Drug Development (with access)

Manufacturing costs for second line AIDS drugs*

2007-02-17T11:15:00.000-05:00

For medicines invented before 1996 and produced or imported as generics in Brazil, the global market for active pharmaceutical ingredients (APIs) is highly competitive. The most widely used 1st line AIDS drug is a twice a day regime of Stavudine (d4T), Lamivudine (3TC), and Nevirapine (NVP). The main factor driving the price of this HAART regime is the cost of the APIs. The total amount of APIs in this cocktail is 284,700 milligrams per year, or .2847 kilos per patient per year.

Drug/APIs in milligrams	Dose	Daily	Yearly
Stavudine (d4T)	40	80	29,200
Lamivudine (3TC)	150	300	109,500
Nevirapine (NVP)	200	400	146,000
Total		780	284,700

Following our price negotiations with CIPLA on behalf of MSF, the price for this regime was $350 in January of 2001, and has fallen steadily, to recent prices as low as $109. Some companies have privately indicated to UN agencies that bulk prices of $70 per year are feasible, if quantities are large and financing is solid.

For this HAART regime, the cost of a kilo of delivered and formulated APIs in Africa was initially more than $35 thousand. With competition, this fell to roughly $3,900 per kilo by 2000, $ 1,229 per kilo in 2001, and $383 per kilo by early 2007.

The $70 per year per person future price that some manufacturers suggest is feasible for this HAART regime is equivalent to $246 per kilo for the fully formulated and delivered APIs.

APIs are the principal cost component of finished pharmaceutical products. The price of APIs fall according to three factors: (1) improved manufacturing processes, (2) economies of scale (larger and more sustained product runs), and (3) sufficient competition between multiple efficient producers. All of these factors have occurred with respect to the first-line HAART regime when Brazil as a large customer "made the market" for generic products, many based upon APIs manufactured in India or China. The Brazil purchases creating economies of scale and incentivizing multiple API manufacturers. Efficiencies and incentives were later enhanced by the presence of global funding mechanisms including the Global Fund to Fight AIDS, Tuberculosis and Malaria and the U.S. PEPFAR program.

What does this analysis suggest concerning the pricing dynamics for the new "second line" regimes? Below we compare the prices per formulated and delivered APIs for the first-line d4T+3TC+NVP regime (Triomune 40) to the prices of formulated and delivered APIs for Kaletra (lopinavir/ritonavir) and Atripla (efavirenz/emtricitabine/tenofovir).

The regime for Kaletra is 4 gel tabs containing 200 milligrams of lopinavir and 50 milligrams of ritonavir -- 1,000 APIs per day, and .365 kilos per year. The once a day regime for Atripla is 600 milligrams of efavirenz, 200 milligrams of emtricitabine and 300 milligrams of tenofovir disoproxil fumarate -- 1,100 APIs per day, or .4015 kilos per year.

Prices per formulated and delivered APIs are currently much higher for Kaletra and Atripla than for the Triomune HAART regime, principally because of the relatively low number of patients on second-line therapies and because of the absence of dynamic generic competition. However, as demand grows for second-line therapies and as Atripla is adopted as a preferred first-line therapy because of its adherence advantages (one pill, once-a-day) and its reduced adverse side effects, we can expect the potential economies of scale to increase and prices to fall, if generic producers are permitted to compete, and to compete in markets that collective are large enough to stimulate entry and competition and to realize economies of scales for the generic suppliers.

Efforts to partition markets or limit markets for generic suppliers will undermine the potential benefits of generic competition in lowering prices for second line drugs.

Prices per formulated and delivered APIs are currently much higher for Kaletra and Atripla than for the Triomune HAART regime, principally because of the relatively low number of patients on second-line therapies and because of the absence of dynamic generic competition.

The price points for Kaletra include the Abbott price for Thailand before the issuance of the compulsory license (roughly $3,800), the prices of generic alternatives in January 2007 (roughly $1,370), and the initial Abbott price in Africa ($500).

The price points for Atripla are the two tiers of prices for developing countries just announced by Merck.

Drug/APIs per year		Price	Price per kilo of API
Triomune
.2847 kilo	Cipla 2001	$ 350	$ 1,229
	Cipla 3 in 1	$ 250	$ 878
	Clinton	$ 140	$ 492
	2007	$ 109	$ 383
	Future low	$ 70	$ 246

Kaletra
.365 kilo	Thailand before CL	$ 3,800	$ 10,411
	Thailand after CL	$ 1,370	$ 3,753
	Abbott initial price in Africa	$ 500	$ 1,370

Atripla
.4015 kilos	"Middle income"	$ 1,033	$ 2,573
	"Low income"	$ 603	$ 1,502

The high prices for Kaletra and Atripla should come down if there a competitive market for generic APIs is permitted to develop. As demand grows for second-line therapies and if Atripla is adopted as a preferred first-line therapy because of its adherence advantages (one pill, once-a-day) and its reduced adverse side effects, we can expect the potential economies of scale to increase and prices to fall, if generic producers are permitted to compete, and to compete in markets that collective are large enough to stimulate entry and competition and to realize economies of scales for the generic suppliers.

Efforts to partition markets or limit markets for generic suppliers will undermine the potential benefits of generic competition in lowering prices for second line drugs. Generic suppliers should have access not only to the poorest countries that are subsidized entirely by Northern donors, but also to countries with somewhat higher incomes that can pay for medicines from national health care budgets.

Efforts by national governments to bargain with patent owners for lower prices for Kaletra and Atripla are unlikely to be as effective in lowering prices for these products as will be the creation of a large global market for generic products. The Triomune example illustrates both the possibilities of lower prices per delivered APIs, as well as the importance of dynamic savings, as entry, competition and efficiency is increased over time.

* Thanks to Brook Baker for many helpful comments.

Michael Abramowicz on "Perfecting Patent Prizes"

2006-12-13T10:53:00.000-05:00

Professor Michael Abramowicz presented “Perfecting Patent Prizes” yesterday at CPTech. The presentation was based on his lengthy 2003 law review article of the same name. Michael began his presentation with an overview and critique of much of the literature proposing prizes or buyouts (see this annotated list of much of this literature) in lieu of patent monopolies: Guell and Fischbaum’s eminent domain proposal, Shavell and van Ypersele’s optional prize system, Kremer’s auction guided buyout proposal, Duffy’s buyout with shareholder compensation, and Lichtman’s coupon approach. Of these, Michael thinks the Duffy proposal (apparently to date it has only been published as a footnote) is generally the strongest. Briefly, Duffy’s suggests that the government meet secretly to decide whether to seize various pharmaceutical patents. When the government does seize a patent, it reimburses those who held shares of the patent holder immediately prior to the seizure by the amount that the company’s stock falls in a given period after the seizure is announced. Michael argued that each proposal has several critical flaws (see his PowerPoint presentation).

Michael’s proposal is to have a fixed prize fund to which patent holders could apply in exchange for turning their patent over to the public domain. A government body would be given broad discretion in awarding shares of the fund, with assumption that the resulting uncertainty would not significantly diminish research incentives so long as there is no pattern in which sort of innovations tend to be over- or under-rewarded by the fund. Significantly, decisions about what share of the fund a given innovation would receive would not be made until ten years after the patent is transferred to the public domain, in order to provide more opportunity for information about the social value of the drug to be revealed.

Michael concluded by suggesting that the Medical Innovation Prize Fund Act (H.R. 417) could be improved by making the proposed prize system an optional alternative to traditional patents. He argued that an optional prize system would be more likely to attract the support of the pharmaceutical industry, that it would lend itself to implementation on a smaller scale trial basis, and that it would be able to better accommodate the possibility that appropriate levels of R&D spending as a percentage of GDP will change over time.

