- The size of global pharma market
- Profit distribution in Pharma sector
- R&D and concerns
- The Health Impact Fund
- Issue of state risk
- What do we lack?
A right time to shift pharma gears
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Medicines are among humanity’s greatest achievements. They have helped attain dramatic improvements in health and longevity as well as huge cost savings through reduced sick days and hospitalizations.
The size of global pharma market
- The global market for pharmaceuticals is currently worth ₹110 crore lakh annually, 1.7% of the gross world product (IPFPA 2017, 5).
- Roughly 55% of this global pharmaceutical spending, ₹60 lakh crore, is for brand-name products, which are typically under patent.
Profit distribution in Pharma sector
- Commercial pharmaceutical research and development (R&D) efforts are encouraged and rewarded through the earnings that innovators derive from sales of their branded products.
- These earnings largely depend on the 20-year product patents they are entitled to obtain in WTO member states. Such patents give them a temporary monopoly, enabling them to sell their new products without competition at a price far above manufacture and distribution costs, while still maintaining a substantial sales volume.
- In the United States, thousand fold (100000%) markups over production costs are not atypical. In India, the profit-maximizing monopoly price of a new medicine is much lower, but similarly unaffordable for most citizens.
- The commercial R&D costs ₹14 lakh crore a year (Mikulic 2020), including the cost of clinical trials needed to demonstrate safety and efficacy, the cost of capital tied up during the long development process, and the cost of any research efforts that fail somewhere along the way.
R&D and concerns
- There are three main concerns.
- First, innovators motivated by the prospect of large markups tend to neglect diseases suffered mainly by poor people, who cannot afford expensive medicines. The 20 WHO-listed neglected tropical diseases together afflict over one billion people but attract only 0.35% of the pharmaceutical industry’s R&D. Merely 0.12% of this R&D spending is devoted to tuberculosis and malaria, which kill 1.7 million people each year.
- Second, the profit-maximizing price of a new medicine tends to be quite high (thanks to a large number of affluent or well-insured patients). Consequently, most people around the world cannot afford advanced medicines that are still under patent. This is especially vexing because manufacturing costs are generally quite low.
- Third, rewards for developing and then providing pharmaceutical products are poorly correlated with therapeutic value. Firms earn billions by developing duplicative drugs that add little to our pharmaceutical toolbox and billions more by cleverly marketing their drugs for patients who won’t benefit.
- To address these problems, we propose a complement to the present regime: The Health Impact Fund as an alternative track on which pharmaceutical innovators may choose to be rewarded. Any new medicine registered with the Health Impact Fund would have to be sold at or below the variable cost of manufacture and distribution, but would earn ten annual reward payments based on the health gains achieved with it.
The Health Impact Fund
- The Health Impact Fund could start with as little as ₹20000 crores per annum and might then attract some 10-12 medicines, with one entering and one exiting in a typical year.
- Registered products would then earn some ₹17000-₹20000 crore, on average, during their first ten years. Of course, some would earn more than others – by having greater therapeutic value or by benefiting more people.
- Long-term funding for the Health Impact Fund might come from willing governments or from an international tax, perhaps on greenhouse gas emissions or speculative financial transactions.
- Non-contributing affluent countries would forgo the benefits: the pricing constraint on registered products would not apply to them. This gives innovators more reason to register (they can still sell their product at high prices in some affluent countries) and affluent countries reason to join.
- The Health Impact Fund would get pharmaceutical firms interested in certain R&D projects that are unprofitable under the current regime – especially ones expected to produce large health gains among mostly poor people. Such projects would predominantly address communicable diseases, which continue to impose devastating disease burdens mainly upon the poor.
- With the Health Impact Fund in place, there would be much deeper and broader knowledge about such diseases, a richer arsenal of effective interventions and greater capacities for developing additional, more targeted responses quickly.
- Pharmaceutical innovators would thus have been much better prepared to supply or develop suitable medicines for containing the COVID-19 outbreak.
- The Health Impact Fund would make an important difference also by rewarding for health outcomes rather than sales.
Issue of state risk
- Participation of commercial pharmaceutical firms is crucial for tackling global pandemics.
- They are best suited to develop and scale up provision of new vaccines and medications fast. At present such firms do, however, face discouraging business risks from governments who may — as some have done — use compulsory licenses to divest them of their monopoly rewards.
- Health Impact Fund registration would remove this risk as states would have no reason to interfere with innovators whose profit lies in giving real and rapid at-cost access to their new product to all who may need it.
- A firm rewarded for merely selling malaria drugs need not be distraught by the fact that malaria continues to infect over 20 crore people each year, killing 5 lakhs of them. A firm rewarded for making its medicine reduce the malaria disease burden, by contrast, would aim to decimate the proliferation of malaria as rapidly and cost-effectively as possible.
- Collaborating with national health systems, international agencies and NGOs, such a firm would seek to build a strong public-health strategy around its product.
- A firm’s highest goal would be complete eradication. If it succeeds in year seven, it can enjoy the world’s gratitude and collect three additional handsome reward payments for investment in its other research projects.
What do we lack?
- Applying this point to a new disease like COVID-19 is complicated by the fact that we lack here a well-established baseline representing the harm the disease would have done in the absence of the new medicine to be assessed.
- For malaria, such a baseline can be established on the basis of a stable disease trajectory observable over many years.
- In the case of a new epidemic, one must rely on a modelling exercise that estimates the baseline trajectory on the basis of obtainable data about the spread of the disease and its impact on infected patients.
- This surely is a challenging undertaking which cannot yield precise or uncontroversial results about what damage the epidemic would truly have done if the vaccine or medication in question had not appeared.
Despites all challenges, the Health Impact Fund would give innovators the right incentives. It would guide them to ask not: how can we develop an effective product and then achieve high sales at high markups? But rather: how can we develop an effective product and then deploy it so as to help reduce the overall disease burden as effectively as possible? The COVID-19 pandemic should make us stop and think: which of these two questions should be guiding our pharmaceutical innovators?