Lead Author: Marcus Low
Additional Author: Kristanna Peris
Organization: Treatment Action Campaign (Submission endorsed by SECTION27 and Knowledge Ecology International, KEI)
Country: South Africa
This contribution calls for changes to the international intellectual property framework for medical products so as to ensure increased investment on research and development (R&D) by holders of patents on medical products. It proposes compliance with a research mandate as a condition for maintaining intellectual property rights on medical products.
The current international intellectual property framework provides rights holders with market exclusivity that enables rights holders to charge high prices for medical products. High prices for medical products are typically justified by arguing that such high prices are required to recoup investments in past R&D and to ensure investment in R&D for future medical products. Available evidence however suggests that rights holders typically spend modest, and in some cases very low, percentages of revenue on R&D, given the fraction of the value of the final product that is based upon knowledge, as opposed to manufacturing costs.
The mechanisms proposed in this contribution are aimed at creating a regulatory and legal environment for rights holders on medical products that would redistribute investment toward medical R&D and away from marketing, advertising, and excessive profiteering. In addition, it proposes mechanisms by which such increased spending on R&D could be channelled to areas of greatest unmet medical need.
This contribution must be considered in combination with the contribution from KEI, TAC, and others focussing on transparency of R&D spending. While that contribution essentially argues for a transparency mandate, this contribution goes a step further and argues that a research mandate must be built on top of the foundations laid by a transparency mandate.
Introduction-Statement of the Problem
The current international intellectual property framework provides rights holders with 20 years of market exclusivity on all medical products that meet national patentability criteria. During these 20 years of patent protection there is often no effective limit to the prices that a rights holder can charge for the medical product in question. Potential price-limiting mechanisms like price regulation and/or compulsory licensing are either not implemented aggressively or not used at all.
High prices for medical products are typically justified by arguing that such high prices are required to recoup investments in past R&D and to ensure investment in R&D for future medical products. However, there is no legal obligation on rights holders to invest in medical R&D. There is also no mechanism to ensure that investment in medical R&D is directed at areas of greatest medical need. The current system gives rights holders the freedom to charge excessive prices for medical products and to spend the money raised through high prices as they wish (e.g. on advertising, litigation, dividends, or profits).
Available evidence suggests that industry invests a very low percentage of revenue on R&D – and typically spends significantly more on marketing. In 2014, the top ten pharmaceutical companies by market share spent an average of 15.5% of revenue on R&D according to GlobalData. By contrast, these ten companies spent an average of 23.04% on sales and marketing and earned a 19.6% profit on average. The World Health Organization (WHO) estimates that global pharmaceutical companies spend an average of 15% of total revenue on research and development. Conversely, an average of 30% of total revenue is spent on sales and marketing. A York University study in 2008 found that US pharmaceutical companies spent 13.4% of revenue on R&D and more than 24% of total revenue on marketing. According to PhRMA, the percentage of revenue dedicated to R&D amongst US pharmaceutical companies rose to an average of 17.8% of total sales on R&D in 2013: however, less than 1% of the total amount of money spent on R&D that year was dedicated to R&D for neglected diseases. According to the International Federation of Pharmaceutical Manufacturers and Associations, in 2014, USD137bn or 14.6% of the global pharmaceutical industry was dedicated to research and development. Of this, only USD525 million was allocated to research on neglected diseases. The WHO also notes that most of the 15% of the global pharmaceutical market spent on R&D is used for researching new drugs that will be utilized by the mass market, not for research on neglected diseases: only 10% of R&D expenditures are spent on diseases that account for 90% of the global disease burden, the so-called 10/90 Gap.
Widely varying estimates have been made regarding the absolute cost of drug development. A 2014 widely quoted, but yet to be published or made public, study conducted by DiMasi from Tufts University, estimated that the total cost of developing a new drug is USD2.6bn. This contrasts with DNDI research which estimates that developing a new drug can cost up to USD166.27 million – a fraction of the DiMasi estimate. In 2001, a study published by Adams and Brantner estimated the absolute cost of drug development at USD1.5bn. In 2010, a study conducted by Paul et al. estimated the total cost of drug development at USD1.8bn.
While much focus is placed on the absolute cost of drug development, spending on R&D as a percentage of revenue is a much more useful measure when considering potential policy interventions. This is because it provides a more accurate indication of how companies invest the income generated through the sale of medicines. It is clear from the above evidence that under current laws rights holders reinvest a relatively small fraction of sales into R&D on new products.
By introducing mandates for reinvestment in R&D, governments will have a mechanism to ensure there is robust funding for R&D, including in areas of priority, even as they pursue other policies that are designed to lower drug prices.
1. Impact on remedying policy incoherence
The policy incoherence of concern in this submission can be summarised as follows: While the justification for granting patent protection on medical products is to ensure investment in medical R&D that would serve the public interest, the evidence suggests that the granting of patent rights provides no guarantee of such investment in medical R&D. In addition, the investment in R&D that does take place tends not to be in areas of greatest medical need.
