[Ip-health] The Wire: WHO Report Flags Distortion of Investment and Innovation in Cancer Research

Thiru Balasubramaniam thiru at keionline.org
Tue Feb 5 07:44:15 PST 2019



WHO Report Flags Distortion of Investment and Innovation in Cancer Research

The report says pharmaceutical companies set prices according to their
commercial goals and focus on extracting the maximum amount that a buyer is
willing to pay.

A cancer drug. Representative image. Credit: calliope/Flickr, CC BY 2.0

Priti Patnaik


Geneva: High prices of cancer drugs hurting desperate patients have caught
the attention of policymakers everywhere. But do high prices of medicines
that provide huge financial returns to pharmaceutical companies also
distort innovation?

A new cancer report by World Health Organisation (WHO) has both countries
and the pharma industry debating on just how much profit cancer drugs
generate for pharmaceutical companies. At stake is not only how much money
the drug industry makes from high priced cancer drugs, but also, as the
report suggests – is this investment really efficient? Is too much money
chasing too few cancer drug candidates with only marginal benefits,
diverting funds away from other therapeutic areas?

The technical report that minced no words, said that “pharmaceutical
companies set prices according to their commercial goals, with a focus on
extracting the maximum amount that a buyer is willing to pay for a
medicine”. The industry denounced the report as flawed.

The report showed that in some cases, the return on investment on research
and development fetched companies as much as $14 for every dollar invested.
The report infers:

[T]he high financial returns from cancer medicines, together with other
government’s incentives, might have over-incentivized the pharmaceutical
industry to dedicate considerably higher, possibly disproportionate, levels
of investment towards the R&D of cancer medicine.

The innocuous-looking comprehensive technical report on pricing of cancer
medicines, issued by the WHO, drew widespread support and endorsement from
most countries. Member states came together to endorse and support the
crucial report on cancer medicines at the 144th Executive Board meeting in
Geneva in January 2019.

All countries suffer from exorbitant prices of drugs which balloon
procurement costs to meet rising burden from cancer related deaths. The
global cancer burden is estimated to have risen to 18.1 million new cases
and 9.6 million deaths in 2018. A majority of these deaths occur in low and
middle-income countries.

Also Read: India Excels in Funding Neglected Disease Research: New Report

Countries called the report a milestone in the debate around high prices of
medicines. It is now aiding international cooperation and dialogue on
addressing rising prices of cancer drugs in the wider context of access to

This story tries to understand and explain some of the issues raised by the
industry, including on returns on investment, pricing transparency and
efficiency of investments – and compares it to what the WHO’S report has
said. It also places the report in the context of the discussions at the
executive board meet last week. The Wire exclusively spoke to the author of
the report.

The World Health Organization (WHO) logo is pictured at the entrance of its
headquarters in Geneva, January 25, 2015. Credit: REUTERS/Pierre

Background: The need for the report

The report, titled ‘Pricing of cancer medicines and its impacts’, was first
released in December 2018. It was taken up and noted by the WHO’s 34-member
Board. Some member states, notably the US, wanted the WHO to organise an
information session on the report ahead of the World Health Assembly in May

The WHO issued the 171 page report following a resolution on cancer
prevention and control in the context of an integrated approach at the 2017
World Health Assembly. Following the parameters described in the resolution
[para 2(9)], the report presents evidence on the impacts of pricing
approaches (or lack thereof), availability and affordability of cancer
medicines. It examines the possible relationship between pricing approaches
and R&D of cancer medicines, including incentives for investment in R&D on
cancer and in innovation of these measures. It also examines possible
funding gaps in undertaking R&D and issues of transparency in price and

The report, supported with more than 400 references, was crafted through
several stages of consultations and meetings. There were consultations with
member states on the report. The secretariat reported that there were
several meetings with the Essential Medicine List Cancer Medicines Working
Group and an informal advisory group on availability and affordability of
cancer medicines, whose experts provided advice on the technical approach
to assessing benefits of cancer medicines, the scope of the report,
analytical feasibility and case studies, and suggested options that might
improve the affordability and accessibility of cancer medicines.

The report on costs, transparency and efficiency of cancer R&D

The report untangles the complicated and connected issues of price of
drugs, costs to make drugs, the incentives to invest in R&D; and whether
these mechanisms should be transparent for the sake of public interest and
good governance.

The report recognises that the industry considers a number of factors could
determine prices including costs of R&D, costs of production and
commercialisation, the “value” of medicine, sufficient returns on R&D. The
industry disagrees on the extent of the returns on R&D in cancer research.

