Identificación del problema público

As discussed above, the business model for pharmaceutical companies involves the pursuit of lucrative blockbuster drugs. ³⁹² The high monopoly profits earned by such blockbusters encourages other pharmaceutical companies to develop ‘me-too’

drugs³⁹³ which can share in the lucrative market.

It has been argued that the majority of drugs are actually ‘me-too’ drugs with little therapeutic advantages over existing drugs.³⁹⁴ Typically, me-too drugs either have the same or similar active ingredient, or act on the same or similar drug target to the original drug.³⁹⁵ Light cited various independent reviews as evidence that 85-90 per cent of new drugs offer little or no clinical benefit to patients.³⁹⁶ Another study showed that of the 1035 new drugs approved by the FDA between 1989 and 2000, 76 per cent offered no significant clinical improvement over currently marketed products.³⁹⁷

The problem is exacerbated as there is no specific regulatory incentive to develop better drugs than what already exist. As regulatory approval requirements for

‘efficacy’ only require ‘substantial evidence’, this can be established by comparison                                                                                                                

391 M Boldrin, D Levine and A Nuvolari “Do patents encourage or hinder innovation? The case of the steam engine” (2008) 58 The Freeman 12 at 12. The article described the technological progress of improved steam engines in Cornwall, England, between 1772 and 1852, which were pivotal to the industrial revolution. The authors argue that patents suppressed incremental innovation, and that an

‘open source’ approach was more useful as it encouraged periods of rapid innovation.

392 As discussed above, these are drugs which achieve more that USD 1 billion in sales per annum.

393 A ‘me-too’ drugs is defined as a drug with enough differences to be patentable and to avoid an innovator’s patents, but having limited benefits over existing drugs. ‘Me-too’ drugs generally work by modulating the same drug target as existing drugs.

394 See M Angell The Truth About the Drug Companies: How They Deceive Us and What to Do About It (Random House, 2004) at 74; DW Light and JR Lexchin “Pharmaceutical research and development:

what do we get for all that money?” (2012) 345(1) BMJ 1 at 1.

395 For example, the blockbuster drug sildenafil (Viagra) is an inhibitor of cGMP-specific phosphodiesterase type 5 (PDE5). Me-too variations of PDE5 inhibitors were subsequently developed by competitors such as tadalafil (Cialis) and vardenafil (Levitra). Other examples of me-too drugs are the eight cholesterol-lowering statin drugs on the market: see JJ Gagne and NK Choudhry “How many

“me-too” drugs is too many?” (2011) 305(7) JAMA 711 at 711.

396 Light and Lexchin, above n 394 at 1-2.

397 Changing patterns of pharmaceutical innovation (National Institute for Health Care Management, 2002) at 8.

to placebo.³⁹⁸ Some commentators have argued that this standard is too low and that new drugs should be tested against the latest ‘first-in-class’ treatments.³⁹⁹

However, commentators have noted that me-too drugs are helpful as they offer more treatment options for doctors when a patient has failed to tolerate or respond to a previous drug,⁴⁰⁰ and also help reduce costs of drugs through price competition.⁴⁰¹ To the extent me-too drugs offer incremental improvements, they are also beneficial.⁴⁰²

Arguably, however, the current system lacks incentives to develop drugs for unmet medical needs and over-incentivises me-too drugs that have an established market.

H Conclusion

Unfortunately, the reliance on patents by pharmaceutical companies means that expenditure on medical research is biased towards ‘monopolisable therapies’ at the expense of socially valuable unpatentable, unmonopolisable and unprofitable therapies, which is likely to have an adverse effect on disease burden as well as contribute to the current productivity crisis facing the industry. The current patent system also encourages pharmaceutical companies to engage in excessive litigation and excessive marketing to maximise monopoly profits, even when this could harm patients. Furthermore, there is a potential anti-commons effect due to the possibility of competitors holding overlapping patents. Finally, there is an incentive to develop me-too drugs in order to obtain a share of lucrative monopoly rents in a proven market.

The next chapter will discuss the ways that governments and health insurers currently try to exercise control of monopoly prices over pharmaceuticals in order to ensure value for money.

398 Federal Food, Drug, and Cosmetic Act, s 505(d)

399 AB O’Connor “Building Comparative Efficacy and Tolerability Into the FDA Approval Process”

(2010) 303(10) JAMA 979 at 979.

400 A Wertheimer, R Levy and T O'Connor “Too Many Drugs? The Clinical and Economic Value of Incremental Innovations” in I Farquhar, K Summers and A Sorkin (eds) Investing in Health: The Social and Economic Benefits of Health Care Innovation (Volume 14, JAI Press, United Kingdom, 2001) 77 at 78-79.

401 Government Accountability Office, above n 21, at 29.

402 J Cohen, L Cabanilla and J Sosnov “Role of follow-­‐on drugs and indications on the WHO Essential Drug List” (2006) 31(6) Journal of Clinical Pharmacy and Therapeutics 585.  

IV Pricing and Reimbursement of Medicines A Introduction

Chapter Four will provide an overview of how the pricing and reimbursement of new medicines is determined under the current incentive system, which, as discussed in the previous chapter, relies on patent exclusivity to incentivise innovators to develop new medical therapies. The chapter will first discuss pharmacoeconomic analysis, which is a process used by governments and health insurers to assess cost-efficacy of medicines. As part of that discussion, the use of health metrics as pharmacoeconomic tools will be considered. Subsequently, the process of using these tools to determine pharmaceutical reimbursement in New Zealand and the United States will be compared.

B Pharmaceutical Pricing and Reimbursement by Payers

Global sales for patented medicines exceeded USD 596 billion in 2011.¹ Under the current system, the majority of the cost of patented medicines is reimbursed by government agencies and private health insurers, which are referred to in this thesis as

‘payers’. Price discovery in the pharmaceutical market is atypical because payers have a major role of determining price and overall rewards, as opposed to typical markets where the consumer decides what to pay.

As will be discussed in Chapter Five, payers reduce deadweight losses that would otherwise occur if the medicine was only available to consumers at the high monopoly price. For this reason, a negative or unfavourable reimbursement decision by a payer will effectively mean that the drug will not be available to the majority of patients. In a sense, because the reimbursement price allows the medicine to be available to consumers at a marginal cost, the decision to reimburse a medicine shares a lot in common with a government prize, discussed further in Chapter 6B, although the latter does not allow a ‘market-based’ negotiation of price after the medicine has been developed.² Accordingly, it is important to understand what factors are taken into account when payers negotiate reimbursement pricing, as this will affect

1 The Global Use of Medicines: outlook through 2016 (IMS Institute for Healthcare Informatics, July 2012).at 8. Total global spending on both branded on-patent and generic pharmaceuticals in 2011 was USD 956 billion.

2 In particular, as will be discussed in Chapter Five, a market-based mechanism involves a negotiation of price between a willing buyer and seller regarding a product. By contrast, for prizes, criteria for calculating the price are ‘pre-determined’.

incentives for development of medical therapies, and is useful for considering how rewards may be calculated under alternative reimbursement mechanisms.

In general, the payer’s task is to maximise the health benefits gained within a limited pharmaceutical budget. Payers accomplish this by evaluating the cost-effectiveness of drugs and leveraging their bulk buying power to negotiate lower prices. However, the responsibility of payers to obtain the most cost-effective price must be balanced against the need to ensure pharmaceutical companies are adequately incentivised to undertake research into new medicines. The mechanism used by payers to determine pricing and reimbursement decisions is called pharmacoeconomic analysis.