A well designed IPR-linked research mandate will address this policy incoherence by mandating rights holders to invest more in R&D. It will do so by making the maintenance of patent rights contingent upon compliance with an R&D mandate.
2. Impact on public health
A well designed IPR-linked research mandate will benefit public health by increasing investment on medical R&D. This will contribute to the accelerated development of much needed new medicines, diagnostics, and other medical tools.
In addition, such a mechanism could be tailored to channel investment to areas of greatest medical need rather than areas of greatest commercial potential. It could, for example, help fund the estimated USD1.3bn annual short-fall in tuberculosis research (as estimated by the World Health Organization). While TB is currently the infectious disease that causes the most annual deaths in human beings, only USD0.7bn is spent on TB research per year.
An IPR-linked research mandate could function in parallel with, and in support of, current and future legal and regulatory mechanisms aimed at ensuring access to medicines. It would however be essential for such a mechanism to be structured in such a way as to ensure that it does not have the unintended consequence of contributing to price increases.
3. Impact on human rights
The right to health is a fundamental human right that is recognised in various legal systems and in a number of international agreements – including the International Covenant on Economic, Social and Cultural Rights and the Universal Declaration of Human Rights. The right to health includes the right to access affordable vaccines and medicines that will prevent, treat and/or cure ‘neglected diseases’ and the right to access paediatric formulations, heat-stable, or appropriately co-formulated drugs that may not return a profit to pharmaceutical companies. This right is not being fully realized. This is partly because the social contract by which companies are expected to invest in useful medical R&D in exchange for patent protection is not being enforced. An IPR-linked research mandate is a potential mechanism to ensure this social contract is enforced in a way that contributes to the realisation of the right to health.
Globally, pharmaceutical companies are dedicating only a fraction of their profits to R&D for neglected diseases which leads to very little innovation in the field: between 1975 and 1999, only 13 (one percent) of the 1393 new drugs approved were specifically designed for neglected diseases. When new treatments for diseases that disproportionately affect developing countries are developed, they are often priced out of reach of the populations it is intended to benefit.
Pharmaceutical companies justify high prices by citing the high cost of R&D. However, as previously mentioned, pharmaceutical companies spend a disproportionately low percentage of revenue on R&D. A research mandate will both ensure greater investment in medical R&D in general and in neglected disease R&D specifically. An IPR-linked research mandate will thus help pharmaceutical companies realize their contribution to the right to health for all human beings by changing the regulatory or legal environment to push increased investment toward R&D.
4.1. Precedents regarding research mandates and conditions relating to intellectual property rights
Research mandates presently exist as part of a number of medicines regulatory frameworks. For example, the United States Food and Drug Administration (FDA) often makes the granting of regulatory approval for a medicine contingent upon a binding commitment to conduct additional clinical trials on the use of that medicine.
Some countries have instituted R&D mandates in other fields of technology (See the example from the Brazilian oil industry in section 4.4.5. below.).
There also already exist strong precedents for linking the maintenance of IPR to certain conditions or requirements. Patent holders are, for example, required to pay annual fees in order to maintain their patent rights.
These precedents, read together with the obligations that States have to take steps toward the progressive realisation of the right to health, establish that the introduction of IPR-linked research mandates falls within the bounds of reasonable regulatory or legislative intervention.
4.2. Key principles behind potential mechanisms that link IPR to research mandates
An IPR-linked research mandate mechanism will ideally be structured in such a way as to meet the following criteria.
• The mechanism must be structured in such a way as to ensure that the prices paid for medicines by governments, insurers or consumers will not be greater with the mechanism than what it would be without it.
• The mechanism must result in significantly increased investment in R&D as a percentage of revenue by holders of pharmaceutical patents. In other words, the mechanism must explicitly be designed in such a way as to incentivise the redistribution of funds from other areas (such as marketing, advertising, and profits) toward R&D.
• The mechanism must incentivise R&D investment in areas where the unmet medical need is greatest.
• The mechanism must function in parallel with, and must in no way impede on, other mechanisms or laws aimed at increasing access to medicines.
4.3. A potential mechanism for an IPR-linked research mandate
The below is a broad outline of what we consider to be a potential mechanism for an IPR-linked research mandate. We recognise that legislation or regulations aimed at implementing such a mechanism would have to be significantly more detailed and nuanced than what we present below. We also recognise that further research needs to be conducted on the potential impact of such a mechanism and the optimal form and structure of such a mechanism.
• For a company in possession of any pharmaceutical patents to maintain the rights to those patents it must, on an annual basis, file information confirming the following:
• That over the last 12 months the company spent a minimum of 30% of revenue on R&D and
• Spending on R&D over the last 12 months was at least double the combined spending on marketing and advertising over the same period and
• Spending on R&D over the last 12 months was at least double the company’s profits.
