaring insurance rates) all brought to us by private enterprise.

  7. Malcolm
    May 28th, 2017 at 09:39 | #7

    Andrew, “100s of millions on a full development program with a lower than 10% chance of success” is overegging it.

    Pharma estimates of the *average* cost of developing a new drug are at around USD1B, factoring in the cost of failures. There are good reasons to think this is padded, including arguments about the cost of capital, the contribution of R&D tax subsidies, pharma accounting practices etc. Independent estimates are not completely credible either, as vital data are not public. But my guess is that a good estimate would be somewhere between USD100M and USD500M. And of course, the variation from project to project will be large.

  8. sunshine
    May 28th, 2017 at 11:23 | #8

    In Indonesia my better half went to get thyroid pills that cost her $3.50 here in Australia .They cost $65 there .I suppose that means that only 1% of Indonesians could afford what is to us a fairly common fix it pill.

  9. NathanA
    May 28th, 2017 at 11:31 | #9

    First of all the estimates on how much pharma spends on R&D are generally about double what is written here, I suggest EvaluatePharma for more accurate figures.

    Second, with respect to the public vs private debate, it is true that the chances of bringing a novel drug to market is very slim. Only about 1500 or so distinct drugs have been approved by the FDA and currently run at around 50 a year. Have a wander around academic pharmacology conferences and look at the number of distinct molecules that are being spruiked as possible drug candidates to get an idea of the scale of the problem.

    The problem with the systems being proposed is that I very much doubt a grants system could be efficient. “Translation” has been the buzzword for the grants system for years and it’s had only limited success. The knowledge of why drugs fail to get to market currently lies almost exclusively with the pharmaceutical companies. This knowledge won’t be transferred instantly, clinical trials are expensive and the potential for opportunity costs by proceeding with projects that have a fundamental flaw is much higher than people assume.

    I understand what Ikonoclast is saying, but I think that is a good argument for a publically owned (or more than one) company similar to what CSL was, not for extending a grants system to a situation where it would not be fit for purpose.

  10. Corey
    June 3rd, 2017 at 05:28 | #10

    Contra those saying your R&D estimates are too low, the industry’s own PR arm PhRMA puts 2013 R&D spending at $51.6 billion, and estimates $51.2bn for 2014 (the latest data I could find last time I advocated this very same public-funding solution). If there was a plausible way to charge other expenses as R&D you’d think PhRMA would use it in their numbers!

    Other numbers per CMS (Center for Medicare Services), actual for 2014:
    Total US prescription drug spending, public and private: $297.7 billion
    Medicare: $86.4 billion
    Medicaid: $27.3 billion
    Out of pocket: $44.7 billion

    So we could completely fund R&D at current levels for about twice what Medicaid spends buying drugs, or half-ish of what Medicare spends for drugs. In exchange, with publicly funded development the resulting drugs would presumably be unpatented generic, hence pretty affordable.

    Just starting a government-run lab funded at $50bn/year and keeping it running would do the trick; as patents on existing drugs run out eventually we get to where this pays for itself even when you only look at what the US government spends on buying drugs today.

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