Thailand Law Journal 2009 Spring Issue 1 Volume 12

2. Lack of Incentives to Commit Resources to Discovery Activities

Though the drug discovery process is iterative, it may be characterized linearly, even though parts of the process feed back into previous stages. The linear simplification of the process can be reduced into three broad stages-discovery, development, and registration. Parallel to the research and development process is a process for manufacturing scale-up and distribution of the drug. Early drug discovery consists of characterizing the disease in as detailed a way as possible in order to find possible drug targets; late discovery consists of modeling compounds which interact beneficially with targets. Preclinical and clinical development involve testing the drug in silico via computer simulation model, in vitro via animal model, and finally in vivo for safety and efficacy. [FN32] The nature of the process contributes to the two reasons that private firms are unlikely to invest in early discovery: (i) the high likelihood of failure and (ii) the lack of patentability of discoveries.

Figure 1 - The drug discovery and development process [FN33]

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE
As a drug passes through the process, success at each stage points to greater likelihood of ultimate success. [FN34] For this reason, manufacturing is typically brought up to scale during Phase III of clinical trials, when success becomes relatively likely. At this point, investment in high-throughput manufacturing becomes prudent. However, this same dynamic risk profile is the reason that drug companies are unlikely to investigate diseases and become specialists in understanding disease mechanisms and identifying targets. At the early discovery stage, success is such a distant possibility that the rewards from investment do not always seem to justify the initial investment.

Furthermore, the nature of basic research is to model a naturally-occurring phenomenon which may not necessarily be patentable or might not be a discernible profit driver, rather than to create an entity which can be profitably patented. Its objectives are inimical to the objectives of the company, because unless the basic research is likely itself to create proprietary opportunities for future profit, the fruits of the research may fall within the public domain before the private firm can capitalize. In this respect, basic drug research possesses the two qualities characteristic of public goods-non-rivalry and non-excludability. [FN35] Since information can be possessed by any number of individuals at once, failure to keep the results of research confidential causes the company to confer a public benefit instead of capturing the benefit for itself. Since much of the information gathered is not patentable (i.e., it does not satisfy the indicia of patentability-novelty, non-obviousness, and utility-or it is excluded from patent eligibility as being naturally-occurring), the company's entitlement to the potential benefit is not as strong as if the company held an enforceable monopoly over the rights to make, construct, use, and sell the information. Though the company can take steps to keep research confidential, it will incur a socially inefficient cost in doing so. As incentives surrounding basic research are such that the private company cannot internalize all benefits associated with its efforts, the efficient decision for the company is to under-invest in socially beneficial basic research. [FN36]

B. Government & International Agency Failures

1. Lack of Drug Development Capability

If a competitive market equilibrium does not yield the publicly desired level of distribution of a particular good, non-profit institutions, including governments, can elect to administer the good themselves. [FN37] However, drugs have typically been considered private, not public, goods. In the 1940s, the discovery of penicillin and other antibiotics by private companies accrued to the benefit of the wealthy and broadened the drug gap early on. [FN38] The success of early pharmaceutical companies caused them to make strategic commitments in research and development, distribution, and marketing in order to maintain their footholds on a fast-changing industry. [FN39]

While pharmaceutical firms innovated, the public sector attempted to indirectly mobilize the resources of private firms toward its own set of priorities. Indeed, the relationships most important to pharmaceutical companies were those with individual scientists, public institutions (for instance, the United States' National Institute of Health) and nonprofits such as research *397 universities. [FN40] Public institutions were provided incentives toward public-private technology transfer arrangements with the enactment of the Bayh-Dole Act in 1980. [FN41] The Act was intended to promote economic development, enhancing U.S. competitiveness, and benefiting the public by encouraging the commercialization of technologies developed with federal funding. [FN42]

Despite explicit efforts to introduce an entrepreneurial spirit into the public sector, very little public drug development capability resulted. In the US, only the Walter Reed Army Institute of Research is equipped to carry out the full drug development process. The Reed Institute and India's Central Drug Research Institute are the only two public entities capable of carrying out drug development activities internally. [FN43]

