# Session Overview By the end of this session, students will be expected to be able to: · describe the main characteristics and history of the global pharmaceutical industry · define key features of different business model types (research and development, or R&D, and generic drug manufacturing) · describe the intellectual property system and state its role in the pharmaceutical industry · assess how the incentive structures of the pharmaceutical industry can affect global health · identify solutions to problems arising from the incentive structure of the pharmaceutical industry · link the economic concepts, especially market failure, to the pharmaceutical industry # 1. Introduction: What is pharma industry? The pharma industry develops and sell a range of products, like medicine, which are chemical or biological products. They also produce products to prevent diseases, like vaccines. They also produce other products, 'consumer healthcare' such as lipbalm and mouthwash. Lo and behold, also nutritional products, such as baby formula or supplements for the elderly. Lastly, they also produces products related to animal health and veterinary medicine. # 2. History of the pharma industry Four distinct periods (see Malerba and Orsenigo 2015 for more) ## 2.1 Formative stages: 1800s - World War 2 Began as an offshoot of the chemical sector in Europe and the US. During this period, the industry was not characterised by intensive R&D of new products. While some companies exploited existing knowledge in organic chemicals, others engaged in the processing, marketing and distributing of existing drugs, often based on natural resources. Few new medicines were introduced to the market in this period. ## 2.2 Golden Age: WW2 - mid 1970s The mass production of penicillin and other key medications needed to treat troops in conflict areas, provided companies in the UK and the US with technological and organisational capabilities favourable for innovation. Many HICs supported publicly funded health research. NIH in the US became important players in the field to provide financing for basic scientific research at universities and other institutions. The development of new medications became a profitable business in part due to the rapid growth in demand, caused by population growth, improved living standards and unmet medical needs. Further, the development of health insurance (US) and welfare state politics (Europe) provided a large and organised market for medications. The rate of innovation increased. Hundreds of chemical entities and drug classes were discovered, including antibiotics, diuretics and antidepressants. The industry began to invest heavily in marketing. In this period, the pharmaceutical industry became international. Given the large investment in R&D and marketing efforts, expansion into new markets was pursued to reduce costs and increase profits. This led to the creation of relationships between international and local firms. As the industry expanded, regulatory processes were set in place to assess safety and, later, efficacy, of new medications, as well as to determine which medicines could be sold over the counter or only through physician prescriptions. ## 2.3 Biotechnology Revolution: 1970s - 2000 Advances of DNA tech and molecular genetics revolutionised the pharmaceutical industry, leading to the emergence of the biotech sector. Companies created the link between research institutions and pharma companies by turning fundamental research into marketable products. These companies, which were essentially selling specialised applied knowledge, were often funded by venture capital and private equity firms. As a greater number and more advanced pharmaceutical products were made available, the structure of demand also changed. Pharmaceutical expenditure in HICs increased sharply, due to higher medicine prices and aging populations, which put pressure on public funds in many settings. As a result, cost-containment considerations led to restructuring of health systems in some countries. ## 2.4 Winter of Discontent: 2000 - present Productivity of the pharma industry declined at the start of the 21st century. A number of reasons for this downturn: 1. Outsourcing of pre-clinical R&D had moved the industry away from truly innovative research to focusin on minor improvements for existing products. 2. Increases in regulatory processes and requirements increased costs and time to get a product to market. 3. Industry may have reached a point of maturity. The lowest-hanging fruit have been picked and developing drugs for complex pathologies is increasingly difficult. ## Activity 13.1 In no more than 10 sentences, summarise the main periods in the history of the pharmaceutical industry from the 1800s to the present day, describing the main characteristics of each period. # 3. Processes and Business Structures R&D and generic drug manufacturing ## 3.1 R&D The process varies but estimates suggest that the time between finding a promising chemical molecule or biological compound and getting the medicine to a patient can be 10-15 years. The initial step, of identifying a promising molecule or compound, is challenging; researchers screen 5,000-10,000 molecules and compounds to find one that is considered promising and studied further (International Federation of Pharmaceutical Manufacturers & Associations, 2021). After this initial identification, many intermediate steps, required by medical regulators, follow. See Figure 1 for a summary. ![[Process involved in R&D of new pharma products.png]] First, toxicology