Using Value-Agnostic Incentives to Promote Pharmaceutical Innovation.

• Author: Madl, Amy C.

Table of Contents Introduction I. Conceptualizing Pharmaceutical Innovation II. The For-Profit Drug Development Model III. Value Agnostic by Default: Existing Government-Backed Incentives A. Therapeutic Gaps and Rationing Rhetoric B. Incentive Distortions in Current Proposals C. Value Agnosticism in Pharmaceutical Innovation 1. Value-agnostic federal drug development subsidies a. Direct funding: Bayh-Dole and academic medicines b. Indirect funding: tax-based subsidies c. Indirect funding: federally mandated coverage requirements 2. Value-agnostic objective-oriented programs a. Priority review vouchers b. Patents for Humanity c. Generic entry incentives IV. Value Agnostic by Design: Patent Buyouts to Promote Public Health A. Patent Buyout Scheme 1. Sale-triggered option rights 2. Contrasting patent buyouts with Bayh-Dole march-in rights B. The Limits of Limited Intervention Conclusion Introduction

Approximately 125,000 Americans die each year because they do not take their medications as prescribed. (1) High prescription drug prices contribute to medication nonadherence, with millions of Americans forgoing their medications because they cannot afford them. (2) For example, only a small fraction of the estimated 3.2 million Americans infected with hepatitis C, a virus that can cause liver cancer and cirrhosis in untreated patients, (3) are treated with potent antiviral medications like Gilead's first-in-class hepatitis C drug Sovaldi (sofosbuvir) [4] Despite cure rates above 95% when using Sovaldi in combination with other medications, [5] many state Medicaid programs only cover Sovaldi's $84,000 price tag for their sickest patients. [6] Because pharmaceutical companies like Gilead own patents covering their lifesaving drugs, (7) competitors cannot make, use, sell, offer to sell, or import lower-cost generics until the patents expire or are invalidated. (8) Many patients will therefore die prematurely before Gilead's hepatitis C patents begin to expire in 2029, (9) twenty years after Gilead filed its oldest patents covering sofosbuvir. (10)

U.S. drug prices are largely driven by what the patent-constrained market will bear; "there is little evidence of an association between research and development costs and drug prices." (11) Monopoly pricing is not unique to the pharmaceutical industry. (12) In many industries, the price of a good, such as the iPhone X, is typically (and unsurprisingly) what consumers are willing to pay. (13) But few goods produce as many positive externalities as pharmaceuticals do. (14) As drug discovery chemist and industry analyst Derek Lowe has observed, "[t]he more important, the more involved with matters of life and death something appears to be, the more uneasy people feel about paying market prices." (15) Paradoxically, people may feel more outrage over high prices for lifesaving therapies--drugs many believe the pharmaceutical industry is insufficiently incentivized to develop (16)--than over incremental improvements or lifestyle drugs.

Because the pharmaceutical industry relies on patents and monopoly prices for lifestyle and lifesaving drugs alike, it has been labeled the poster child for both patents (17) and corporate greed,18 prompting calls for reform in the United States. (19) While some reform proposals only rely on indirect government pricing influence, (20) scholars and policy analysts have increasingly called for direct interventions, such as publicly financing pharmaceutical companies, (21) forcing them to reincorporate as benefit corporations, (22) tying federal grant funding to price controls, (23) or using the government's eminent domain power to overcome patent monopolies. (24)

Although some of these proposals requiring the government to grapple with drug prices head-on might be socially beneficial, this Note does not consider the normative merits of previous proposals. Instead, this Note argues that proponents of direct government intervention overlook a critical factor that distinguishes the public sector from the private sector and limits the feasibility of direct intervention: political accountability. While existing literature discusses government incentives to lower drug prices, (25) this Note highlights common features underlying existing government-backed innovation policies and explains how political headwinds, such as interest group pressure and election timing, may shape U.S. pharmaceutical innovation policy design.

