Mariana Mazzucato, SCIENCE POLICY RESEARCH UNIT, UNIVERSITY OF SUSSEX

Lead Author: Mariana Mazzucato
Organization: Science Policy Research Unit, University of Sussex
Country: UK

Abstract

The current debate about medical innovation is characterized by a poor understanding of, and many myths around, the drivers behind innovation, in particular the respective roles of public and private actors in the innovation process.

This contribution to the UN High-Level Panel on access to medicines aims at laying these myths and showing their connection to the current rules and assumptions that underpin a currently ineffective and wasteful medical innovation system. The aim is to sharpen the Panel’s critical reflection on the connections between the organization of an innovation system (including the narrative that is used to describe it), and the following key areas: the pace of innovation, the direction of innovation, and the accessibility of the resulting medical products.

INTRODUCTION:
Our current innovation system drives medical R&D priority setting in the direction of greatest profit but not of greatest need nor of true medical benefit, and allows pharmaceutical companies to charge high prices that have no relation to the actual cost of developing and manufacturing the medicines. Current economic and regulatory incentives have resulted in a highly financialized pharmaceutical sector that fails to deliver the medical innovation we need, despite major public and private investments and rhetoric of unprecedented medical progress. Over two thirds of new medicines reaching the market do not represent any therapeutic advance for the patients, while many health needs remain unmet. In combination with high medicines prices for the relatively few drugs that are medical breakthroughs, our medical innovation system needs a radical transformation in order to respond to social justice imperatives that should govern health and human rights.

Innovation is a collective process, requiring different public and private actors to be willing and able to take large risks throughout the entire innovation chain. Indeed, most attempts at innovation fail. Better understanding how the different public and private actors interact along the innovation chain, from basic research to applied research and early stage funding for new startups, as well as how innovation is paid for and the way in which the risk taking is distributed between actors, and how this effects not only the rate of innovation but also its direction is the key to this statement. The statement is guided by the conviction that the question, in particular, about directionality, is very important because medical innovation is not simply about new products to be marketed but about concrete advances that can over time improve health outcomes. Thus bringing together our understanding of how innovation in the medical field—and the division of innovative labor in particular— is/not achieving this goal is extremely important.
Key to the problem is that fact that while public sector investments, through organizations like the National Institutes of Health (NIH) in the USA or the Medical Research Council (MRC) in the UK, have been fundamental to advances in the industry, the ‘narrative’ continues to be one where it’s the large private companies that are the most important (the biggest ‘value creators’ and ‘risk takers’), and this has justified their power in determining the prices that are set (to recoup R&D costs, as well as more recent ‘value based pricing’ arguments), as well as the direction of innovation (Mazzucato, 2013) . It is my belief that precisely because this is a science base industry (Pavitt, 1984) (and one that generates products that are key to public health objectives), we must fundamentally rethink the current way in which the medical innovation cycle operates.

(1) THE NARRATIVE OF RISK (and REWARDS)
Despite a narrative of relentless medical progress thanks to biomedical innovation, and an increased attention to ‘life-sciences’ in various countries’ revived industrial policies (EC 2020) , there is increasing recognition that the current private profit and patent-driven model for pharmaceutical innovation is deficient (Light & Lexchin, 2012) . While critical medical needs remain unmet (e.g. multidrug-resistant bacterial infections ), the large majority of new medicines developed have no added therapeutic value . The few new drugs that do represent breakthroughs are priced out of reach for most, except the wealthy and well-insured . While previously mostly an issue for people in low- and middle-income countries, there are growing concerns that the steady increase in medicines prices is threatening equitable access to health care in wealthy countries too . The myth of ever increasing R&D costs (now into the $1-2 Bn range) to justify high medicines prices does not hold up to data scrutiny, and is toppled by much higher marketing expenditures. Instead, it points to massive inefficiencies in the R&D process that are being sanctioned in the current model in which a highly monopolized and subsidized market will pay any price for a new medicine.