studies and pre-clinical research. The safety of the molecule or compound is assessed by testing it on cells or animals, such as rats or rabbits, as well as by complex computational models. If safe, the drug moves onto clinical research on human subjects most often in the form of a clinical trial. During Phase 1 clinical trials, the medication or vaccine will be administered to a small number of human volunteers, normally in good health. The principal objectives of this phase are to ensure that the medication or vaccine are safe in humans and to clarify that it can reach the targeted body area. Results of Phase 1 clinical trials may also produce preliminary evidence of efficacy. If Phase 1 is successful, Phase 2 will involve a larger number of volunteers who, generally, have the condition that the treatment targets. Phase 2 aims to establish the efficacy of the medication or vaccine on treating the condition and to determine adequate dosing levels. The efficacy of the treatment may be compared to that of a separate group of people receiving a placebo (also known as a control group). Safety will also be monitored If Phase 2 produces encouraging results, companies will proceed to Phase 3, which involves a larger clinical trial often across different settings and can last years. Phase 3 aims to demonstrate safety and efficacy, confirming appropriate dosing, identification of side effects and building evidence on benefits and risks of the treatment vis-à-vis existing treatments in the same category. If Phase 3 trials are successful, pharmaceutical companies may seek country-specific regulatory approval by putting together a ‘registration dossier’. Generally, regulators expect new treatments to be at least as, if not more, efficacious, than available treatments. This regulatory process requires the review of evidence on safety and efficacy and can last up to two years. If the regulatory agency is satisfied, the pharmaceutical company will have permission to market, advertise and sell the product. In many countries health technology assessment (HTAs) may also be carried out, which assess other criteria, such as cost-effectiveness, before medications or vaccines can be incorporated into the public healthcare system. > The entire process is long and financially risky. The overwhelming majority of molecules or compounds tested are never developed into marketable products. Pharma companies, then, need to able to secure substantial financial capital upfront to invest in the process before they receive any financial returns. They also need incentives to undertake such risky investments. However, despite the high upfront costs and the risks inherent to the process, ==the pharmaceutical business has traditionally been very profitable, with high levels of return on investment, particularly for companies specialising in R&D==. In order to ensure high returns, pharmaceutical companies often focus on HICs where patients, insurance companies and national governments have greater purchasing power. ==As a result, the priorities of HICs often skew the types of medications or vaccines that are researched and eventually brought to market,== as we will examine below. Further, pharmaceutical companies that specialise in R&D often derive large amounts of revenue from single medications, known as ‘[[blockbusters drugs|blockbusters]]’, often defined as products that produce over US$1 billion per year. In some cases, ‘blockbuster’ drugs account for a large portion of company revenues. In the 1990s, for example, the cholesterol medication Lipitor, accounted for 23% of the pharmaceutical company Pfizer’s overall revenue. ## 3.2 Intellectual property system / [[Intellectual Property Rights (IPR)]] Despite high upfront costs, pharma companies engaging in R&D can expect high returns on investment because their business model is underpinned by intellectual property system. The IPS dictates that if a person or entity creates a product, they can patent it, meaning they have the sole right to make or sell that product for a period of time. In other words, that person or entity has a monopoly right on that good. As a monopoly means that there is no market competition, the person or entity can set whatever price they choose for that product. The challenge, from the perspective of pharmaceutical companies engaging in R&D is that, after a product’s patent expires, other companies can produce the product, leading to reductions in prices due to the forces of market competition. Given that pharmaceutical companies often rely on a limited number of ‘blockbuster’ products for a substantial amount of revenue, it is crucial for them to constantly have a strong R&D pipeline. Companies often improve or strengthen their pipelines by merging or acquiring other companies with promising developments. This reduces costs as they achieve [[economies of scale]] by joining departments, such as R&D or marketing. Further, the acquisition of new companies can also allow for entry into new markets. ## Activity 13.3 Read the article [[@kesselProblemsTodayPharmaceutical2011]]. Although this article is from 2011, this outlines many of the problems big pharmaceutical companies and R&D in the pharmaceutical sector are still facing nowadays. Explain some of the problems mentioned and solutions proposed (which can be separated into short-term and long-term solutions). Having considered the R&D approach, which is high risk and high return, we will now consider and discuss an alternative model, that generic drug manufacturing, exploring