Abstract
The term “innovation” is used in a number of different ways in pharmaceutical regulation processes. In this chapter I address the question of what is meant by the term “innovation” in the context of the debate on new drug prices. I distinguish between lay and medical uses of the terms “innovation” and “innovative” then I identify three ways that pharmaceutical innovation generates a social surplus. First, clinical innovation, which is the “incremental effect” used in cost-effectiveness analysis and quantified for a specific clinical context and patient group. Resource innovation is the second source of surplus: innovation in the resources involved in supplying a given clinical benefit, for example, an oral version of an intravenous drug. Third, developing and manufacturing innovation, for example, innovation in the methods of manufacturing drugs. An analogy between clinical and economic concepts of value is noted. Clinical value of innovation, like economic value, is constrained by the best alternative strategy. The clinical value of a new drug’s innovation is its gross clinical effect (compared with no care) constrained by the opportunity cost (foregone health benefit) to the patient of not using the best existing therapy.
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- 1.
An example of a new therapeutic subclass is the introduction of the selective serotonin reuptake inhibitors (SSRIs) in the early 1990s. SSRIs are anti-depressants that were considered a separate therapeutic subclass from the existing tricyclic anti-depressants (TCAs). Fluoxetine was the first SSRI (innovative) and then others (“me-toos”) followed (e.g. sertraline). The introduction of venlafaxine in the late 1990s was considered to be a new therapeutic subclass, the serotonin–norepinephrine reuptake inhibitors (SNRIs) (DeVane 1994; Pekarsky 2010).
- 2.
This characteristic of a firm, investment in pharmaceutical R&D, is a necessary condition for membership in the PhRMA: “The Pharmaceutical Manufacturers Association was founded in 1958.” Its name was changed to the Pharmaceutical Research and Manufacturers of America in 1994 to underscore the extraordinary commitment of member companies to research. Headquartered in Washington, DC, PhRMA represents the country’s leading pharmaceutical research and biotechnology companies, which are “devoted to inventing medicines that allow patients to live longer, healthier and more productive lives” (PhRMA 2013).
- 3.
For example, in 2011 Pfizer reported 93 NMEs in the pipeline of which 4 were in the Registration phase and 13, 28 and 49 of which were in Phase 3, 2, and 1 respectively. It is not possible to determine the number of NMEs with Pfizer patents on this date, but not yet in Phase 1, from this report.
- 4.
A search of the Australian patent data base on February 28 2011 of patents where the applicant’s name contains the word Pfizer contains 2,513 results, not all of which are NMEs (AUSPAT 2011).
- 5.
The US Food and Drug Administration website details the requirements for approval (FDA 2013).
- 6.
A paper by Cohen et al. (2007) describes the fourth hurdle and also describes some of the limitations of not considering the opportunity costs of decisions.
- 7.
In 1993, the Australian PBAC published the first Guidelines for the use of HTA/CEA to inform a drug reimbursement process. These Guidelines illustrate the rigour and specificity HTA/CEA requires for Industry submissions to PBAC for reimbursement of new drugs. This set of guidelines is regularly updated (PBAC 2013).
- 8.
The US has only recently started to consider the idea of comparative effectiveness as a way of understanding the benefits of a new drug. In recent years the US has focused on evidence of performance against placebo rather than an alternative active therapy as an indicator of the value of a new drug. In the words of the FDA: “FDA’s experience with comparative effectiveness claims is relatively limited. Our enabling law (FDC Act, as amended in 1962) does not require assessment of comparative assessment and the legislative history made it very clear that there is no relative effectiveness requirement. A new drug does not have to be better than or even as good as existing treatment” (Temple 2010). This statement suggests that the US decision makers conflate the idea of having to be proven to be more effective than existing therapies in order to be approved by the FDA and having to provide evidence of comparative effectiveness as part of the new drug approval for uptake on the formularies. Comparative effectiveness analysis also concerns the review of data bases such as cancer registries and longitudinal data bases held by Medicare and Medicaid to develop evidence of comparative effectiveness. The substantial infrastructure investment by the US in relation to data collection for comparative effectiveness is reviewed in Trontell (2010).
- 9.
The ICER does not appropriately accommodate the situation where either or both of the incremental cost and effect are negative. Hence the NB i is considered preferable. However, in this book the situation of interest is where there is both an additional cost and an additional effect.
- 10.
- 11.
The American Pharmaceutical Research and Manufacturer’s Association website is rich in examples of this narrative, for example, the marketing publication entitled: “2011s New Medicines Fought Wide Range of Diseases, Conditions” (PhRMA 2011).
- 12.
The endogeneity of new drug price is discussed further in Chap. 6.
- 13.
Why should the resource innovation be considered in terms of the incremental cost net the effect of the incremental cost of the drug itself? The incremental cost includes a term relating to the net financial effect of adoption on other resources, as well as the additional cost of the new drug compared to the existing drug (if it is a direct substitution.) However, as first discussed in Chap. 6, while differences in resource use and the associated costs can be estimated empirically in a clinical trial, the price of the drug and its associated cost is determined endogenously to the Reimbursement process. What this means is that a new drug could be innovative in terms of preventing the need for an admission to deliver the drug IV, however, the incremental cost will not reflect this if the firm prices the drug so as to appropriate the full value of that surplus or resource innovation. That the price of the new drug is the mechanism by which clinical and resource innovation are appropriated by the firm, a point well understood by pharma-economists, for example Vernon et al. (2009).
- 14.
Technically we could consider an incremental cost as resource innovation (albeit undesirable)—for example, two additional consultations with a GP are required.
- 15.
DiMasi’s study (2002) highlighted a range of factors that could be addressed to improve productivity of drug development processes, including both regulatory and business decision making. He concluded that there could be a “substantial” impact on R&D costs if efficiency of manufacturer and research wee improved.
- 16.
There are numerous businesses offering innovative solutions to pharmaceutical manufacturers to improve their efficiency. A quick look at an industry journal such as the Pharmaceutical Manufacturing magazine highlights that pharmaceutical manufacturers are like every other industry—they welcome innovation in the manufacturing process (Pharmaceutical Manufacturing 2013).
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Pekarsky, B.A.K. (2015). The Clinical Value of Innovation. In: The New Drug Reimbursement Game. Adis, Cham. https://doi.org/10.1007/978-3-319-08903-4_4
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