Intended for healthcare professionals

Analysis

Accounting for US public funding in drug development: how can we better balance access, affordability, and innovation?

BMJ 2020; 371 doi: https://doi.org/10.1136/bmj.m3841 (Published 08 October 2020) Cite this as: BMJ 2020;371:m3841
  1. Ameet Sarpatwari, assistant professor of medicine,
  2. Jerry Avorn, professor of medicine,
  3. Aaron S Kesselheim, professor of medicine
  1. Program on Regulation, Therapeutics, and Law (PORTAL), Division of Pharmacoepidemiology and Pharmacoeconomics, Department of Medicine, Brigham and Women’s Hospital/Harvard Medical School, Boston, MA 02120, USA
  1. Correspondence to: A Sarpatwari asarpatwari{at}bwh.harvard.edu

With the price of prescription drugs increasing rapidly, Ameet Sarpatwari, Jerry Avorn, and Aaron Kesselheim explore the ways US public funding supports drug development and identify policy reforms to help ensure that patients can affordably access therapies arising from such support

US drug prices are the highest in the world and are continuing to rise, with an increasing number of patients unable to afford taking their medications as prescribed. Many of the most transformative new drugs have their origins in academic research institutions or government laboratories supported by US public funding, with for-profit pharmaceutical manufacturers often becoming involved later in the course of development, investing large sums in conducting clinical trials, and creating commercial production and distribution systems. Reforms to ensure that such support is reflected in drug pricing could help to ensure that medicines are affordable without jeopardising clinically meaningful innovation.

Problem of high US drug prices

High and rising US drug prices have taken a heavy toll on payers and patients. Between 2007 and 2018, net (post-rebate) US spending on brand name prescription drugs increased by 60%.1 By 2018, the average annual cost of a new cancer drug had reached over $175 000 (£135 000; €150 000), over threefold higher than in 2000.2 Payers and insurers have increasingly passed on these costs through rising deductibles, co-insurance percentages, and co-payments, making it harder for patients to afford their prescribed medications.34

Many drug manufacturers have argued that high prices are necessary to sustain innovation. In support of this claim, the Pharmaceutical Research and Manufacturers of America—a trade group for brand name drug manufacturers—often cites an industry funded study reporting that it costs over $2.6bn to develop a new drug,5 though others have disputed the accuracy of this estimate.67 In 2017, the industry group launched a lobbying campaign promoting the industry’s role in discovering “tomorrow’s breakthrough treatment and cures.”8 This narrative has been used to push back against drug pricing reform, with claims that actions to reduce industry revenues would curtail drug discovery.9

US government contributions

Yet despite industry claims to the contrary, the US government makes critical contributions to drug development through both direct and indirect mechanisms.

The US government is the largest single funder of biomedical research in the world. In 2019, the National Institutes of Health (NIH) spent $39bn on such work,10 which has been instrumental in spurring scientific discovery. About 10% of NIH grants directly yield a patent, and about 30% generate research articles cited by patents.11 Recent studies have found that NIH funding contributed at some level to all 210 new drugs approved by the US Food and Drug Administration between 2010 and 2016,12 and that about a quarter of small molecule drugs approved between 2008 and 2017 were based in part on patents or other late stage contributions from publicly supported research institutions (table 1),13 although their manufacturers generally made additional expenditures to bring these products to market.

Table 1

Examples of drugs developed with late stage contributions from federally funded research

View this table:

The association between US government support and transformative therapeutic innovation is particularly strong. From 1990 to 2007, 21% (44/209) of new drugs receiving priority FDA review14—a pathway reserved for medications representing an expected therapeutic advance15—were discovered in academic institutions or government laboratories. More than half of the 26 most transformative new drugs or drug classes over the past 30 years, as rated by physician experts, originated in such settings.16

The US government’s contribution often extends beyond basic science research. In 2006, the NIH launched the clinical and translational science awards programme; by 2011, it had issued more than $2.2bn in grants and contracts to 55 academic institutions to accelerate the transformation of basic science discoveries into new therapies.17 In 2011, President Obama signed legislation creating the National Center for Advancing Translational Sciences (NCATS) as a new NIH institute.18 With an annual budget of over $500m, NCATS assumed stewardship of the clinical and translational science award programme—funding public-private partnerships, repurposing initiatives, and late stage trials of drugs for rare diseases aimed at financially “de-risking” companies’ investment in products with potential clinical application.1920