trends and opportunities. ## 3.3 Generics drug manufacturing A generic drug is a pharmaceutical product that contains the same chemical substance as a drug which has been patented. The process of getting generic drugs to market is cheaper, shorter and less risky and complex than the R&D process. This is because the regulatory requirements are less stringent. Legislation in different parts of the world allowed for the creation and expansion of the generics industry in the last quarter of the 20th Century. In the United States, for example, the [[Hatch-Waxman Act]] was adopted in 1984 and was seen as affording a compromise between companies that engaged in the R&D process and those focusing on generic drug manufacturing. Prior to the Hatch-Waxman Act, generic drug approval required the filing of existing data on efficacy and safety of the product. However, producers of branded drugs had proprietary rights over these safety and efficacy data, so generic manufacturers did not have the required documentation to file for approval. Consequently, companies specialising in generic drugs manufacturing had limited reach: in 1983 only 35% of top-selling branded drugs with expired patents had generic competition (Boehm et al. 2013). The Hatch-Waxman Act allowed for the removal of the requirement to provide data on efficacy and safety for companies wishing to produce generic drugs, but rather only required them to demonstrate bioequivalence with a branded product. Further, the Act the publication of a list of approved drugs with efficacy and safety evaluations. This allowed for the creation of a substitution system; state legislation could mandate the substitution of branded drugs with generic equivalents. As a result, there was a boom in the production of generic drugs. By 2012, generics made up 84% of dispensed prescriptions in the US. However, companies focussing on the R&D process also received concessions in the Act; companies were able to file for patent extensions to compensate for the time taken by regulatory agencies to review and approve dossiers. See Boehm et al., 2013. Several LMICs also amended existing laws in order to foster companies that produced generic drugs. For example, India introduced the Indian Patent Act in 1972. This Act differentiated between product patents and process patents: the former is the output, and the latter is the process that allows the creation of that output. The Act allowed companies wishing to develop generics to identify alternative processes to produce the same end product. However, this changed in 2005 when India recognised the Agreement on Trade-Related Aspects of Intellectual Property Rights ([[TRIPS Agreement]]), which regulated and protected intellectual property (see Box 4 below). ## 3.4 Interaction between R&D and Generics ### Example 1: Traditional pathway: Simvastatin/Zocor Simvastatin was developed by Pfizer. Pfizer started doing research on the chemical compounds used in Simvastatin in the 1980s. By 1984, when the molecule showed substantial promise, Pfizer applied for and obtained a patent from the US Patent Office. At the time, patent law allowed pharmaceutical companies monopoly over a drug for 17 years. The 17-year rule changed for new products and was extended to 20 years after 1995 as a result of the TRIPS agreement. By 1991 the R&D process was completed. Pfizer submitted a registration dossier, including data on safety and efficacy, with the US Food and Drug Administration (FDA), which gave marketing approval to the branded version of Simvastatin, named Zocor. Pfizer was then able to sell Zocor in the US and, as the sole producer with monopoly rights, the company consequently able to charge whatever it wanted without competitors undercutting their prices, initially for 17 years. However, ==Pfizer applied for patent extensions==. The first was linked to the [[Hatch-Waxman Act]], which states that companies can ask for extensions as compensation for the time the regulatory agency takes to review the dossier. The second was linked to another exception, a concept called [[paediatric exclusivity]], allowing companies to extend their patent protection if studies were conducted with a paediatric population. As a result, the original patent life was extended until 2006, when monopoly rights expired, and generic versions of Zocor came to the market. Three different generics competitors produced and marketed Simvastatin at that point, leading to changes in the market, especially for the patient (or the payer of the medication for the patient). Before the patent expired Pfizer charged US$3 for a daily pill. After 2006, generic companies charged 30 cents. ==This meant a large drop in revenue for Pfizer; whereas in 2005 Pfizer’s revenue from sales of Zocor in the US were US$3.1 billion, by 2006 yearly revenue dropped to US$876 million.== ### Example 2: Exceptional pathway: Antiretroviral therapy By the late 1990s the epidemic was concentrated in specific groups in HICs, as well as in the general population in low- and middle-income countries (LMICs) in sub-Saharan Africa. Whereas the price of ART, estimated at US$10,000 -15,000 per patient per year, was affordable for some patients (or their payers) in HICs, it was unaffordable for the overwhelming majority of people in LMICs (Hoen et al. 2011). [[Power asymmetry|This created a situation of inequality between the global North and South]]; in the North HIV became a treatable chronic condition while in the South people continued to die of AIDS. This inequality, as well as an awareness of the macroeconomic impact of AIDS in sub-Saharan Africa, attracted global attention. Access to ART became a political issue, leading to a coalition of state and non-state actors to push pharmaceutical companies to lower prices. Five pharmaceutical companies announced the Accelerating Access Initiative (AAI) in 2000, offering substantial reductions in the prices of antiretroviral therapy in LMICs. In some cases, prices for LMICs were 10%-20% of the prices in HICs (World Health Organization and UNAIDS. 