The problematic narrative of who the risk-takers are underlies the justification for absurdly high prices in the industry. The longstanding excuse is that the large companies must recoup R&D costs, even if research has shown it to be heavily absorbed by the tax payer (Angell, 2005) . More recently, the doctrine of value based pricing is put forward, which suggests that the value and therefore price of a medicine can be equated to what it would cost to the health system to not have that medicine. For instance the $84,000 price for a 12-weeks hepatitis C treatment costing <$200 to manufacture is justified as “cheaper than a liver transplant”, the ultimate resort for people dying from chronic hepatitis C infection. While clearly this is an absurd reasoning, the question remains: what is a fair price for any given medicine, and who gets to determine that?
Key to rethinking the risk narrative is to also rethink its influence on pricing policies. There are key lessons here from the way that the defense industry has organized innovation, with upstream public input being met by downstream public purchase of products (via procurement) at prices that reflect the public contribution. Indeed, while the Bayh-Dole act in theory gives marching rights to government for publicly financed drugs, it’s is curious that the US government has never exercised this right (Kleinman, D., & Biscotti , 2011) .

(2) THE RATE OF INNOVATION
While pharmaceutical companies continue to be amongst the most profitable in the Fortune 500 list, there is a recognition that the productivity of the industry has fallen in recent years (measured in terms of the relationship between R&D as an input, and new drugs as an output).. This problem is often interpreted as being related to patent cliffs , and statements about the ‘low hanging’ fruit having been picked, resulting in current innovation proceeding at much more incremental rates than in the past due to the fewer opportunities remaining. What this discussion ignores is the changing behavior of the actors in the industry. The industry has slowly been moving downstream, dis-investing from the upstream research in the R&D process, focusing a higher percentage on development, and marketing (indeed many marketing budgets are larger than R&D budgets), and also increasingly, since the late 1980s, on financialized practices like share buybacks. Lazonick has shown that many large pharmaceutical and biotechnology companies are spending record levels on share buybacks, with the proportion to R&D spending escalating in recent years (Lazonick, 2014) : Pfizer, a company that benefits immensely from government spending on life sciences research and subsidies of drug development, spent $56bn on buybacks, equivalent to 59% of its profits, with another 64% going to dividend payouts – a total payout to shareholders of 123% of net income (Mazzucato, 2013b) .

This is a problem because the industry requires not only high government spending but also an equally high commitment from the private sector. Instead, trends seem to suggest that the more the public sector spends on R&D (e.g. $32billion/year by NIH), the more the private sector is able to free ride, and concentrate on easier downstream areas (D, ‘me too’ R, marketing). While traditional analysis might interpret government spending on R&D as fixing a ‘market failure’ (basic research is a public good), the breadth and depth of public spending has had to increase above what it should using this perspective, due to emergence of a dysfunctional public-private eco-system of innovation. It is essential to not only throw money at the ‘life-sciences’ but to fundamentally ‘de-financialize’ big pharma, and insist that profits that are generated from a public-private eco-system of financing, also be reinvested back into innovation. In essence, this means bringing innovation policy and issues of corporate governance. In particular, if health care, supported by medical innovation, is considered not only a ‘public good’ but also a human right, society must question whether the shareholder model of corporate governance is the right one to structure the health care industry by. The high percentage of public financing of medical R&D, as well as the massive subsidies the industry receives (through different types of tax credits), requires paying more attention to the ‘direction’ of medical innovation—steering it more towards areas that are in the public interest.

(3) THE DIRECTION OF INNOVATION
The relationship between finance and innovation is a non-linear one. It is not just that innovation must be financed, but the type of finance that is received affects the type of innovation that emerges Research, for example has shown how the short-term, exit-driven venture capital model has created large problems for the biotechnology industry, full of product-less IPOs (companies that go public on the stock market but produce no products) (Lazonick and Tulum, 2011) . In particular for medicines addressing important public health needs (e.g., antibiotics, hepatitis C drugs, certain cancer medicines), there is growing consensus among experts around the need to adopt alternative models for (financing) R&D in which critical health needs are prioritized, and medicines are considered public or social goods (or essential utilities like water and electricity) or even human rights. Furthermore, there is the increasing realization that the cost and risks of such R&D don’t need to be commercialized in the market place and recouped via high medicines prices . However the public at large, including policy makers, is not sufficiently aware that the current model is failing, even for wealthy countries, by being highly expensive while delivering little health value, and excluding the majority of the population from accessing the products of innovation.

