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Drug Development

The Atlantic on Drug R&D

“Can you respond to this tripe?” asked one of the emails that sent along this article in The Atlantic. I responded that I was planning to, but that things were made more complicated by my being extensively quoted in said tripe. Anyway, here goes.
The article, by Brian Till of the New America Foundation, seems somewhat confused, and is written in a confusing manner. The title is “How Drug Companies Keep Medicine Out of Reach”, but the focus is on neglected tropical diseases, not all medicine. Well, the focus is actually on a contested WHO treaty. But the focus is also on the idea of using prizes to fund research, and on the patent system. And the focus is on the general idea of “delinking” R&D from sales in the drug business. Confocal prose not having been perfected yet, this makes the whole piece a difficult read, because no matter which of these ideas you’re waiting to hear about, you end up having a long wait while you work your way through the other stuff. There are any number of sentences in this piece that reference “the idea” and its effects, but there is no sentence that begins with “Here’s the idea”
I’ll summarize: the WHO treaty in question is as yet formless. There is no defined treaty to be debated; one of the article’s contentions is that the US has blocked things from even getting that far. But the general idea is that signatory states would commit to spending 0.01% of GDP on neglected diseases each year. Where this money goes is not clear. Grants to academia? Setting up new institutes? Incentives to commercial companies? And how the contributions from various countries are to be managed is not clear, either: should Angola (for example) pool its contributions with other countries (or send them somewhere else outright), or are they interested in setting up their own Angolan Institute of Tropical Disease Research?
The fuzziness continues. You will read and read through the article trying to figure out what happens next. The “delinking” idea comes in as a key part of the proposed treaty negotiations, with the reward for discovery of a tropical disease treatment coming from a prize for its development, rather than patent exclusivity. But where that money comes from (the GDP-linked contributions?) is unclear. Who sets the prize levels, at what point the money is awarded, who it goes to: hard to say.
And the “Who it goes to” question is a real one, because the article says that another part of the treaty would be a push for open-source discovery on these diseases (Matt Todd’s malaria efforts at Sydney are cited). This, though, is to a great extent a whole different question than the source-of-funds one, or the how-the-prizes-work one. Collaboration on this scale is not easy to manage (although it might well be desirable) and it can end up replacing the inefficiencies of the marketplace with entirely new inefficiencies all its own. The research-prize idea seems to me to be a poor fit for the open-collaboration model, too: if you’re putting up a prize, you’re saying that competition between different groups will spur them on, which is why you’re offering something of real value to whoever finishes first and/or best. But if it’s a huge open-access collaboration, how do you split up the prize, exactly?
At some point, the article’s discussion of delinking R&D and the problems with the current patent model spread fuzzily outside the bounds of tropical diseases (where there really is a market failure, I’d say) and start heading off into drug discovery in general. And that’s where my quotes start showing up. The author did interview me by phone, and we had a good discussion. I’d like to think that I helped emphasize that when we in the drug business say that drug discovery is hard, that we’re not just putting on a show for the crowd.
But there’s an awful lot of “Gosh, it’s so cheap to make these drugs, why are they so expensive?” in this piece. To be fair, Till does mention that drug discovery is an expensive and risky undertaking, but I’m not sure that someone reading the article will quite take on board how expensive and how risky it is, and what the implications are. There’s also a lot of criticism of drug companies for pricing their products at “what the market will bear”, rather than as some percentage of what it cost to discover or make them. This is a form of economics I’ve criticized many times here, and I won’t go into all the arguments again – but I will ask:what other products are priced in such a manner? Other than what customers will pay for them? Implicit in these arguments is the idea that there’s some sort of reasonable, gentlemanly profit that won’t offend anyone’s sensibilities, while grasping for more than that is just something that shouldn’t be allowed. But just try to run an R&D-driven business on that concept. I mean, the article itself details the trouble that Eli Lilly, AstraZeneca, and others are facing with their patent expirations. What sort of trouble would they be in if they’d said “No, no, we shouldn’t make such profits off our patented drugs. That would be indecent.” Even with those massive profits, they’re in trouble.
And that brings up another point: we also get the “Drug companies only spend X pennies per dollar on R&D”. That’s the usual response to pointing out situations like Lilly’s; that they took the money and spent it on fleets of yachts or something. The figure given in the article is 16 cents per dollar of revenue, and it’s prefaced by an “only”. Only? Here, go look at different industries, around the world, and find one that spends more. By any industrial standard, we are plowing massive amounts back into the labs. I know that I complain about companies doing things like stock buybacks, but that’s a complaint at the margin of what is already pretty impressive spending.
To finish up, here’s one of the places I’m quoted in the article:

I asked Derek Lowe, the chemist and blogger, for his thoughts on the principle of delinking R&D from the actual manufacture of drugs, and why he thought the industry, facing such a daunting outlook, would reject an idea that could turn fallow fields of research on neglected diseases into profitable ones. “I really think it could be viable,” he said. “I would like to see it given a real trial, and neglected diseases might be the place to do it. As it is, we really already kind of have a prize model in the developed countries, market exclusivity. But, at the same time, you could look at it and it will say, ‘You will only make this amount of money and not one penny more by curing this tropical disease.’ Their fear probably is that if that model works great, then we’ll move on to all the other diseases.”

What you’re hearing is my attempt to bring in the real world. I think that prizes are, in fact, a very worthwhile thing to look into for market failures like tropical diseases. There are problems with the idea – for one thing, the prize payoff itself, compared with the time and opportunity cost, is hard to get right – but it’s still definitely worth thinking about. But what I was trying to tell Brian Till was that drug companies would be worried (and rightly) about the extension of this model to all other disease areas. Wrapped up in the idea of a research-prize model is the assumption that someone (a wise committee somewhere) knows just what a particular research result is worth, and can set the payout (and afterwards, the price) accordingly. This is not true.
There’s a follow-on effect. Such a wise committees might possibly feel a bit of political pressure to set those prices down to a level of nice and cheap, the better to make everyone happy. Drug discovery being what it is, it would take some years before all the gears ground to a halt, but I worry that something like this might be the real result. I find my libertarian impulses coming to the fore whenever I think about this situation, and that prompts me to break out an often-used quote from Robert Heinlein:

Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded — here and there, now and then — are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.
This is known as “bad luck.”

44 comments on “The Atlantic on Drug R&D”

  1. Electrochemist says:

    If these scientifically illiterate journalists have such great ideas about drug discovery and development, they should quit muckraking and start their own companies. I’m sure the VC boys would line up 2-deep to give them money to fund their
    superb ideas.

  2. Oldunke says:

    No one in their right mind should give money to the UN or any of these other “world” organizations. They are even less cost-effective than our own government. $100 in and you might get $5 worth of work done – the rest will be outright stolen or spent on pet projects.

  3. A Nonny Mouse says:

    Strange, as those drug companies that have any interest in malaria tend to collaborate with organisations such as MMV which have the dedicated resources to deal with disease.
    A quick glance at the MMV R&D effort shows collaborations with several familiar names.

  4. Brett says:

    The whole “opportunity cost” factor really needs to be driven hard into the heads of journalists studying these things. If you don’t offer substantial profits in a risky business where tons of drugs fail and it takes years to get pay-out, then investors are just going to say, “Screw this” and put their money in something shorter-term and safer.

  5. lynn says:

    Also, check out DNDi – lots of pharma partners for neglected diseases [].

  6. Puff the Mutant Dragon says:

    What a joke. I love how he says the pharma industry needs to be “goaded” into producing new drugs like antibiotics. I happen to work at a small pharma that’s working on developing new antibiotics, and we don’t need any “goading”, we’re working on it, dammit. Not sure what he is talking about

  7. Electrochemist says:

    @6 Puff:
    Yep; spot on. Another great phrase from the article: “…the storied advocacy group Public Citizen.”
    That’s akin to saying something like: “…the storied social reformer Pol Pot.”

