Week 10 - Pharmaceutical Drugs & Innovation

Policy Issue #5: Pharmaceutical Drugs &

Innovation

HLTH 405 / Canadian Health PolicyWinter 2012

School of Kinesiology and Health Studies

Course Instructor: Alex Mayer, MPA

Pharmaceutical Drugs & Innovation

Today’s LecturePharmaceutical Innovation in Ontario: What is our Willingness to Pay?

• Why does it pharmaceutical policy matter?

• Ontario’s Contexto Failed policies to attract R&D investments

o Failed policies to lower public drug spending

o 2008: The Recession

• Recent Changes to Pharmaceutical Policy in ON/CAN

• Where do we go from here?o Better Public Drug Coverage Policies

o Better Innovation Policies

Why Does

Pharmaceutical Policy

Matter

Pharmaceutical Policy Matters Because…

It Affects Our Healtho Price of pharmaceutical

products

o OHIP coverage

o Drug approval process

o Treatment and Quality of care

Pharmaceutical Policy Matters Because…

It Affects Our Economy

o International trade

o Manufacturing

o R&D Capacity

o Retail Distribution

o Pharmacies

Pharmaceutical Policy Matters Because…

It Affects Education

o Domestic Expertise

o Quality of education

o Speed of innovation

o Research funding

Pharmaceutical Policy Matters Because…

If we get it right…

How is Canada doing?

How is Canada doing?

How is Canada doing?

2000

2002

2004

2006

2008

2010

-5

0

5

10

15

20

Publid Drug Exp Growth (%)GDP Growth (%)

Clearly, a work in progress…

Pharmaceutical Policy in Canada

o 1987 Patent Act amendment (Bill C-22)

• Patent life of pharmaceutical drugs extended to 20 years

• Additional protections for Canadian Rx brands from generic competitors

• Established the Patented Medicines Price Review Board

o 1994 TRIPS Agreement (WTO)

• Data exclusivity for minimum of 5 years

o 2006 Food and Drugs Act amendment (C.08.004.1)

• Data exclusivity extended to 8 years

Pharmaceutical Policy in Canada

Failures of Past Pharmaceutical Policy

• Past Policies:o “Zero-sum Thinking”

• Accepted argument that pharmaceutical policy involves a real tradeoff between affordability of Rx pharmaceuticals and incentives for R&D investment

o Naturalistic Fallacy

• Looked to policies in jurisdictions with strong pharma lobbies to try to spur our own industry

o Failed to appreciate global nature of pharmaceutical R&D investment

o Failed to appreciate the incentives and behaviors responsible for generic drug price inflation

2008 Recession

Goals of Future Policy

• Evidence-Based Decision-making o Considers both the benefits and costs of

strengthening patent rights

o Balances the diverse interests of Canadian society in setting drug prices

o Promotes R&D innovation that is not just profitable but clinically valuable

Recent Changes

• In Canadao Federal Secretariat (STIC) to review

innovation (2007)

o SR&ED Tax Incentive Program (2012)

o Research Partnership between CIHR and Rx&D (2012)

• In Ontarioo Transparent Drug System for Patients Act

(2006)

What Else Needs to Be Done?

Prescription Drug Coverage in ON

Program Beneficiary Deductible Copay Max Annual Copay

Ontario Drug Benefits

Seniors $100 $6.11 N/A

Low-income Seniors

$0 $2 N/A

LTC & Home Care Patients

$0 $2 N/A

ODSP/OW Recipients

$0 $2 N/A

Trillium Drug Program

Residents w/ Catastrophic Drug Costs (>4% income)

Income-based(For $6k-$100k households: $350-$4,000)

$2 N/A

Special Drugs Program

Any OHIP beneficiary

$0 $0 $0

Perverse Incentives of ODB Coverage

Minimum Wage

Working Income

Social Assistance Income

Social

Assistance

Benefits (ODB)

Benefits of Welfare outweigh Benefits of Employment

Effective Wage of SA

Poverty Wall

Inequities in ODB Coverage

• Seniors but not Low-Income People?o In 2008, ODB subsidized the drug costs of

300,000 Ontario seniors with incomes over $50,000 per year.

o Meanwhile, working-poor families are 3.3X more likely not to refill their prescriptions due to high cost and have to spend more than 4% of their total income on drugs before they get any subsidy at all.

