Monopoly Medicine The Built-in Inefficiencies of a Patent-Based Pharmaceutical R&D System

By James Love

While the pharmaceutical industry routinely exaggerates its expenditures on research and development (R&D), it does nonetheless spend billions annually.

According to the Pharmaceutical Researchers and Manufacturers Association (PhRMA), the trade association of the brand-name drug industry, its members spent more than $30 billion on R&D in 2003.

But while most people would agree that spending on R&D is a good thing -- and, indeed, incentivizing spending on R&D is the main rationale for having a patent system -- not all R&D is equally important.

The patent-based system does not provide rewards for R&D in general. Patents do not provide rewards for all innovations, only those for which there is a market.

Thus, most notably, perhaps, the system does not provide incentives for research into diseases that affect the poor in developing countries. While the health burden from these diseases may be tremendous, because the affected populations have no or minimal buying power, patents on drugs to cure or treat these diseases provide monopolies where there are few if any buyers. So, in general drug companies do not invest in what Doctors Without Borders calls the "neglected diseases" of the poor [see "An Epidemic of Neglect: Neglected Diseases and the Health Burden in Poor Countries," Multinational Monitor, June 2002].

Even in rich country markets, however, the patent system in many ways distorts healthcare research. The proprietary nature of the patent-based R&D system interferes with information sharing and collaborative research. The value of a patent is determined as much, and sometimes more, by the size of the disease market than the novelty of a patent holder's invention. Thus Big Pharma ploughs large sums of money into me-too drugs, which offer relatively minimal clinical benefits over existing therapies. And the 20-year marketing monopoly created by a patent leads drug companies to invest huge sums in marketing, and even to skew the research process with an eye to marketing opportunities once a drug is approved.

The Costs of Closed Science

While it is generally true that the greater the financial incentives, the greater the private sector investment in R&D, there are other very important non-financial factors that influence innovation. The primary barriers to the development of new drugs are cogitative. Clearly a "cure" for HIV would be worth billions, as would more effective treatments for cancer, diabetes and other severe illnesses diseases. Despite enormous sums invested to combat cancer, it is still a deadly disease, and scientists do not appear to be close to obtaining a vaccine or cure for HIV -- only treatments that will control or manage the consequences of infection.

Often the key cogitative breakthroughs are not the product of massive private investments, but rather the work of creative academic or government researchers who have the talent to understand the science and a sufficient amount of hard work and luck to make a breakthrough.

Recently, there has been renewed interest in the importance of shared information in the development process. New "open medicine" models, such as the government- and donor-funded Human Genome Project or the corporate-funded SNPs Consortium, seek to give all academic and industry researchers access to research tools and data, so that decentralized and collaborative research projects can apply different approaches and insights to different problems.

Sir John Sulston, a key figure in the Human Genome Project and the winner of the 2002 Nobel Prize for Medicine or Physiology, says that he believes open research is nine times as productive as proprietary research.

Dr. Harold Varmus, also a Nobel laureate and a former director of the U.S. National Institutes of Health, recently created the Public Library of Science and has become a leader in the Open Journals movement, designed to widen access to scientific information, particularly among researchers in developing countries that have the talent, but often lack access to quality medical research information.

Not So Original

Not all industry R&D is devoted to new products, and not all new products represent advances in terms of therapeutic benefits.

Thus, not all of the R&D costs reported by PhRMA have the same value to society.

The U.S. Food and Drug Administration (FDA) classifies new drug approval applications as standard or priority. For new drugs, the FDA awards a priority status if the product "would be a significant improvement compared to marketed products Ö in the treatment, diagnosis or prevention of a disease." Under the FDA's standard, improvement can be demonstrated by (1) evidence of increased effectiveness in treatment, prevention or diagnosis of disease; (2) elimination or substantial reduction of a treatment-limiting drug reaction; (3) documented enhancement of patient compliance; or (4) evidence of safety and effectiveness of a new subpopulation.

From 1993 to 2002, the FDA classified 31 percent of new molecular entities submitted for marketing approval as priority. The agency categorized 69 percent as standard. Thus, according to the FDA, more than two thirds of new products did not provide evidence that they were significantly better than existing therapies.

Using FDA approval letters, Michael Palmedo of the Consumer Project on Technology compared the number of patients in clinical trials cited by the FDA for new drug approval submissions from 2000 to 2002. According to the Palmedo analysis, for all trials, the average number of patients cited by the FDA was 2,253, and the median was 1,428.

