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Yves here. This post provides compelling evidence as to why running health care, and particularly pharmaceutical development, on a market basis is a bad idea. One has to wonder how much prejudice leads to the neglect of deadly diseases that afflict many millions….but in tropical areas, stereotyped as poor. The post does not mention as a possible driver that stock investors view life-saving drugs that would be sold in huge numbers, but significantly in poorer countries, as much less sexy than drugs to treat the ailments of the affluent.
By Payal Arya, Post-Doctoral Fellow, Bentley University, Center for Integration of Science and Industry and Fred Ledley, Professor of Natural & Applied Sciences and Management, Bentley University and Director, Center for Integration of Science and Industry, at Bentley University. Originally published at the Institute for New Economic Thinking website
The World Health Organization (WHO) estimates that 1.7 billion people around the world are in need of measures to prevent or treat neglected tropical diseases (NTDs), conditions that collectively account for as many as 200,000 deaths/year and a burden of disease running in the hundreds of billions of dollars per year. This vast unmet medical need reflects the global pharmaceutical industry’s focus on developing products for US markets, where efficient channels for product sales and few limits on drug pricing provide companies with the opportunity for robust returns on investment and profit. US markets, however, account for less than 4% of the global burden of disease. The greatest disease burden is associated with conditions prevalent in low- and middle-income countries, where the available market is typically inadequate to justify the investment cost; a classic instance of market failure.
From 1975-1997, less than 1% of new drug approvals in the USA and EU were indicated for tropical communicable diseases. A decade later, from 2000-2011, only 1% of new drug approvals (New Chemical Entities) were indicated for NTDs, and only 1% of all clinical trials involved products that might address this unmet medical need. A new report in the British Medical Journal Open (BMJ Open) from the Center for Integration Science and Industry at Bentley University demonstrates that this trend continued through the decade before COVID (2010-2019) with only 1.8% of the new drugs indicated for tropical diseases. The BMJ Open study further demonstrates that, while half of the new product approvals were for conditions in the top quartile of US disease burden, there was no association between the number of product approvals and conditions contributing the most to the global disease burden.
Classical economic theory posits a central role for the government in rectifying such market failures through regulation, subsidies, or public investments. These interventions are variously designed to adjust either the cost basis for bringing products to market or the structure of the market such that the potential returns to industry are sufficient to warrant private investment. These principles underlie a number of policies in the US (and analogous policies in the EU) intended to incentivize industry development of drugs with characteristics that have made industry investment unattractive. These include the Orphan Drug Act for rare diseases and programs that provide expedited review of products for selected “serious diseases” with attributes that make development relatively unfavorable, including special “fast track”, “breakthrough”, “accelerated”, and “priority” review programs. These programs reduce the requirements, timelines, or costs of development, provide tax breaks, or create indirect subsidies (vouchers) to reduce the net cost of development or provide extended patent protection to increase the market potential.
The orphan drug and expedited review programs have dramatically changed the landscape of pharmaceutical development. They have helped create more than 500 products for “orphan” diseases since 2000 with almost 60% of all approvals between 2010-2019 taking advantage of at least one designation for “expedited” review. While these policies were primarily designed to address unmet needs in US markets, the FDA has issued guidance on the application of these policies to incentivize product development for NTDs, and one program, the “Tropical Disease Priority Review Voucher Program,” focuses directly on such diseases.
But the critical analysis in BMJ Open not only shows that, despite such guidance, only meager progress has been made in developing products for diseases with the greatest disease burden, and that programs for expedited review may actually be making things worse. Supported by funding from INET, the study examined 387 drugs approved between 2010-2019 and found that 207 of them were granted a “priority review” designation. Only seven of these, however, specifically target tropical diseases. No less worryingly, the research found a negative association between drugs being designated for expedited review and the burden of disease associated with the conditions they were approved to treat. Thus, programs for expedited review may be preferentially reducing the development costs for conditions with lesser disease burden, potentially making investments in addressing the most significant disease burdens even less appealing and exacerbating the market failure further.
