Report lambastes innovation policy governing pharma R&D and drug costs

Radical re-think required

The public cost of supporting biopharmaceutical R&D in Canada far exceeds the value added that companies contribute to the economy due to innovation policies that are "a total failure", says a new report. Entitled The Economic Case for Universal Pharmacare, the report employs different determinants and examples of countries with lower drug costs to demonstrate how the Canadian system could save billions of dollars, which it argues should not be squandered to entice companies to spend more on R&D.

Tax subsidies for biopharmaceutical R&D totaled $753 million in 2008 — an amount representing 59% of the $1.3 billion spent on R&D by members of Canada's Research-Based Pharmaceutical Companies (Rx&D). At the same time, Canada has among the highest prices for patented medicines in the world, due to the Patented Medicines Prices Review Board's (PMPRB) policy of setting price caps in relation to a small group of similarly high drug cost jurisdictions.

"Canada artificially inflates drug prices for brand name drugs and provides huge incentives for R&D for drug development. When you compare that to the spin-offs created by the industry, we must say it is a total failure," says report author Dr Marc-André Gagnon, a professor at Carleton Univ's School of Public Policy and Administration. "For innovation policy to attract R&D investment, you want an interesting rate of return and we are receiving less than we pay for. This is pure nonsense."

Gagnon points out that public funding supports more than 84% of all health and health-related R&D, helping Canada to amass considerable expertise in health R&D. But drug companies do not sufficiently leverage that expertise to create breakthrough medicines and therapies, opting to produce "me too" drugs that do little to improve the health outcomes of Canadians.

"I have no problems with tax incentives as they are the best way to do it (encourage R&D spending). The problem is we're inflating drug prices to create a favourable environment for companies," says Gagnon. "Innovative research is more costly and more risky, but this is what we want and the private sector is not the best way. It's more a game of political power than a discussion to achieve breakthrough innovation through R&D."

According to the most recent PMPRB data, pharmaceutical R&D in Canada is declining, despite having access to some of the most generous incentives in the world for conducting R&D. In 2009, R&D expenditures by 81 reporting companies dropped 2.2% to $1.272 billion, the largest decline in the past 22 years. Rx&D responded to the drop by warning that the deteriorating environment for conducting R&D was making Canada less internationally competitive (R$, July 6/10).

On a global scale, however, rapidly increasing R&D costs have produced a declining number of new molecules brought to market, raising new concerns over how pharmaceutical innovation should be encouraged.

According to Gagnon, dramatically different approaches should be considered for stimulating companies to do more innovative R&D. Rather than assume that companies are the only route to market, Canada should consider the development of a public system to bring innovative drugs to market. Gagnon says countries such as Thailand, Sweden, Brazil and Equador have moved in this direction.

Another approach is to institute a prize system for companies that produce breakthrough innovations — an idea also explored in a 2009 working paper by Dr Paul Grootendorst, director of the Division of Clinical, Social and Administrative Pharmacy in the Univ of Toronto's Faculty of Pharmacy.

"Although Canada deliberately sets its drug prices high to encourage research and development on Canadian soil, total R&D spending by the industry is $1.31 billion, 59% of which consists of tax subsidies. The PMPRB's policy has therefore been a complete failure, since it leads Canadians to spend $1,530 million more than the average prices of brand name drugs in OECD countries in order to generate $537 million in R&D spending. Canada would benefit greatly from using this money instead to encourage pharmaceutical R&D by funding new types of incentives — for example through public spending on pharmaceutical research or the implementation of a prize system for innovation."

— Gagnon report

Grootendorst outlines several types of prizes that could be employed to boost innovation, including:

* prizes offered by public agencies that set the research direction and monetary rewards;

* division of social surplus between the innovator and the consumer, with the social surplus being the dollar value of the health gains created by the drug less costs of development, production, marketing and distribution;

*setting rewards for a new drug through an auction format;

* offering greater rewards for breakthrough drugs than me-too drugs; and,

* publicly financed reward scheme that distributes the financial burden of pharma R&D access to drug users.

Gagnon presented his findings last month in Montreal at the Canadian Science Policy Conference, outlining how Canada can save billions of drug costs while encouraging more innovative biopharmaceutical R&D. He points to British Columbia's contentious Therapeutics Initiative which lowers provincial drug costs by an estimated 8.2% by upholding the efficacy of older medicines over newer ones. If extended across Canada, the savings could reach $2.1 billion annually.

New Zealand example

New Zealand's "guerrilla-style pricing policies" would generate even more substantial results, which could save Canada $10.2 billion on brand-name medicines, says Gagnon.

"New Zealand is the only OECD country to use such a strategy, where new drugs are placed into competition with existing drugs, with the government reimbursing only the reference price," says Gagnon, "As a result, no core companies have any R&D labs in New Zealand. The drugs companies took any investment away to punish it for this.".

Gagnon acknowledges that his proposals would dramatically alter Canada's drug R&D and pricing system but he argues that failure to do so will result in ever increasing costs for medicines and little incentives for true innovation.

Since the publication of his report, Gagnon has been invited by Rx&D to discuss his views and has already met with Industry Canada officials. He says there are already some innovative organizations active in Canada that warrant serious analysis, including Montreal Invivo and the Structural Genomics Consortium. The latter is an international initiative led by Dr Aled Edwards.

The SGC discovers 3-D structures of human proteins and puts them into the public domain without restriction with the support of government and industry funding. Edwards is also critical of current pharmaceutical R&D practices and has called for a new paradigm for drug discovery and commercialization (R$, July 7/08).

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