  8. A Non-Mousse says:

    #6: True, but I think the general belief that pharma would rather spend more on drugs for heart disease than on antibiotics because there’s more money to be made off of the former is quite valid.

  9. Stu West says:

    I think I like the idea of libertarian impulses within an industry that depends on a government-enforced monopoly to make its profits. It’s a nice little bit of cognitive dissonance.

  10. JL says:

    “Tripe” is exactly what I’d call Till’s article. It’s a factually inaccurate, rambling, poorly written mess. Whatever happened to editors, copy editors, and fact checkers in journalism?

  11. anon the II says:

    I didn’t read the article. You talked me out of it. Too many better things to do.
    But I do appreciate the Heinlein quote. A one of many who despises the small minority as much as aspire to be one of them, the quote provokes a bit of introspection.

  12. RB Woodweird says:

    There’s some kind of esoteric philosophic principle illustrated in the Heinlein quote which I did not go to a liberal enough school to know the Latin name of, but it is something like this: Everyone agrees with Heinlein, but everyone thinks that the “small minority” is them. Scientists think it is them, engineers think it is them, doctors think it is them, hedge-fund managers think it is them. Therefore the quote is both accurate and useless.

  13. Vanzetti says:

    >>>I think I like the idea of libertarian impulses within an industry that depends on a government-enforced monopoly to make its profits. It’s a nice little bit of cognitive dissonance.
    The industry exists because of the government-enforced monopoly. Without it, there would no drugs at all but those developed directly by the government.

  14. anon says:

    Many good points, but my question for everyone is- does the market system work for essential services such as healthcare. Most people wouldn’t be calling multiple hospitals to comparison shop ER prices.
    You can say that food is an example where market forces has given much to many, but isn’t it partly the market nature of it that gives us industrial products that don’t really resemble food. And besides not many people can whip up a batch of Velcade in their backyard as they can with veggies.
    Profits are fine, and markets do good things, but when questions of morality/values come in, the Market can not provide an answer- checkout Michael Sandel’s book for examples.

  15. Nekekami says:

    Derek: Unfortunately, the link you gave to check spendings isn’t too terribly informative.
    However, to give you an indication: 16% of revenue going into R&D would put you right on the average in terms of semiconductor R&D spending. Yes, that would be the AVERAGE. Some are down at 8%. Others are up at 30%

  16. Derek Lowe says:

    #15 Nekekami –
    I’ll do a longer post on just that issue. Try looking at the big companies. If you arrange the biggest R&D spending companies in the world by their % of revenues spent, it goes like this: Roche, Merck, Novartis, AstraZeneca, Intel, Nokia, Sanofi, GSK, Pfizer.
    That, to me, says that “Big Pharma” spends at levels that do not deserve an “only” in front of them. But I’ll have more tomorrow.

  17. Nekekami says:

    #16 Derek:
    And how does it look if you compare the average of the top 12 pharma R&D spenders vs the average of the top 12 semiconductor R&D spenders?