In order to gain momentum to transform the current trillion-dollar economic model that has sidelined health needs and affordability towards a health and public interest-focused system, it will be essential to change the dominant narrative that maintains that the current model is the only or best possible. One element to is to document and expose the economic reality and cost-inefficiency of the current model in which “the public” pays multiple times (funding and infrastructure for early research as well as clinical trials, various tax and other incentives to de-risk pharmaceutical companies’ R&D investments, price monopolies with limited to no price regulation and acceptance to pay high prices) without demanding outputs, accountability nor transparency. In fact, the current incentive structure for medical innovation favors ever-increasing costs for R&D that can be recouped through totally elastic prices (prescribed and paid by third parties, not consumers), me-too medicines that provide no or little therapeutic benefit, expensive niche medicines instead of affordable medicines addressing major public health needs, etc.

KEY ISSUES TO BE ADDRESSED
In re-thinking medical innovation for the public interest, a number of key questions need to be asked:
• What is the current distribution of public and private assets (money, infrastructure, knowledge) going into the pharmaceutical R&D process, and are they being used efficiently? Fairly? This requires a careful mapping of different types of R and different types of D across the entire innovation chain, and how this is evolving with the trend towards ‘open innovation’, as well as the trend towards increasing ‘financialization’ of Big Pharma (Lazonick and Mazzucato, 2012) ;
• Is ‘open innovation’ an excuse for a reduction in Big Pharma R? if so, what are the implications for ‘fair’ pricing (to avoid tax payer paying twice)?
• Does the current model produce the desired result? What could be an alternative that is much more cost-effective? How can we define medical “innovation” to include ‘access’ issues (including who pays for it)? There is no medical innovation if people don’t have access to it.
• How could medical innovation be valued in ways that recognize the desired health impact, instead of the current model in which only economic value (including pharma jobs) and market creation is measured and valued? This should include addressing people’s health needs and also recognizing that in the field of medicines, more (consumption) is not necessarily better or desirable. For instance in the case of antibiotics, the rational use (including rationing) of existing antibiotics is at least as important as developing new ones. What does that mean in terms of incentives and rewards? Or, what are “we” (society) ready to invest in the development and/or use of a new cancer medicine that only extends the average lifespan with a couple of weeks? Or do we choose to invest in the R&D for another cholesterol-lowering drug that will unlikely add value to the current therapeutic arsenal that already contains multiple such drugs?
• How to ensure that not all medical innovation is geared to profitable products? There are many more health interventions and innovations that could have major impact, but are being ignored or sidelined because not a sellable product (eg 1h of exercise/week may be as effective in lowering risk for cardiovascular events as daily statins). How to make sure that public and third sector activity is focused on opening up the pharma landscape rather than working within the privately defined one: less emphasis on drugs, more emphasis on diagnostics, life-style, surgical treatments (see great work of John Abrahams on this (Abraham, 2010) .
• How to build more symbiotic, less parasitic, public-private partnerships in pharmaceutical research, so that the rewards from innovation are socialized as much as the risks? How can pricing policies reflect the tax-payer contribution so that the tax payer does not pay twice.
• Relatedly, what can be learned by the Department of Health, from the way in which the Department of Defense has structured the innovation division of labor so that upstream public investment is reflected in the prices that are determined (via procurement).
• What is the value of a life-saving medicine? And how is that expressed in a market price, especially in the pharma market which is not an ordinary consumer market but a complex global market with many rules and regulations (intellectual property laws, prescription vs over-the-counter rules, quality-safety-efficacy regulations, price rules, health insurance systems in some countries, etc ) as well as high emotional value. How to balance the notions of “if a medicine or vaccine is truly valuable, it should be for free or cheap and accessible to all?” versus: “no price is too high to save a life”. That of course all depends on who is expected to pay…
• How would transformational change that provides better outputs in a more cost-efficient way look like? How could governments be catalytic towards such transformational change? To what degree does this require abandoning the ‘market failure’ framework for a market shaping/creating one (Mazzucato, 2015) ? Are there other (industrial / utility) sectors that can be looked at as examples?

CONCLUSION
It is proposed to redesign our medical innovation ecosystem such that it catalyzes to right type of innovation, i.e. effectively addresses global health needs and delivering improved health outcomes. To that end, this statement suggests that the way in which we define innovation (so to include issues of ‘access’, and addressing unmet health needs), and organize the division of innovative labor across the medical innovation chain is of utmost importance. This requires considering how the change in the actors’ behavior, and the relationships between actors, can affect not only the pace of innovation but also its direction. In particular, we believe that we must question the way in which changes in corporate governance have increased the short-termism and speculative nature of the industry, and how public actors should, due to the high spending, have more of a say on both the direction of innovation, as well as on the prices. This is especially important given not only the ‘public good’ status of essential medicines but what could (and perhaps should) be their status as a human right (Orsenigo, Dosi and Mazzucato, 2006) .