In what may sound counter-intuitive, the report found that “the costs of
R&D and production may bear little or no relationship to how pharmaceutical
companies set prices of cancer medicines”.

As mentioned before, the report says that companies put an overwhelming
emphasis on commercial goals while setting prices.

There has been continued debate on estimates of R&D costs for drugs – but
the most commonly accepted estimates are between US$ 200 million and US$
2.9 billion, the report says.

Analyses in its cancer report involved examining the sales incomes from
cancer medicines. According to the report, for the 99 medicines included in
the analyses (those approved by the US Food and Drug Administration from
1989 to 2017 for the originator companies), the average income return by
end-2017 was found to be US$ 14.50 (range: US$ 3.30 to US $55.10) for every
US$ 1 of R&D spending, after adjustments for the probability of trial
failure and opportunity costs.

Further, 33 of those medicines had already qualified as “blockbuster drugs”
by having an average annual sales income exceeding US$ 1 billion, the
report explains. (The Return on Investment (ROI) is basically a ratio
between the net profit and cost of investment.)

The industry did not agree with this assessment. In its statement at the
Executive Board on the WHO’s cancer report, the International Federation of
Pharmaceutical Manufacturers and Associations (IFPMA) said:

[The report] relies on flawed methodology resulting in overstating the
return on investment, suggesting that industry achieves a windfall 1,400%
return on investment, contrary to a recent report that estimates R&D
returns for biopharmaceutical companies have declined to 1.9%.

It added that revenue from oncology treatments support and fund research
into other diseases. IFPMA represents research-based biopharmaceutical
companies, and regional and national associations across the world.

The Deloitte report (‘Measuring the return from pharmaceutical innovation
2018’) cited by the industry, showed that Deloitte’s estimates of the
projected return on investment of late stage pipelines 12 large cap
biopharma companies drop to 1.9%. (A drug pipeline refers to potential drug
candidates that a company has under discovery and development)

The Deloitte report calculated “the internal rate of return (IRR) and used
it as a proxy to measure biopharma’s ability to balance R&D investment
(initial and ongoing capital outlay) with the cash inflows (drug sales) the
industry is projected to receive as a result of this investment.” Deloitte
says, the IRR is based on the total spend incurred bringing assets to
launch and an estimate of the future revenue generated from the launch of
these assets.

The WHO says the two reports cannot be compared. In an exclusive interview,
the author of the WHO report, Dr Kiu Siang Tay, technical officer, working
on Innovation, Access and Use in the department of Essential Medicines and
Health Products at the WHO, told The Wire that the information in the WHO
report is based on direct observation of reported sales incomes, by
considering return on investment as a measure.

There has been continued debate on estimates of R&D costs for drugs – but
the most commonly accepted estimates are between US$ 200 million and US$
2.9 billion. Credit: Reuters

Tay added, “We found a median of US$ 14.50 return in income for every US$ 1
of R&D cost, after adjustments for the probability of trial failure and
opportunity costs. To be clear, this analysis did not estimate profit
return because we do not have information about the costs and year-to-year
variations in costs (i.e. expenses and taxes) specific to cancer drugs. The
Deloitte report, on the other hand, looks at the internal rate of return
for late-stage development drugs in 12 companies, based on future
projections. These projections put profit return on research and
development at 1.9% for these late-stage pipeline drugs. The set of
products are not specific to cancer. The two studies are not comparable.”

On the issue of transparent pricing of drugs, the WHO report says that high
prices of cancer medicines may have inadvertently caused inefficient R&D
practices as well as unethical or illegal business practices. “The
increasing use of agreements with confidential rebates and discounts has
had a negative impact on price transparency, potentially leading to
outcomes that are inefficient or not conducive to good governance,” the
report said.

The industry believes that transparency on pricing could hurt preferential
pricing strategies. IFPMA said in its statement, “The Report also failed to
analyze the unintended negative consequences of its policy recommendations,
such as the impact of full price transparency on the capacity of companies
to provide preferential prices to developing countries. It does not
appropriately take into account the specificity of different national
healthcare systems, particularly between developed and developing
countries, and promotes policies that could be detrimental to many

In addition to prices of drugs, incentives given for cancer research have
generated much discussion in global health. To what extent to companies
benefit from say sources of public funding and how does it impact prices.
The report addresses this.

Also Read: India’s Cancer Incidence Rate Among Lowest in the World – but
for How Long?