The US government also contributes to drug development in more indirect ways. Since 1986, drug manufacturers have received a 20% tax credit for their research and development costs. Passage of the Orphan Drug Act in 1983 created a larger 50% tax credit for clinical testing costs incurred by manufacturers of drugs for rare diseases (this was lowered to 25% in 2017).21 The US Government Accountability Office estimated that these two tax credits accounted for $2.7bn in transfers to the drug industry in 2014 alone.22

In addition, the US government is among the largest purchasers of prescription drugs. Medicare Part D and Medicaid together account for about 40% of net retail pharmaceutical spending.23 The Veterans Affairs Health System and the Department of Defence also purchase large amounts of drugs. In many cases, government insurance coverage is guaranteed once a drug is approved by the FDA: Medicare Part B and Medicaid must generally cover all drugs for their FDA approved indications, while Medicare Part D must cover all drugs in any of six large “protected” classes, including cancer.24

Policy reforms to account for US public funding

When US government funding supports investment and de-risking of drug development, such contributions should arguably be reflected in the drug’s price.2526 Below, we consider two options to help ensure drugs developed with substantial public contributions are affordable for patients and taxpayers.

Conditions on technology transfer

One possible reform would be to mandate reasonable pricing as a condition of transferring the intellectual property rights underlying such drugs. For example, a manufacturer that commercialises a product or process designed using taxpayer funds could be required to price the drug based on its clinical value, as determined by a neutral third party, and to not raise the price beyond inflation over time. This value based price and the cost-effectiveness assessment underlying it would be developed transparently and made publicly accessible.

Several organisations already perform cost effectiveness assessments, including the Institute for Clinical and Economic Review (ICER) in the US and the National Institute for Health and Care Excellence (NICE) in England.2728 In general, these groups determine what a new drug should cost based on its capacity to extend quality adjusted life years (QALYs) in relation to its cost. In 2015, for example, ICER determined that based on clinical trial outcomes, value based prices of the (then new) lipid lowering PCSK9 inhibitors alirocumab and evolocumab should not exceed $5000 a year—about a third of their initial list prices in the US market.29

Requiring value based pricing and limiting subsequent price increases beyond inflation as conditions of technology transfer would have two main advantages. Firstly, implementing the conditions as part of patent licensing would be relatively straightforward. For the value based pricing condition, the US government would have to select the arbiter and decide the cost effectiveness threshold. Although some disagreement about specific methods is likely, there would be a wealth of expertise on which to draw.

Secondly, the approach would encourage manufacturers to bring forward higher value drugs that better improve the public’s health, since those drugs would command a higher price. Currently, this is not the case. For example, of all new drugs approved by the FDA in 2017, about half were rated by expert organisations in Germany, France, and/or Canada to offer no or minor additional benefits over existing treatments.3031 This suggests there are good reasons to pay for all drugs, and not just products originating from publicly funded research, according to their clinical value.

Potential limitations of the plan warrant consideration. Critics argue that it would reduce drug manufacturers’ profits and, by implication, investment in the industry. However, this presumes the existence of more profitable sectors to invest in, the willingness to move investments accordingly, and currently optimal allocation of funding on research and development—all questionable assumptions. Additionally, manufacturers and their investors would still be able to profit handsomely from drugs that offer clinically meaningful benefits. This focus on value could help channel industry efforts towards developing the drugs that patients most need.

Although the condition of reasonable pricing would apply to all payers, it would not affect drugs developed entirely outside the US public sector. However, if a substantial fraction of new drugs were subject to value based pricing, it would increase the pressure to apply the same principles to all drug prices. This would help support efforts by US legislators to move from a system in which drug prices are set by the manufacturer to one in which prices paid by public insurance programmes are negotiated by the government. Other nations could set out their own policies on the pricing of drugs developed with public support, whatever their origins.

This solution would apply most naturally to drugs with a patent that could be directly linked back to taxpayer funded support. However, some drugs have substantial taxpayer funding that did not lead to a patent but was still critical to their discovery and development. In those cases, an expert body could be organised and tasked with reviewing the drug development history and determining in which cases the threshold of public contribution was surpassed, invoking the reasonable pricing framework.

