Alternative Commercial Models for Drug Development

drug-moneyThe rise of antibiotic-resistant bacteria constitutes a serious emerging threat and potential world-wide health crisis. The current treatment options are increasingly ineffective against evolving strains of harmful pathogens. Worse still, antibiotic resistance is not only inevitable, it’s accelerating. Although recent discoveries appear promising, no new classes of antibiotics have been found since 1987. It is currently estimated that a post-antibiotic future would result in the death of over 10 million people and cost $100 trillion in economic losses. This situation represents a clear and present danger, and some—including the AstraZeneca CEO—argue that it’s time for “new commercial models” for drug development.

Accordingly, in January of this year, the Word Economic Forum called for such a new commercial model in the form of up to $37 billion in advanced payments from national governments. This call for investments was endorsed by over 80 pharmaceuticals companies. You’ve read correctly. Merck, Pfizer, Johnson & Johnson, Glaxo-Smith-Kline, AstraZenaca, and 75 other companies are asking for $37 billion before they do anything. At the very least, this seems extortive. Ten million people over the next 35 years are looking at death, and the pharmaceuticals industry’s response is, “You want to live? Pay up.”

Perhaps more importantly, the idea that Merck, Pfizer, Johnson & Johnson, or GSK aren’t fully capable of making the necessary R&D investments on their own defies belief. These are major multinational pharmaceuticals corporations. The ten largest companies, internationally, make over $10 billion a year, with a 30% profit margin. Combined, global pharmaceuticals is a $300 billion a year industry. As Lawrence Friedhoff explains in his industry-insider’s guide to pharmaceuticals development,

“Successful development of a major new pharmaceutical product typically returns revenue that is approximately 500 times the development investment. In general, a pre-tax profit is 50% or more of this revenue; thus, successful drug development is capable of generating an after-tax return on investment of about 15,000% (assuming a 40% tax rate).”

Never mind the fact that careful use of international tax havens often results in far lower rates. This aside, there are, admittedly, special complexities in the antibiotics market, such as regulatory efforts to slow anti-microbial resistance, which, in some cases, might prevent an individual product from achieving this kind of ROI. Nevertheless, I can’t imagine that the patent-holder on the first new antibiotic in a new class since 1987 wouldn’t be set up to rake it in hand over fist.

However, maybe the World Economic Forum and the CEO of AstraZenaca are correct. Maybe it’s inappropriate to ask these companies to shoulder the R&D burden on their own, as all other companies do. Perhaps it is, indeed, time for alternative commercial models. With such a profound threat to human life and economic well-being on the horizon, it may be incumbent upon national governments to contribute meaningfully to ensuring public health. However, simple advanced remuneration doesn’t seem sufficient. If national publics are going to make an investment in our health security, then it seems inappropriate that we should be subject to the kind of price-gouging that will inevitably arise for newly patented antibiotics, especially given the lack of competition as a result of evolving resistance.

Fortunately, there is a solution. Historically, when modern governments have been faced with a deadly, economically disastrous, and potentially overwhelming threat, they have embraced the profound benefits that alternative commercial models can offer. Here, of course, I speak of nationalization. Both UK and US governments had the presence of mind to nationalize railroads, coal mines, and even a department store in the face of WWI and WWII. More recently, the 2008 financial collapse prompted the US government to assume controlling interests in certain financial and automotive corporations.

With 10 million lives at stake and $100 trillion in potential economic losses, a similar approach may be required with respect to the pharmaceuticals industry. The threat of antibiotic resistance is no less dire than the 2008 fiscal collapse. Trusting an industry that would so mischaracterize its capacity for R&D investment while simultaneously taking in hundreds of billions in annual revenues is certainly not the safest option. As the companies themselves suggest, our governments have a moral obligation to intervene, but they must do so in a way that safeguards public health and well-being. Nationalization may well be the smartest option.

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