Plos Blogs, October 19, 2015. By James Love, International intellectual property rights analyst, Knowledge Ecology International
Today we are confronted with three related set of issues dealing with the pricing of new drugs, vaccines and medical devices. There are cases where older drugs, out of patent protection, are subject to price gouging, due to a lack of competition in the local market. Prices for new drugs, or new uses of drugs, are exploding, with no obvious ceiling or limit. And, trade negotiators, pushed by the United States and the European Union, are advocating a series of binding international norms that collectively make drug, vaccine and medical devices monopolies stronger, and products more expensive. What to do?
The problem of price gouging for unpatented drugs is largely a consequence of regulatory barriers to trade. Turing’s aggressive increase in the price of Daraprim to $750 per pill in the United States occurred when several generic versions available outside the United States are available for less than $1 per pill, including from markets subject to regulatory safeguards comparable to those of the United States. The situation is reminiscent of a shortage of treatment for Fabry disease, a rare genetic disorder of lipid metabolism, when the drug Fabrazyme was available from a single company, Genzyme/Sanofi, in the United States market. As there was a second supplier with an acceptable substitute, the U.S. Food and Drug Administration indicated to the National Institutes of Health (NIH) that it was possible to permit the import and sale of the unregistered foreign product into the United States, by exercising enforcement discretion. Whether or not this measure is legally possible under current U.S. statutes, it should be, to address the issue of domestic shortages like those involving Fabrazyme or the cancer drug Doxil,  or cases like Daraprim, which involve price gouging from a sole source supplier of a generic product.
More generally, the global patchwork of drug regulation can be improved by reducing barriers to marketing products that are available from suppliers in countries that have sufficiently rigorous regulatory standards to protect consumers. One example of this is in the area of HIV drugs, where systems of “pre-qualification” of generic drugs by the World Health Organization or the U.S. FDA have been quite important in driving prices down to remarkably affordable levels.
The largest immediate challenge on drug pricing is to respond to the dramatic price increases in medicines for cancer and other severe illnesses. The most common comment is to ask governments to negotiate drug price, including for Medicare, or to order rebates on prices. When price negotiations are based upon threats to withhold reimbursements, narrow permitted uses on formularies or increase patient co-payments for expensive drugs, the patients are effectively hostages in the negotiation, and often suffer. In the UK, several very important breast cancer drugs will not be reimbursed beginning in November, because prices are too high.
The monopoly should be at risk, rather than the patients, when prices are too high. Intellectual property rights should be seen as a privilege, not a right, and the legal monopoly should be ended if prices are excessive.
What type of pricing systems make sense for new drugs?
Certainly one would want as much transparency and evidence as possible of R&D costs and risks, as well as the benefits that products provide. An ideal pricing system would consider not only benefits, and not only R&D costs, but some combination of both, and also realistic budget constraints. For the U.S. Veterans Health Administration, Senator Sanders has proposed a system that allows patents to be overridden when prices are excessive, and compensation to patent holders to be constrained by the Department of Veterans Affairs budget for drug purchases. This approach could be scaled for Medicare.
R&D costs and health benefits from products are both important parameters that are at least implicit in most pricing models. Making their joint role more explicit will be helpful. The point of a good drug pricing model is to direct the premiums (price over manufacturing costs) in the best way to stimulate the R&D that is desired, within realistic budgets, without distorting decisions by physicians to prescribe medicines in the best interests of the patient.
That was the point in Senator Sander’s medical innovation prize fund legislation, first proposed in 2005, but it can also be implemented as a set of prices that meet budget constraints.
Pharmaceutical Drug Prices, Intellectual Property Rights and TPP
Trade policy often is described as a tool to promote “free trade,” but in the area of pharmaceutical drugs and other medical technologies, the result is often the opposite. The United States and the European Union are among the most aggressive in pushing for provisions in trade agreements that expand and extend intellectual property rights and legal monopolies for new medical products. In the recent Trans Pacific Partnership (TPP) negotiation, the United States acted as an advocate for the large drug companies represented by the trade associations PhRMA and BIO on a wide range of issues, pushing for new global standards on the granting of patents, extensions of patent terms, controversial exclusive rights on the data that establishes a drug is safe and effective, aggressive standards for damages for patent infringement, giving drug companies the right to challenge government decisions on drug reimbursements, and other measures, all designed to expand and extend drug monopolies and raise drug prices.
While PhRMA companies did not get everything they asked for, the overall result will be higher drug prices everywhere, and particularly in lower income countries where the new standards will have the largest and most harmful impact. These policies are partly justified by the argument that high drug prices are good for U.S. and EU exporters of medicines, but more generally on the grounds that higher and higher drug prices stimulate more and more R&D.
While it is true that high drug prices stimulate R&D, the modest percentage of sale reinvested into R&D makes this a costly endeavor. PhRMA’s 2015 survey of its members reported $51.223 billion in global R&D outlays, a significant number, but lower than the previous year, and just 4.83 percent of the $1.0571 trillion IMS estimated for the total global pharmaceutical market. In a previous industry study, PhRMA member R&D represented 70 to 78 percent of all private sector biomedical R&D outlays. In recent years, the combined private sector outlays on R&D have been less than 8 percent of global sales and trending downwards as sales have increased faster than R&D outlays.
High prices for drugs are an expensive burden on everyone, and most of all in the United States, where prices and marketing costs are higher than anywhere else. The companies located in the United States share the burden of paying for the high prices on drugs, and this makes the goods and services from the United States less competitive in world markets.
