Transcript PowerPoint-Präsentation

Patents and the pharmaceutical
industry
Economics of Health Care
April 1, 2004
Group 3: Bernadette, Emmanuel, Inger, Pythagoras
1.
What sort of market failure are patents intended to address?
2.
With reference to the British pharmaceutical industry, explain
positive and negative outcomes of patents
3.
Critically assess the role of Government in regulating the
industry.
Knowledge-based industries
A few characteristics:
Rely on the production of ideas (e.g. via innovation, R&D)

Although some discoveries are by chance; most advances
require deliberate allocation of resources to R&D

Associated with high fixed costs

Intangible assets

An idea or discovery can (or need) only be „produced“
once
Pharmaceuticals: a knowledgebased industry?
 Average R&D cost of a new medicine up to launch = $802 million
(DiMasi et al, Tufts Center for the Study of Drug Development, 2001)
Market failure in knowledge-based
industries
Consider knowledge as a good:
1. Once an idea has been invented, the marginal cost of using it is zero
2. Once an idea has been invented, there is a zero marginal cost to
producing it (again)
 Knowledge or ideas can be viewed as a nonexcludable and
nonrival goods (public good)
 Free-rider problem
How do we exclude other from using our ideas?
Purpose of a patent
 Patents provide exclusive rights to marketing and
production of a drug for a period of 20 years (although
the effective life is much shorter, approx 10 years)
 Patents act as a barrier to prevent imitators from freeriding
 In economic terms, prevents competition from driving
the price down to marginal cost
Effect of patents
Positive
Not so positive
 Correct the free-rider problem
associated with public good excluding others from using
knowledge without paying
 Creates monopoly position –
pricing, potential for abuse
 Incentivise innovation –
investment of private capital,
development of drugs that
otherwise could or would not have
been produced
 Stimulating or stunting? Ideas
are carefully guarded –
publication and sharing of
research is limited or postponed
– science for the pursuit of
higher knowledge versus higher
profits
Do patents stunt or stimulate
innovation?
Heller and Eisenberg and the National Research Council have
suggested, however, that recent policies and practices associated
with the granting, assertion, and licensing of patents on research
tools may now be undercutting the stimulative effect of patents on
drugs and related biomedical discoveries. … [They] argue that
biomedical innovation has become susceptible to what they call a
“tragedy of the anticommons,” which can emerge when there are
numerous property right claims to separate building blocks for some
product or line of research. When these property rights are held by
numerous claimants (especially if they are from different kinds of
institutions), the negotiations necessary to their combination may fail,
quashing the pursuit of otherwise promising lines of research or
product development.
Cohen W.M. and Merrill S.A. (Editors), Committee on Intellectual Property Rights in the Knowledge-Based Economy,
National Research Council Patents in the Knowledge-Based Economy (2003). National Academies Press,
Washington D.C.
The role of government in
regulating the industry
What you can protect
Patent system
How much you can charge
Pharmaceutical Price
Regulation Scheme (PPRS,
DOH)
Who can consume
NHS (as a monopsonist)
NICE (as the fourth hurdle)
What you can manufacture and sell
(safety, efficacy, quality)
Medicines and Healthcare
Products Regulatory Agency
(MHRA)
Regulating patents
 Consensus that patents are a necessary and effective
way of protecting IP and incentivising R&D but:



How long should they be granted for?
What about markets where patents are not
recognised? Can they be imposed?
Potential for abuse – the never-ending patent
(Wall Street Journal, June 6, 2002: „Prilosec's Maker Switches Users To Nexium,
Thwarting Generics”)
Regulating pricing:
in favour of pricing controls
 Are pharmaceutical companies abusing their monopoly
position?