The NIH probably has the authority to enact patent licensing reform for funds that it disseminates. Additional federal legislation could help clarify key details and ensure timely implementation. Given its focused scope and the broad appeal of the concept of adequate return on public investment, the proposal should secure broad backing. For example, the We Protect American Investment in Drugs (WE PAID) bill, which would create a drug affordability and access committee to determine a reasonable price for drugs with important late stage contributions from federally funded research, was co-sponsored by a Democrat and a Republican in the Senate.

Government led drug development

Focused drug development led by the US government is another policy opportunity. Under this approach, the US government, rather than industry, could advance selected public sector drug candidates through final development, testing, and approval, either independently or with contracted partners receiving fixed fees rather than exclusive licenses. Many manufacturers already outsource much of their clinical trial work to contract research organisations (CROs); one estimate predicted that CROs will conduct more than a third of applied drug discovery research by 2021.32 Once a qualifying drug is approved, its production and distribution could be open to all FDA certified manufacturers. For small molecule drugs that come to have at least three manufacturers, evidence indicates that there would be a greater than 60% reduction from monopoly prices.33

Contrary to the often repeated argument that “only drug companies can develop new drugs,” the experience of the Drugs for Neglected Disease initiative (DNDi) has shown that it is possible for non-profit organisations to efficiently develop new treatments. Founded in 2003 by Médecins Sans Frontières (Doctors without Borders) together with several government and non-profit organisations, DNDi has brought to market eight drugs for five diseases over the past 15 years, including for Chagas disease and visceral leishmaniasis.34 This success has been driven by partnerships with over 150 private drug manufacturers, governments, academic groups, public sector research institutions, and other non-profits. Some of the treatments advanced by DNDi have been new drugs while others were reformulations of existing products. Last year, for example, DNDi secured a “positive scientific opinion” from the European Medicines Agency for the use of fexinidazole, a novel treatment for sleeping sickness, in countries where the disease is endemic, having led development from drug candidate screening through pivotal trial testing and demonstration of efficacy.35

Conclusions

Providing funds for the development of any new technology or product is a risky proposition. That is why venture capital investors provide such an important foundation for the creation of new products and are so handsomely rewarded for taking such early stage risk. However, in drug development, there is no such symmetry of risk and reward. The US government spends vast sums on the high risk side of new drug development through funding from the NIH and other support of university based biomedical research programmes; other national governments and philanthropies serve similar functions. Yet such public sector investors expect and receive relatively little in return—what has been described as the socialisation of risk and the privatisation of gains. New policies could make it possible to better define the role and value of public sector investment in developing new drugs, and to make drugs that benefit from such investment more affordable for all patients.

Key messages

  • Many prescription drugs arise from key late stage contributions from publicly funded research

  • The intellectual property rights underlying these drugs are routinely transferred to private sector manufacturers, which often charge high prices for the resulting medications

  • Making licensing conditional on value based pricing and banning price increases exceeding inflation could improve affordability for patients and better promote clinically meaningful innovation

  • Having the US government move forward with final development of medications for which it has provided substantial support could also help contain costs

Acknowledgments

We are grateful for discussion with members of the PORTAL Advisory Group on Public Funding in Drug Development (in alphabetical order): Tahir Amin, Dean Baker, Rachel Cohen, Jonathan J Darrow, Amy Kapczynski, Danielle Li, Dan Liljenquist, Mariana Mazzucato, Joan Miller, David Mitchell, Azzi Momenghalibaf, Daniel B Ravicher, Victor Roy, and Bhaven Sampat. We also thank Emily Jung and Frazer Tessema for their research assistance.

Footnotes

  • Contributors and sources: This work arose from a Radcliffe Institute for Advanced Study Academic Ventures exploratory seminar entitled the “US government’s contribution to transformative drug development,” also funded by the Open Society Foundations and Arnold Ventures. AS is an epidemiologist and lawyer, and the principal investigator on a grant from the Open Society Foundations on the US government’s contribution to transformative drug development. ASK is an internist, lawyer, and health services researcher focused on researching the effects of intellectual property laws and regulatory policies on pharmaceutical development, approval, and access. JA is an internist, health services researcher, and pharmacoepidemiologist with four decades’ experience studying pharmaceutical efficacy, safety, use, and costs.

  • Patient and public involvement: David Mitchell, who founded the non-profit organisation Patients For Affordable Drugs, was a key participant in the exploratory seminar and reviewed an early draft of this article.

  • Competing interests: We have read and understood BMJ policy on declaration of interests and have no interests to declare.

  • Provenance and peer review: Not commissioned; externally peer reviewed.

References

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