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Once Should Be Enough
American consumers often pay twice for their prescription drugs—first to the U.S. government in the form of taxes spent on research, then to drugmakers holding lucrative patents. Why?
By Katharine Greider
May 2006
How do Americans pay for progress? If progress is measured in new drugs to combat disease, we pay in two basic ways. First, as taxpayers, we support research directly through the National Institutes of Health (NIH) and through federal tax deductions of 39 percent on the research and development (R&D) costs of the pharmaceutical industry. Then, as consumers, we also support R&D through high prices made possible by patents, the government-granted monopolies that reward innovation. While many have called this multifaceted R&D apparatus the best in the world, it also has become increasingly expensive for American families.
Take the new cancer drug Avastin. Avastin is what you might call an R&D success story—the fruit of cross-fertilization between private and public sectors, basic and applied science, shareholders' and taxpayers' commitment of resources to smart people who doggedly pursued results in labs and clinics.
Judah Folkman, M.D., likens his founding of the scientific theory underlying Avastin's development to building "a little tiny model of the first car with paper and sealing wax." Director of the vascular biology program at Children's Hospital in Boston and a long-time professor of cell biology at Harvard Medical School, Folkman established that tumors cannot progress unless they stimulate the growth of nourishing blood vessels, a process known as angiogenesis. NIH—via taxpayer dollars—began supporting Folkman's research before he published his seminal hypothesis in 1971, and continued its support through years of skepticism about his ideas, and into the '80s and '90s.
It was Napoleone Ferrara, M.D., a young Italian researcher working for the California-based biotechnology company Genentech, who turned Folkman's theory into a drug. Beginning in 1989, Ferrara and his team identified a key angiogenic protein, then discovered an antibody that blocks its action. In 2004 a human trial sponsored by Genentech showed that Avastin, when taken along with standard chemotherapy, extends the median survival of patients with advanced colorectal cancer, albeit by only five months. The U.S. Food and Drug Administration (FDA) swiftly approved it.
The National Cancer Institute (NCI), part of NIH, had been running trials on bevacizumab (Avastin's generic name) for more than five years. "We get involved in the development of drugs at various stages," explains Michaele Christian, M.D., director of NCI's Cancer therapy evaluation program. "And the reason we do it is because we think the drug has tremendous potential and that we can expand and accelerate its development, to the benefit of patients." Indeed, NCI is sponsoring more than 30 clinical trials using Avastin, and recently produced trial results establishing the drug's efficacy (when combined with chemotherapy) in advanced lung and breast cancers.
The FDA has approved Avastin only for colorectal cancer, at a cost of about $50,000 a year at its present unit price. If the drug is approved by the FDA to treat breast and lung cancers, the annual cost (or unit price) could be twice as much, because the doses are higher. Sensitive as of late after a rain of criticism in the press and from patient advocate groups regarding Avastin's cost, Genentech's director of government affairs, Walter Moore, insists the company is struggling with the question of unit price for lung and breast cancer treatments if approved.
But when asked in a recent interview with Business Week online to "explain why it may be necessary to boost the cost of Avastin," Genentech's CEO Arthur Levinson replied, "Selling twice as much of the drug means it's going to cost us twice as much in production expenses."
Meanwhile, people eligible for treatment with Avastin face copayments that can run well into the thousands of dollars annually. Insurers are balking at covering the drug in cases that don't fit the FDA-approved indication. Patients have declined treatment with Avastin due to expense, says Deborah Schrag, M.D., M.P.H., an oncologist at Memorial Sloan-Kettering Cancer Center. "It's much more common that people get it, and then they struggle under these big payments," she says. "And these people are dying, so I also worry about their families' [financial stress]." In a survey published in February in the journal The Oncologist, only a quarter of cancer doctors said they felt Avastin offered "good value."
Government Funding: A "Push" for Innovation
Just how much does the federal government contribute to drug R&D? Broadly speaking, if talking in terms of roles, the government is more involved in basic research and private companies, in applied research on particular drugs. But even here there are areas that overlap. One study found that of 21 therapeutically important drugs introduced between 1965 and 1992, 15 were developed with substantial input from public research.
The industry group Pharmaceutical Research and Manufacturers of America (PhRMA) reports its members spent almost $40 billion on R&D in 2005. NIH also spends billions—$8.4 billion in 2003—on clinical research, testing health interventions in real people. NIH is particularly involved in the study of severe illnesses such as AIDS and cancer.
Increasingly, nonprofits also are stepping in to fund R&D aimed at diseases affecting the world's poor, who cannot reward corporate investment with high sales figures. The Bill & Melinda Gates Foundation, a major player, has poured $6 billion into global health initiatives since 1994.
Patents: the "pull" for innovation
Are high drug prices the result of the U.S. system of drug R&D working as it is designed to do? That system revolves around the patent, a promise to the owner of an invention: If you can get the product to market, you will be rewarded with a temporary monopoly, which allows a drug to be sold at prices many times the cost of production.
Once a patent is awarded, shareholders expect companies to fully exploit the promise inherent in patent protection. Sales of oncology drugs, including the newly launched Avastin, helped drive up profits for the pharmaceuticals division of Roche—the Swiss-based multinational pharmaceutical corporation that owns a majority share in Genentech and markets Avastin outside the U.S.—37 percent in 2005. Profit as a percentage of sales was 27.4 percent.