Pharmaceuticals are the fastest growing component of health
care costs, increasing at a rate of about 15% per year in the
US
Pharmaceutical industry consistently among the most
profitable (Fortune 500 in 2001: 18.5% return on revenues)
Massive advertising and marketing budgets
Regulating pricing:
against pricing controls
 Price controls could contradict the purpose and incentives
associated with granting patents:
“By consistently failing to reflect the value of innovative drugs,
controlled prices would signal to manufacturers of future innovative
therapies that they would not be able to charge prices that represent
the contributions of their drugs.“
 Does not fully take into account risk associated with bringing a
drug to market:
“There is no objective basis for price ceilings, largely because
research costs are borne long before the economic and medical
benefits of a resaerch stream can be known, a fact that poses
intractable difficulties in such matters as taking reasonable account of
the risks of research and development.“
(John Calfee on behalf of the PhRMA, Ann Int Med (2001); 134: 1061)
Regulating pricing: how?
 How do pharmaceutical firms determine prices?
 What form of price regulation is appropriate?
 Should we regulate profits or prices?
 So far, no company has ever exceeded the (upper)
PPRS threshold on profits – is this an indication that
the scheme works or does not work?
Regulating consumption
 The NHS is the main purchaser of drugs – potential for
monopsony power

Lack of coordination, decentralised decision making

Role of the doctor or pharmacist as the decision
maker versus making the options available

Caution in using monopsony power given that price
controls are in place
Regulating consupmtion via NICE
 „The role of NICE is to provide patients, health
professionals and the public with authoritative, robust
and reliable guidance on current best practice.“
 Regulating cost-effectiveness (NICE) vs effectiveness
(MHRA)
 Cost-effectiveness as a signal of value for money
But to what extent are NICE‘s decisions and guidelines
turned into practice?
Example: NICE on Relenza
 NICE guidance issued October 1999:
“On the basis of its findings and conclusions, the
Institute [NICE] advises that health professionals
should not prescribe zanamivir (Relenza) during the
1999/2000 influenza season.”
Glaxo’s response
 In a letter to Health Secretary Frank Dobson, Glaxo’s chairman
(Sir Richard Sykes) told the Government that a decision to ban
the use of Relenza would damage the entire British
pharmaceutical industry. He has also hinted that Glaxo Wellcome
might quit the UK, claiming that the NICE decision "calls into
question the suitability of the UK as a base for multinational
pharmaceutical operations".
 Ministers were warned that leading drugs companies will consider
pulling out of Britain if the government adopts an "antagonistic"
attitude towards the pharmaceutical industry.
NICE on Relenza revisited
 November 2000 (1 year later):


NICE reverses its decision after ‘new data’ is
presented
Relenza is recommended for patients ‘at risk’, e.g.
over age 65, people with diabetes and immunocompromised
Concluding remarks
We have looked at government regulation in terms of:
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Patents
Pricing (PPRS)
Power of the NHS as a monopsonist
Prescribing guidelines (NICE)
The government seems is doing a dance with the pharmaceutical
industry, acutely sensitive of the danger of stepping on their toes
or crossing that line that will cause industry to pack its bags and
leave. As long as economic rent continues to be generated by the
pharmaceutical industry in the UK, this will continue to exert
downward pressure on government-led attempts to effectively
regulate the industry.
Resources:
Patent granting bodies
UK Patent Office
http://www.patent.gov.uk/
European Patent Office
http://www.european-patentoffice.org/index.en.php
World Intellectual Property
Organisation
http://www.wipo.int/
US Patent and Trademark Office
http://www.uspto.gov/
Resources:
Regulatory bodies in the UK
Pharmaeutical Price Regulation Scheme
(PPRS) of the Department of Health
http://www.dh.gov.uk
National Institutes of Clinical Excellence
(NICE)
http://www.nice.org.uk
Medicines and Healthcare Products
Regulatory Agency (MHRA)
http://www.mhra.gov.uk
Association of the British Pharmaceutical http://www.abpi.org.uk
Industry (ABPI) – Code of Practice
(industry association, i.e. self-regulation,
non-government)