Peter Pitts on Prizes

2006-11-09T20:17:00.000-05:00

Peter Pitts took part in a brown bag discussion today at CPTech during which he covered several topics, including prize fund approaches to medical innovation like H.R. 417 (title from 109th Congress). Peter co-founded and currently works full time for the Center for Medicine in the Public Interest (CMPI), a group that is funded by major pharmaceutical companies. Peter previously served as the FDA’s Associate Commissioner for External Relations, and has held positions at the Hudson Institute, as well as the Washington Times, the New York Post, Readers Digest, McCalls, and other publications. (See his CMPI bio here).

Pitts was invited to CPTech to present his perspective after writing some critical posts about the prize fund on CMPI’s blog www.drugwonks.com. The visit consisted of a fruitful give and take with Peter asking as much as he was asked. Peter expressed a number of concerns about a prize system for medical innovation, but the main complain was this: Pitts did not want governments to determine the value of pharmaceutical innovations.

In response to the concern about government involvement, it was suggested that prizes should be compared the current system, which involves a government run patent system that is frequently gamed by pharmaceutical lawyers, and prices set by third-party payers, including employers, insurers and increasingly, governments. Indeed, the role of the government in setting "prices" is likely to expand following the Democrats' takeover of the US House and Senate this week. Peter agreed that the patent/monopoly price system for drugs was flawed, but was skeptical that a prize system could be better.

One key feature of the prize system approach was discussed at length. The Sanders bill from the 109th Congress (HR 417) would look at evidence of the "incremental therapeutic benefit" of a drug. Pitts was quite uncomfortable with the notion that the incentives to innovate would be focused on incremental benefits.

A related technical issue that was discussed concerned the ways that a Prize fund would treat products that were in development at roughly the same time, and how incremental benefits would be calculated in such cases -- a point earlier raised by Dean Baker. One proposal by participants was to consider drugs that were developed at roughly the same time as if they were simultaneous developments, for purposes of determining incremental benefits.

Noah Novogrodsky on “Compulsory Licensing in Ghana – the Continuing Barriers to Affordable Medicines”

2006-11-09T20:05:00.000-05:00

Last Tuesday, November 7 2006, at the Consumer Project on Technology (CPTech) Washington, DC office, Professor Noah Novogrodsky gave a talk on attempts to improve access to medicines in Western Africa, using the example of Ghana’s compulsory license for HIV-AIDS drugs (slides).

Professor Noah Novogrodsky is a Visiting Professor of Law at Georgetown University Law Center and the Director of the University of Toronto Faculty of Law International Human Rights Program. For each of the past three years, Professor Novogrodsky has taught a seminar titled “The HIV/AIDS in Africa Project” in connection with the work of Stephen Lewis, the UN Secretary-General’s Special Envoy on HIV/AIDS in Africa. Professor Novogrodsky’s current research agenda focuses on the HIV/AIDS pandemic as a threat to human security.

The presentation provided background on the “traditional” compulsory license regime under article 31 of the TRIPS and the 2001 Doha Declaration as a realization of the Human Right to Health.

However, the majority of the presentation focused on the new compulsory license mechanism under the WTO August 30th 2003 decision that was recently incorporated permanently into the TRIPS agreement under article 31 bis. The August 30th decision permits countries with generic manufacturing capacity to manufacture and export generic versions of patented drugs to developing countries which lack such manufacturing capacity (the so-called Paragraph 6 mechanism).

Professor Novogrodsky explained the University of Toronto-based Access to Drugs Initiative (ADI) work with Ghana to use the WTO decision. These efforts were initially geared toward providing a test for the Canadian patent reform implementing the Paragraph 6 mechanism, “Jean Cretien’s Pledge to Africa Act” (formerly known as Bill C9), that was intended to enable Canada’s robust generic industry (robust due in part to past use of compulsory license flexibilities by the Canadian Government) to take advantage of the WTO decision for the benefit of developing countries.

ADI hoped that Ghana would become the first country to import drugs under C9, and offered technical assistance filing a compulsory license. However, the effort did not go smoothly. Noah reported that the HIV community in Ghana is marginalized and securing treatment did not always seem to be a high priority for government officials. Noah also described a lack of communication between the Ghana Department of Health and the Department of Justice, a generally unsubstantiated perception of pressure from the U.S. government, and evidence of threats by pharmaceutical companies to retaliate for compulsory licenses by raising prices for other drugs.

Besides difficulties with coordination in Ghana, features of C9 itself created further impediments, including restrictions on eligible drugs (Schedule 1), eligible recipient (only listed countries can use the mechanism, and not NGOs or others), and a limited 2 year duration for the compulsory license that makes it difficult for generic manufacturers to recoup their costs.

Noah and the attendees commented on three attempts that have been made to modify the list the drugs eligible for exportation under the Canadian C9 regime:

First: The unsuccessful request by Essential Invention with the drug Glivec.
Second: The successful request by MSF that lead to the addition of AZT/3TC.NVP on September 2005.
Third: The successful request by Biolyse that lead to the addition of Oseltamivir on September 2006.

ADI was not able to obtain a Canadian Compulsory License to export, but Ghana finally issued a compulsory license in October 27, 2005 to allow importation of ARVs for government use. The supplier was an Indian generic manufacturer.

The presentation concluded with Noah’s proposal for a bigger picture solution. Noah suggested that it would be preferable for one country to obtain a license and then export drugs that it manufactures or imports to its neighbors with similar health needs. If this were permissible, he argued, Ghana could further develop its limited generic manufacturing capacity to serve the whole region, especially Nigeria, a country with a large HIV+ population.

Noah suggested implementing a regional arrangement to permit exports under GATT article 24. He claimed this would permit a developing country that is a party to a regional trade agreement (RTA) to export a product imported or locally produced under a compulsory license to neighboring countries belonging to the RTA. Noah suggested the Economic Community Of West African States (ECOWAS) as an example of a potential platform to do this, and he reported that ADI has worked with Ghana to incorporate an exception into its law based upon Article 24 of the GATT.

Noah and audience discussants debated if Article 24 of the 1947 GATT would actually allow this. There were also discussions of other efforts to reduce the need for redundant compulsory licensing including those operating through TRIPS article 6 (exhaustion of rights), anti-competitive grounds of article 31.k of the TRIPS Agreement, proposals for the use of patent pools. Some also speculated about the potential of the "goods in transit" exceptions.

Thomas Pogge on "Social Justice and Pharmaceutical Innovation"

2006-10-20T13:24:00.000-04:00

This week at CPTech Thomas Pogge presented “Social Justice and New Approaches to Promoting Pharmaceutical Innovation,” based roughly on his paper “Human Rights and Global Health: A Research Program.”

Thomas began his presentation with a brief exposition of one of his better known moral arguments, namely that the imposition of global institutions (e.g. TRIPS) that prevent the poor from satisfying their basic needs constitutes a violation of human rights. As a result, changing existing policies and institutions to better serve the poor is not a matter of charity or being a Good Samaritan but rather is mandatory in order to stop violating the rights of the global poor.

Thomas followed with an impressive overview of the scope and ramifications of global poverty before describing his proposal for making medical innovations more responsive to global medical needs.

Pogge proposes giving innovators a choice between two types of patent for new drugs and vaccines, Patent I or Patent II. Patent I is the same as pharmaceutical patents currently issued. Patent II requires open-licensing the innovation in exchange for a yearly payment for some duration based upon the actual impact of the innovation on the global disease burden. Thomas suggests that with the prospect of substantial rewards, innovators would opt for Patent II rather than Patent I to cover most drugs for diseases that significantly impact the developing world. Basing rewards on actual medical impact is intended to solve the “last mile problem” of getting medicines from the cargo plane to the people who need them: Patent II holders will have strong incentives to create the infrastructure necessary to ensure their product does as much good as possible. Funding for Patent II rewards would be provided by a “coalition of the willing” – countries would sign up and pledge to pay a given amount per unit of medical benefit (QALY, DALY, or some other metric) provided by drugs under Patent II, with richer countries expected to pledge more. As more countries sign on, reward amounts or the scope of eligible innovations could be increased (for instance, to begin with only drugs for communicable diseases might be eligible for Patent II, but eventually this might be expanded to all drugs).