Bibliography and References

1 Mazzucato, M. (2013), The Entrepreneurial State: debunking public vs. private sector myths, Anthem Press: London, UK, ISBN 9780857282521, US edition (Public Affairs, 2015).
 2 Pavitt, K. (1984). Sectoral patterns of technical change: towards a taxonomy and a theory. Research policy, 13(6), 343-373. 
3 The EC has signaled the central role of the pharmaceutical industry in achieving the health related challenges in Horizon 2020 https://ec.europa.eu/programmes/horizon2020/en/h2020-section/societalchallenges
4 Light & Lexchin, Pharmaceutical research and development: what do we get for all that money? BMJ 2012; 344:e4348 doi: 10.1136/bmj.e4348
 5 http://www.nytimes.com/2014/07/23/business/a-dearth-of-investment-in-much-neededdrugs.html?smid=tw-share&_r=0
6 A look back at pharmaceuticals in 2006: Aggressive advertising cannot hide the absence of therapeutic advances. Prescrire International 2007; 16: 80–86; 
7 E.g. http://nymag.com/news/features/cancer-drugs-2013-10/ and http://www.npr.org/blogs/health/2013/12/30/256885858/-1-000-pill-for-hepatitis-c-spurs-debate-over-drugprices
8 E.g. http://www.washingtonpost.com/blogs/wonkblog/wp/2014/07/24/the-drug-thats-forcing-americasmost-important-and-uncomfortable-health-care-debate/ and http://www.fiercepharma.com/story/francehealth-minister-says-eu-will-fight-price-gileads-sovaldi/2014-07-11
9 Angell, M. (2005). The truth about the drug companies: How they deceive us and what to do about it. New York: Random House Trade Paperbacks. 
10 “A new pharmaceutical that brings in more than $1 billion per year in revenue is a drug marketed by Genzyme. It is a drug for a rare disease that was initially developed by scientists at the National Institutes of Health. The firm set the price for a year’s dosage at upward of $350,000. While legislation gives the government the right to sell such governmentdeveloped drugs at ‘reasonable’ prices, policymakers have not exercised this right. The result is an extreme instance where the costs of developing this drug were socialized, while the profits were privatized. Moreover, some of the taxpayers who financed the development of the drug cannot obtain it for their family members because they cannot afford it.” From Vallas, S. P., Kleinman, D., & Biscotti, D. (2011). Political structures and the making of US biotechnology. F. Block and M. Keller (eds). 
11 http://blogs.wsj.com/pharmalot/2015/02/09/big-pharma-faces-some-big-patent-losses-but-pipelines-areimproving
12 Lazonick, W. (2014). Profits without prosperity. Harvard Business Review, 92(9), 46-55. 
13 Lazonick, W. and Mazzucato, M. The Guardian, Nov. 29, 2012 http://www.theguardian.com/commentisfree/2012/nov/29/innovation-good-risk-takers-reward
14 Mazzucato, M. (2013b), “Financing innovation: creative destruction vs. destructive creation,” in special issue of Industrial and Corporate Change, M. Mazzucato (ed.), 22(4): 851-867
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16 E.g http://www.bbc.co.uk/news/health-21834442 and http://www.who.int/phi/cewg/en/ 
17 Lazonick, W. and Mazzucato, M. (2013), “The risk-reward nexus in the innovation-inequality relationship: Who takes the risks? Who gets the rewards?,” Industrial and Corporate Change, 22(4):1093- 1128
18 Abraham, J. (2010). Pharmaceuticalization of society in context: theoretical, empirical and health dimensions. Sociology, 44(4), 603-622. 
19 Mazzucato M. (2015) "From Market Fixing to Market-Creating: A new framework for innovation policy", Forthcoming in Special Issue of Industry and Innovation: “Innovation Policy – can it make a difference?” DOI 10.1080/13662716.1146124
20 Orsenigo, L., Dosi, G., & Mazzucato, M. (2006). The dynamics of knowledge accumulation, regulation and appropriability in the pharma-biotech sector. In Mazzucato, M., & Dosi, G. (2006). Knowledge accumulation and industry evolution: The case of Pharma-Biotech. Cambridge University Press.