What initiative might rectify this situation? A variety of non-profit entities and public-private partnerships (PPPs) have emerged to tackle this unmet need. These include a number of product development partnerships (PDPs) focused explicitly on developing drugs, vaccines, or diagnostics for conditions prevalent in low- and middle-income countries. Examples of such partnerships are the Global Alliance for TB (TB Alliance), Medicines for Malaria Venture (MMV), and Drugs for Neglected Diseases Initiative (DNDI). These entities raise capital primarily through government funding and philanthropic contributions and typically rely on partnerships or contracts with the private sector for product development.
A survey of funding for research on products for neglected diseases conducted by Policy Cures Research has identified more than $60 billion in total funding for product development related to “neglected diseases” (not including Coronavirus) from 2007-2022. Contrary to the popular perception that these initiatives have been driven by private philanthropy, the data show that 66% of the funding came from public institutions (government): 20% from philanthropic sources: and 13% from industry.
The money supported $13.7 billion for basic research on neglected diseases; $13.6 billion on new drugs; and $21.5 billion on vaccines over these 16 years. Nevertheless, the BMJ Open study could identify only two new drug approvals in the period from 2010 to 2019 for tropical diseases that were sponsored by PDPs. One was Pretomanid approved in 2019, developed by TB Alliance; the other was Moxidectin approved in 2018, developed by the Medicines Development for Global Health. (Note that the BMJ Open study did not include vaccines.)
This leads to a crucial question: Can the non-profit sector provide the firepower necessary to address the global burden of disease?
In a comprehensive study of the global non-profit sector, the late Lester Salamon and his collaborators defined the “broad non-profit sector” as comprising “entities that are formal organizations having an institutionalized character; constitutionally independent of the state and self-governing; non-profit-distributing; and involving some degree of volunteerism” and documented their growing financial resources, employment, and impacts. This research ascribes growth of the non-profit sector over recent decades to the widespread adoption of the “neoliberal consensus” that many social services might be provided more efficiently and effectively through partnerships with the private sector (including both for-profit and non-profit entities) than by government or markets alone. Significantly, this research also showed that, contrary to popular perception, the non-profit sector was not supported primarily through philanthropy, which provided only 11% of financial support for global non-profit enterprise (data from 22 countries, for 1995), but that proceeds from commercial activities provided 49% of the financial support and government provided 40%.
The panoply of non-profit entities committed to addressing the global burden of neglected diseases through advocacy, education and research, health, or social services related to neglected diseases are well within the mainstream of traditional non-profit activities identified by Salamon and his collaborators. One could also argue that PDPs focused on discovery, development, or commercialization of novel pharmaceutical products are not conceptually different than other non-profits involved in commercializing goods or services in the healthcare or educational sectors. The question, however, is whether non-profit business models can really rectify the market failures that have led to a paucity of products for neglected diseases.
In our view, the crucial feature of non-profit entities is not the absence of profit, but rather the fact that they are characteristically prohibited from distributing cash resources to shareholders. Since 2010, public (for-profit) biopharmaceutical companies have distributed almost $1.6 trillion in cash to shareholders through dividends or stock buybacks, representing approximately 16% of their total revenues, an amount slightly larger than their total profit (net income). Thus, while the absence of cash distributions to shareholders could contribute to lowering drug prices or realizing a return on investment, the size of the effect is unclear. Even putting all that money back into research might not lead to a quantum leap in the production of the drugs most urgently needed by the world’s poor.
Non-profits are more likely than for-profit firms to attract philanthropy to support product development or treatments. The available data suggests, however, that philanthropic contributions comprise a minor fraction of the capital resources required to address neglected diseases. Nor is there evidence that non-profit entities benefit substantially from discounted or donated goods or services, or that non-profit firms can systematically develop new products more efficiently or at a lower cost than for-profit firms.
Non-profits might also face some peculiar problems of their own. Since most PDP activities are likely to be tax-exempt, non-profit initiatives may not benefit from government incentive programs that reduce corporate tax burdens or provide tax credits, unless such benefits can be sold. Thus, it is not evident that the financial model of non-profit enterprise would really address the market failures confronting neglected disease. The fact that two out of seven drugs for tropical disease described in the recent BMJ Open paper were developed by non-profits (TB Alliance, MDGH) suggests that more research is required to understand these business models and the role they can play in addressing the global burden of human disease.
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