After the presentation, much of the discussion involved comparing the Pogge proposal to other proposals for accessible medical innovation such as the Kremer et. al APC/AMC proposals, the Love/Hubbard prize fund/R&D Treaty approach, the Sanders Bill (HR 417), the Hollis voluntary prize fund, proposals to combine outcomes based rewards as incentives to voluntary licenses of patents to a patent pool for developing countries (possibly targeting CIPIH type II and III illnesses), and various patent buy-out proposals.

Particular attention was devoted to discussing the rationale for offering innovators a choice between Patent I and Patent II, rather than doing away with Patent I altogether. Thomas suggested that offering innovators a choice would be more politically feasible because the pharmaceutical industry might support the proposal. Others suggested that the political advantages of making Patent II mandatory might be greater, since it would presumably offer greater benefits to patients in rich countries (because given the choice, most innovators would chose Patent I for drugs with significant rich-country markets).

Thomas also answered questions about his proposal that countries pledge to pay an amount per unit of benefit rather than a fixed amount per year. Some suggested that countries would be unlikely to go along with open-ended financial commitments. Thomas stressed that one advantage of pledging funds per unit of benefit would be that countries would only pay if the proposal were successful in promoting the development of clinically significant open-licensed drugs. He also suggested that having a fixed amount awarded per year regardless of the quality of innovations could encourage collusion among innovators in an attempt to game the system – though he agreed that the possibility of this would be remote.

The majority of the questions focused on how a drug’s actual impact on the world’s disease burden would be measured and isolated from other influences. Thomas explained that the process would require “cutting corners” since an exact calculation of impact would be impossible. He suggested that standard public health sampling methodology be used to estimate the expected progression of diseases over the next decade or so. A drug’s impact for the purpose of determining Patent II rewards would be determined by comparing expected disease burden to actual disease burden as determined by similar sampling methodology. Background factors causing fluctuations in disease burden would be ignored and so introduce an added element of risk for innovators, but according to Thomas this would be no different than the risk faced by auto–makers that gas prices will increase and suppress demand for SUV’s. Innovators would work out rules in advance to decide how to divide rewards in cases of sequential innovation and multiple treatments for the same disease. While basing rewards upon expected rather than actual medical impact would be more difficult, Thomas suggested that using actual impact would be preferable because it addresses the “last mile” problem.

Overall reaction to many aspects of the proposal was positive, though many attendees expressed remaining concerns – particularly about the possibility of obtaining the requisite drug impact information, the ability of innovators to agree amongst themselves to an adequate system for dividing shared rewards, and the political feasibility of open ended financial commitments.

Kevin Outterson on “Patent Buyouts”

2006-10-10T17:58:00.000-04:00

Today Kevin Outterson gave a presentation at CPTech, on "Patent Buyouts." The talk was based upon the paper Patent Buyouts for Global Disease Innovations for Low- and Middle- Income Countries. American Journal of Law & Medicine. 32:159-173.

In his presentation, Kevin most notably called attention to the toll of human papilloma virus (HPV) in the developing world and the potential benefits of newly developed HPV vaccines to women in less developed countries. HPV is a necessary condition for the 470,000 diagnosed cases of cervical cancer worldwide each year that result in 230,000 deaths per year. According to Kevin, while only 8% of worldwide cervical cancer deaths occur in 30 high-income countries, these countries are expected to account for an estimated 90% of expected revenues from an HPV vaccine. While the vast majority of cervical cancer deaths occur in lower income countries, the incidence of cervical cancer in high-income countries is significant, and HPV has not been neglected by pharmaceutical companies. In the past year, both GlaxoSmithKline and Merk have received patents for HPV vaccines that appear to be 100% effective in preventing infection with the most dangerous strains of HPV. The cost will be $360 per vaccination cycle in the United States. Outterson said these vaccines, developed with high-income countries in mind, would be of much greater benefit globally if they were made available at cheaper prices in lower income countries.

Outterson briefly discussed and critiqued several proposals for making HPV and other vaccines available in lower income countries, including manufacturing un-licensed generics, voluntary differential pricing, compulsory licensing, and prizes or advance purchase commitments.

Outterson's proposal is as follows. Leave in tact the existing pharmaceutical system in the 30 high-income countries that would account for 90% of vaccine revenues. For all other countries, the vaccine patent owners would voluntarily permit generic competition. In return, Outterson suggested that patent holders would receive money. He called this a buyout (more on this choice of words later).

There was some difficultly at first following the method of determining the amount of money for the "buy out" of the patents, but it turns out to be fairly simple. Whoever is paying for the patent "buy out" would give the patent owners an amount equal to 14-17% of the price of the cheapest generic product, multiplied by the number of generic units sold in the low income countries, paid every year.

In the case of the two HPV vaccines, Outterson reckoned that this would come to $30 million for each patent holder per year for the life of the patent assuming that every 12 year old girl in the world is vaccinated.

Quick math..... if vaccinating every 12 year girl in the world reduced deaths in the developing world from cervical cancer by 70 percent, preventing roughly 150 thousand deaths per year, the patent owners would receive roughly $400 per life saved. (The cost to society would be the $400 to the patent owners plus the cost of making, distributing and administering the vaccine to every 12 year-old girl in the developing world).

The amount is intended to compensate the patent holders for R&D funding lost by opening up lower income country markets to generic competition.

Seminar attendees raised a number of questions. Some suggested that Outterson’s plan did not seem like a true patent buyout, and instead more closely resembled a proposal for licensing patented products. Outterson agreed that his proposal was not for traditional patent buyouts that involve paying for full rights to a patent up front.
(There was some discussion of who should bear the risk that a product would turn out to be better or worse than expectations.)

Most questions focused on the rationale for Outterson’s formula for calculating buyout amounts. Kevin explained that the 14-17% was the PhRMA estimate of the rate of investment in R&D from sales. The price of the cheapest generic product is intended to approximate the marginal cost of production, and was chosen for inclusion in the formula on the normative ground that vaccines should be available to people in lower income countries at the most efficient price. Kevin had not spoken to anyone in the industry about the proposal, and some questioned whether patent holders would be likely to voluntarily accept the proposed "buyouts."

IRS Data Shows Increasing Pharma Income From Royalties

2006-08-30T17:23:00.000-04:00

CPTECH has requested and received from the United States Internal Revenue Service tax return data for the years 1995 to 2003 for companies in the pharmaceutical and medicine manufacturing industry.

Among the more striking findings is a dramatic increase in the level and share of income received from royalties.

First, a few notes about the data.

Data cover the pharmaceutical and medicine manufacturing industry (NAICS code 325410), filing U.S. Corporation Income Tax Return Form 1120. Virtually all pharmaceutical corporations are required to file form 1120, with the exception of those meeting nine requirements including having gross receipts, total income, and total assets under $500,000.

Sales: we use line 1c on form 1120, for gross receipts or sales less returns and allowances. I believe this normally would include both US and foreign sales for US firms, but only income from US subsidiaries for foreign owned firms. There is also an exclusion of some income that qualifies under the form 8873 "Extraterritorial Income Exclusion." The sales reported on this form will also include some non-pharmaceutical sales, for companies with broader product lines. The number of firms filing form 1120 ranged from 1,150 to 1,801.

Royalties: we use line 7 on the form 1120, for "gross royalties." We assume that royalties are primarily from patents, but also include royalties from the use of know-how, copyrights and other royalty generating items. The number of firms reporting royalties is much smaller, ranging from 101 to 151 in years for which we have data.