As private pharmaceutical capacity increased, awareness of the lack of essential medicines distribution worldwide has become a public priority, with the WHO publishing its first Essential Drugs List in 1976. [FN44] Despite increased efforts on the distribution side, capacity for drug development never materialized to complement basic research potential within either the US or global public sectors. Indeed, the $36 million drug development budget allocated by the WHO to its Special Programme for Research and Training in Tropical Diseases (TDR) for comprehensive research across ten diseases is scarcely sufficient for the development of even one drug. [FN45]

In response to a competitive equilibrium which undersupplies drugs for neglected diseases to the developing world, neither donor nor recipient governments possess the resources or capabilities to carry out the drug development process from beginning to end. In small developing country governments, even the prospect of learning good manufacturing practices from developed countries is poor. [FN46] For developed countries, the requirement for public sector capacity for drug development is arguably not urgent enough domestically to warrant heavy capital investment. Even orphan diseases have historically generated private sector research and development sufficient for the creation and dissemination of life-saving drugs. [FN47] It is hard to argue that one country should spend many billions of dollars to invest in capacity to develop drugs explicitly for other countries when the capacity of already-existing private firms in that country struggles to satisfy domestic need.

[FN32]. Hillisch & Hilgenfeld, supra.

[FN33]. Nwaka & Ridley, supra note 15, at 923.

[FN34]. Ibid. at 924.

[FN35]. P. Samuelson, “The Pure Theory of Public Expenditure” (1954) 36 Review of Economics and Statistics 387-389.

[FN36]. K. Arrow, “Economic Welfare and the Allocation of Resources for Invention,” in Nelson, R. (ed.), The Rate and Direction of Inventive Activity, (Princeton: Princeton University Press, 1962).

[FN37]. Interview of Jon Putnam, Faculty of Law, University of Toronto (26 May 2004).

[FN38]. World Health Organization, “Setting the Scene: the Essential Drugs Concept” available online: <http:// www.who.int/medicines/organization/par/prduc/prduc_scene.doc>. (Setting the Scene)

[FN39]. L. Galambos & J. Sturchio, “Pharmaceutical firms and the transition to biotechnology: a study in strategic innovation,” (1998) 72 Business History Review 2 250(29).

[FN40]. Ibid.

[FN41]. Pub.-L. No.96-517. § 6(a), 94 Stat. 3019. (Bayh-Dole Act).

[FN42]. United States General Accounting Office, Report to the Honorable Ron Wyden, U.S. Senate: Technology Transfer: NIH-Private Sector Partnership in the Development Taxol (June 2003) GAO-03-829.

[FN43]. Nwaka & Ridley, supra note 15 at 919.

[FN44]. WHO, Setting the Scene, supra note 37.

[FN45]. Special Programme for Research and Training in Tropical Diseases, Approved Programme Budget (2004) TDR/PB/04 - 05/REV.1. Available online: < http://www.who.int/tdr/publications/publications/pdf/budget%20_04.pdf>.

[FN46]. For a contextual discussion of technology transfer problems confronting the developing world, see CIPR, Integrating intellectual property rights and development policy (UK: CIPR, 2002) at 24-29 available online: < www.iprcommission.org/papers/pdfs/final_report/CIPRfullfinal.pdf>.

[FN47]. Merrill Goozner, The $800 Million Pill: The Truth Behind the Cost of New Drugs, (Berkeley and Los Angeles: University of California Press, 2004) at 8. Since the number of people inflicted with a rare first-world disease is very small, it is conceivable to reimburse patients for therapies procured. For example, Ontario reimburses patients with Gaucher's disease. Since only twenty patients in Ontario demand the treatment, the $3.5 million reimbursement costs were justified as a controllable cost, despite high per-treatment cost. It would be inconceivable for poor governments to prioritize and support such expensive therapy. For more information about Ontario's Gaucher's disease reimbursement program, see Joe T.R. Clarke, Dominick Amato & Raisa B. Deber, “Managing Public Payment for High-Cost, High-Benefit Treatment: Enzyme Replacement Therapy for Gaucher's Disease in Ontario” (2001 September 4) 165(5) CMAJ 595.

This article is published with the kind permission of Nathaniel Lipkus. The article originally appeared in Michigan State University Journal of Medicine & Law, Spring 2006 issue.