To Spur Medical Innovation, Make Corporate Cheaters Pay

By Aaron S. Kesselheim and Ameet Sarpatwari 

Cross posted from Health Affairs Blog

The past decade has seen a relatively constant rate of newly approved drugs every year. The number has even jumped in the past few years. Yet, despite such encouraging trends, we are actually facing a crisis in drug innovation today. That is because many of these new products do not offer substantial improvements over already available alternatives.

At the same time, novel and effective treatments for many diseases—both rare and common—remain elusive. For example, there is widespread concern over the lack of development of new antibiotics aimed at multidrug-resistant infections. Therapeutic innovation for central nervous system disorders such as dementia and psychoses, which affect almost 100 million Americans, has likewise stagnated.

In this climate, pharmaceutical manufacturers have nonetheless continued to thrive. The top eleven drug manufacturers made $711 billion from 2003 to 2012, including $68 billion in 2012 alone, translating to an industry profit margin on par with the banking sector.

Yet some of these profits have been acquired through illegal marketing practices that lead to unnecessary over-prescribing of their products, including issuing kickbacks to physicians, making false claims about their products, and marketing drugs for unapproved uses for which there is no evidence of efficacy despite important risks potentially leading to adverse patient outcomes. In the past five years alone, pharmaceutical companies have been required to pay over $13 billion for such violations.

Greater Accountability, More Resources

Imagine if we could hold these companies more accountable for their behavior while at the same time improving the resources available for groundbreaking medical research and the training of young scientists? In January 2015, Senators Elizabeth Warren (D-MA), Benjamin Cardin (D-MD), Sherrod Brown (D-OH), and Tammy Baldwin (D-WI) introduced the Medical Innovation Act to do just that.

Under this legislation, drug companies that engage in illegal sales tactics would be required for the next five years to pay an additional fee amounting to 1 percent of their profits multiplied by the number of blockbuster drugs they produce that were developed in part with federal funding. The extra money would be used for promoting advances in regulatory science at the Food and Drug Administration (FDA), highly innovative research on unmet health care conditions at the National Institutes of Health (NIH), or training of young scientists.

The bill, nicknamed the “NIH Swear Jar” legislation, has been criticized by the drug industry as interfering with pharmaceutical innovation. But the industry’s criticisms are based on misconceptions about the true sources of transformative drug innovation. To be sure, large pharmaceutical companies do invest money in research and development (R&D), but it is less than they spend on marketing and administration. It is actually a pretty small percentage (12-18 percent) of revenues, and the majority of that investment in R&D leads only to incremental innovations on already-existing projects.

One study estimated that large drug manufacturers spend less than 3 percent of revenues on truly innovative drug development, a fraction that may be an overestimate going forward as some companies close their research centers. In addition, spending on R&D is deducted from a company’s revenue before profits are calculated. The payments in Senator Warren’s bill would be therefore unlikely to make a substantial dent in industry R&D.

Basic Science

Opponents of the Medical Innovation Act also claim that the proposed recipients of the law’s funds are not involved in drug innovation. NIH is engaged in basic science, they say, too far removed from drug development to make a significant difference and the FDA only serves as a hindrance to innovation. Nothing could be further from the truth. Vital high-risk/high-reward basic science research has traditionally been the sole domain of the NIH. This is the kind of critical investment that corporate interests beholden to shareholders who have little interest in gambling on.

In a recent study published in Health Affairs, our group found that a majority of the most transformative drugs introduced over the past 25 years were directly related to discoveries made in government laboratories or by academic researchers supported by federal grants, including imatinib (Gleevec) for chronic myelogenous leukemia, infliximab (Remicade) for rheumatoid arthritis, bevacizumab (Avastin) for cancer and eye diseases, and epoetin alfa (Epogen) for anemia. It is exactly these sorts of products that should be the goal of investments in innovation. But NIH funding has withered; over the past decade, the agency has seen its purchasing power decline by 25 percent.

Similarly, advances in regulatory science at the FDA have helped make useful drugs rapidly available to patients. For example, the FDA has for decades developed mechanisms for allowing new drugs to be approved on the basis of solid early results or validated biomarkers, leading to development and approval of drugs like zidovudine (AZT) for HIV or imatinib in extremely short time frames. But FDA funding is also limited, leading the agency to become increasingly reliant on outside resources to maintain its regulatory efficiency. By directly aiding the NIH and FDA, funds from the Medical Innovation Act would support the infrastructure for generating and approving the next generation of transformative drugs.