Year	Sales	returns	Royalties	returns	%
1995	144,919,796	1,312	3,472,600	106	2.4
1996	165,914,444	1,418	4,200,321	147	2.5
1997	175,317,302	1,801	5,001,710	133	2.9
1998	189,613,246	1,493	7,309,528	144	3.9
1999	201,290,916	1,150	9,811,938	151	4.9
2000	203,210,319	1,231	11,356,862		5.6
2001	218,514,161	1,367	12,486,640		5.7
2002	249,096,548	1,278	13,415,678	101	5.4
2003	273,870,756		18,064,648		6.6

Total	1,821,747,488		85,119,925		4.7

A note on obtaining IRS SOI Data

Statistics of income data are a fruitful source of information on corporations’ costs and earnings. General SOI data, including data from the health care industry, are available online. More detailed breakdowns by industry, including the pharmaceutical and medicine manufacturing industry (NAICS code 325410), are available from the IRS for a negotiable fee.

Using information to measure benefits

2006-08-20T18:20:00.000-04:00

One of the most common criticisms of drug prize plans like HR417 is that they would require a tremendous amount of information to be able to allocate prizes correctly. However, as an article in the NYTimes ("Smart Care via a Mouse, but What Will It Cost?") discusses today, exactly such information is becoming available.

---snip ---
The technology backbone for more efficient health care markets is being called the “national health information network.” Such a network — with patient records stripped of their personal identifiers — is intended to someday allow doctors, nurses, researchers and ordinary people to track the outcome of various therapies, drugs and devices.

The idea is that they could tap into a public Web site to sift through health databases that are based on millions of records, updated regularly. Clever software would help them to understand what works and what doesn’t — and to seek answers about side effects, recovery times and vitamin regimens. A result, health experts say, is that fewer decisions about how to treat patients would be based on studies by drug companies and medical device makers, as they often are now.
---snip---

The information system described would be ideal for measuring the benefits of specific drugs.

Korean A-7 Prices Compared to U.S. Prices

2006-07-31T21:07:00.000-04:00

CPTech was asked by Heeseob Nam to compare prices in the United States (U.S.) and Korea for the certain medicines (in this case cancer drugs), including Iressa (for lung cancer), Velcade (for blood cancer), Gleevec (forchronic myeloid leukemia) and Temodar (for brain cancer), for which we were able to obtain US and Korean prices.

One objective is to compare the prices that the US government pays for medicines to the prices that the Korea government is obligated to pay, under the so called A-7 Pricing Agreement.

The A-7 pricing agreement was recently described by USTR as follows:

"In 1999, the United States and Korea reached agreement on how new innovative drugs were to be priced (based on A-7 pricing or the average ex-factory price of A-7 countries, i.e., United States, United Kingdom, Germany, France, Italy, Switzerland, and Japan) and reimbursed (based on Actual Transaction Price [ATP]). Since its implementation, anomalies have surfaced. A June 2004 industry survey revealed that A-7 prices have only been granted to 33 percent of new products since April 2000. Because of Korea’s restrictive application of the A-7 pricing methodology, U.S. drug companies have decided not to introduce at least nine new products in Korea from 2000 to the present. In December 2004, the United States proposed that Korea issue a one-page justification for when it decides not to provide A-7 pricing for new medicines. The proposal is currently under discussion."

2005 Trade Policy Agenda and 2004 Annual Report of the President of the United States on the Trade Agreements Program. Office of the United States Trade Representative. Section III. Bilateral and Regional Negotiations (full document available here)

We looked at three different measures of US prices, and compared them to the Korean A-7 prices, provided by Mr. Nam.

The U.S. Big 4 price which is only available to Veterans Administration, Department of Defense, Public Health Service (Indian Health Service), and U.S. Coast Guard customers and are based on pricing calculations outlined under the U.S. Public Law.
The U.S. Federal Supply Schedule Price which is multiple award, multi-year federal contract that is available for use by any Federal Government agency. It satisfies all Federal contract laws and regulations. Pricing is negotiated based on how vendors do business with their commercial customers. The FSS program also provides additional opportunities for savings to the customers with negotiated quantity and tier discounts.
The U.S. retail price as offered by Drugstore.com, for someone who does not have insurance. This price is normally higher than the prices paid by US consumers who have private insurance or other methods of obtaining negotiated prices.
The Korean prices determined by a 1999 A-7 pricing agreement.

PRELIMINARY CONCLUSIONS

For all products for which we have data, the prices paid by the US government, under the "big four" or FSS schedules, were always lower than the prices that Korea must pay under the A-7 pricing agreement. In some cases, the differences were very large. Compared to the "Big 4" prices, the A-7 prices were 20 to 84 percent higher.

Prices for four drugs
(price per year or completed treatment)

Drug	Big 4	FSS	A-7
Iressa	$14,516	$18,775	$23,696
Velcade	$47,991	$47,991	$57,685
Gleevec(600)	$28,654	$43,898	$52,831
Temodar	$16,935	$16,935	$20,255

As a share of income, the differences are even more clear. In the table below, current prices are expressed as a percentage of 2004 per capita GNI ($14,000 in Korea, and $41,440 in the U.S.), illustrating the relative hardship that Korea faces with the A-7 pricing agreement.

Prices as a share of income

Drug	Big 4	FSS	A-7
Iressa	35%	45%	169%
Velcade	116%	116%	412%
Gleevec(600)	69%	106%	377%
Temodar	41%	41%	145%

For the three products available from drugstore.com, A-7 prices were higher for two, and lower for one. The Drugstore.com prices are prices faced by uninsured persons.

Prices
(price per year or completed treatment)

Drug	Drugstore.com	A-7
Iressa	$21,964	$23,696
Velcade	na	$57,685
Gleevec(600)	$48,769	$52,831
Temodar	$28,523	$20,255

<------------Data on the four drugs-------------------->

IRESSA
Iressa is indicated as monotherapy for the continued treatment of patients with locally advanced lung cancer. The recommended daily dose of IRESSA is one 250 mg tablet with or without food. Treatment is continued as long as the patient continues to benefit.

For patients receiving Iressa (250mg/day) it will cost per day, month, and year:

U.S. Big 4: $39.88/day, $1,116.64/Mo, $14,516.32/Yr
U.S. FSS: $51.58/day, $1,444.24/ Mo, $18,775.12/ Yr
U.S. Drugstore.com: $60.34/day, $1,689.52/ Mo, $21,963.76/ Yr
Korean A7: $65.10/day, $1,822.80/ Mo, $23,696.40/ Yr

VELCADE
Velcade is used to treat a type of blood cancer called multiple myeloma. It is a cancer of the plasma cell, an important part of the immune system that produces antibodies to help fight infection and disease.

Velcade is given by injection into the bloodstream twice a week for two weeks (days 1, 4, 8, and 11) followed by a 10-day rest period (days 12-21). This three week treatment schedule is considered as ONE CYCLE of treatment. A physician will decide how many cycles a patient will receive depending on their particular stage of cancer.

For patients receiving Velcade (3.5 mg) 2x/week for 2 weeks will cost per month (about 1 cycle), and per year (about 17 cycles):

U.S. Big 4: $2,823/Mo, $47,991/Yr
U.S. FSS: $2,823/Mo, $47,991/Yr
U.S. Drugstore.com: Unavailable
Korean A7: $4,807.04/Mo, $57,684.48/Yr

GLEEVEC
Gleevec is indicated for the treatment of patients with chronic myeloid leukemia (CML) in blast crisis, accelerated phase, or in chronic phase after failure of interferon-alpha therapy. CML is a type of cancer in which the bone marrow produces an excessive number of abnormal white blood cells. These abnormal cells suppress the production of normal white blood cells, which act to protect the body against infection. In time, the abnormal cells spread to sites outside of the bone marrow.

The recommended dosage of Gleevec is 400 mg/day for patients in chronic phase CML and 600 mg/day for patients in accelerated phase or blast crisis. The prescribed dose is administered orally, once daily with a meal and a large glass of water. Treatment is continued as long as the patient continues to benefit. Gleevec is sold in 100mg tablets.

