1. Pharmaceutical innovation and its contribution to longevity and economic growth Frank R. Lichtenberg Columbia University and National Bureau of Economic Research frank.lichtenberg@columbia.edu

2. Life expectancy at age < 1 year, Ireland, 1986-2010 Irish life expectancy has increased 7.5 years since 1986. The UK’s National Institute for Health and Clinical Excellence (NICE) assumes that the value of a quality adjusted life year (QALY) is between €22 000 and €34 000. This would imply that the value per person of the 7.5 year increase in life expectancy is between €165 000 and €255 000. Moreover, evidence on the public’s willingness to pay to extend longevity suggests that these estimates are conservative. 2 Source: Eurostat

3. Life expectancy at age < 1 year and real GDP per capita, Ireland, 1995-2010 3 Between 2007 and 2010, real GDP per capita declined 12.3%, and life expectancy increased 1.3 years. Source: Eurostat

4. Number of New Molecular Entity Drugs & New Biologics approved by the FDA, 1993-2008 4 Total = 441; mean = 27.6. Beginning in 2004, figures include BLAs. http://www.fda.gov/downloads/Drugs/DevelopmentApprovalProcess/HowDrugsareDevelopedandApproved/DrugandBiologicApprovalReports/UCM123959.pdf

5. Some recent FDA New Molecular Entity Approvals 5 APPROVAL DATE PROPRIETARY NAME ESTABLISHED NAMEAPPLICANT REVIEW CLASSIFICATIONINDICATION 7/1/2011XARELTORIVAROXABAN JOHNSON AND JOHNSON PHARMACEUTICAL RESEARCH AND DEVELOPMENT LLCStandard PROVIDES FOR THE PROPHYLAXIS OF DEEP YEIN THROMBOSIS AND PULMONARY EMBOLISM IN PATIENTS UNDERGOING HIP REPLACEMENT SURGERY OR KNEE REPLACEMENT SURGERY. 7/20/2011BRILINTATICAGRELORASTRAZENECA LPStandard PROVIDES TO REDUCE THE RATE OF THROMBOTIC CARDIOVASCULAR EVENTS IN PATIENTS WITH ACUTE CORONARY SYNDROME (ACS) (UNSTABLE ANGINA, NON-ST ELEVATION MYOCARDIAL INFARCTION, OR ST ELEVATION MYOCARDIAL INFARCTION) 8/17/2011ZELBORAFVEMURAFENIB HOFFMANN LA ROCHE INCPriority PROVIDES FOR THE TREATMENT OF UNRESECTABLE OR METASTATIC MELANOMA WITH THE BRAFV600E MUTATION AS DETECTED BY AN FDAAPPROVED TEST. 8/25/2011FIRAZYR ICATIBANT ACETATE SHIRE ORPHAN THERAPIES INCPriority PROVIDES FOR THE TREATMENT OF ACUTE ATTACKS OF HEREDITARY ANGIOEDEMA IN ADULTS 18 YEARS OF AGE AND OLDER 8/26/2011XALKORICRIZOTINIBPFIZER INCPriority PROVIDES FOR THE TREATMENT OF PATIENTS WITH LOCALLY ADVANCED OR METASTATIC NON-SMALL CELL LUNG CANCER (NSCLC) THAT IS ANAPLASTIC LYMPHOMA KINASE (ALK)POSITIVE AS DETECTED BY AN FDA APPROVED TEST http://www.fda.gov/downloads/Drugs/DevelopmentApprovalProcess/HowDrugsareDevelopedandApproved/DrugandBiologicApprovalReports/UCM276989.pdf

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7. Questions Irish life expectancy has increased 7.5 years since 1986; it continued to increase (at a faster annual rate) during the last 3 years, during a severe economic downturn What accounts for this increase? 441 New Molecular Entity Drugs & New Biologics were introduced in the U.S. during 1993-2008. What were the health and economic impacts of this innovation? 7

8. My research on pharmaceutical innovation 8 Pharmaceutical innovation (development and use of new drugs) Longevity (life expectancy; “quantity of life”) Ability to work and to perform other activities (“quality of life”) Utilization of other medical care Hospitals Nursing homes Variety of approaches Patient-level data and aggregate (disease-level or region-level) data Drugs in general and drugs for specific diseases (e.g. cancer drugs, cardiovascular drugs and HIV/AIDS drugs) Studies of single countries (US, Canada, Australia, France, Germany, Korea) and cross-country studies