  18. SK says:

    The whole point of a prize system is that it would be optional- if it didn’t provide sufficient incentives for R&D compared to the “opportunity cost” of not investing in more lucrative markets then innovator companies would not invest. However, in an industry where R&D productivity is halving every 9 years per dollar spent, some of these therapies for which market exclusivity does not provide sufficient incentives for development (i.e. “neglected diseases”, antibiotics and other therapies for which market exclusivity cannot be used to recover monopoly prices, including second indications for generic drugs, diets, lifestyle interventions, natural medicines) might be “low hanging fruit”.
    Prizes could be based on proven health outcomes such as increased QALYs. The Health Impact Fund is an example of how it could work in practice – there is a fixed budget (say US$6 billion p/a – each country would contribute a small % of GDP) and companies can choose to “register” their new drugs (for which market exclusivity provides insufficient incentives e.g. neglected diseases, antibiotics) with the Fund. They will get a percentage of the fund according to their health impact compared to other registered drugs for that year (e.g. total QALYs per year due to that drug compared to other drugs – the assumption is that it is possible to obtaining a reliable measurement efficiently) for the next 10 years. Importantly, the prize would not be linked to number of pills sold, but the amount of health impact. The prize value will be self-correcting, if the number of registrations is too low, this will drive the prize rewards higher, and vice-versa.
    Another way to value the prize is to slowly increase the potential rewards until you obtain the optimal number of registrations/interest.
    Regarding how to combine it with an open source model – there is a “pre-competitive” phase where collaboration drives R&D. This would be where new biomarkers need to be developed, as well as validation of drug targets and generation of reliable animal models. Arguably, patents thickets can create inefficiencies here. The competitive phase would be once a drug candidate is ready for clinical testing. At that time, the prize model could provide “clinical exclusivity” to the first sponsor over their molecule. The reward would be paid upon achieving regulatory approval. The sponsor could chose a period of market exclusivity as a reward (which would be more lucrative for diseases which have a large and profitable market) or the prize payments (which would incentivise therapies where market exclusivity does not work e.g. neglected diseases).

  19. Jose says:

    Sheessh- Sanofi is spending gobs of money on a dengue vaccine (plant completed, multiple Phase III trials underway) and GSK has sunk huge amounts of money into the RTS,S vaccine and trials for malaria over the past decade.

  20. SK says:

    @ Jose
    What is “gobs” and “huge amounts” in comparison to overall R&D spending? Only 10% of global R&D spending is spent on treatments which relate to 90% of global disease burden (the so-called 10/90 gap). Of 1393 new chemical entities achieving regulatory approval between 1975 and 1999, only 16 were for tropical diseases and tuberculosis.
    Obviously, there is a market failure. Is it enough to rely on private charitable giving? Patent monopolies are also a government reward, but they fail to incentivise this R&D. Why not fix the broken model and provide alternative incentives?

  21. Puffenstuff says:

    Assuming we are looking for a proxy for how dedicated a company is to creating products, I would be more interested in seeing a comparison of R&D + manufacturing.
    An Intel chip fab costs several billion US Dollars and they have to retool every few years. If I understand correctly, manufacturing costs for pharmaceuticals are tiny compared to R&D. In fact, is there any other industry which has such enourmous R&D costs compared to manufacturing?

  22. Jose says:

    @ SK
    I sure as hell am NOT an apologist for the industry, but $350 million EUR is not pocket change:
    That said, SP clearly hopes to profit from all the middle-income and high income countries with dengue; they’re not stupid.

  23. Doug Steinman says:

    For future reference, when you talk to journalists you have to talk to them in “sound bites” because that is all they understand and all that they will print in an article. Once you get into a long and involved explanation, things tend to get lost and you end up getting misquoted, or worse.

  24. MTK says:

    So what if large Pharma, or any other free enterprise, doesn’t work or spend money on unmet third world problems?
    I know it sounds cold, but I don’t know of any moral, ethical, fiduciary, or legal obligation for them or anyone else to do so.
    Do we rail on Intel for not producing cheap, but slower, chips so that computers can go in third world schools? Have we pilloried Ford or Toyota for failing to commit significant resources to producing third world transportation solutions? What are Samsung’s moral obligations to spend R&D money on cheap wireless phones for third world consumption rather than on expensive high-end smart phones? What exactly is the largest hospital system in the US, HCA, Inc. with revenues of $33B in 2010, doing for third world healthcare? Does anyone care?
    If companies want to do any of these things for whatever reasons, ethical, financial, or otherwise, that’s great, but I see no reason why they are obligated to do so or why the Pharma industry should be held to a higher standard regardless of how much they spend on R&D.

