A Public Option for Pharmaceutical Research and Development

Introduction

The United States has the world’s most successful pharmaceutical industry, responsible for numerous blockbuster¹ drugs and important scientific advances. But the vast majority of human diseases still have no treatments on the market,1 and high prices preclude many from accessing the treatments where they do exist. Much time and many resources have been spent attempting to incentivize the industry to lower prices and ramp up research and development (R&D) in specific areas, however the central problem remains: an industry built entirely around the goal of maximizing profits falls short on social returns. To address the issue at its root, I propose the creation of a National Pharmaceutical Institute (NPI), a federal public pharmaceutical R&D institute that would engage in full-cycle drug development at scale, filling R&D gaps, providing competition in key market sectors and making public investment in the sector more efficient.By all business measures, large private pharmaceutical companies are extremely successful. They live up to their promise to shareholders by maximizing returns on their investments so expertly that on average, these companies secure profit margins twice the Standard & Poor’s 500 index (S&P 500).2 For investors, pharmaceutical giants have long been a safe bet, in part because the most unpredictable part of their business (early stage scientific development) is largely de-risked by steady public investment. Big Pharma companies have also proven themselves very adept at all the usual tactics available to minimize their tax liabilities, cut costs, and grow their market share with minimal competition, allowing them to steadily rake in high profits. So Big Pharma is clearly good at business, but how good is its business for society? Over and over, profit-motivated tactics that contribute to public health disasters have taken over the headlines and sparked widespread outrage-from the opioid epidemic to insulin-rationing deaths. Meanwhile, the industry has become less productive in terms of bringing new, clinically meaningful innovations to market. The number of new drugs approved for market per inflation-adjusted $1 billion spent on R&D has declined significantly since the 1950s, falling roughly 80-fold by the 2010s,3 and though levelling off somewhat in the 2020s, continues to show overall decline.4 All the while, many large pharmaceutical companies get away with contributing little or nothing at all to the tax base, while commanding higher and higher prices for their products.5 In recent years, untold hours of debate have occurred in Washington and around the country about how best to rein in rising drug costs and generally curb the excesses of Big Pharma. However, much of the debate-and virtually all the legislation and regulation in recent years that is supposedly aimed at fixing these problems-misses the point: Big Pharma is doing exactly what it’s supposed to do for its bottom line. These companies are just doing business in an economy that rewards them for downsizing and outsourcing, amassing huge troves of intellectual property rights, and prioritizing shareholders over the larger public. Current proposals for addressing drug prices, consolidation, and even waning innovation fall short because they do not address the underlying incentives of the industry. To truly rectify these issues requires a structural approach. Recognizing this, a “public pharma movement” has been coalescing and quickly gaining momentum in the United States. This movement-composed of patient advocates, academics, legal scholars, and increasingly, public officials-argues that regulation alone cannot assure a safe and adequate supply of the medicines we need at prices we can afford. Thus, these groups have united around demands for a public option in pharmaceutical production6 as the necessary transformative solution to high drug prices and waning innovation. Nevertheless, this movement has yet to fully tackle the highest leverage point in the pharmaceutical value chain: research and development (R&D). This paper makes the case for the creation of a National Pharmaceutical Institute on the basis of 1) public return on public investment, 2) directing pharmaceutical innovation based on areas of greatest public health need and speeding up innovation, 3) building public power and reducing regulatory capture, and 4) providing meaningful market discipline to Big Pharma through competition in the brand-name drug market. Further, it shows that there can be significant economic, political, and health benefits to pursuing such a public option in pharmaceutical R&D.

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Introduction

The United States has the world’s most successful pharmaceutical industry, responsible for numerous blockbuster drugs and important scientific advances. But the vast majority of human diseases still have no treatments on the market,1 and high prices preclude many from accessing the treatments where they do exist. Much time and many resources have been spent attempting to incentivize the industry to lower prices and ramp up research and development (R&D) in specific areas, however the central problem remains: an industry built entirely around the goal of maximizing profits falls short on social returns. To address the issue at its root, I propose the creation of a National Pharmaceutical Institute (NPI), a federal public pharmaceutical R&D institute that would engage in full-cycle drug development at scale, filling R&D gaps, providing competition in key market sectors and making public investment in the sector more efficient.By all business measures, large private pharmaceutical companies are extremely successful. They live up to their promise to shareholders by maximizing returns on their investments so expertly that on average, these companies secure profit margins twice the Standard & Poor’s 500 index (S&P 500).2 For investors, pharmaceutical giants have long been a safe bet, in part because the most unpredictable part of their business (early stage scientific development) is largely de-risked by steady public investment. Big Pharma companies have also proven themselves very adept at all the usual tactics available to minimize their tax liabilities, cut costs, and grow their market share with minimal competition, allowing them to steadily rake in high profits. So Big Pharma is clearly good at business, but how good is its business for society? Over and over, profit-motivated tactics that contribute to public health disasters have taken over the headlines and sparked widespread outrage-from the opioid epidemic to insulin-rationing deaths. Meanwhile, the industry has become less productive in terms of bringing new, clinically meaningful innovations to market. The number of new drugs approved for market per inflation-adjusted $1 billion spent on R&D has declined significantly since the 1950s, falling roughly 80-fold by the 2010s,3 and though levelling off somewhat in the 2020s, continues to show overall decline.4 All the while, many large pharmaceutical companies get away with contributing little or nothing at all to the tax base, while commanding higher and higher prices for their products.5 In recent years, untold hours of debate have occurred in Washington and around the country about how best to rein in rising drug costs and generally curb the excesses of Big Pharma. However, much of the debate-and virtually all the legislation and regulation in recent years that is supposedly aimed at fixing these problems-misses the point: Big Pharma is doing exactly what it’s supposed to do for its bottom line. These companies are just doing business in an economy that rewards them for downsizing and outsourcing, amassing huge troves of intellectual property rights, and prioritizing shareholders over the larger public. Current proposals for addressing drug prices, consolidation, and even waning innovation fall short because they do not address the underlying incentives of the industry. To truly rectify these issues requires a structural approach. Recognizing this, a “public pharma movement” has been coalescing and quickly gaining momentum in the United States. This movement-composed of patient advocates, academics, legal scholars, and increasingly, public officials-argues that regulation alone cannot assure a safe and adequate supply of the medicines we need at prices we can afford. Thus, these groups have united around demands for a public option in pharmaceutical production6 as the necessary transformative solution to high drug prices and waning innovation. Nevertheless, this movement has yet to fully tackle the highest leverage point in the pharmaceutical value chain: research and development (R&D). This paper makes the case for the creation of a National Pharmaceutical Institute on the basis of 1) public return on public investment, 2) directing pharmaceutical innovation based on areas of greatest public health need and speeding up innovation, 3) building public power and reducing regulatory capture, and 4) providing meaningful market discipline to Big Pharma through competition in the brand-name drug market. Further, it shows that there can be significant economic, political, and health benefits to pursuing such a public option in pharmaceutical R&D.