9. Background Longevity increase is an important part of economic growth and development. In the long run, the rate of economic growth is determined by the rate of technological progress, which is generated by private and public R&D investment. Most technological progress is embodied in new goods. Therefore, the welfare of consumers (and the productivity of producers) depends on the vintage of the goods (or inputs) they purchase, especially when those goods are R&D-intensive. The pharmaceutical and medical devices industries are the most R&D-intensive industries in the economy 9

10. 10 Five recent studies The quality of medical care, behavioral risk factors, and longevity growth, International Journal of Health Care Finance and Economics 11(1), March 2011, 1-34. The contribution of pharmaceutical innovation to longevity growth in Germany and France, 2001-2007, Pharmacoeconomics 29 (12), forthcoming November 2011 Has pharmaceutical innovation reduced Social Security Disability growth?, International Journal of the Economics of Business 18 (2), 2011. The effect of new cancer drug approvals on the life expectancy of American cancer patients, 1978-2004, Economics of Innovation and New Technology 18 (5), 2009, 407-28. Have newer cardiovascular drugs reduced hospitalization? Evidence from longitudinal country-level data on 20 OECD countries, 1995-2003, Health Economics 18 (5), 2009, 519-534.

11. 11 Measuring pharmaceutical innovation To measure the value of pharmaceutical innovation, one first has to measure pharmaceutical innovation itself I use two alternative measures: The mean vintage (FDA approval year) of treatments used The number of potentially available treatments

12. The contribution of pharmaceutical innovation to longevity growth in Germany and France, 2001-2007, Pharmacoeconomics 29 (12), forthcoming November 2011

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14. Potential determinants of longevity growth use of new drugs GDP per person the unemployment rate the number of notifiable diseases per 100,000 persons the number of new AIDS cases per 100,000 persons the number of people injured or killed in road traffic accidents under the influence of alcohol per 100,000 persons the number of users of hard drugs who came to police notice for the first time per 100,000 persons the number of prescriptions per person the number of hospital beds per 100,000 persons the number of physicians per 100,000 persons the number of pharmacists per 100,000 persons the number of CT scanners in hospitals and prevention or rehabilitation facilities per 100,000 persons 14 Life expectancy

15. German longevity growth German life expectancy at birth increased by 1.7 years during the period 2000-2007. The estimates imply that one third of this increase was due to the replacement of older drugs by newer drugs: new drugs have increased life expectancy by about one month per year. The cost per life-year gained from the use of newer drugs is a small fraction of leading economists’ estimates of the value of (willingness to pay for) an additional year of life. 15

16. The effect of new cancer drug approvals on the life expectancy of American cancer patients, 1978-2004 Economics of Innovation and New Technology 18 (5), 2009, 407-28. Winner of Research!America’s 2010 Garfield Economic Impact Award

17. 17 Objective Attempt to determine the extent to which new cancer drugs introduced during the last 40 years have prolonged the lives of Americans diagnosed with cancer. Methodology A reliable estimate of the overall effect of new cancer drugs on the longevity of cancer patients can’t be obtained by simply surveying previous clinical studies of specific drugs and cancer sites.

18. 18 FDA approval years of chemotherapy agents with approved uses for 3 cancer sites 151 Malignant neoplasm of stomach LEUCOVORIN CALCIUM1952 METHOTREXATE SODIUM1953 FLUOROURACIL1962 DOXORUBICIN HYDROCHLORIDE 1974 CISPLATIN1978 MITOMYCIN1981 ETOPOSIDE1983 DOCETAXEL1996 EPIRUBICIN HYDROCHLORIDE 1999 174 Malignant neoplasm of female breast METHOTREXATE SODIUM1953 CYCLOPHOSPHAMIDE1959 FLUOROURACIL1962 DOXORUBICIN HYDROCHLORIDE 1974 CARBOPLATIN1989 PACLITAXEL1992 VINORELBINE TARTRATE1994 DOCETAXEL1996 GEMCITABINE HYDROCHLORIDE 1996 CAPECITABINE1998 TRASTUZUMAB1998 EPIRUBICIN HYDROCHLORIDE 1999 188 Malignant neoplasm of bladder METHOTREXATE SODIUM1953 CYCLOPHOSPHAMIDE1959 VINBLASTINE SULFATE1965 DOXORUBICIN HYDROCHLORIDE 1974 CISPLATIN1978 GEMCITABINE HYDROCHLORIDE 1996 Sources: NCI Thesaurus; Drugs@FDA database

19. 19 Cumulative number of chemotherapy agents approved by the FDA with accepted uses for six types of cancer, 1975-2005

20. 20 Estimates of utilization of cancer drugs, relative to their utilization in the year they were launched (approved by the FDA)

