The Cost of Innovation - Pharmaceutical Executive

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The Cost of Innovation
Highlights from "Large Molecules, Large Dreams: A Forum on Global Drug Pricing and Sustainable Medical Innovation," held August 12, 2004, at MIT's Sloan School of Management.

Pharmaceutical Executive


Because the price differences are not observable to other people, manufacturers have the ability to segment markets and confidently give different lower prices to lower-income countries, knowing those prices will not spill over to the higher-income countries. Parallel trade and external referencing are not possible. The system can be fully flexible across drugs and across countries, and it encourages and indeed builds on competition.

This proposal was designed primarily for developing countries, but it applies equally well to the differences within the industrialized world, where the need to preserve differential pricing is important, given the differences in income. The perception that Canada and European countries are on the same income level as the United States is incorrect, and it is important to preserve a way for prices to vary to subtle degrees between countries based on their differences in income.

A Pull Model for the Developing World Hannah E. Kettler

Program Officer, Global Health Strategies, the Bill & Melinda Gates Foundation


Hannah E. Kettler
I'm here representing the Bill and Melinda Gates Foundation, which is concerned about a lot of what's been discussed today—the goal of creating an environment in which the motivation to innovate is sustained and the outcome of that innovation is affordable, accessible products. The foundation focuses on diseases and health conditions that affect predominantly the poorest of the globe, patients living in the developing world, where not only is the disease burden significant but the potential for patient populations to afford even the cheapest medications is limited.


Now All Foreign Drugs Are Cheap
Technically, the diseases that the Gates Foundation focus on are all orphan diseases. The key difference is that not even a small number of patients—not 10,000 nor even 2,000—are in the position to pay high prices. So one of the current focuses of the foundation is to create an environment with incentives that will facilitate innovation by the private sector. There's been a lot of discussion of the dual approach of push, trying to reduce the costs of research and development, and pull, trying to increase the expectation of a return on investment should the private sector be successful.

To date, the foundation has invested a lot of funds in public-private partnerships and other methods of reducing R&D costs. But we increasingly recognize that without an expectation of return on investment, we are never going to be able to afford the R&D costs—$800 million many times over—of delivering vaccines and drugs for these neglected diseases. Therefore, we are exploring how to expand the expected market for our global diseases.

In 1999, an alliance called the Global Alliance for Vaccines and Immunizations (GAVI) was established with the goal of increasing coverage for existing and future vaccines. Funding is distributed between support for building the immunization system in the world's poorest countries to increase coverage rates, while at the same time creating a vaccine fund through which countries can make proposals for funding to help cover the cost of purchasing new vaccines.

Now here's the trick. This isn't funding forever. It only covers the period when the company needs to recover the cost of R&D, scale up manufacturing capacities, and expand delivery systems. For a period of time—at the moment, five years—the vaccine fund pays the difference between the marginal cost of a vaccine and the cost that the companies are looking to receive as an incentive to complete R&D and expand their manufacturing capacity to meet the demand that ultimately will be created by this vaccine fund. The expectations are that over time the price of these vaccines will come down, the supply will expand, and the likelihood of getting some kind of return on investment will motivate new entrants.

At the moment, the primary focus has been on purchasing hepatitis B and Hib vaccines, which until recently were almost completely unavailable in the developing world. This is serving as a model to test the extent to which the suppliers and countries respond to new resources for expanding immunization. The next big challenge will be to use these kinds of pull and promise-to-pay financial incentives as a way to encourage the companies to make much more expensive investments in new product development for the diseases of poverty.


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