Author: Isabel Wassing Edited by: Luiz Guidi
The limited accessibility of drugs in low- and middle-income countries (LMIC) has been a recognised global problem for decennia. The World Health Organization (WHO) estimates that a third of the world’s population does not have access to essential medicines. Not only are existing therapies often unavailable at affordable prices in these countries, but LMICs also have to deal with the prevalence of under-researched neglected tropical diseases (NTDs), for which no effective treatment exists at all. Indeed, the WHO reports that in 2014, at least 1.7 billion people required treatment for NTDs. This represents an incredible 60% of the total population of ‘low-income' countries. There is a pressing need for the global community to come together to address these problems. While the cry for urgent action is crystal clear, exactly which actions should be taken is much less obvious. How can we increase accessibility of affordable drugs in an effective and sustainable way?
Patenting: a necessary evil
Drug patents and the pharmaceutical companies that hold them are familiar villains in the story of unaffordable drugs. After all, long-lasting patents promote market monopoly by preventing the manufacturing of cheaper generic drugs. Generic manufacturing refers to the licensed production of an existing drug by a company other than the ‘innovator’ company that initially developed the drug. The generic drug is a (bioequivalent) copy of the ‘originator’ drug, such that the major difference between the products is merely in the brand name (e.g. ‘generic’ supermarket-brand paracetamol versus ‘originator’ Panadol). Unless special licenses are acquired, generic manufacturing is prohibited during the length of a patent.
In the absence of competitive generic manufacturing, the patent-holding innovator is often accused of taking advantage of its market dominance by setting the price of the drug at high levels to maximise profits, thereby preventing drug affordability. However, the high costs of drug development shouldered by the innovator cannot be denied. Manufacturing of generic drugs does not involve costly R&D processes which renders their prices lower than their patented counterparts. Indeed, patenting is arguably the only way the innovator can make up for their vast investment in R&D. Therefore, in order to improve the accessibility of affordable drugs in LMICs in a sustainable manner, proposals must be careful not to neglect the financial incentives that drive the pharmaceutical industry.
Tiered pricing: Not quite a win-win situation
One proposed strategy to increase drug affordability in LMICs, without affecting the patent-dependent profitability of pharmaceutical research, is tiered pricing. Tiered pricing refers to adapting the price of the drug to the income of the market: in other words, essential drugs would be sold at lower prices in LMICs compared to high-income countries. In this way, drug affordability may be achieved in markets that would otherwise not be able to buy the drug at all. As profit margins are insignificant in these markets, the selectively decreased price of the drug does not risk the loss of profits, so long as a ‘lowest sustainable price’ can be paid (i.e. the lowest price at which a drug can be sold without its production costs resulting in a loss for the company). In fact, by offering the drug at the new affordable ‘tiered’ price, the innovator company would actually be entering a previously untapped market while simultaneously increasing the global accessibility of the drug – a ‘win-win’ situation. However, the implementation of this initiative is neither simple nor as effective as it initially seems.
One potential problem of tiered pricing is the possible exportation of the low-priced drug to high-income markets, which would undercut the overall profitability of the drug. Preventing such trade would be costly and problematic in low-income countries.
Another difficulty of tiered pricing lies in determining which countries or markets are considered ‘low-income’ and should benefit from the discounted tiered price. This is particularly difficult in countries of extreme inequality, where the standard indicators of economic wealth do not necessarily reflect income differences across the population and likely underestimate the necessity of tiered pricing. Apart from income, a country’s need for lower drug prices also depends on the prevalence and nature of the disease in question (i.e. What percentage of the population is suffering? Is long-term drug treatment required?). Indeed, the classification of markets as ‘low-income’ is not centrally regulated – thus, it is up to the innovator company which countries receive tiered pricing. The innovator company is also in charge of setting the tiered price, hence introducing a foreseeable conflict of interest: Will companies truly set the lowest sustainable price? Unfortunately, this does not always seem to be the case.
Tiered pricing has been implemented on various occasions, generating valuable case studies by which to assess the effectiveness of the strategy. In many cases, several years of established tiered pricing of the originator drug are followed by the introduction of generic products on the market. The price of the newly-introduced generic drug is generally lower than the tiered price of the originator. Even more striking is the fact that the tiered price often drops upon introduction of the cheaper generic. This strongly suggests the original tiered price does not truly represent the lowest sustainable price – the drug can apparently be sold for less! An example of this trend is illustrated in Figure 1, which shows the specific case of an HIV/AIDS treatment for which the tiered price remained unchanged until a cheaper generic became available. At this point the tiered price decreased - for the first time in 7 years - to just below the generic price.
Indeed, various case studies show the same general trend: as soon as (generic) competitors become available, the tiered price of the originator falls. Clearly, this kind of competition naturally drives down drug prices over time. Rather than regulating the correct implementation of tiered pricing, stimulating competition may therefore decrease drug prices more effectively than tiered pricing in the long term.
In fact, tiered pricing can actively discourage competitors from entering the market and ultimately impede drug affordability. It has even been suggested that some innovators may purposely set tiered prices below production costs to further discourage competition – a strategy that, although introduces a temporary financial loss to the company, avoids price adjustments over time and ultimately generates profits from the continued market dominance in the future. All in all, tiered pricing is generally considered to be an unfavourable strategy to lower drug prices in the long-term. However, it may still be an effective strategy to lower drug prices in markets where demand is simply not sufficient to encourage competition, or where the capacity for generic drug manufacturing is limited.
Patent pools: introducing generic competition and stimulating drug innovation
The above analysis of tiered pricing clearly shows the introduction of competition can effectively lower drug prices in LMICs. However, to increase competition in markets dominated by innovator companies, restrictions imposed by patents must be circumvented.