  25. anon says:

    Because the areas you are talking about- chips, phones, cars are NOT essential human needs, unlike healthcare. it doesn’t matter to you because it doesn’t affect you, but access to healthcare is not a problem that the Market can solve. Unless you, like Ron Paul, thinks we should let a young man die because he can’t afford healthcare; that or let the churches take care of them, all of them.

  26. Ernie G says:

    I can’t see this implemented without some sort of a huge commission, with committees, an elaborate bureaucracy, and conferences at expensive resorts.

  27. charles austin says:

    anon, yes of course, talented people should be slaves to satisfy someone else’s needs, even if those needs are only your need to know that their slavery is for a good cause.

  28. The Sanity Inspector says:

    I am very pleased to see that Corante is still alive, but will someone please clear out the deadwood on this site! Does Corante even have a webmaster anymore?

  29. DensityDuck says:

    ” access to healthcare is not a problem that the Market can solve. ”
    Sure it is. You just need to de-link, as they say, the notion of “healthcare” and “emergency care”. Cancer is bad, but it’s not emergent; you don’t suddenly break out in cancer and fall over on the floor and die. You’ve got some time to talk to different treatment centers, say “what services do you provide”, “what’s your success rate for treating this kind of cancer”, “how much does it all cost”, and so on.

  30. Andy Freeman says:

    > access to healthcare is not a problem that the Market can solve.
    Oh really? The market has provided more access to healthcare than all other mechanisms combined.

  31. Garrett says:

    Why is it that we have somehow absolved the countries afflicted with these diseases from working on and curing these diseases? After all, other diseases weren’t cured through charity but a long and difficult research and development effort.

  32. Collin Dow says:

    Access to healthcare is a problem ONLY the market can provide. Trying to centrally plan one of the most complex systems in the world leads to…poor outcomes, like in Canada, Britain, and all of Europe.

  33. anon says:

    How do you define poor outcome? Is it less healthy people, more money spent, unsustainable system?
    How has the Market system solved any of these problems in this country?

  34. Sam Adams The Dog says:

    “But if it’s a huge open-access collaboration, how do you split up the prize, exactly?”
    And also, if researchers are competing for prizes, how open are they going to be about their work?

  35. MTK says:

    So why don’t we require HCA, Inc. or the Mayo Clinic to open hospitals in the third world?
    Where’s the handwringing that Harvard Medical School or Johns Hopkins doesn’t open branch campuses in Mali?
    Where’s the outrage that Calgon Carbon doesn’t develop water purification systems that any village in any third world country can implement for a song?
    If healthcare is a right, then why aren’t we proposing treaties requiring them to do more? Heck, cheap water purification would do way more for human health than new drugs.

  36. ech says:

    @21 ” In fact, is there any other industry which has such enourmous R&D costs compared to manufacturing?”
    Sure: Music, TV, Movies, Software. Millions to make, pennies to distribute. Much cheaper than Pharma. Oh, and the US is world leader in them.

  37. V says:

    #12. RB Woodweird said: “There’s some kind of esoteric philosophic principle illustrated in the Heinlein quote which I did not go to a liberal enough school to know the Latin name of, but it is something like this: Everyone agrees with Heinlein, but everyone thinks that the “small minority” is them.”
    Haha! The Dunning-Kruger Effect.
    Yet, as a libertarian, my view is that Heinlein is referring to a somewhat different aspect. That there is an ‘Archimedes lever’ effect whereby those individuals, albeit small in absolute number, who inhabit the far right tail of the g-loaded/intelligence distribution have an outsized and large multiplier effect on our civilizations actual progress — these few are the engine of creation.*
    Your extension into the question of who considers themselves to be the select few is orthogonal to his general idea. Rather it’s a very pointed critique on social policy targeted at the “middle class” or the “average man” which several economic and political theories hold out to be the major driving force of civilization.
    *History seems to back this up as we move in punctuated bursts predicated by a single diversion. See the outsized effects of individuals: Napoleon and Hitler and Marx; Descartes and Wittgenstein; Gauss, Netwon, Einstein and von Neumann; Da Vinci, Michelangelo and Dali, etc.

