Idea: NIP, National Institutes of Pharmaceutics

by Alan Cohen

The problem, in brief: Drugs are expensive. This is not because they are expensive to make, but because they are expensive to develop, and because pharmaceutical companies hold patents. The high drug prices mean that many who need them don’t get them, and that many who do get them become impoverished as a result. Drug costs represent a substantial and growing percentage of medical expenditures, regardless of how they are paid for. However, pharmaceutical companies argue (reasonably) that without patent rights, they would have no incentive to conduct the risky, billions of dollars of research necessary to develop the drugs. So, how can we get cheap drugs to the population without slowing down future drug development?

The problem, in a bit more detail: As every good liberal member of society knows, the evil pharmaceutical companies (“Big Pharma”) spend billions of R&D dollars developing slight chemical modifications to existing drugs, just so they can have the patent rights to something that isn’t really new. Furthermore, most of these drugs are yet another version of an allergy drug or Viagra: not exactly the cure for cancer or a malaria vaccine. Then they market these useless pills to doctors and the public, causing an overuse (and inappropriate use) of medication, and taking tons of money out of the pockets of little old ladies struggling to get by on social security. Most of these drugs are unavailable to the impoverished masses in the developing world. So, in sum, we have a system that makes pharmaceutical companies rich at the expense of the poor, the sick, and the elderly, despite the meager contributions of Big Pharma to societal well being.

This portrait strikes me as a bit unfair: Big Pharma does develop lots of useful drugs as well, and some companies have made substantial efforts to get cheap AIDS drugs to the developing world, though this took longer than it should have. Furthermore, the system as it exists virtually ensures the current state of things, such that individual companies are less to blame than the profit incentives built into current law in most developed countries. A pharmaceutical company that doesn’t follow this playbook (at least in its broad outlines) is unlikely to be profitable, and thus to disappear from the market.

Nonetheless, it is indisputable that drugs are quite expensive, particularly in the US, and that this represents a substantial financial burden to some of the most vulnerable parts of society. Even when this burden can be mitigated by some sort of governmental support for costs, a failure to rein in increasing medication costs presents a major challenge to society: somebody is paying for the drugs. Some suggested solutions to this problem involve convincing doctors to use fewer prescriptions; while this idea has merit, it’s not the one I’ll address here.

The idea: Create a National Institutes of Pharmaceutics (NIP) in the US to mirror the National Institutes of Health (NIH) and use it to dole out research grants to fund drug development. Fund it through billions of dollars of public money above and beyond the current NIH budget. Eliminate most of the pharmaceutical patent system so that the resulting technology is in the public domain and new drugs can be manufactured generically at low cost as soon as they are discovered and approved.

Some potential problems and how to deal with them:

1)    What to do about sales of drugs in other countries? Is the US expected to subsidize pharmaceutical research for everyone?

There needs to be a clear framework for sharing technology and costs internationally. For example, instead of an NIP, we might have an IIP (International Institutes of Pharmaceutics), with monetary contributions from different countries proportional to their GDPs. We might also have national or multi-national patents, where countries involved in the research can control the intellectual property of the drugs in countries that don’t participate, but not within their own borders.

2)    Who conducts this research and where?

Certainly much of the research could be conducted at universities. Currently many university researchers, particularly in health-related disciplines, are supported through the “soft money” system, in which their salaries come largely from grants, not from the university itself. This system would undoubtedly expand to include many more chemists and various research institutes. Because coordination among many researchers could be key, funding would be more likely to go to institutes and centers rather than to the individual researchers themselves. Also, given the need to find ways to get the drugs to market eventually, many of the grants might go to private companies specialized in the research, particularly at the later stages of development.

3)    How do we pay for it?

This would be a large chunk of US discretionary spending, certainly in the 10s of billions of $US. Certainly there are ways to pay for it by increasing taxes, decreasing other spending, and so forth, but one option might be to simply tax all pharmaceuticals. This would mean that the after-tax price of pharmaceuticals would, on aggregate, reflect their cost to society. The merits of such an approach depend on what supports are available to help vulnerable populations get access to the drugs.

4)    Private pharmaceutical and biotech companies have expertise in bringing drugs to market that university researchers don’t have. How do we bridge this gap?

This is a critical and difficult question. It is possible that giving some research grants to private companies through the NIP might be sufficient. I am not enough of an expert to comment on this, but certainly many details of the policy would have to be written with this in mind.