Another, perhaps bitter, irony is that although a U.S. company discovered Avastin and U.S. taxpayers have supported its underlying science and ongoing development, it was introduced at lower prices in Canada, Germany, and the United Kingdom. In Roche's home country of Switzerland, the drug was priced at more than 25 percent less than even the discounted U.S. price, which is available only to federal purchasers such as the Department of Veterans Affairs. In the absence of government regulations to restrain prices—such as those in place in the countries mentioned above—the upper bound on the U.S. price is simply the point at which people are unwilling or unable to pay it.
Bayh-Dole and "Technology Transfer"
Before 1980 the federal government retained rights to research conducted under its grants. That year, reacting to concern that few government-owned inventions were being made into usable products, Congress passed legislation that transformed the research landscape. The Bayh-Dole Act gave universities and other grantees the right to license inventions developed under government grants to private companies, in exchange for royalties. The government too can license inventions developed by its scientists, alone or in collaboration with industry, to private enterprise.
The Bayh-Dole Act promoted the commercialization of government-funded research, and partnerships between business, academia and the federal government. One measure of this trend: universities received 264 patents in 1979; in 2003 they received 3,259. But in at least a few contentious cases, lawmakers and consumer advocates have cried foul when a drug developed largely at public initiative and expense was later offered at a price that made it inaccessible to many Americans.
An early case was AZT, the first AIDS drug. Burroughs Wellcome, NIH's partner in developing AZT, introduced it in 1987 at $8,000-$10,000 a year. Outrage over the price—protesters shackled themselves inside the New York Stock Exchange and staged other attention-grabbing stunts aimed at the company and regulators—led to an attempt in 1989 to require so-called reasonable pricing in products developed under partnership contracts between NIH and private industry, known as Collaborative Research and Development Agreements (CRADAs). The intended pricing language, never decisively enforced, apparently discouraged would-be collaborators with NIH. The number of CRADAs dropped off sharply. NIH nixed the clause in 1995, and public-private partnerships—like the one that is accelerating the development of Avastin—rebounded.
Another high-profile case involved the cancer drug Taxol; the government initiated a study of the drug's therapeutic value, but eventually needed industrial partners to help commercialize it. One of these partners was the pharmaceutical company Bristol-Myers Squibb (BMS).
According to a 2003 report by the U.S. General Accounting Office, NIH spent about $484 million between 1977 and 2002 on research related to Taxol. BMS reported having spent $1 billion developing the drug. Once it hit the market in 1993, Taxol garnered the highest sales figures of any cancer drug in history, with worldwide revenues through 2002 topping $9 billion, partly on the strength of a $1,000-a-dose U.S. price. Primarily through Medicare, the federal government has been a major purchaser of Taxol, spending $687 million on the drug from 1994 through 1999. In comparison, as of 2003, NIH has received $35 million in royalty payments from BMS.
Best Alternative? Or Broken?
The argument for this R&D support system goes that without the fabulous "upside" potential of sales under patent, no company would take the enormous risks required to bring a drug like Avastin to market. Neither would companies engage in collaborations with government if that meant limits on prices. "It has consistently been shown that the ability to capitalize on invention is a tenet of innovation," says Caroline Loew, Ph.D., PhRMA senior vice president for scientific and regulatory affairs. If drugs are unaffordable to some, this argument suggests, that is a problem that should be addressed through more and better insurance coverage and charitable programs to assist the indigent. American pharmaceutical companies say they're doing their part by handing out free prescriptions—28 million last year in the United States—to poor patients.
On the other hand, some in Congress and in policy circles are convinced the system is indeed broken, and that its fundamental mistake is to use high, patent-protected prices as the reward for and principle stimulus of R&D. Supporting R&D with high prices at the pharmacy, say these critics, not only rations drugs according to ability to pay but encourages companies to
* spend huge sums on marketing the most lucrative patented products.
* develop patentable but therapeutically unimportant variations on existing products.
* protect product portfolios by keeping research, especially unfavorable results, secret.
Says Jamie Love, director of the Consumer Project on Technology, an organization concerned with intellectual policy and practices, and an expert on the economics of the drug industry, "When the price of a drug becomes like the price of a house in some cases, people are beginning to ask, is this really the best we can do?" [See sidebar, "Bringing Competition to Market," on new legislative proposals to overhaul the current system.]
Innovations on a Professor's Salary
The last half-century has birthed a panoply of new medical technologies. It has also seen the growth of health care costs from 5.9 percent of gross domestic product (GDP) in 1965 to 16 percent of GDP in 2006.
Over these same decades, Judah Folkman has been a veritable font of innovation, not only launching the field of angiogenesis research but also helping develop the first cardiac pacemaker and pioneering controlled-release technology found in the contraceptive Norplant. And he's done it on a professor's salary. Folkman has seen a small number of colleagues find success by founding start-ups; a few have failed. "It's a different kind of career," he remarks.
Even so, at 73, Folkman would dearly like to see the angiogenesis blocker he discovered, endostatin, fully tested, manufactured and made available to the ill patients who constantly call him seeking help. The small biotech firm EntreMed dropped endostatin in 2003, citing the high cost of manufacturing it. Now colleagues in Folkman's lab have altered the molecule to make it easier to produce. Folkman adds that their discovery has not yet been used to lower the manufacturing cost here in the United States, but the Chinese have come up with a different method that has already resulted in cheaper production. And his institution, Children's Hospital, is in possession of what in today's R&D world is an indispensable tool. "If you don't hold a patent," says Folkman, "they won't even talk to you."