For patients receiving Gleevec (400mg/day) will cost per day, month and year:

U.S. Big 4: $52.48/day, $1,469.44/Mo, $19,102.72/Yr
U.S. FSS: $80.40/day, $2,251.20/Mo, $29,265.60/Yr
U.S. Drugstore.com: $89.32/day, $2,500.96/Mo, $32,512.48/Yr
Korean A7: $96.76/day, $2,709.28/Mo, $35,220.64/Yr

For patients receiving Gleevec (600mg/day) will cost per day, month, and year:

U.S. Big 4: $78.72/day, $2,204.16/Mo, $28,654.08/Yr
U.S. FSS: $120.60/day,$3,376.80/Mo, $43,898.40/Yr
U.S. Drugstore.com: $133.98/day,$3,751.44/Mo, $48,768.72/Yr
Korean A7: $145.14/day, $4,063.92/Mo, $52,830.96/Yr

TEMODAR
Temodar is used to treat adults newly diagnosed with a form of brain cancer (glioblastoma multiforme) while also being treated with radiotherapy and then used as a maintenance treatment. The daily dose of Temodar capsules for a given patient is calculated by the physician, based on the patient's body surface area (BSA) which is based on a person's height and weight. The resulting dose is then rounded off to the nearest 5 mg. Patients continue to take Temodar until their physician determines that their disease has progressed, up to two years, or until unacceptable side effects of toxicities occur.

On average patients newly diagnosed with this type of brain cancer are administered Temodar orally for 42 days concomitant with focal radiotherapy followed by maintenance Temodar for 6 cycles, in which each cycle consists of 5 days of treatment and 23 days of rest, with varying dosages dependent on a person's BSA and response to treatment. This treatments constitutes at one treatment procedure and will be the basis for our calculations.

For instance, a man who is 6 feet tall, weighs 190 pounds and has a BSA of 2.1 would have the following drug course and cost per TREATMENT PROCEDURE (includes initial 42 days of 160mg Temodar treatment and 6 cycles (Cycle 1 with 315mg and Cycles 2 through 6 with 420mg of Temodar) thereafter):

Cost per treatment procedure (72 days of actual treatment):
U.S. Big 4: $16,935.06
U.S. FSS: $16,935.06
U.S. Drugstore.com: $28,523.38
Korean A7: $20,255.06

Collective (total) milligrams (mgs) of Temodar taken by a person per treatment procedure is 18,795 mgs.

Bio-generics and prize systems

2006-07-28T14:53:00.000-04:00

Salon has a recent article on the difficulties of creating an approval process for bio-generics. The problem is that "large molecule" drugs may be very difficult to replicate, unless the entire process is perfectly known and the mechanism for creating the molecule can be exactly duplicated.

The result of this is that even after the expiry of all relevant patents, generic firms may not be able to show bio-equivalence, which would mean that they would have to go through exactly the same clinical trials to be able to sell their product; and even then it is not obvious that they would be able to claim bio-equivalence.

Large molecule drugs, in this situation, may be able to retain their monopoly for a very long time, until a better drug comes along. This is good for encouraging investment in new large-molecule drugs. But if that were optimal, we should have a system of patents with no expiry date. Instead, most countries have adopted a system of patents with durations of approximately 20 years, to balance the incentive for more innovation against the benefits which come from lower prices. So we probably don't want firms to enjoy monopolies forever, even if it increases investment into R&D.

How would a prize system deal with large molecule drugs? A key aspect of a prize system is that the reward for innovation is separated from the price of drug, which should be based on manufacturing costs. But if there are no competitive manufacturers, the drug price will be based on willingness to pay, not cost to produce. Then the manufacturer could charge a high price, and it would earn profits from high prices in addition to whatever reward was due to it under the reward system.

I suggest here a couple of solutions.

Solution 1: Base rewards on some dollarized version of therapeutic value less the cost of the drugs. Then the reward is reduced the higher is the price of the product.

Solution 2: Given the structure of the reward system, it might be possible to require licensing of all the technologies -- not just patented ones -- involved in the manufacturing process, as a condition of participating in the reward system. This would enable bio-generics to be genuinely bio-equivalent. (Note, however, than in some markets with large economies of scale in production, you might not want to have multiple manufacturers, which brings you back to solution 1.)

It would be valuable to hear others' comments about the feasibility of either of these work-arounds, as well as about other problems which might be foreseen with respect to large-molecule drugs.

Off-label prescribing and rewards based on observed value

2006-07-24T13:44:00.000-04:00

NY Times, July 22 2006 has a story by Alex Berenson -- who is doing very worthwhile reporting on drugs -- on off-label prescribing.

“The case has put the spotlight on the murky financial relationships between drug companies and the physicians they use to promote their medicines. Companies cannot directly advertise drugs for purposes not approved by the Food and Drug Administration. But getting drugs prescribed for unapproved uses can increase a drug’s sales, so companies often skirt the rules by sponsoring seminars where doctors are paid to make presentations promoting their drugs, including the “off label” uses.
For doctors, these and other payments they receive for discussing drugs can be very lucrative. Dr. Gleason acknowledges that he received more than $100,000 last year alone from Jazz Pharmaceuticals, which makes Xyrem, the narcolepsy drug he has promoted.”

There is nothing illegal off-label prescribing – doctors are entitled to prescribe drugs for a condition even when official labeling does not include that condition – but it is not legal in most jurisdictions for a company to promote a drug for off-label purposes.

Off-label prescribing is one way that firms and doctors find out about the possible uses of a medicine. I have the impression that it is particularly common for drugs treating mental health.
When drugs are used off-label the firm makes profits, and this gives incentives for promotion of off-label uses. This is particularly problematic if the off-label uses are in fact of low value, comparatively. For example, suppose that drug A is approved for condition X, and is reimbursed accordingly. But a doctor prescribes it for condition Y, which already has an available treatment. Perhaps drug A is slightly better for condition Y, or perhaps not. The price, however, basically relates to the use of drug A for condition X.

An insurer may refuse to reimburse, since not for the approved use, or it may reimburse at a price which has little to do with the value of the drug in use Y.

How would a prize system treat off-label prescribing? The obvious approach is simply to reimburse according to incremental therapeutic value, given the evidence on the uses for which the drug has been prescribed. If the evidence on the value of the drug for treating condition Y is weak, the reward for the times the drug was used for condition Y would be accordingly small, but need not be zero. The trick is that the reward is determined based on the value of the drug in the way that it has actually been used.

This highlights a general advantage of a reward system: it rewards based on observed therapeutic value, rather than based on a price which is set before it is observed how much value the drug actually generates.

PhRMA says industry wide R&D outlays on medicines were $51.3 billion in 2005

2006-07-17T10:47:00.000-04:00

In this press release, which is on the front of its web page, PhRMA pegs global industry R&D outlays on new medicines at "$51.3 billion in 2005, according to a Burrill & Company analysis for PhRMA." IMS puts global pharmaceutical sales at $602 billion for 2005. That would put R&D spending on new medicines at 8.5% of global sales.

The press release reports a much higher percentage for member R&D investments. They use a number from the PhRMA 2006 Industry Profile, for PhRMA member US R&D spending, divided by US sales, which gives them 19.2 percent. Since most of their members spend the majority of their R&D in the US, this gives a big number.

The figures in the PhRMA survey that look at the combination of the US market, plus sales or R&D from "abroad," are 15.8% invested in R&D. This too is higher than the 8.5% calculated above, for the whole world market.

Part of the difference concerns the way the data is collected for the PhRMA Industry Profile. As noted in Table 6, PhRMA's report of "Sales Abroad" excludes sales generated abroad by the foreign divisions of foriegn owned PhRMA members. So too does it exclude R&D abroad by foreign divisions of foriegn owned PhRMA members. It is likely that these exclusions are more important for sales than for R&D. PhRMA only reports $86 billion in "sales abroad" for 2005 -- a year when the global pharmaceutical market was more than $600 billion. On the other hand, the $39.4 billion in reported member R&D is 77% of the estimated $51.3 billion in global R&D, by PhRMA and non-PhRMA members combined. A more inclusive reporting of PhRMA member foriegn sales and R&D would likely have given a much lower rate of R&D spending for PhRMA members, but certainly higher than the 8.5% number for the industry as a whole.