2002). In parallel, several LMICs, notably India, started producing generic antiretroviral drugs. Prior to the TRIPS agreement implementation, many countries did not consider patents on medical products to be in the public interest and therefore excluded pharmaceuticals from patenting altogether. In 2000 the Indian generics company Cipla started producing the same triple combination ART in a legal way (this was banned in 2005 once the TRIPS agreement was implemented). In early 2001, Cipla offered the triple combination ART for US$350 per person per year, which was lower than even the discounted priced under the AAI. This price reduction garnered international attention and highlighted how pharmaceutical companies were cashing in on their monopoly despite the human cost. Consequently, in the following decades the largest share of antiretroviral products used around the world were generic drugs. Of the 17 million people accessing HIV treatment, 13.9 million live in LMICs where generics are accessible (UNAIDS 2016). The implementation of TRIPS limited the availability of countries to produce generic drugs; signatory countries had to implement reforms to meet TRIPS obligations, constraining the policy space to design intellectual property systems to fit their development needs. However, it is important to note that the TRIPS agreement does allow for a mechanism called ‘compulsory licensing’ whereby a government grants a license to an entity other than the patent holder to produce the patented product in exchange for a set remuneration. Countries are free to determine the grounds for issuing a compulsory license. Further, as a result of the HIV crisis, the World Trade Organization adopted the Doha Declaration on TRIPS and Public Health in 2001, which stated that the TRIPS agreement “can and should be interpreted and implemented in a manner supportive of WTO Members’ right to protect public health and, in particular, to promote access to medicines for all” (World Trade Organization, 2001). The two examples above involve different processes to drug development and availability. The Simvastatin/Zocor example illustrates how branded drugs can provide high profit margins to companies for a long time. The ART example shows that, in some exceptional cases, alternative solutions are found to address inequities stemming from the patent system. However, what they both illustrate, is the way in which competition affects prices and how generic drugs alters the market for medications in substantial ways. ## 3.5 R&D: a counter argument Some people disagree with the concept of intellectual property system. Fundamental (or basic) research seeks to expand knowledge in a particular area but does not usually generate findings with immediate application. Unlike applied research, fundamental research is considered too risky and the potential that it may not produce a sufficient return on investment is high. It is therefore not generally carried out by private profit-maximising companies. However, despite the risk to private companies, fundamental research contributes to the [[global public goods for health (GPGH)|public good]], and as such there is a strong rationale for funding it through public sources. This is an example of market failure: left to its own devices, the market would not produce sufficient incentives for investment in fundamental research despite its contribution to [[global public goods for health (GPGH)|public goods]], and a result the state must intervene. > [!Box] [[Market Failure]] > Market failure refers to a situation where the free market does not allocate resources in an efficient manner. National governments (or supranational organisations) intervene in order to correct for market failures. There are several types of market failure, including: > - **Externalities**: Additional costs (or benefits) that are not priced into a good or a service are often called externalities. This means that there is a mismatch between public and private costs/benefits. Pollution is a classic example of a negative externality, where a cost is incurred by the public (generally) without compensation. > - **Monopolies**: A definition can be found in Box 2. They are a cause of market failure because the absence of competition allows the individual, firm or state to dictate prices as they are the only supplier of a good or service in the market. This leads to higher prices and undersupply of goods and services. > - **Missing markets**: Markets can be described as missing (or incomplete) when they cannot meet the demand for certain goods. Public goods (a good that provides benefit or wellbeing to the public), despite having high demand, may not be supplied by the market because of low profits (or net losses) to the provider. As a result, governments often step in to provide these goods. While investment in fundamental research is risky, it can lead to path-breaking types of innovations. Some argue that most innovative drugs are not invented by the pharmaceutical companies that sell them. Original discoveries of