Increasing the Cost of Illegal Behavior

A final criticism of the Medical Innovation Act is that pharmaceutical industry payments under the law essentially represented an additional penalty for violations that have already been punished. In fact, despite the billions in penalties, the profits that companies in this sector earn from illegal behavior far outweigh the civil and criminal fines they pay when caught.

For example, by the time that Pfizer settled charges of improper marketing of its antiepileptic drug gabapentin (Neurontin) for $430 million, its promotional campaigns had been so successful that an estimated 90 percent of Neurontin sales were for off-label uses, including many indications with little convincing evidence of efficacy. Pfizer’s revenue related to Neurontin in 2004 alone was around $3 billion.

The Medical Innovation Act would make these violations of the law seem just a little bit less like an otherwise minor cost of doing business. By increasing the cost of illegal behavior, the law could help reduce fraud and ultimately save taxpayer dollars by protecting Medicare and Medicaid from waste and abuse.

If enacted, the Medical Innovation Act would be both effective and equitable. Had it been in place over the past five years, the law would have yielded a 20 percent increase in critical funding to the FDA and NIH, channeling misbegotten profits at the expense of patients into groundbreaking research for their benefit.

Ameet Sarpatwari

Ameet Sarpatwari

Ameet Sarpatwari is an Instructor in Medicine at Harvard Medical School, an Associate Epidemiologist at Brigham and Women’s Hospital, and Assistant Director of the Program On Regulation, Therapeutics, And Law (PORTAL) within the Division of Pharmacoepidemiology and Pharmacoeconomics. His research draws upon his interdisciplinary training as an epidemiologist and lawyer and focuses on the effects of laws and regulations on therapeutic development, approval, use, and related public health outcomes.

3 thoughts to “To Spur Medical Innovation, Make Corporate Cheaters Pay”

  1. Great write up! One question that has been bugging me is the fit between the deterrent and compensatory aims of the bill. To put it another way, even if one thinks there ought to be fines there is no necessary reason why the fines should go to NIH or FDA rather than somewhere else. It is a nice “soundbite” to call it the “swear jar” and have the money go to NIH but other than the politics, is there a policy reason why it ought to go to that part of the government rather than other areas of need — for example, medicare coverage? Why not just direct the money to the place where it will do the most good — that may be the NIH, but maybe not — or just to general government coffers? Indeed there is a way that directing the money to NIH may actually *lessen* the deterrent impact, since pharma also presumably benefits from NIH training of scientists, FDA review, etc. Thus for every dollar spent paying out for a fine they get some of it back indirectly. This would offer an argument for spending the swear jar money on something completely unrelated to drug development, like highway funding or foreign aid. So what do you guys think — is directing the money to NIH/FDA just a good soundbite/political move or is there something from a policy perspective I am missing?

    1. Thanks for the note and query! We do believe there is more to the deterrent and compensatory aims of the bill than just politics. A principal utility that pharmaceutical companies offer the public is drug development. When these companies do not play by the rules, they threaten this good—directly or indirectly. You can imagine that a $3 billion fine against a drug company would transiently impact its socially beneficial investments, even if drug companies do only spend 12-20% of revenues on research and development. So we think it makes sense that the bill allocate the penalty money in a manner that promote drug development.

  2. I’ve read about this legislation before. To me it may have two effects: a) either the “cheating” stops – and therefore no additional funding develops (while the “cheaters” may still try out new practices that just stay within the legal framework, like you always see with taxation). Or b) you will have drawn-out legal battles etc. The other alternative would be to stop state funding completely – as it obviously has not led to any of these drugs that were needed. How come? Probably because it ain’t so easy to invent them. Or when you have them, their side-effects then kill them during approval. But there’s another thing you COULD do: hold all the “cheaters” accountable that without consultation among colleagues prescribe all these drugs that interact adversely but they don’t care as they treat the “one” disease at the time. Iatrogenic ailments in the elderly often outrun conditions these people would have if you stopped all drugs they take! And as for dementia etc. prevention, not treatment, is the way to go. “Cheating” would be to produce yet another drug (with side-effects of course) to “cure” an ailment that is largely man-made. The same goes for multi-antibiotics resistance. There are three things at play here (at least!): a) use and over-use of antibiotics in breeding/livestock management, b) treating e.g. viral infections with antibiotics, leaving resistance in the intestinal flora that prevails for two years after, when a new infection, bacterial this time, comes along and gets the same “treatment”, yet has inherited the previously amassed resistance via cross-species vectors and c) not controlling patient compliance, i.e. patients who do not take antibiotics long enough or omit/extend intervals through forgetfulness. Take away these three, and good ol’ penicillin would still even work!

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