Trump White House Releases Biopharmaceutical Pricing Reform White Paper

The White House Council of Economic Advisers recently released a report titled, “Reforming Biopharmaceutical Pricing at Home and Abroad.” [Report]  The Report points to basically two problems: 1) overpricing in the United States; and 2) underpaying outside the United States.  The Report states:

U.S. patients and taxpayers alike have mainly financed the returns on R&D investments to innovators. Unlike other developed countries with single payer systems, which nearly all impose some sort of price controls on pharmaceuticals, the U.S. drug market is less financed by the public sector and more open to private market forces. In a free market, prices of products reflect their value as opposed to prices in government-controlled markets, which reflect political tradeoffs. CEA estimates that because of the American market system, more than 70 percent of OECD patented pharmaceutical profits come from sales to U.S. patients even though the United States only represents 34 percent of OECD GDP at Purchasing Power Parity (OECD 2016). Thus, innovators across the world rely heavily on Americans paying market prices to underwrite the returns on investments into products that improve their health because governments abroad use their monopsony power to set prices below market-levels. The United States both conducts and finances much of the biopharmaceutical innovation that the world depends on, allowing foreign governments to enjoy bargain prices for such innovations. This indicates that our current policies are neither wise nor just.  Simply put, other nations are free-riding, or taking unfair advantage of the United States’ progress in this area. In addition, prices paid by Americans for many drugs are too high, particularly so when paid for in government programs. This is the result of poorly designed reimbursement policies and regulations that inhibit price competition, and it is therefore a poor use of taxpayer money. 

The Report further notes that, “The U.S. market makes up 46 percent of OECD sales of brand name innovative drugs, funds about 44 percent of world medical R&D, invests 75 percent of global medical venture capital, and holds the intellectual property rights for most new medicines (BMI 2017; Moses et al. 2015; TEC 2017). Furthermore, publicly funded medical research in the United States has produced two-thirds of the top-cited medical articles in 2009, underlying the university research that often leads to medical breakthroughs (Moses et al. 2015).”

The Report points to issues regarding Medicaid, including opportunity for pharmaceutical companies to game and artificially raise prices.  The Report further provides suggestions concerning Medicare as well as the Pharmacy Benefit Manager Market.  Notably, the Report fails to address biosimilars in very much detail, but notes that there may be two more years before final regulations concerning interchangeability are issued.  This delay is raised as a potential reason why interchangeability approval may be slow.

This Report could drive the Trump Administration's approach to dealing with the high cost of health care.  

"The winner takes it all" (or at least most), productivity and frontier companies: how does IP fit in?

The Economist magazine recently discussed (“The great divergence’, November 12th) an (unnamed) research report carried out by three researchers at OECD (Dan Andrews, Chiara Criscuolo and Peter Gal), which suggests that the Schumpeterian notion of “creative destruction” may be stuck in neutral. Leading companies seem more and more to be enjoying a continuing lead in their industries, with less and less challenges from scrappy newcomers.

In particular, the report found a major distinction in productivity between the top 5% companies surveyed. These so-called “frontier” companies show productivity gains of 2.6% per year, while the remaining 95% have managed only 0.6% productivity gains. The difference in productivity is even more stark when comes to services: 3.6% for the frontier companies as compared to only 0.4% for the stragglers. Two major themes relating to IP emerge from The Economist article: (i) the role of patents and know-how; and (ii) the transmission mechanism for innovation.

The role of patents and know-how—Regarding patents, the report states that frontier companies “[u]nsurprisingly …are ahead of the pack in technological terms, and they make much intensive use of patents.” No more explanation is provided, which is a shame, because the statement as provided is not entirely clear. How does one measure “intensive use of patents”; is it a quantitative or qualitative analysis? Is it really the case that a major indicium that distinguishes between the frontier companies and the laggards is patent activity? One need only think of the large patent portfolios that were sold several years ago by failing companies such as Kodak and Nortel. It is a pity that the article does not elaborate.

Of equal interest is the role of know-how. The article writes that “…frontier firms (the 5%) have each discovered their own secret sauce”, going on to describe the know-how that has enabled companies such as 3G Capital (a successful, Brazilian-based private equity firm), Amazon, and BMW to dominate. The linkages between the patent position and the development of special know-how tailored to each of these companies’ activities suggest that the two work in tandem.