PhRMA Press Release: R&D Investments by America's Pharmaceutical Research Companies Near Record $40 Billion in 2005

Washington, D.C. — New statistics released today show that R&D investments in new medicines by PhRMA's biotechnology and pharmaceutical research member companies reached a record $39.4 billion in 2005 (up from $37 Billion in 2004), according to PhRMA's Annual Member Survey. The increased investment in biomedical R&D in 2005 continues 25 years of strong growth in R&D investments by America's research-based pharmaceutical companies – up from $2 billion in 1980. When factored together, the total investments in biotechnology and pharmaceutical R&D by both PhRMA member companies and non-PhRMA members reached a record $51.3 billion in 2005, according to a Burrill & Company analysis for PhRMA.

"America's research-based biopharmaceutical companies once again lead the world in investing in the hunt for new cures and treatments. It is the most research-intensive industry in America, and we are proud of the longstanding commitment to meeting patient needs shown by PhRMA member companies‘ R&D investments - investments that far exceed those of the international pharmaceutical industry and the National Institutes of Health," said PhRMA president and CEO, Billy Tauzin. "We are working everyday to save lives, end disease and relieve pain. The R&D investment made by PhRMA member companies is one reason that Americans today live longer, healthier and more productive lives. In 2005 there were more than 2000 compounds under development by pharmaceutical companies."

The steady growth of R&D investment continues to support important advances in better medicines and new treatments for patients made by research scientists and physicians. The over $39.4 billion invested in R&D in 2005 represents a 6.5% increase over 2004 expenditures. In 2005, PhRMA member companies invested a record 19.2 percent of domestic sales on U.S. R&D.

The Pharmaceutical Research and Manufacturers of America (PhRMA) represents the country's leading pharmaceutical research and biotechnology companies, which are devoted to inventing medicines that allow patients to live longer, healthier, and more productive lives. PhRMA companies are leading the way in the search for new cures. PhRMA members alone invested an estimated $39.4 billion in 2005 in discovering and developing new medicines. Industry wide research and investment reached a record $51.3 billion in 2005.

Size of trials by status (S or P) - Some 2004 FDA and Parexel data compared

2006-07-14T17:08:00.000-04:00

This note is a follow-up to discussions stimulated by Michael Palmedo's note on 2004 FDA NME drug approvals. In particular, it follows discussions on ip-health by Joe DiMasi and myself on a fairly narrow question -- are clinical trials trials larger for Standard (S) FDA NME drug approvals than for Priority (S) approvals?

The following table reports the size of clinical trials for 5 priority and 8 standard FDA NME drug approvals. The products are the union of those reported by Michael Palmedo for 2004 FDA approvals, and data from Parexel. These are the data that Joe DiMasi referred to in his June 14 post to ip-health.

Drug	Rating	Size, FDA letter	Size, Parexel
Clolar	P	66	138
Lyrica	P	1,508	9,100
Prialt	P	1,434	1,634
Sensipar	P	1,146	2,000
Tarceva	P	1,837	6,000
Apidra	S	2,467	4,093
Cymbalta	S	1,850	6,100
Enablex	S	1,454	8,830
Fosrenol	S	2,357	2,697
Ketek	S	2,016	5,900
Lunesta	S	2,100	2,909
Spiriva	S	2,663	3,168
VESIcare	S	3,027	3,327

Below are the mean and median , for the FDA and Parexel data, reported by (P) and (S) drugs.

	Mean-FDA	Median-FDA	Mean-Parexel	Median-Parexel
Standard Approvals	2,242	2,229	4,628	3,710
Priority Approvals	1,198	1,481	3,774	2,000
Difference	1,044	854	795	1,710
% larger	87%	55%	23%	86%

Two quick points. First, Parexcel reports more patients for every trial. Second, the number of data points is pretty small (5 P and 8 S drugs), so one has be careful about drawing conclusions.

Joe notes that when you look at means from the Parexel data, the trials for Standard approvals (S) are only 23 percent larger than for the Priority products. Joe notes that by comparison, when looking at the FDA data, the mean size of the trials for Standard approvals were 87 percent higher, suggesting a possible bias when looking at FDA data.

However, I would add, that when looking at the MEDIANS of the Parexel data (for the 13 products), the differences between the size of standard and priority drug trials are quite pronounced. For the Parexel data, the median size of trials for the Standard drugs is 86 percent larger than the size of the median trial for the priority drugs -- actually higher than the 55 percent difference (in medians) that Michael reported, looking at FDA data for the same drugs.

Ultimately, this is too small a sample to say that much. We'll take a look at a larger sample, and report that. But before doing so, it is also interesting to look at the differences between the FDA data and the Parexel data. Parexcel always reported more patients in the trials than did Palemedo, looking at the FDA approval letters. In some cases, much more. Pfizer's Lyrica, for example, was reported by Palmedo as 1,508, and Parexcel as 9,100. Enablex, reported by Palmedo as 1,454, is reported by Parexel is 8,830. In looking further at this issue, we will also look closer on these differences. One person suggested the initial FDA approvals may not report parallel trials in the works for other indications (Lyrica is now approved for 3 indications, for example). Another comment is that some of the "trials" reported by Parexel may be of lesser scientific importance (possibly having value for marketing purposes), or may be un-reported by the FDA other reasons. People may speculate or offer some evidence on these points in the comments to this note.

This issue has generated some debate with Joe DiMasi, because we have questioned his repeated finding (in 1991 and 2001/2003) that priority products are more costly than standard drugs, at least in terms of the important area of clinical trials. Our reviews of the data, on a couple of different occasions, have suggested that priority drugs consistently have smaller clinical trials than do standard approvals (findings borne out here again). If priority drugs have smaller trials and quicker approvals, they would seem to be less expensive, all other things being equal. Joe's comments have been informative and constructive, and we will revisit the issue, incorporating both a broader analysis of the Parexel data, and a closer look at the differences between the FDA and Parexel data, as well as other evidence on this topic.

Finally, we remind people that neither the Parexel nor the earlier (2001, 2001/2003) DiMasi et all data claim to present data for all drug approvals. Most importantly, DiMasi has said that "It should also be noted that our study was based on the R&D experiences of major traditional pharmaceutical firms," in contrast to "small biotech and niche pharmaceutical firms." This is not a criticism of the DiMasi studies, as any analysis is going to be limited in some way. It is rather a reminder that some of the estimates provided by DiMasi are based upon particular samples that may not be representative of other drug development efforts. Indeed, DiMasi's 2001/2003 paper, which is now so widely quoted, drew important conclusions about relative investments in priority and non-priority drugs from just 10 priority products and 14 standard products (DiMasi 2003 page 172). His estimates of out-of-pocket outlays were also more than twice as high as the previous PERI study involving 117 drug development projects (Project Management in Pharmaceutical Industry: A survey of Perceived Success Factors 1995-1996, PERI), raising some questions about the nature of the sample he studied. To deepen the understanding of these issues, people have to look at more data, and do some modeling of their own.

Bayh Dole Rights, Size of Clinical Trials, 2004 Approvals.

2006-07-10T15:59:00.000-04:00

CPTech has looked at the patents for New Molecular Entities (NMEs) that came to the market in 2004.

Excluding antibiotics, which do not have Bayh-Dole listings in their patents, the FDA approved 19 NMEs in 2004. Nine of these received priority status for approval, meaning they were found to have significant therapeutic gain over existing medicines. The remaining 10 NMEs were given standard approvals.