For standard reviews -- that is, for drugs that do not show significant improvement over existing therapies -- the average number of patients in clinical trial submissions was 2,667 and the median was 2,238. For priority reviews, the average was 1,461, and the median was 905.

Assuming that the relative number of patients cited in the priority approvals is indicative of the relative investment in priority products, one can estimate the share of investment in new products spent to develop products that are significantly better than existing therapies.

Using the 31/69 ratio of priority to standard reviews and the 1,461/2,667 ratio of patients in trials, the share of investments in new products that have significant improvements over existing treatments is 20 percent. By this analysis, 80 percent of the industry's investment in new products is spent on projects that demonstrate no significant improvement over marketed products.

The number of truly innovative drugs may be much less than the number falling into FDA's priority category. Dr. Joel Lexchin, a Canadian expert on marketing practices and the evaluation of new medicines, points to the findings of an independent French drug bulletin, Prescrire International. Out of 2,500 new preparations or new indications for existing drugs that the bulletin evaluated between 1981 and 2001, it rated just 76 -- 3 percent -- as major or important therapeutic gains. It rated close to 1,600 as superfluous because they did not add to the clinical possibilities offered by previously available products.

The safe bet for pharmaceutical companies is to invest in a proven therapeutic area, and grab some of the market. Second and third comers into a market may not be disadvantaged against initial entrants.

The evidence is mixed regarding the value of the investing in "me too" products.

Marcia Angell, former editor of the New England Journal of Medicine, recently explained the dynamic to the Los Angeles Times, using the example of cholesterol-lowering statins. "There are now six different statins to lower cholesterol," she said. "The first, Mevacor, which was approved in 1987, was indeed an innovative drug. Other companies wanted to capitalize on this extremely lucrative market and they began creating other statins. Lipitor is now the biggest-selling drug in the world. But it's a me-too drug. There's little scientific evidence that any of them is better than the others in comparable doses."

However, in other cases, the late entrants are the better products, and firms learn to deal with important side affects, make drugs easier to use, or provide other benefits. For example, many of the most important AIDS drugs were not first in their class (d4T, 3TC, Efavirenz or Kaletra).

The problem with the patent system is that it may provide inadequate rewards for the more risky first-in-class products, which are more innovative, but which may lose market share to later, more refined or better marketed entrants, and relatively too much rewards for products like Lipitor, which earns billions as a knock-off statin.

Marketing-Influenced R&D

There is also good reason to believe that many of the industry's R&D expenditures are wasteful or designed to meet marketing rather than genuine scientific or public health objectives.

There exists considerable confusion and some controversy over the actual cost of performing clinical trials, but there is general agreement that spending on clinical trials has increased sharply in the past 15 years. Analysts suggest this is due in part to the greater complexity of new pharmaceutical products, but also a surge in tests to address pharmacoeconomic and marketing issues.

Increasingly, pharmaceutical companies are inserting marketing consultants into the clinical test design process. Their role is not to help meet regulatory requirements for marketing approval, but to frame studies that will persuade managed care organizations and doctors to prescribe their product. In many cases, the key is to show that their product offers some incremental benefit, however tiny and on whatever dimension, over existing products in the same therapeutic class. These advantages may be offset by other negatives -- not to mention price -- but obtaining those findings is not the purpose of the studies.

"We understand that the transition from clinical development to marketplace introduction is critical to the success of any pharmaceutical, biotechnology or medical device product," explains the consulting firm Abt Associates in a promotional brochure. "Our expertise can enhance your plans for research before, during and after market launch. Our projects -- which range from small-scale retrospective studies to large-scale prospective registries -- can be used to generate greater understanding of the use and value of a new drug, biologic or device. This understanding in turn supports its use by physicians and managed care organizations (MCOs) as well as appropriate coverage of reimbursement decisions by payors -- both public and private."

The firm brags that its involvement in research will translate into enhanced sales: "Abt Associates' skill and experience in post-marketing evaluations can help sponsors meet the needs of their marketing and sales teams. Since the 1970s, Abt Associates has conducted hundreds of prospective observational studies and longitudinal surveys to determine the value of healthcare products and services across a wide range of therapeutic areas. We will work with you to achieve the scientific credibility needed to maximize your product exposure."

A particularly controversial mixture between research and marketing is so-called "seeding studies," which are designed to promote the use of medicines. Seeding studies occur after a product is on the market. They have the ostensible purpose of undertaking the very important work of post-marketing surveillance -- tracking how a product performs when it is actually on the market, and being used in a real-world setting -- but are actually designed to achieve marketing purposes.