• For the purpose of this mechanism investment on R&D must include direct contributions made to approved medical R&D grant-making institutions at the national level or as part of a UN agency or a partnership with with a UN agency, such as the United States National Institutes for Health, the South African Medical Research Council (SAMRC), or TDR, the Special Programme for Research and Training in Tropical Diseases. A minimum of 20% of the patent holder’s R&D investment must be contributed to such institutions. Such institutions should be obliged to invest these funds in R&D relating to areas of greatest medical need.
• In cases where fewer than four companies hold a license or licenses to market a specific patented medical product, these provisions will apply to all license holders in exactly the same way as it applies to the original patent holder.
4.4. Examples of research mandates
Various forms of research mandates have been proposed and/or implemented to varying degrees. Below we briefly describe some examples.
In 1983, an R&D mandate proposal was made in connection with cisplatin, a cancer drug invented at Michigan State University. When generic producers wanted to sell cisplatin, Bristol-Myers (before Squibb merger) claimed competition and lower prices would reduce R&D. One generic producer’s response to this claim was a proposal for an R&D mandate on generic producers. The generic producer said that the government could require any amount of R&D investment, and specify also who the recipient of the funds would be.
A watered down version of the R&D mandate was eventually implemented, not in connection with the entry by generic producers, but in connection with a negotiation which gave Bristol-Myers a 5-year extension on its monopoly, in return for a 30 percent decrease in prices, and a $35+ million obligation to fund third party cancer R&D (supervised by the NIH). Later BMS would return to this idea in 1997, and propose a 5-year extension of its Taxol monopoly in return for a 6 percent R&D mandate on Taxol sales (with half going to the NIH and half invested by BMS).
4.4.2. Brazilian proposal to World Health Organisation
In a proposal made as part of a WHO consultation, the Brazilian government in 2009 proposed a tax on pharmaceutical profits that would go toward an R&D fund. The fund would be used only for R&D on medicines and vaccines that address public health needs of developing countries. The available resources could be drawn upon by the pharmaceutical industry, including the ones that paid the tax in the first place, in a partnership with national public or private laboratories from developing countries, in a public-private partnership fashion. Products resulting from those R&D activities would be made available to developing countries in accessible terms.
4.4.3. HR 4270, 104th Congress.
A US proposal by Representative Sanders in the 104th Congress (HR 4270) was made to require more transparency of R&D, and to impose minimum R&D requirements on companies that sell drugs in the United States. The contribution levels would depend on patent protection, orphan drug status, and the magnitude of sales. The 1996 Sanders' proposal demonstrated how one could make the overall level of private R&D investment a matter of public policy, and also that policy makers could do various things to protect consumer interests, and not worry about overall R&D levels, since there would be another mechanism (other than high prices) to increase private R&D investments.
Knowledge Ecology International submitted a proposal to be considered at the WHO World Health Assembly in May 2014 proposing a new form of sustainable funding for R&D on antibiotics. The proposal included a mechanism that taxed the use of antibiotic drugs and used the revenue from this tax to partially or completely fund R&D incentives or direct R&D on antibiotics. The mechanism also aims to regulate the usage of the tax funds so that it is not used towards low value uses of antibiotics that cause negative externalities.
4.4.5. R&D Mandates in the Brazilian Oil Fields
The Brazilian government began taking legal measures in 1998 to tie the right of oil exploration concessions to R&D funds. Under the Petroleum Law and Federal Decree 2,705, when production of oil or natural gas reaches a certain target, the concessionaire is required to make investments in R&D. The Concession Contract also requires the concessionaires to invest in R&D projects. The obligation, established by the National Agency of Petroleum, Natural Gas and Biofuels (ANP) in Resolution No. 33/2005, requires that an amount equal to 1 percent of the field’s gross product income must be invested in R&D projects. At least half of the 1 percent must be invested in previously accredited institutions by the ANP while the other half may be invested in development activities in the concessionaire’s own facilities. “The main purpose of this R&D investment requirement is to protect and channel the investments to institutions with high expertise, operational capability and technological standards.” Since 1998, the cumulative R&D investments from this program exceed USD3.3bn. In the future, the program is expected to raise up to USD2bn per year for R&D projects.
4.4.6. Research mandates in Columbia
In 2011, Colombia created new laws requiring that ten percent of the royalties of exploitation of oil, coal, gold, platinum, and other mineral resources by both the government and private sectors must be invested in various R&D projects. The funds are distributed to R&D projects based on where the need is greatest and increase the country’s R&D funding by almost 40%. Because of the success of these laws, Columbia is now a co-sponsor of a proposal before the World Health Organization to fund a prize fund designed to stimulate the development of new, low-cost diagnostic tests for cancer.
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