For the products for which data was available, I looked up the number of patients cited by the FDA in approving the medicines. (I had to exclude three of the priority NMEs approved in 2004 for which the label did not include the number of patients) The average (mean) number of patients in the clinical trials on which the FDA approvals were based was 1073 for priority drugs and 1840 for standard drugs. The median numbers of patients in these clinical trials were 1290 for the priority drugs and 2058 for the standard drugs. These figures are considerably lower than the average size of clinical trials used by DiMasi in his often-cited research on the cost of drug development – 5,303 patients.

The Orange Book lists 45 patents on the 19 NMEs. Three of these patents include clauses citing government funding and subsequent Bayh-Dole rights to use or license the patent. These three patents cover two of the nine drugs which received priority approval – two patents for Clolar (a leukemia drug sold by Genzyme) and one for Lyrica (a diabetes drug sold by Pfizer).

A spreadsheet with the drugs, patents, and size of trials is online here:
http://www.cptech.org/ip/health/rnd/2004nmes-07102006.xls

Mike Palmedo

Some Resources on Innovation Prizes and Related Mechanisms

2006-07-10T12:36:00.000-04:00

Thanks very much to Jamie for initiating this discussion and for including me.

I am going to post several links to resourcesf or key papers in the field, and I hope that they are useful. Maybe it would be possible to create a static page with these and other useful resources.

Consumer Project on Technology's page on H.R. 417 The Medical Innovation Prize Fund Act including a link to the text of the act
http://www.cptech.org/ip/health/hr417/

An Efficient Reward System for Pharmaceutical Innovation (Aidan Hollis)
http://econ.ucalgary.ca/fac-files/ah/drugprizes.pdf

Patent Buyouts: A Mechanism for Encouraging Innovation
(Michael Kremer, The Quarterly Journal of Economics, Vol. 113, No. 4. (Nov., 1998), pp. 1137-1167. Link requires JSTOR access.)
http://links.jstor.org/sici?sici=0033-5533%28199811%29113%3A4%3C1137%3APBAMFE%3E2.0.CO%3B2-D

Rewards versus Intellectual Property Rights
(Steven Shavell and Tanguy Van Ypersele)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=145292
http://www.law.harvard.edu/faculty/shavell/pdf/44_J_Law_Econ_525.pdf

CPTech comments on the APC/AMC approaches

2006-07-10T12:02:00.000-04:00

The debates over the various version of the Advanced Purchase Commitment (APC)/Advanced Marketing Commitments (AMC) proposals have a fairly long history (since the late 90s). Most of the people in the debate are sincerely motivated to address extremely important gaps in R&D for persons living in poverty in developing countries. There were, particularly in the beginning, ideological aspects of the debate, as some proponents of the APC/AMC approaches presented the issue in such as way as to understate the importance of public sector directed medical research and overstate the efficiency and benefits of the patent system -- which they claimed, "worked fine" so long as people had sufficient purchasing power, which the APC/AMC sought to remedy. (Views emphasized by the IFPMA, for example). This led to a backlash against the proposals by persons who saw other flaws in the patent system, or wanted to defend the importance of "push" funding by governments and PPPs, and to call attention to the potential "crowding out" problems if massive funding went into APC/AMC proposals.

There have also been a host of practical issues raised about the proposals, including the specifications of the qualifying products, rewards for follow-on R&D, and many other issues.

CPTech has viewed the APC/AMC proposals as having the most appeal in the context of vaccines or other products where it is particularly useful to tie the incentive to innovate to practical plans to insure that patients actually have access to and benefit from the new products. Our concerns about the APC/AMC proposals are several, including those about the crowding out of other R&D funding possibilities, but more importantly, we question whether or not the fundamental approach of structuring commitments to buy products that meet particular standards is the best approach.

Like the proponents of the APC/AMC proposals, we are convinced that some significant public funding should be devoted to so called "pull" mechanisms, that reward successful drug developers. In terms of the R&D incentive aspects of the proposals, we would reduce the complexity of the AMC proposal by replacing the purchase commitments with large prize fund like rewards that were tied to positive health care outcomes. We proposed such systems in 2002, in the context of a broader separation of the markets for innovation and products. Others, particularly Aidan Hollis, have elaborated on how this might be done in the context of neglected diseases.

The APC/AMC proposals essentially link together the R&D incentives with the delivery of products to patients. We would prefer if these were not tied together, and rather that developers would be rewarded regardless of who markets, sells or delivers products. We (as others) would also prefer that rewards be tied more generally to health outcomes, rather than specific product standards, so that drug developers would have more flexible targets -- the more general, the better, in our view. Perhaps this could be also tied to the voluntary licensing of patents to a patent pool that faciliated generic competition for products.

That said, we do appreciate and agree with the point made by APC/AMC proponents that it is important to fund also the systems that deliver products to patients. We would not link this so closely in practice to the R&D issue, however.

Jamie

Here are a few links for some background documents on the G8 discussions on Advanced Marketing Commitments

Proponents and explainers of the AMC proposals

http://www.dfid.gov.uk/consultations/amc-report-tremonti.pdf
Advanced Market Commitments for vaccines, A new tool in the fight against disease and poverty, Report to the G8 Finance Ministers, Giulio Tremonti, Minister of the Economy and Finance, Italy, December 2, 2005

http://www.dfid.gov.uk/pubs/files/amc-consultation-report.pdf
Advance Market Commitments, Results Of UK Consultation, February 2006

http://www.cgdev.org/section/initiatives/_active/vaccinedevelopment/overview
Making Markets for Vaccines (one of many of the CGDev papers on this)

http://www.ifpma.org/News/NewsReleaseDetail.aspx?nID=4762
Advanced Market Commitment (AMC) Proposal an Important Step in Right Direction to Develop & Provide Access to New Vaccines, IFPMA, Geneva, Switzerland, 4/24/2006

Critics of AMC approach

http://www.slate.com/id/2133355/?nav=fo
Run-AMC: The latest idea in vaccine funding won't cure AIDS and malaria.
By David Dobbs, Dec. 29, 2005, which makes refers to:

http://www.economics.ox.ac.uk/members/andrew.farlow/CIPIH1May2005.pdf
Concerns Regarding the Center for Global Development Report, "Making Markets for Vaccines," Submission to the CIPIH, 29 April 2005. Andrew, W.K. Farlow, Donald, W. Light, Richard, T, Mahoney, Roy Widdus.

AMCs and the G8

2006-07-09T22:24:00.000-04:00

The latest news on advance market commitments is that it not clear whether the Heads of State will announce a pilot program The Wall Street Journal reports that it wider politics may be an obstacle. If a pilot program is not agreed at St Petersburg, it is possible that the idea may be taken forward by a coalition of interested governments outside the G8 process.

AMC mention in July 10 Pre Summit Statement by G8 Finance Ministers

2006-07-09T20:32:00.000-04:00

This is the mention of the Advance Market Commitments for vaccines in the July 10 pre-summit statement by G8 Finance Ministers:

"We thank the World Bank and GAVI for their technical work on Advance Market Commitments for vaccines and look forward to a successful launch of the AMC pilot project by the end of this year."

http://www.fin.gc.ca/activty/g7/g8100606_e.html

June 10, 2006 Pre Summit Statement by G8 Finance Ministers

We met and discussed today a number of global economic issues in preparation for the annual Summit of G8 Heads of State and Government in St. Petersburg. We also had productive discussions with colleagues from Australia, Brazil, the People's Republic of China, India, the Republic of Korea and Nigeria.

[snip]

5. We re-iterate that the risk of an avian flu pandemic requires preparation through facilitating cooperation across countries in drafting contingency plans, including for the financial sector. We appreciate the work undertaken by the IMF in promoting the common elements of business continuity planning and encourage further efforts in helping countries elaborate their own plans. We take note of the progress on innovative financing mechanisms. We thank the World Bank and GAVI for their technical work on Advance Market Commitments for vaccines and look forward to a successful launch of the AMC pilot project by the end of this year. We also call for mobilization of additional support to close the financing gap for polio eradication activities.