The studies themselves may be paid for by marketing departments, and data may be collected by sales representatives rather than contract research organizations. Typically, the studies do not follow appropriate research protocols -- they may lack a control group, for example, or have irrelevant research purposes.

The central features of such studies are relatively few patients involved, but recruitment from a large number of sites. The last element is key, because the real purpose of the studies is to induce doctors to prescribe the product.

The Netherlands Health Care Inspectorate analyzed seeding studies in a 2001 report. The Health Care Inspectorate found that industry plans for phase IV [post-marketing] studies "show that influencing prescriptions for the product being promoted and building up relationships with the doctor are mentioned" in more than two thirds of 71 examined cases. "The designations in the studies suggest that they could be described as scientific studies. The fact that no specific study objectives were mentioned in some of the studies leads us to assume that the execution of the study is not a prime objective. Ö Presenting these forms of influencing as research can be seen as socially unacceptable and unethical. It undermines the public's trust in healthcare."

An undetermined amount of investment in clinical trials, both before and after product approval, is related to marketing issues. Whatever the amount, surely the basis of the industry's claim that it has to be recompensed for high costs of R&D do not reasonably apply to its expenditures on R&D undertaken for marketing purposes.

Haste Makes Waste?

Research costs are also inflated by pharmaceutical companies' rush to market.

Firms are sometimes under tremendous pressure to speed the completion of clinical trials.

"Delays can cost pharma companies at least $800,000 a day in lost sales for a niche medication, such as Amaryl, an oral antidiabetic treatment, and as much as $5.4 million for a blockbuster like Prilosec, a gastrointestinal medication," explain McKinsey & Co. consultants in a 2002 newsletter from the consulting firm. The problem in many cases is much more than deferring income, the consultants explain: "Millions of dollars in revenue can vanish if a competitor catches up or, worse, gains the advantage with an earlier debut. Delays can also affect a company's valuation, since investors closely watch the progress of new drugs: efficient clinical trials put them on the market more quickly, so they take market share more quickly."

Big money is therefore at stake in speeding the clinical trial process, the McKinsey consultants conclude. "Taking a single month off a trial by improving recruitment could generate an additional $40 million in sales for an average drug," they conclude.

But to achieve these increased revenues, the consultants argue, "Pharma companies must radically alter their R&D efforts by improving the speed and efficiency of recruitment, and this in turn will streamline the whole clinical-trials process."

The bottom line: "To get patients into trials more efficiently, pharma companies must begin to think like marketers."

Since recruiting patients is one of the key bottlenecks in speeding trials, recent years have seen the emergence of a growing industry of firms that specialize in patient recruitment.

One such firm is the Mathews Media Group. In a promotional brochure, it promises to "take the guesswork out of the patient recruitment process."

"What's a better recruitment tool, TV or radio?" asks the brochure. "How many calls will it take to yield a patient on a study? What's the per-patient cost to fill a trial? What regulatory or institutional review board requirements should be considered? These are questions clinical investigators and study coordinators ask -- and MMG can answer. MMG designs patient recruitment strategies to help clients find the participants they need for clinical studies -- strategies customized to therapeutic area, target audience demographics and eligibility. We base each tactic on outcome data from our extensive database of results from previous trials and on statistics derived from MMG's call center, study sites, media tracking and research."

Another important mechanism to speed patient recruitment is to pay patients to participate, or to pay bounties to the doctors or other health care workers who recruit patients.

The difficulty of recruiting patients increases when the benefits of being a test subject are small, and when the risks are large or uncertain. It is much easier to recruit patients for a promising product for a severe illness that has no satisfactory treatment than it is for a "me too" product that is unlikely to be significantly better than existing therapies and that has risks of adverse side affects.

So while the industry may in fact incur non-trivial costs in rapid patient recruitment, just as with trials that are really designed to serve marketing purposes, these costs are largely driven by the companies' market positioning, not by public health considerations.

The incentive to invest so heavily in marketing and marketing-related measures masquerading as research, and to be so influenced in the research process by marketing considerations, is a function of the patent-based system. Under the patent-based system, innovators are rewarded with a marketing monopoly. That drives what kind of research they do, and it determines what practices will enable them to profit from their products. It is a system that in many ways creates incentives for marketing more than for research, and that inevitably drives the marketing mission to corrupt the R&D process.

James Love is director of the Washington, D.C.-based Consumer Project on Technology.