Medicines development is currently incentivised by profit. Because of this incentive structure, products that are important for public health but unlikely to be profitable are often not developed. This means that some areas of acute need are underserved, if the market they provide is not sufficiently profitable to motivate companies to develop medicines. Such products can include those that treat diseases that largely affect poor and vulnerable populations and those that treat rare diseases with very small patient populations. They can also include treatments for antimicrobial resistant infections that must be kept in reserve after registration, or products to treat illnesses with pandemic potential (before an outbreak has occurred). The ‘financialisation’ of pharmaceutical development leads to market failures, as the profit motive is insufficient to meet public need, including the need for novel disease preparedness.
Related Solution: Better innovation models
Innovation need not always be incentivised by potential profit. Alternative innovation models that “delink” the cost research and development from the eventual price of a medical product offer the potential to separate incentives for research and development from profit and to allow for a more public-health focused agenda.
Limited public interest
Medicines are sometimes not developed due to limited interest, knowledge, motivation or funding. This mostly happens with rare diseases, of which there are at least 7000. Disease mechanisms are often unknown or patients are scarce or not organised. Consequently, pharmaceutical companies will not see the need to develop such medicines.
Solutions for this issue might be in public financing, either through universities or public research organisations, or via organising rare disease patient groups or professional rare disease networks. Financial incentives, such as awards or subsidies for the development of medicines to treat rare diseases, can spur pharmaceutical company interest, but may also drive high prices.
Financialisation of Research and Development
Millions of people are missing the medicines they need either because they are too expensive (see: Access Issues) or they simply do not exist.
One of the main factors that contribute to an absence of pharmaceutical products is the ‘financialisation’ of research & development. Financial profit is the primary incentive for medicine development, as pharmaceutical companies (often driven by their shareholders) want to recoup their high research and development costs, protect their investments, and turn a profit.
This incentive structure causes the pharmaceutical industry to focus the majority of its resources on the most profitable medicines, even if their value to society is limited. This leads to under investment in products that are important for public health but unlikely to be profitable, such as those ‘neglected tropical diseases’ (NTDs) that primarily affect low- and middle-income countries (e.g. Malaria), as well as medicines for rare diseases with very small patient populations.
It also means that therapeutically equivalent versions of profitable medicines are more interesting investments than new innovation. And it is often more profitable for pharmaceutical companies to tweak their existing medicines (to prolong patent rights – ‘evergreening’) than to invest in new medicines. (See Patents & IP, under Access Problems Due to Monopoly) This further explains the lack of new treatments for a number of less profitable diseases.
Changes in how R&D is conducted
Pharma companies used to have large R&D departments that developed medicines in-house. That pattern has changed: now, it is generally universities or public research institutions that do the bulk of basic R&D. Discoveries that have profit potential will either lead to a start-up company linked to the university or public institution.
Specialised financial capital institutions will seek out the promising products, and try to obtain a licence, acquire the patent or buy the start-up company. These institutions invest risk capital, perform animal tests and human phase 1 / 2 clinical trials and then try to sell a promising product to the highest bidding Pharma company.
Big pharmaceutical companies pay billions for potential blockbusters. But much of this money is not going to ‘R&D’ as is often claimed but rather to multiple buy-outs of promising companies. As a result, medicines prices like Sofosbuvir, Zolgensma are skyrocketing and the percentage of medicines being developed in-house has plummeted.
Pharma companies have become financial companies. Read more about this in the article “Overpriced!”. Studies prove that only 7% of out-of-pocket costs are for the successful drug’s R&D, 40% for the unsuccessful R&D and 53% are for the costs of capital – that is, the amount put into buy-outs of smaller companies. This leads to artificially high prices, prompted more by the high costs of buy-outs than the high costs of research.
The ‘financialisation’ of pharmaceutical development leads to market failures, as the profit motive is insufficient to meet public need, including the need for novel disease preparedness. (See Financialisation of Research & Development).
Market failure is the economic situation in which there is inefficient distribution of goods and services in the free market, and the government must step in to intervene. In the case of pharmaceuticals, this market failure occurs as a result of the mismatch between which medicines will best meet public need and which medicines will best ensure private profit. In some cases, pharmaceutical companies raise prices of medicines so high that the demand for medicines (predominantly low- and middle- income patients) is not met, because countries cannot afford those prices.
In other cases, such as when there is no or little prospect of earning enough money, pharmaceutical companies are not inclined to start the development of a new medicine. They might even interrupt the development of a new medicine or clinical trials to favour research into new uses of existing medicines. This leads to underdevelopment of medicines that might meet needs. For example, big pharmaceutical companies have no profit incentive to develop new antibiotics, despite a clear and urgent public health need, and have thus largely withdrawn from that research sector.
Diseases of poverty, tropical diseases or rare diseases are other examples of situations like this. This ‘market failure’ can only be overcome by public investment or collaboration between public and private sector in so-called Product Development Partnerships (PDP).
The practical effect of this market failure is that millions of patients cannot access the medicines that they need.