If so, even the most sophisticated patent analytics may be missing a crucial component in seeking to explain the success of technology-based companies. What may be needed is a metric measuring the contribution of know-how, which can then be applied together with patent analytics to provide a more robust picture of the IP position of these companies, and whether any generalizable insights can be obtained.

The transmission mechanism for innovation-- Here, the article focuses on how technology spreads horizontally between companies that are members of the top 5% as well as vertically within a given economy. The suggestion is made that with respect to frontier companies—

“…technological innovations from the frontier are spreading more rapidly across countries than they are within them. The gap between an elite British firm and an elite Chinese firm is narrowing even as the gap between an elite British firm and its laggardly compatriots is expanding.”

The upshot is that—

“…technological diffusion has stalled: cutting-edge ideas are not spreading through the economy in the way that they used to, leaving productivity-improving ideas stuck at the frontier.”

The result is what has been termed a “winner takes all (or at least most)” position in the relevant market. Schumpeterian notions of “creative destruction” are less likely to apply because not only do the frontier companies better exploit their patent/know-how mix, but they are able to attract the most talented persons in their industry. In such a scenario, continuing incumbency as an industry leader becomes more of the norm.

The causal direction of this relationship is not entirely clear, i.e., do more talented people lead to a continued stream of better patents and know-how, or is it the reverse, or are they merely coincident factors in connection with productivity and market dominance? Of perhaps greater concern is the suggestion that useful IP, particularly patents, will be increasingly the purview of only the top layer of companies, with less and less vertical transmission within the relevant industry. When leavened together with unique know-how, this combination gives rise to the increasingly expressed concern that IP, particularly patents, are more an instrument for maintaining market power than a facilitator of broad-based innovation.

Patent Box Regimes Globally - OECD/G20 respond

The UK's patent box regime  under which companies can get significant tax reductions for income deriving from patented products has been criticized by several countries, notably Germany (see here), as resulting in unfair competition for foreign investment. This blog noted back in July that the EU commission was looking into the issue.

Germany's Finance Minister lecturing his audience
about the evils of the patent box

The OECD in conjunction with the G20 group of major economies has now published a detailed report (available for download here) on countering harmful tax practices more effectively. It includes a number of pages devoted to the patent box regime and seems to approve generally the UK practice, which differs from other countries with similar regimes. One issue that appears to be controversial is the extent to which outsourced research and development activities can later qualify for tax relief, and both the UK and Spain entered reservations on this section of the report. The report emphasizes that marketing-related IP assets such as trademarks should not qualify for the tax benefits, which would appear to impact on schemes in some countries.

It's probably not surprising that the report is at least generally supportive of favourable tax treatment of intellectual property given that a number of countries have introduced such regimes over the years (although Ireland abandoned their tax break, as reported here). The report's main recommendation is that there needs to be a clear link between the revenues and the IP right. This will probably complicate calculations in the future, but the authors noted that taxpayers may chose this in order to exploit the opportunity to benefit from an optional tax benefit. Indeed by harmonising the reporting requirements among different jurisdictions may lead to an overall reduction in complexity.

German chancellor Angela Merkel's
X-ray eyes 

And Germany's response? Well, the news magazine Spiegel reported over the weekend that the German finance ministry was considering introducing a patent box benefit in Germany and the German Industry Group BDI welcomed this move on Monday.

OECD 2012 Updated Biotechnology Indicators: Funding for IP and Other Interesting Stats

The OECD recently released its updated 2012 Biotechnology Indicators here. Some of the statistics are updated and others are not. On the number of biotechnology firms in 2011: Germany, 678; United Kingdom, 488; Ireland, 237; New Zealand, 369; Sweden, 129; Poland, 91; Finland, 157. The latest numbers for the United States are from 2009 with 6,213 biotechnology firms. My guess is that this number has dropped. The Biotechnology Industry Organization has around 1,000 members (many of them universities) and most of those are based in the US. According to this 2011 BIO report, "the number of public biotech companies in the U.S. has decreased by 25% since January of 2008."

