Current situation: bad pharma or bad patents? Inefficiencies through the patent protection process Return to patent protection rewards pharma profits – Marketing same level as pharma R&D Government regulation costly – But still necessary for safety, efficacy & reimbursement

We know on the pharma side R&D productivity slipped (until 2015 when NCEs took off again)

What do we know? (about pharmaceutical firms and optimal R&D levels) Very little other than a lot of “facts” Top 10 Fortune pharma companies earned more than the rest of the Fortune 500 $870 billion global market (28% USA; 15% Europe; 12% Japan) $161 billion merger activity 2009; $51 billion 2010 $71million (R&D/new drugs) or $360 million (Berndt et al, 1995) cost to develop new drug to market 1 year delay over market authorization costs £22million (EU DG Enterprise, 2009) Price discrimination – Court cases in USA – Variation in prices across markets R&D : 13% of expenditure (up from 0.05% in 1950s, 0.1% in s, 0.15% 1990s-2000s) – Promotion costs 25% of expenditure;

What do we know? (about pharmaceutical firms and optimal R&D levels) Pharmaceuticals gain large rents – Scherer & Ross (1990) Pharma profit 2-3% higher than other industries during 1980s – Arora et al (2003) 10% patent premium on pharma products compared to that earned by other companies Rate of return to R&D low (McGuire & Raikou, 2012) Scherer (2001) pharma industry best seen as a virtuous rent- seeking model – As profit expands, companies compete by increasing R&D (& promotional costs) until increase in costs dissipate supranormal profit at INDUSTRY level – R&D endogenous in this case – Firms can use to establish market power

What do we know? (about patents) Welfare effects of patents (very little: Tirole, 2002) – If patents are strong then we get duplication of effort in R&D as winner takes all – R&D competition may lead to technologies with wide variance as winner takes all – With infinitely long lived patents firms may have too much incentive to engage in R&D – Patent gives an appropriability effect which, given winner takes all, means that too little or too much R&D – Business stealing effect Firm introducing new product does not internalise the loss in R&D investments to other firms so (socially) overinvests in R&D Increased R&D effort by firm increases probability of success so (privately) overinvests – Adoption lags for pharmaceuticals in more heavily regulated markets Static efficiency may improve at cost of dynamic efficiency Welfare loss of late adoption (Danzon et al, 2005; Kyle, 2007; Varol et al, 2010) Reduced NPV of R&D investments

What do we know? (about patents) If society not generous enough (tends to 0) risk of losing surplus from R&D investments If society too generous (tends to 1) encourages erosion of societal surplus from R&D through wasteful R&D competition Surplus Realized % Benefits Awarded in Patent 0 1 A B C

Bad Pharma or Bad Patents? Science/information should be public good – No restriction to use, everyone consumes – Incentive problem: Who Funds? – Charity Free rider problem – Governments Other objectives than R&D : long-term gets crowded out

Market access issues remain: once R&Ded still need marketing, distribution, etc Risk-sharing contracts FDA schemes – Accelerated Approval – Priority Review – Fast Track Designations – Breakthrough Therapy EMA – Conditional Marketing Authority – Adaptive Pathways Pilot

Viable Alternatives to patents? Various proposals to de-couple price/reimbursement decisions from R&D incentives – Tax credits – Prizes – Patent Auctions – Priority Review Vouchers – Advance Purchase Agreements

Future Increasing tension in regulation? – Efficient regulation has to give consistent signals and be transparent More exceptions? – Evidence on social weightings remains weak Lack of transparency? – Patient access schemes/risk sharing – Discounts De-coupling of price/reimbursement decisions from R&D decisions? – Current patent/price system liable to remain in place – Further route changes on market access – Increasing emphasis on value More CONDITIONALITY? – Conditional approval – Conditional pricing to establish innovative benefit