21. 21 Methodology We analyze the correlation across cancer sites (breast, prostate, lung, etc.) between changes in the hazard rate of people previously diagnosed with that cancer and changes in the number of drugs that have been introduced to treat that cancer. We control for variables likely to reflect changes in diagnostic techniques –cancer stage distribution –age at diagnosis –number of people diagnosed (incidence) –use of surgery and radiation

22. 22 Results Cancer sites with larger increases in the lagged stock of approved drugs had larger reductions in the mortality rate, ceteris paribus. The impact of the stock of FDA approvals on the mortality rate tends to increase steadily for a number of years, peak about 8-12 years after launch, and then decline. This finding is consistent with evidence about the product life-cycle of cancer drugs: utilization tends to increase steadily after FDA approval, peak about 6-10 years after launch, and then decline.

23. 23 Results New cancer drugs introduced during the period 1968- 1994 were estimated to have increased the life expectancy of cancer patients by almost one year (0.94 years). Although the health of cancer patients is less than perfect, the increase in quality-adjusted life-years is not necessarily less than the increase in life expectancy. Since the lifetime risk of being diagnosed with cancer is about 40%, the 1978-2004 increase in the lagged stock of cancer drugs increased the life expectancy of the entire U.S. population by 0.38 years. This represents about 8.8% of the overall increase in U.S. life expectancy at birth. The cost per life-year gained does not exceed $6908, which is far below recent estimates of the value of a statistical life-year.

24. Consistent results for France during 2002-2006 Cancer sites for which there were larger increases in chemotherapy vintage had larger reductions in the age-adjusted mortality rate. Chemotherapy innovation accounted for at least one-sixth of the decline in French cancer mortality rates during 2002-2006, and may have accounted for as much as half of the decline. 24

25. Has pharmaceutical innovation reduced Social Security Disability growth? International Journal of the Economics of Business 18 (2), 2011.

26. 26 Disability rate,1995-2004

27. 27 Disabled workers as % of population, by age, 2006

28. 28 Objective Investigate whether, in general, the introduction and use of newer prescription drugs reduces disability Methodology Use longitudinal state-level data during the period 1995-2004. Disability measure: number of workers receiving Social Security Disability Insurance benefits working-age population

29. 29 Methodology: Other factors controlled for Age Education Behavioral risk factors –Obesity –Smoking –HIV/AIDS incidence DI program generosity & labor market conditions –Average wage –Index of employment opportunity

30. 30 Key findings Disability recipiency inversely related to: drug vintage average wage rate the fraction of state residents with at least a college education Disability recipiency directly related to: mean age

31. 31 Predicted disability rate in year t (t = 1996,…,2004), in the absence of any post-1995 increase in drug vintage In the absence of any post-1995 increase in drug vintage, about 418,000 more working-age Americans would have been DI recipients, and Social Security benefits paid to disabled workers in 2004 would have been about $4.5 billion higher.

32. Have newer cardiovascular drugs reduced hospitalization? Evidence from longitudinal country-level data on 20 OECD countries, 1995-2003

33. 33 A re-examination of cardiovascular drugs Background Heart disease was the most frequent cause of hospitalization in the U.S. in 1999 Cardiovascular drugs comprise the largest therapeutic class of drugs, in terms of expenditure, in 13 key global markets. Objective To examine the effect of changes in the vintage distribution of cardiovascular system drugs on hospitalization and mortality due to cardiovascular disease using longitudinal country-level data. Methodology The vintage of drug is defined as the year in which the drug was first sold anywhere in the world. We used annual data on the utilization of over 1100 cardiovascular drugs (active ingredients) in 20 OECD countries during the period 1995-2003.

34. 34 Methodology We estimated models of the following measures of hospital use or mortality due to cardiovascular disease: The number of hospital discharges in which the principal diagnosis was cardiovascular disease (n_discharges) Average length of stay in hospital discharges in which the principal diagnosis was cardiovascular disease (alos) The total number of hospital days in which the principal diagnosis was cardiovascular disease (n_days = n_discharges * alos) The (age-standardized) number of deaths caused by diseases of the circulatory system (n_deaths) Potential years of life lost due to diseases of the circulatory system before age 70 (pyll)

35. 35 Methodology We controlled for the following explanatory variables: the number of standard units of cardiovascular drugs per person per capita GDP educational attainment mean calories consumption mean tobacco and alcohol consumption