  38. Hap says:

    32: Um, don’t all of those countries have better health care than the US, in terms of life expectancy (not big differences), infant mortality, and cost? The former two might go away if everyone were covered (infant mortality in particular would probably look better) but would probably increase the costs further. That doesn’t seem to support the claim of “market = effective, central planning = ineffective”.
    Also, not all of the places you cited have single-payer or centrally run healthcare – I think Switzerland is a private, but gov’t mandated, system.

  39. melow says:

    At those who say that universal health care in other countries is better than the U.S:
    How much of their own medicine is created just by their own systems with out any outside influence?
    Technology and experience get spread around as products are sold then imitated and when doctors and scientists change jobs, teach, and move.
    Can you tell us that they get no technology, no experience, no knowledge from giant capitalist Pharma?

  40. Hap says:

    It mostly works for capitalism, with caveats. I would guess most (recent) drugs were found or developed in the US, though Europe has some capacity (GSK/Novartis/smaller Bayer). (Note, though, that lots of our expertise was developed elsewhere – money has given good incentives to expand and improve it but we didn’t get it all de novo).
    On the other hand, all of the recent business and outsourcing issues around pharma revolve around the inability to make enough money to pay for drug development, either by getting money from customers (mostly insurance), getting money out of R+D (by sending it away or hoping someone else does it for them), or getting more customers (DTC ads, followed by massive sanctions and increased safety emphasis by FDA which yields fewer drugs). I know markets don’t have to be pretty, they only have to work, but it appears ugly enough (not just in human terms, but in market terms) that it’s hard to tell whether it’s working or not.

  41. teapartydoc says:

    The viewpoint of government: If it moves, tax it; if it still moves, regulate it; if it stops moving, subsidize it.
    -Ronald Reagan

  42. Fred the Fourth says:

    A couple more computer industry data points from my own experience:
    – A producer of MIL-spec rugged computers for DOD & industry: its R&D was 15% at a time when comparable companies were averaging 12%, and that 15% was considered very risky.
    – Price drops on older chip designs: Remember the Intel 80286 that powered the IBM PC-AT? $ hundreds for each chip, in the 1980’s. The last time I checked prices on them (about 1998), they were 12 cents each (for a vastly superior redesigned part, too) and being bought in truly massive quantities (to run things like refrigerators and clothes washers).

  43. JosieB says:

    One reason those European and Canadian health systems operate more cheaply is because they don’t pay market prices for new drugs. They refuse, and the drug companies take the view that selling their products for anything over marginal production costs is the best deal they can get. The American consumers pay higher costs, which pharma companies use to amortize their research and and FDA approval expenses. It’s still a market, sort of, but with a bunch of free riders.

  44. Hap says:

    1) I’m not sure how much credence I should give Reagan on government policy – if he helped the economy, he did it in large part by spending his (and everyone else’s) kids’ money via the deficit, and did it to support a larger government, just one more focused on defense. Either by intention or timing, he never tried to balance the spending with the cuts needed to make everything balance. It seems like going to Donald Trump for advice on how to get rich – he’s gotten rich at least thrice, and gotten poor at least twice.
    2) The problem is that there isn’t really a free market here, either – if people paid (could pay) for their own medications, the prices charged for drugs would quickly become untenable. The prices aren’t really what anyone would pay – instead the costs are spread out under insurance (with the insurance company’s costs and profit slipped in as well), and the insurance market is probably not free, either.
    In addition, the differences in health care costs probably don’t simply reflect free ridership benefits (for example, if drugs are 10% of medical costs, then the biggest benefit in costs would be 10%, and the cost differentials between health care in different places and the US are a lot higher than that. I don’t suspect that other consumables have significant free rider benefits on them, and don’t think instrument costs are a similar fraction of health care spending to drugs).

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