Specifically, this Note argues that current U.S. pharmaceutical innovation incentives reflect the same "value agnosticism"--neutrality toward both the disease treated and the curative potential of the treatment--embedded in most of the American health care system. Value agnosticism avoids the appearance of government-administered "death panels" rationing essential health care at the cost of potential static efficiency gains (such as lower prices). (26) In policy choices ranging from tax incentives for research and development (R&D) to the regulatory approval process to intellectual property rights, the government makes no, or only coarse, distinctions between specific therapeutics, (27) leaving direct decisions about who will be treatable in private hands. For example, the U.S. government has adopted a facially technology-neutral approach to patent law, (28) a stance it has exported worldwide through free trade agreements such as the Agreement on Trade-Related Aspects of Intellectual Property Rights. (29) Therefore, patents for incremental innovations enjoy the same government-backed monopoly term--twenty years from the date of filing--as those for breakthrough therapies. (30) Similarly, data exclusivity, which constrains the ability of the Food and Drug Administration (FDA) to consider applications by additional manufacturers seeking approval to sell copycat therapeutics, makes only broad distinctions among therapeutics. For example, these rules provide different exclusivity periods for new therapeutics relative to new uses of old therapeutics (distinguishing only between small molecules and biological products), and for new therapeutics for uncommon diseases, antibiotics, and therapeutics that undergo certain pediatric trials (31) By contrast, no major legislation to increase the government's role in valuing specific-disease treatments--at the development or marketing stage--has been passed in the United States, with most direct intervention proposals dying in committee. (32)

Thus, politically successful, value-agnostic programs could serve as a model for further short-term reform efforts in the United States. Because value-agnostic programs indirectly influence innovation while leaving original value judgments--about whom new therapeutics should be made for, when, and at what cost--in private hands, they allow the government to avoid accusations of drug-development "death panels." However, broadly conceived programs can significantly impact future R&D directions, as illustrated by the Orphan Drug Act of 1983, which dramatically increased the number of approved therapies for rare diseases without specifically incentivizing development efforts for a particular disease or drug type. (33) Value-agnostic programs may even lower costs. Nevertheless, value-agnostic programs allow politicians to pass hard choices to the private sector, where they do not seem to be choices at all. But even if value-agnostic programs represent a second- (or third-) best option for cost-efficient reform, short-term advances do not preclude more radical future reforms.

This Note proceeds in four Parts. Part I offers key conceptual considerations when analyzing pharmaceutical innovation policies and highlights two overlooked players in early-stage drug development policy: early-stage financiers and developers. Part II discusses the pharmaceutical innovation landscape, focusing on tradeoffs inherent in for-profit drug development as well as potential targets for future policies. Part III, the heart of this Note, explains how political accountability may influence policymakers' incentives to directly control pharmaceutical access. Additionally, Part III demonstrates that many influential U.S. pharmaceutical innovation programs avoid making disease- and medication-level value judgments, even when such judgments appear to be consistent with program goals. Part III then argues that value-agnostic programs modeled after current government-backed incentives provide a more realistic path for further reform, at least in the short term, than the proposals dominating the existing literature. As one example of this framework, Part IV suggests a patent buyout system that could promote public health without significantly altering private decisionmakers' current role in early-stage drug discovery.

1. Conceptualizing Pharmaceutical Innovation

   When scholars discuss "pharmaceutical innovation," they are typically referring to the discovery and development of new therapeutics. However, this umbrella definition obscures important innovation elements implicated by incentives, such as:

   * Developer. Who discovers new therapeutics?

   * Early-stage financier. Who finances early-stage development (such as drug discovery, preclinical trials, and Phase I/II clinical trials)?

   * Late-stage financier. Who pays for late-stage development (such as Phase II/III clinical trials and the approval process)?

   * Marketer. Who markets new therapeutics?

   * Payer model: Who pays for new therapeutics, and how are those costs passed on to patients?

   * Disease. Which diseases do developers target?

   * Therapy. What types of therapeutics (small molecule drugs, protein-based therapeutics, cell therapies, or gene therapies) are developed?

   * Efficacy. How effective are new therapeutics (i.e., cures versus incremental innovations)?

   * Quantity. How many distinct new therapeutics are developed?

   * Timing. When do new therapeutics make it to market?

   Considering each innovation element highlights the potential...