Beyond the Ivory Tower: Making Practical Choices

Stephen M. MaurerGoldman School of Public Policy & Berkeley Law School

March 16, 2009

Introduction

Advocate’s View: “Everything’s Great (and We Can Fix It)”

This Course (Agnostic)’s View: “Whatever Costs Less”

Today’s Lecture:Illustrating the “Sharp Pencil Approach” A Work – and Hopefully a Conversation –

In Progress

Roadmap

Prizes vs. PPPsOverpayment Under E2E PrizeOverpayment Under PPPs*

Designing a PaYG System

PPPs, Access, and Leveraging Resources

*PPPs can offer prizes!

Will Sponsors Overpay?

Usual Viewpoint: Reward Amounts “Should be More Transparent.”

This Lecture: Smart People Working Very, Very Hard!

Prize Overpayments

Naïve Calculation: DiMasi et al.

$803m ± $115m 14% Average Overpayment

Prize Overpayments

DiMasi et al., “The Price of Innovation,” Journal of Health Economics 22: 151-185 (2003)

A Better Calculation

R&D Cost = Net Revenue – Marketing CostsWhat are the error bars?

Prize Overpayments

Berndt et al., “Advanced Markets for a Malaria Vaccine: Estimating Costs and Effectiveness” (2005)

Prize Overpayments

What is Net Revenue?$2.84bn

Limited Data

Revenue is Not a Single Number…

Uncertainty ~ 10%??Circularity?

Grabowski, et al. “Returns on Research and Development for 1990s New Drug Introductions.” Pharmacoeconomics 20 Supp. 3:11-29 (2002)

Prize Overpayments

R&D Cost = Net Revenue – Marketing Costs

What is Marketing Cost?Published Estimates: 15 - 36% R&D Expenditure is $1.8bn - $2.4bn. Implied overpayment = 14%.

What Number Do Berndt et al. use?

Prize Overpayments

10%Rationale: Drug companies will spend less on promotion (including free samples).

$2.56bn18% OverpaymentWhat number do Berndt et al. use?

Prize Overpayments

$3.0bn.Rationale: “[A] malaria vaccine may be more difficult to Develop than the typical new chemical entity.”

$25% OverpaymentFolklore: $3.3bn.

39% Overpayment

Prize Overpayments

Caveats:

Assumes Past R&D CostsTied to Rich Nation R&D EffortWhat Does “Overpayment” Mean? Finessing Our Ignorance?

Prize Overpayments

Caveats: Assumes Past R&D Costs

Data are often 15 years old.

Real drug discovery costs have risen 7-8%/year since 1970s.

And: Clinical grew from 6.1% in 1970s to11.8% in the 1980s.

What does Pharma believe today?

Prize Overpayments

Caveats: Tied to Rich Nation R&D Effort

Berndt et al.: “Would need to pay out $2.56bn to match the average revenue brought in by NCEs.”

Global Alliance: TB vaccine would cost $115 - $240m.

8% of Berndt et al. Estimate!!!Global Alliance for TB Drug Development: Economics of TB Drug Development (2001) http://www.tballiance.org/downloads/publications/TBA_Economics_Report.pdf

Prize Overpayments

Caveats: Tied to Rich Nation R&D EffortPPP estimates show “enormous variability” in input costs, should be approached with “great caution.”

Early estimates are being revised…

Towse et al., “Estimates of the Medium Term Financial Resource Needs for Development of Pharmaceuticals to Combat ‘Neglected Diseases’” in Widdus and White, “Combating Diseases Associated With Poverty” (Initiative on Public-Private Partnerships for Health: 2004)

Prize Overpayments

Caveats: What Does Overpayment Mean?

Higher Rewards Higher EffortNot as Bad as “Ordinary” WasteBut: Diminishing returns & “Me-Too” drugs.

DownsideLosing An “Extra” Drug Program

For 25% overpayment “Buy 3 get one free…”

Prize Overpayments

Caveats: Finessing Our Ignorance

Hollis: Racing for Shares in a Pooled Reward(QALYs Reduced Benefits?)

Adjusting the Prize Over Time?Reward Can’t Grow Faster than Internal

Rate of Return (11%).Assume Historic 7% Rate…Assume 11.8% Rate…

Can’t go below rich nation reward as long as pharma is internally funded!

PPP Overpayments

Basic Picture: Prizes + Competitive Bidding =Unambiguous Improvement

PPP Overpayments

Purchasing Power:Enforcing the Best PriceExample: Compound Development

15-20% Accounting Profits in Early 1990sCut by ~ 5% in late 1990sTypical of outsourced costs?

Counterexamples: Manufacturing in Asia is 5% cheaper…Does Pharma Know How to Do Trials in

LDCs?A much smaller penalty than prizes!

But: Are PPPs “less efficient…?”

PPP Overpayments

Competence and Adverse Selection?Evidence (1)

Virtual Pharmas

Evidence (2) Pasteur Institute, Fort Detrick, etc. Probes both efficiency and reduced R&D

intensity.

Are Foundations Good Shareholders?The Big Unknown: Foundation cultureDesign Issues

Multiple Missions, Lack of Competition.

Designing a PaYGSystem

PaYG includes Prizes!Where Do Prizes Make Sense?

1. Setting R&D Priorities?Does Pharma Know More Than the Sponsor…

About Disease Burden?About WHO Approvals/Purchasing

Procedures? About Uptake?

Designing PaYG

Designing PaYG

2. Pre-Clinical Drug DiscoveryIdeas Are Cheap

A Small Community?Widely Dispersed Knowledge?Proprietary Data Inside Pharma?

Early Stage Developments ~25% of Total Costs.Best Efforts Prizes?

Designing PaYG

3. Clinical Trials75% of CostsWhat Does Pharma Know About

Developing World Trials? Is The “Near-Term” Prize Inverted?

4. Approvals and DistributionSponsors Know More than Pharma…

Adding Patents

“PPPs have increased drug development”

- Suerie Moon

Adding Patents

How Much Will the Private Partner Invest?

Adding Patents

Estimating the Prize Amount (Revisited)- Amount of Required Reward- Future Cost

Outside LDCsTo Gates, Governments

- Do PPPs Care?

Overpayment Revisited- Extra Effort Crowding Out

Adding Patents

Side Issue: Silver Bullet Technologies- If Rich Nations Didn’t Invent This Technology …

Nanotechnology?

- Counterexample: AmyrisRich nations don’t make medicines from bark…

Adding Patents

Beyond the Ivory Tower: Making Practical Choices

Stephen M. MaurerGoldman School of Public Policy & Berkeley Law School

March 16, 2009