36. 36 Top 10 (ranked by no. of standard units) cardiovascular drugs in 2005 Switzerland vs. Austria SWITZERLAND (N=1,903,135) AUSTRIA (N=1,890,382) HYDROCHLOROTHIAZI DE 19593%C9D ANGIOTEN-II ANTAG, COMB HYDROCHLOROTHIAZ IDE 19596%C9B ACE INHIBITORS COMBINAT HEPARIN19103%C5B VARICOSE THERAPY,TOPICAL METOPROLOL19753%C7A B-BLOCKING AGENTS,PLAIN ATORVASTATIN19972%C10A CHOLEST&TRIGLY.REGU LATOR AMLODIPINE19903%C8A CALCIUM ANTAGONIST PLAIN METOPROLOL19752%C7A B-BLOCKING AGENTS,PLAIN CRATAEGUS OXYACANTHA.3%C1X ALL OTHER CARDIAC PREPS HYDROCHLOROTHIAZI DE 19592%C9B ACE INHIBITORS COMBINAT FUROSEMIDE19643%C3A DIURETICS TORASEMIDE19922%C3A DIURETICS BISOPROLOL19863%C7A B-BLOCKING AGENTS,PLAIN AMLODIPINE19902%C8A CALCIUM ANTAGONIST PLAIN GINKGO BILOBA19653%C4A CEREBR/PERIPH VASOTHERAP ATENOLOL19762%C7A B-BLOCKING AGENTS,PLAIN SIMVASTATIN19883%C10A CHOLEST&TRIGLY.REGULAT OR SIMVASTATIN19882%C10A CHOLEST&TRIGLY.REGU LATOR HEPARIN19103%C5B VARICOSE THERAPY,TOPICAL

37. 37 Post-1995 cardiovascular Standard Units (Sus) as a percentage of total SUs in 2004, by country

38. 38 Results If drug vintage had not increased during 1995–2004, hospitalization and mortality would have been higher in 2004. We estimate that per capita expenditure on cardiovascular hospital stays would have been 70% ($89) higher in 2004 had drug vintage not increased during 1995–2004. Per capita expenditure on cardiovascular drugs would have been lower in 2004 had drug vintage not increased during 1995–2004. However, our estimate of the reduction in expenditure on cardiovascular hospital stays is about 3.7 times as large as our estimate of the increase in per capita expenditure for cardiovascular drugs that would have occurred ($24) if drug vintage not increased during 1995–2004.

39. Recent actions by the Irish government vis-à-vis pharmaceuticals As part of its fiscal retrenchment, the government targeted cuts of €2 billion in healthcare spending in 2010 and 2011, of which roughly 20% (€400 million) was intended to come from reductions in procurement and drug expenditure. Of this amount, roughly €140 million in each year was intended to come from reductions in payments to pharmaceutical manufacturers, corresponding to 0.07% of Ireland’s GDP. The government has taken a range of actions: –Price controls: price cuts of 40% on nearly 300 widely prescribed medicines; –Mandatory rebates: increase in the annual rebate paid by manufacturers to the Health Service Executive on sales under public health insurance schemes; –Cost-sharing: introduction of a prescription drug charge for patients (€0.50 per prescription, with a cap of €10 per month per family); –Internal reference pricing: implementation of reference prices setting maximum reimbursement amounts for clusters of products; and –Generic substitution: establishing the right of pharmacists to substitute cheaper but equivalent products where possible.

40. Study Finds Co-Payments Discourage Drug Treatments A new study published in the New England Journal of Medicine shows patients are more likely to take their medicine when they do not have to help pay for the prescriptions. The study focused on patients with health insurance who had heart attacks. When co-payments were waived, patients’ adherence to their medications went up by four to six percentage points, according to the study, without increasing the total amount being spent on these patients’ care. There was a significant decline in those people who returned to the hospital for care. http://prescriptions.blogs.nytimes.com/2011/11/14/stud y-finds-co-payments-discourage-drug- treatments/?scp=1&sq=co-pays&st=csehttp://prescriptions.blogs.nytimes.com/2011/11/14/stud y-finds-co-payments-discourage-drug- treatments/?scp=1&sq=co-pays&st=cse

41. Internal reference pricing: potential risks Internal reference pricing: implementation of reference prices (setting maximum reimbursement amounts for clusters of products) Cost to patients of newer, more expensive products in a therapeutic class increases relative to cost of older products  decreased use of new products (reduction in mean vintage of medications)  worse health outcomes

42. Pharmaceutical spending as a percent of GDP, OECD countries, 2008

43. Conclusion Overall, new drugs have provided several important benefits, including increased longevity and reduced disability and hospitalization, and have not increased per capita medical expenditure. The benefits of pharmaceutical innovation have exceeded its costs by a substantial margin. 43