According to the OECD Biotechnology Indicators, the total biotechnology R&D expenditures in the business sector in 2011 includes (in millions of US dollars): Germany, 1,221; Sweden, 534.7; Ireland, 380; and the Russian Federation, 137. In 2009, the United States spent 22,030. The total public (Government and Higher Education sectors) biotechnology R&D expenditures in 2011 includes (in millions of US dollars): Russia, 763.4; Poland, 241.5; and the Czech Republic, 146.9. For 2010, Germany spent 5,972 and Korea spent 2,468. The percentage of share of biotechnology PCT patents from 2008-2010 included the United States at 40.76%, Japan at 11.49%, Germany at 6.77%, United Kingdom at 3.92%, Korea at 3.74% and China at 3.12%.

The OECD on Innovation: Once Again

Hardly a month goes by without some new pronouncement by a respected body on the subject of innovation. My particular interest is seeing how these efforts view the role of IP within the larger framework of innovation. While it certainly is the case that IP rights are not identical to innovation, there surely is a relationship between them. However, what that relationship is, and how governments may contribute to it, are both questions to which the answers remain elusive.

The latest effort bears the imprimatur of both the OECD (Organization of Economic Co-operation and Development) and The Economist mgazine. In its May 29 issue, under the title "Growth on the Cheap: Promoting Innovation", there is a discussion based on a conference organized by OECD (described in the article as "[t]he rich-country think-tank") on how governments can do a better job "at spurring and measuring innovation." Since I was not at the conference (no surprise there), I rely on the summary set out in the magazine article. Two points caught my eye.

I. "[The OECD] suggests that governments should not merely encourage the supply of innovation (for example, by funding research), but also try to stimulate demand. Economies, after all, benefit not from the invention of new products or services, but form their diffusion. In countries that are good at commercializimg new ideas, such as America and Norway, even newly founded firms coin valuable intellectual property."

The article sets out a table that shows the percentage of "international patents" filed by firms under five years old as a percentage of all patents filed by firms in such country, for the period 2005-2007 . The table ranges from over 20% by Norway and nearly 15% by the U.S. to under 5% by Italy and the Netherlands.

I make two comments here:

a. As for the first point, it has been part of the management/innovation body of knowledge for at least 25 years that the innovator of a technology or product is only infrequently the party that enjoys commercial benefits of the innovation. Succesful commercialization requires a bundle of skills and capacities, such as manufacturing and marketing, that the innovator itself will not often possess. Government policy may affect these capacities as well as provide incentives for the "supply of innovation" itself. If that is what is meant by "diffusion", then there is nothing really new being said here. If "diffusion", however, means something else, then it is a pity that the article does not go to explain this, as well as how governments can facilitate this process.

b. The reference to young firms "coining valuable intellectual property", using patent filings as a proxy, does not seem to follow from the previous assertion about the need to diffuse the benefits of inventions. I had thought that the point of the paragraph is that successful innovation requires more than invention, namely innovative methods for successful commercialization. If so, I don't follow what patent filings by start-up companies (some, if not many, of whose gazes may well be on achieving a quick exit rather than staying in the game for the long haul) has to do with better innovation after the invention has been made.

II. "The OECD encourages governments to rethink their policies in light of globalization and information economy. It notes that "intangibles" such as knowledge networks and open business models now make up much of the value of firms in rich countries and that many companies produce profitable innovations with little or no research in-house. For example, most of the research behind the iPod was done by other firms, but Apple reaped huge profits from its skill in design, systems integration and marketing."

I feel compelled to comment here as well.

a. I am not sure that what is meant is that many companies innovate without carrying out research in-house, thanks to open networks and business models. Indeed, it is odd that Apple, known as a company that resists open development models (except for the app developers for its ITune ecosystem), is brought as an example for the point. I recall a recent Scientific American podcast that discussed the success of Apple (and the iPod in particular) in driving technology in the direction of design and user experience. Nothing in that podcast interview suggested that Apple's skill-set was connected to open networks and business models.

b. The larger issue seems to be the interconnection between and among in-house invention and research (read: patents), in-house skills, open networks and innovation. Maybe the OECD conference addressed this question, but simply failed to include it within the magazine report--or maybe it did not. It would be interesting to know.

It Means Different Things to Different People