Many want a different trade policy that promotes R&D investments, but delinks the funding of R&D from high drug prices. In this approach, trade agreements place obligations on governments to support R&D funding, but allow for flexible approaches, including by expanding public sector R&D funding (think NIH grants), R&D subsidies (think Orphan Drug tax credits), or funding robust innovation inducement prizes. By implementing delinkage at the global level, national governments will have more freedom and new incentives to reform the way R&D is funded and avoid pitting consumer protection and fairness against innovation objectives.
If the United States and other countries want to control high drug prices, they can, by implementing policies that eliminate monopolies when prices are excessive, by increasing more efficient global markets for quality assured generic medicines, and by changing and transforming trade policy, so the emphasis is on funding R&D rather than raising drug prices.
To implement both the short term incremental reforms or the more transformative delinkage approaches, policymakers need to talk openly about budget constraints, and find realistic and practical ways to make access more universal, rationale and optimal for patients. Ultimately, society needs to transition to a system that funds medical R&D as a public good. The movement to delink R&D costs from product prices embraces the most transformative and rationale approaches for reform.
The flaws in the current system should be obvious enough, and the potential benefits of the reform also, to induce policy makers to begin the responsible and forward-looking tasks of proposing, evaluating and then implementing the policies that eliminate high prices as the primary mechanism to fund medical R&D.
 A single .25 mg tablet of pyrimethamine is currently retailed in the Netherlands for .41 Euros (Medicijnkosten), in Australia for .49 AUD (PBS) and in New Zealand for .739 NZD (PHARMAC). The BBC reports a price of .433 GBP in the UK.
 See Email from Kathy Hudson (NIH/OD) to Francis Collins (NIH/OD), August 5, 2011, subject: Subject: Fabry’s – it is time to act. Reported, FDA enforcement discretion to allow unregistered generic Daraprim to be imported and sold at lower prices, October 8, 2015, http://www.keionline.org/node/2332. The FDA instead encouraged and authorized Shire to import Replagal for use in “single-patient INDs,” and gave Shire a Fast Track designation for a BLA. “In response to the shortage of Fabrazyme, FDA has been in discussion with Shire regarding possible options that would allow Fabry patients in the U.S. access to Replagal. At this time, individual Fabry patients may access treatment with Replagal under emergency or single-patient INDs based on clinical need as assessed by their treating physician.” http://www.fda.gov/downloads/Drugs/DrugSafety/DrugShortages/UCM187056.pdf. After the shortage abated, and days after Shire negotiated a license to certain Fabry’s disease patents in Europe, Shire withdrew its US BLA. See: KEI asks FTC to investigate Shire decision to abandon efforts to compete in US market for Fabry’s disease treatments, July 15, 2014. http://keionline.org/node/2055, and the attached Timeline for Fabrazyme, Replagal.
 See also, Alexander Gaffney, FDA Loses Major Case Testing its Enforcement Discretion Authority, RAPS, July 23, 2013, http://www.raps.org/focus-online/news/news-article-view/article/3828/
 Executive Order 13588 — Reducing Prescription Drug Shortages, October 31, 2011; FDA News Release. FDA acts to bolster supply of critically needed cancer drugs. Announcements build on President Obama’s Executive Order, February 21, 2012. http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm292658.htm; FDA News Release: FDA acts to bolster supply of critically needed cancer drugs Announcements build on President Obama’s Executive Order, February 21, 2012. http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm292658.htm
 Andrew Ward, Cancer drugs cut as UK budget clampdown bites, September 4, 2015, Financial Times. http://www.ft.com/cms/s/0/01ac9236-5327-11e5-b029-b9d50a74fd14.html; James Gallagher, Cancer drugs fund cuts 23 treatments, BBC, 4 September 2015, http://www.bbc.com/news/health-34153136.
 Sarah Boseley. “Health secretary urged to tear up patent on breast cancer drug,” October 1, 2015, The Guardian; Ben Hirschler. “Call for Britain to over-ride patents on Roche cancer drug,” October 1, 2015. Reuters; Coalition for Affordable T-DM1 Crown Use Request (for patents on cancer drug Kadcyla), October 9, 2015. https://www.youtube.com/watch?v=sggwS9IIQN0
 2015 biopharmaceutical research industry profile.Washington, DC: PhRMA; April 2015. Table 1.
 Total Unaudited and Audited Global Pharmaceutical Market by Region 2014 – 2019, IMS Health Market Prognosis, May 2015.
 See Figure 3 in the 2013 PhRMA Annual Industry Survey, which cites a Burrill & Co. analysis for PhRMA.
 Senator Sanders introduces two medical innovation prize bills in U.S. Senate to de-link R&D costs from drug prices, May 27, 2011. http://keionline.org/node/1147; Press Release. March 10 2014; German company wins EU’s €2 million inducement prize for innovative vaccine technology, European Commission. March 10 2014. http://europa.eu/rapid/press-release_IP-14-229_en.htm; The NHS INnovation Challenge Prizes. http://www.england.nhs.uk/challengeprizes/; PROPOSAL by Bolivia, Suriname and Bangladesh. Prizes as a Reward Mechanism for New Cancer Treatments and Vaccines in Developing Countries, April 15, 2009. http://www.who.int/phi/Bangladesh_Bolivia_Suriname_CancerPrize.pdf; Charles Clift, Kevin Outterson, John-Arne Røttingen, Towards a New Global Business Model for Antibiotics: Delinking Revenues from Sales October 9, 2015 Centre on Global Health Security, Antimicrobial Resistance. https://www.chathamhouse.org/publication/towards-new-global-business-model-antibiotics-delinking-revenues-sales; James Love, Alternatives to the Patent System that are used to Support R&D Efforts, Including both Push and Pull Mechanisms, with a Special Focus on Innovation-Inducement Prizes and Open Source Development Models, World Intellectual Property Organization, CDIP/14/INF/12, September 19, 2014.