ODB’s Generic Price Policy

• Capping generic prices at 25% of Rx o A price cap may mean that some products only

those drugs whose cost of production is significantly below 25% of Rx will appear on the market.

o Generic drugs with higher costs of production will not enter the market (there is no profit to be made), thereby eliminating some potential benefit that patients would have received from a lower-priced generic option.

Perverse Incentives of Gx Price Cap

Supply

Demand

Under-supply of generics

25% Rx Price Cap

Qty

Best Price

Fixed Price

Lack of Balance in Incentives facing Rx and Gx Manufacturers

• Rx have incentives to claim multiple (often invalid) patents for the same pharmaceutical product.o At worst, the litigation delays introduction of

price competition from Gx products.

o Gx have little incentive to litigate due to the “free-loading problem” (subsequent Gx manufacturers will benefit the same amount at less cost).

The Public Drug Coverage Solutions

‘Better Coverage’ Policy Options

Solution #1:

Using Income, not Age as the eligibility criterion.

Perverse Incentives of ODB Coverage

Minimum Wage

Working Income

Social Assistance Income

Social

Assistance

Benefits (ODB)

Benefits of Welfare outweigh Benefits of Employment

Effective Wage of SA

Poverty Wall

Minimum Wage

Working Income

Social Assistance Income

No Poverty Wall

Constant Incentive to Work

ODB Benefits

ODB Benefits

Non-Discriminatory ODB Coverage

‘Better Coverage’ Policy Options

Solution #2:

Use a declining reimbursement scheme based on number of market entrants, instead of a fixed price cap.

Perverse Incentives of Gx Price Cap

Supply

Demand

Under-supply of generics

25% Rx Price Cap

Qty

Best Price

Fixed Price

Declining Reimbursement Scheme

Supply

Demand

Demand for generics is met at point that optimizes net social benefit to taxpayers and Gx manufacturers

25% Rx Price Cap

Qty

Best Price

Fixed Price

‘Better Coverage’ Policy Options

Solution #3:

Reward Generic Manufacturers for litigating against invalid patents, through a royalty rate (e.g. 3% of revenue) owed by subsequent manufacturers to the first-mover.

Effect of Successful Gx Litigation against Rx Patents

Supply

Demand

Qty

Best Price

Rx Monopoly Price

‘Better Coverage’ Policy Options

To increase the scope of public drug coverage, promote equity and lower insurance premiums, Ontario should therefore:

1. Use income instead of age for drug benefits eligibility

2. Use a declining reimbursement scheme instead of a price cap for Gx drugs

3. Reward successful Gx litigants of Rx patents with royalties from other Gx manufacturers

How do we promote innovation?

Failures of Past Pharmaceutical Policy

• Past Policies:o “Zero-sum Thinking”

• Accepted argument that pharmaceutical policy involves a real tradeoff between affordability of Rx pharmaceuticals and incentives for R&D investment

o Naturalistic Fallacy

• Looked to policies in jurisdictions with strong pharma lobbies to try to spur our own industry

o Failed to appreciate global nature of pharmaceutical R&D investment

Better ‘Innovation’ Policy

Solution #1:

Use reference-based pricing for public Rx drug coverage.

Better ‘Innovation’ Policy

Solution #2:

Subsidize pharmaceutical R&D by specifically targeting the high failure rate of many Rx clinical trials.

Better ‘Innovation’ Policy

Solution #3:

Introduce a pay-for-performance reward scheme for Rx innovators; Replace Patent System with a Licensing System.

‘Better Innovation’ Policy Options

To increase the degree of pharmaceutical innovation in the province and promote the design of clinically valuable products, Ontario should therefore:

1. Use reference-based pricing for public Rx coverage.

2. Subsidize pharmaceutical R&D and facilitate basic research/knowledge dissemination.

3. Introduce pay-for-performance to reward clinical innovators that create genuinely beneficial cures.