Simulating prize fund rewards

2006-07-08T20:05:00.000-04:00

At a meeting last year at Columbia, Barry Nalebuff suggested we consider testing the prize fund approach by simulating payoffs, beginning with past drug approvals, to look at how a particular system might have worked, given the drugs that were approved. We intend to do some of this.

Data
Data on drug approvals is easy to get. Excellent data exists on usage -- privately collected and owned by IMS. But IMS data is very expensive, even for older data. We might use data from medicaid outlays or some other public sorce, to get a sense of market shares (as measured by units), as well as relative prices of products introduced in a given year or time period.

The main point of this exercise would be to see how differnent approaches, such as those proposed by Aidan (directly related to QALYs), as well as others (such as this) might work.

Any suggestions regarding data or approach are appreciated.

Incentive constituency, surrogate outcomes

2006-07-08T12:41:00.000-04:00

Hi All

Jamie, thanks for the opportunity to be involved in this. Here are some initial thoughts, ranging from nuts and bolts to broad canvas ideas. (1) Changes such as those proposed here to the R&D incentives system require a founding constituency, a sector of champions with an appeal to policy makers. The legislation could facilitate involvement of corporate (multinational) non-profits in this area through tax incentives etc. (2) The prize fund system might reward business plans as well as outcomes in terms of QALYS. (3) Prize gatherers and seekers will probably push for outcomes to involve surrogate markers (decreased viral load, improved white cell count) rather than QALYS on the grounds that its easier to get objective data rapidly. (4) Who will organise the ground rules and funding of the outcome clinical trials? (5) Industry is using restriction in the experimental use exemption (Madey) and grant schemes pushing researchers into linkage projects, to limit the capacity for independent public-funded research to gain patents and become self-sustaining. Perhaps a scheme for private-public sharing of patents would be a good initial step. That is, we may need to think of the logic steps to achieve the full Prize Fund, rather than ask for it all straightaway. (6) At the moment governments allocate R&D funds according to national benefit priorities, one of the few areas where they can continue to discriminate against multinationals working in a specific sector of technology (avoiding TRIPS problems) how to convince them to globalise this? (7) Why not fund the prize from a Tobin tax type tithe on global financial transactions...making the global money markets assist the global burden of disease would be more appealing, but may require (8) removing the anacronistic system of national governance through (industry-targeted and captured) elected representatives, rather than voluntarily registered citizen electronic voting on each important measure

Determining rewards in a prize fund

2006-07-08T10:41:00.000-04:00

James Love has suggested, in his post yesterday, that rewards should not be simple linear multiples of QALYs. I appreciate his points, but think that there are some good reasons why simple linear multiples make sense.

1. Simpler rules are better. Jamie suggests -- and I am not sure how seriously -- a rule such as

Reward = a + b * ( QALYs ^ k ) ,where k < 1.

I don't like that kind of rule because I don't think that putting exponents into regulations is all that great an idea. People don't understand what they are getting. Every economist knows that many contracts and rules could be (theoretically) improved if only they were more sophisticated. But people continue to use simple contracts and rules in many situations, presumably because they value simplicity and clarity.

2. What I have suggested is that a drug's share of the reward fund should be equal to the share of the QALYs generated by that drug. Note that there are two things which increase QALYs: the number of people using the drug, and the average benefit per user. Under Jamie's suggested rule, the reward does not proportionally increase with the benefit. This would mean that a drug which offers half the benefit of another drug, but to the same number of people, would obtain more than half the reward. (Under a simple linear reward, it would get exactly half.) What rationale would there be for this? Jamie's rule could also lead to the following kind of behavior: create one new medicine with two equivalent forms. Market it as two medicines, and increase the reward.

3. I think, if there is to be any adjustment, it should be for drugs which treat diseases and conditions which are relatively rare. I think an appealing, and straightforward solution to the rare disease problem, is simply to create a supplementary reward which is only available to drugs treating rare diseases and conditions. Similarly, a fund could be created for drugs which treat the diseases of poverty, such as visceral leishmaniasis.

4. Adding flexibility is attractive, but also dangerous. The problem with flexibility is that it offers more parameters for games-playing by firms. The greater the discretion of the rewards authority, the more difficult the set of problems it faces, and the more rent-seeking effort there will be. If the only thing that is rewarded is creating measurable health benefits, then firms will focus on creating measurable health benefits. (And who can argue against that?) Adding flexibility can in principle allow the rewards authority to do better: but in practice it creates a whole new set of incentives for firms, many of which may not be desirable.

However, I would certainly agree that HR417 is right in not specifying a particular reward mechanism; and I think that the question of an appropriate reward mechanism is still very open.

Aidan Hollis

Modeling prize fund rewards

2006-07-07T08:14:00.000-04:00

As a general issue, I an not too keen on prize fund approaches for medicines that focus too narrowly on a specific disease or medical outcome. I think that a broader set of targets and more flexability in terms of earning participation in the rewards is quite important, given the stochastic nature of the R&D process. This note looks at a different issue, the way you structure rewards in different cases.

Aidan Hollis has emphasized the potential role of Quality Adjusted Life Years (QALYs), as a basis for rewards in a prize fund system. I have suggested several times that rewards should not be simple linear multiples of QALYs, as the costs of drug development are insensitive to population size, and high income societies also have strong willingness to pay for inventions that serve small client populations. There are other issues that are important also, such as the importance of developing medicines like antibiotics or medicines used in stockpiles for emergencies, where immediate usage is not the objective, but the medicine is desired as a back-up in cases of resistance, or for emergency use or other contingencies. There are separate issues associated with development of medicines for certain global health problems, like malaria, Chagas disease or visceral leishmaniasis.

These are among the reasons that HR 417 does not mandate a simple reward = QALY system, leaving the actual reward structure up to the managers of the Fund, with a flexiable legal structure that allows some learning by doing.

In thinking about the structure of rewards from a fixed prize fund, such as the one envisioned by the 2005 proposal for the Medical Innovation Prize Fund (HR 417), one can propose various ways of modeling the rewards.

If the rewards are to be based upon the incremental benefits of new (or improved) products, we have to identify the things we value.

One thing we want are improved health outcomes, as measures for example by QALYs. And while we certainly value more QALYs than less QALYs, it is not necessarily optimal to have a linear reward structure. One can imagine, for example, that the rewards for QALYs should follow a simple decay function, such as:

Reward = a + b * ( QALYs ^ k ) ,

where k (less than 1) is the decay parameter, and a and b are parameters that reflect the fixed and variable value of new products, both determined within the context of a budget constraint.

Products with larger populations (or greater benefits per patient) would receive more, but less on the margin. It could or could not also be combined with the notions of set-asides for orphan (rare) diseases (or other priorities) that is now part of HR 417.

One can also imagine different values for the parameter "a," depending upon the nature of the new product. For example -- the degree to which the new product itself represents an improvement over existing medicines, regardless of the number of patients, such as the current FDA S and P catagories, or even the catagory for products used to treat severe illnesses.

This is fairly simple, but I present it as an initial illustration of how one might go beyone the reward = QALY approach. I'll return to this later, with a number of other approaches, after a bit deeper look at different ways of modeling efficient reward systems.

In the case of antibiotics that are best used in case of failures of first line regimes, it seems important to think about rewards not tied to current usage of the new products. Use of the current stock of antibiotics can be modeled as a depletion of a resource, and the new antibiotics as replenishment.

In the case of a medicine to be used for a stockpile for a low probability event, such as a bird flu pandemic, SARS, or a bio-terrorism attack, one could imagine different approaches for medicines that have another use, such as Tamiflu, and medicines that would only be used for the low probability event (a vaccine for Bird Flu or Anthrax). I have suggested elsewhere that in the first case, the reward for the stockpiled products should be contingent upon actual use. But in the second case, methods of valuing options would seem more appropriate.