One way to achieve this is through ‘voluntary licensing’, when the patent-holding innovator company grants licenses for the production of generics in return for royalty payments. Although these royalties are unlikely to amount to an income stream capable of compensating the innovators’ high R&D cost, voluntary licensing may be considered in markets where it does not significantly decrease profits (i.e. those where the originator drug is almost entirely unaffordable to the point of virtually zero sales; so that royalty payments present a financial benefit).
More controversially, generic pharma companies can also make use of compulsory licensing. In this case, patents are licensed without the consent of the patent holder for products that are deemed ‘not available to the public at a reasonably affordable price’, as defined by the country’s legal system. Some critics say that this allows for the exploitation of the patent holder and their hard-won intellectual property. Meanwhile, others consider compulsory licensing to be an important bargaining tool for LMICs to reach affordable price agreements with large pharmaceutical companies, ultimately protecting the human right to health.
Another proposed strategy to alleviate the restrictions imposed by strict patenting is the formation of ‘patent pools’ by various patent-holders. Here, patents of related or competing products and technology are pooled together so that licenses can be obtained for the entire pool directly. In exchange, patent holders receive royalty payments set and shared amongst themselves. Patent pooling is proposed to reduce the complication and costs of applying for each license separately, facilitating the entry of generic competitors into LMIC markets through simpler and cheaper licensing of patents. Additionally, patent pools are expected to promote continued innovation of the pooled products, as restrictions between the (previously competing) pooled patent holders will be entirely lifted – thereby fostering collaboration between companies and distributing the financial risk of any renewed innovation between them. This is thought to facilitate the development of combinatorial drug treatments where each drug would previously have been patented separately.
Patent pooling is a relatively new strategy for the development of cheaper, better drugs: indeed, the UN-backed ‘Medicine Patent Pool’ was set up in July 2010 with the goal of providing access to better HIV/AIDS treatment in LMICs. Although it can potentially facilitate the entry of generic competition into the LMIC markets, the effectiveness of this strategy depends on the voluntary entry of significant patent-holders into the patent pool. The lauded advantages of obtained royalties and future drug innovation may not be sufficient to entice already profitable patent-holders into such deals, as the sharing of successful intellectual property (and the corresponding royalties) will likely decrease overall profits.
PDPs: A collaborative approach
Drug development necessarily requires hefty financial returns given the exorbitant costs of R&D. In its current state, the profitability of the pharmaceutical industry almost entirely depends on sales revenue, which in turn determines the funds available to invest into R&D of the next drug. In other words, drug development in the pharmaceutical industry is funded by a vicious cycle relying on the output of expensively priced drugs. To fundamentally address the problem of drug affordability, it is important to find sustainable streams of funding that do not rely on drug sales. Financial input from the public sector (i.e. governmental input) is clearly key to relieve some of the profit-making pressure imposed by the private sector.
This is the approach taken by Product Development Partnerships (PDPs). PDPs pool together funding from both the private and the public sector to finance R&D of urgently required drugs. However, PDPs can also set up self-sufficient and sustainable financial resources through a so-called PDP financing facility. The idea is to sell bonds for a pooled R&D fund on the international capital market – thus allowing any interested person to invest in the fund. The public sector (i.e. rich donor countries) and private sector (i.e. private entities with high credit ratings) back up the pooled fund in the case of financial losses, thus presenting an attractive investing opportunity. In this way, the proposed PDP financial facility could generate a substantial source of sustainable funding by allowing people to invest into R&D in a secure system.
Collaborations between the private and public sector are not only essential to sustainably fund drug development, but they can also provide effective ways to reduce the cost of R&D itself. This is clearly shown by the surprising success of a PDP non-profit organisation called the ‘Drug for Neglected Diseases initiative’ (DNDi). DNDi leads the development of new drugs against neglected tropical disease (NTDs) for a fraction of the conventional cost of drug development in the industry. Indeed, DNDi estimates the cost of producing a novel drug at $110-$170 million, compared to the estimated average cost of $1.4 billion in the pharmaceutical industry.
The incredible success of DNDi’s approach may be largely attributed to the kind of drugs that it develops – since there is no financial interest in developing NTDs, competitive pressure is absent. It is precisely this lack of competition that allows for the close collaboration of DNDi with different industrial partners and academic institutes.
DNDi’s approach to drug development relies entirely on collaborations with industrial and academic partners – in fact, DNDi does not even have its own laboratory. Instead, DNDi utilises already available compound libraries generated in industry to search for drug candidates. Next, the process of screening through the compound library is outsourced to high-throughput screening centres at academic institutes. Once a promising candidate is identified, DNDi itself takes on the costs and organisation of clinical trials. However, the cost of the clinical trials themselves can be kept relatively low – after all, it is much less demanding to demonstrate the superiority of a new drug when no other effective treatments exist. Finally, pharmaceutical companies may agree to manufacture the drug for the benefit of the company’s public image. Given that R&D has already been accounted for, the final cost to the pharmaceutical company is kept to a minimum. This collaborative approach to drug development shows that urgently needed drugs can be produced in an affordable way, without negatively impacting any of the parties involved.
Promising approaches to increase drug affordability, such as patent pools and PDPs, as well as the recent successes of initiatives like DNDi and the ‘Medicine Patent Pool’, pinpoint the key to affordable drug development: we must foster collaboration in pharmaceutical research. Continued successes will hopefully awaken the interest of other big pharmaceutical players and bring about a much-needed change to the industry.
 Abbas, Muhammad Zaheer. "Pros and cons of compulsory licensing: An analysis of arguments." International Journal of Social Science and Humanity 3.3 (2013).