5)    Centralized funding agencies tend to be conservative, and may miss important opportunities that individual researchers and investors can currently pursue through biotech start-ups. How can we keep this innovation if we get rid of patents?

Another critical question. It may be necessary to keep some limited patents for small start-ups. Another option is a prize money approach: to offer, say, $1 billion to any company that successfully develops a drug of Type X. Such approaches would still allow venture capitalists to fund start-ups much as in the current system, with the major difference being that the payoff is not for what will sell but for what society needs for its health.

Why it works: Although government programs get a bad rap in the US, they can sometimes be a very efficient way to achieve societal goals, and the NIH is a good example of this. Any researcher who has tried to fill out an NIH grant application has certainly been frustrated with the paperwork, but on balance it is hard to deny that the NIH does a quite decent job of allocating money for medical research and achieving substantial results: far from perfect, but much better for society than what a free market would produce. Why couldn’t the same principles work for drug development? Fund the research with public money, and in return keep the intellectual property in the public domain. This will allow the NIP to set research priorities (think: cancer drugs and malaria vaccines as opposed to slight modifications of existing allergy meds), in the end delivering a lot more bang for research buck in terms of what drugs get produced.

In a larger sense, it is helpful to frame the problem at a societal level: there is a need for new pharmaceuticals, and there is a cost to developing them. There is also a need to deliver existing and future pharmaceuticals to the people who need them, and a cost to their production. Generally speaking, the manufacture of a pill doesn’t cost much, so the critical issues in terms of cost are R&D costs and any costs incurred because certain companies hold monopolies through patents and thus raise prices to make a profit. These R&D costs can be born by Big Pharma and paid for in the prices of the drugs while on patent, or they can be born by the NIP and taxpayers. It is thus wrong to think of the taxes that would pay for this research as stifling growth: it is more or less the same research that would have been conducted by Big Pharma anyway, except more focused on the targets most useful to society. By transferring the R&D to the public domain, and with it the intellectual property rights, the associated costs can be more fairly distributed, rather than disproportionately to those with health conditions needing new (versus old) drugs.

Additionally, the R&D costs go much deeper than is normally acknowledged: each drug rests on a foundation of basic science mostly paid for with public funds, and often this basic science led right up to the doorstep of the drug, at which point one of the scientists took the fruits of the public investment and created a start-up firm to capitalize on the potential.

As well, there is a general sense for most people that drugs are different from, say, iPhones: you may want that new iPhone, but it’s not really a matter of life and death. For many pharmaceuticals, it is literally a question of lie and death, meaning that anyone with a patent can charge exorbitant rates and still be assured of sales, and that many people will bankrupt themselves in order to get them. These stakes mean that market forces are likely to result in a situation that most of us find unappealing: vulnerable populations either bankrupted or without access to drugs that cost pennies to manufacture.

Lastly, by taking the intellectual property rights for drugs away from the pharmaceutical companies, you also take away the incentives to market the drugs and to try to influence drug consumption in ways that may not benefit patient health. No more Big Pharma-paid trips for doctors to tropical resorts, no more TV commercials for Cialis (for better or worse…)

Thus, while there are many important details that would need to be done right for this proposal to work, on balance there is great potential to lower the total drug R&D costs, to distribute them more fairly across society, and to more efficiently achieve drug development where it is a priority for health reasons, not for financial ones.


But wouldn’t Big Pharma oppose any such plan, stopping it dead in its tracks in congress?

Possibly, but not necessarily. From Big Pharma’s perspective the current system leaves much to be desired. The costs of developing a single drug are exorbitant and there is a substantial risk that any given drug will eventually prove ineffective or unsafe, resulting in billions of dollars of lost investment. Even the largest companies thus find themselves exposed to substantial long-term risk that none of their major research projects will result in a blockbuster drug, as is the case for Pfizer now, with several recent failed projects and older successes coming off patent. If all drug production shifted to generics, there would be much less risk for the industry. True, the total volume of money flowing through would decrease dramatically, but since much of that went to R&D anyway, it’s not clear what the net effect would be. In particular, it might be possible to develop a legislative strategy based on dividing the industry. Even if in 5 years Pfizer is in a strong position again with big drugs coming online, right now its interest is in a system that doesn’t favor patents too much. At any given moment, the interests of different companies with respect to an NIP will vary, and good timing might be enough to peel away the opposition of a substantial chunk of the industry.

Of course, there is no hope that the US congress will pass such a plan anytime soon, what with talk of austerity, deficits, and such. But who knows in 3-5 years? Political winds can change quickly.