molecules (also known as new molecular entities, or NMEs) occur in university labs with public funding, are then licensed to small biotech start-ups often partly owned by universities, and later sold to larger companies where little innovation is added. Instead of focussing on truly innovative products, pharmaceutical companies focus on ‘me-too drugs’, existing top-selling drugs with an added minor variation that allows pharmaceutical companies to claim they are different enough to justify new patents. In the US 75% of NMEs can trace their origin to publicly funded laboratories instead of pharmaceutical companies (Angell, 2004). In some cases, NMEs changed the biomedical paradigm permanently. For example, research supported by UK Medical Research Council funding led to the development of monoclonal antibodies, which make up a third of new drug treatments for major diseases such as cancer, arthritis and asthma. More recently, a study examining two decades of research and development of the ChAdOx vaccine technology, which the Oxford-AstraZeneca COVID-19 vaccine builds on, suggests that over 97% of research funding came from the public sector (Cross et al. 2021). [[Open Question]] If a substantial amount of money from taxpayers is invested in research that leads to scientific discoveries that allow for the development of new drugs, the policy question is: why should the cost of those medications be off-loaded to individual patients and the public sector (again, the taxpayers) while the profits go to the pharmaceutical companies? # 4. Impact of pharma industry to global health ## Example 3: Neglected Tropical Diseases (NTDs) The lack of pharmaceutical interventions for NTDs can be linked to market failure, specifically the aspect of ‘missing markets’. Where there is no market (in this case, people able and willing to pay), there is no incentive for pharmaceutical companies to invest into the R&D of new products. Even if a private company had a patent, and consequently monopoly rights, that product will not translate into high profits. NTDs disproportionally affect poor people in mostly LMICs. No matter how many people are affected across many countries, the purchasing power of these people (and their governments) is low. There is therefore, from a financial perspective, no incentive to invest and innovate. ## 4.1 A hope for the future? In the absence of national government capacity to correct this market failure, global, philanthropic and private actors have recently coalesced to address this problem. One important development has been the creation of [[product development partnerships (PDPs)]]. By 2017, there were around two dozen PDPs for neglected diseases (Hoogstraaten 2020). The type of PDPs vary. Some are led by governmental, inter -governmental or not-for-profit organizations and focus on the R&D process in-house. Others manage funds and rely on external partners for research (i.e., social capital venture funds). Some also focus on capacity building and technology transfer to endemic areas. Another recent development is the creation of units of neglected disease research within pharmaceutical companies. For example, Novartis has an Institute for Tropical Diseases, which works on medications for diseases such as fascioliasis. Glaxo Smith Kline (GSK) has a Global Pharma R&D Unit focusing on pharmaceutical innovations for several diseases, such as Chagas disease and leishmaniasis. Procurement funds, such as the [[Global Fund to Fight AIDS, Tuberculosis, and Malaria (GFATM)]] or [[GAVI]], have played an important role in raising and procuring money for pharmaceutical products for diseases in LMICs. However, they have largely funded medications on diseases which already attract a large amount of global attention. Their involvement in NTDs has been traditionally limited. However, there have been some modest investments in recent years. Unitaid has started funding Chagas disease. While the Global Fund does not provide funds for NTDs, it has provided support for co-infections of HIV, such as leishmaniasis, and Gavi has investments in the rabies vaccine. # 5. Integrating activity Access to pharmaceutical products for the treatment of HIV and NTDs has improved over the past two decades. How could lessons learnt in these two areas be applied to ensure a more equitable access to vaccines and medications for COVID-19 (or other future pandemics)? # 6. Summary Pharmaceutical products play an extremely important role in global health. This lecture covers the key features and history of the pharmaceutical industry and describes the way that market forces and scientific innovation interact. The intellectual property system has shaped the way the industry functions, allowing companies to gain great profits for their scientific innovations. While some believe this is fair (due to the large costs incurred in research and development), others argue that the role of governments and the public sector in drug development has been overlooked. Further, economic incentives at a global level have led, at times, to highly inequitable situations. Treatments for diseases that affect the world’s poorest and most marginalised remains unexplored. However, new initiatives have raised hopes that some of these health inequalities may be corrected. # 7. References ## 7.1 [[Essential readings]] [[@WhoFundedResearch]] [[@kesselProblemsTodayPharmaceutical2011]] ## 7.2 [[Recommended reading]] #to-read [[@boehmDevelopmentGenericDrug2013]] #to-read [[@hoenDrivingDecadeChange2011]] [[@hoogstraatenHowProductDevelopment2020]]