The report raised a fundamental argument on whether cancer research has
been “over-incentivized” and more broadly on the efficiency of such large

One justification for high prices of drugs has been ploughing back profits
on sales into R&D in order to “reward innovation”. But given the
extraordinary returns in some cases, the report said, “the returns on the
factors of production of cancer medicines are in excess of what would be
necessary to maintain operation of the pharmaceutical industry.”

The report goes further and suggests that “excessive returns, combined with
market dominance, could encourage companies to engage in wasteful
rent-seeking activities such as lobbying and filing patent clusters to
delay entry of generic/biosimilar products, distort investment and stifle

It cites evidence of disproportionate levels of research for cancer
medicines, despite lower success rates of clinical trials and the highest
number of discontinued projects. The potential for lost investment would
normally mean that the pharma industry should have diverted investment away
from cancer research, the report explains. But higher level of investment
for cancer research, “might be explained by the considerable financial
incentives in place to safeguard the higher risks of failure”, the report

The report warns that long-term innovation of cancer medicines might be at
risk due to the inefficiencies and distortion of investment that could to
excessive returns from cancer medicines combined with market dominance.

“It is simply ‘poor economics’ to chase drugs for the sake of profitability
alone. Investment into drugs for cancer research has got the industry into
a vicious circle,” one expert told The Wire on the condition of anonymity.

The WHO report says that high prices of cancer medicines may have
inadvertently caused inefficient R&D practices as well as unethical or
illegal business practices. Credit: Pixabay

What the report suggests

In a departure from the tone of such technical reports, the report boldly
suggests that, “..lowering current prices might in fact be conducive to
long-term innovation.” After all, financial return is a function of price
and volume; potential impact on revenue due to lower prices could be offset
by higher volume, particularly when the marginal cost of production is low,
the report justifies.

It cautions:

Global correction of unaffordable prices of cancer medicines will require
considerable short-term system adjustments, but such adjustments are
fundamental to the sustainability of access to cancer medicines, and
medicines in general in the long term.

In bare terms, the report that has caused much consternation to the
industry says, “Some stakeholders have influenced medicine prices higher
than the true clinical value of cancer medicines, essentially lending
higher negotiation power to the pharmaceutical industry. This power
imbalance compromises the ability of the system and individuals to pay for
these medicines, and deliver quantities less than what would be required
for maximizing societal welfare.”

Citing evidence, the report says that lowering medicine prices would not
impair the incentives for R&D of cancer medicines. Touching upon the much
heated discussion on public financing of drug research, the report says,
“Excluding infrastructure investment and labour development, public sector
investments in health R&D accounted for 30% of the total US$ 240 billion
funding globally in 2009. The remaining 60% of R&D investment came from the
business sector and 10% from non-profit-making organizations.”

Also Read: If We Can Build Mangalyaan, Why Can’t We Do More in Health
Sciences: New WHO Deputy Director General

Stakeholders such as Knowledge Ecology International, believe that
incentives to invest in R&D are linked to prices. On the cancer report, KEI

We believe international action is required to improve transparency in
reporting the costs of R&D and production, including public sources of
funding. We agree with the report that prices for cancer drugs are not
based upon R&D costs, but also note that incentives to invest in R&D are
linked to prices. This creates a conflict, or policy incoherence, between
access and affordability on the one hand, and innovation on the other.

KEI has urged the WHO to host a meeting to look at the feasibility of
progressively de-linking R&D incentives from prices, so that efforts to
make cancer treatments more affordable do not conflict with innovation

What countries said

One developing country delegate told The Wire, that they see the report as
a milestone. “This report will be used as a reference point and as a
precedent to be cited in all future discussions on prices of cancer drugs
and more generally on access to medicines.”

Australia told the meeting that costs of cancer drugs are the biggest
driver of costs of medicines.

India asked the WHO to work on voluntary licensing of patented medicines to
make cancer drugs more affordable. Italy called the report as a “tour de
force” and said that international action is needed to take it forward.

Some countries hoped that the US would support and consider the report.
“Drug prices for cancer are expensive everywhere – the American prices
become like a reference price, so therefore important for the US, to engage
on this,” one delegate said.

The US said that the country cannot support policies that include the use
of flexibilities in the World Trade Organisation Agreement on Trade-Related
Aspects of Intellectual Property Rights (TRIPS) or increasing R&D cost

During the proceedings of the board meeting, the US drew attention to the
lack of pharmaceutical industry involvement in the preparation of the

Given the contents, scope and tone of the report, the industry was
reportedly “flabbergasted” that the WHO did not consult with companies on
the report.

In its statement, IFPMA said, “…We are concerned that the Technical Report
has been developed without adequate consultations with key stakeholders,
including industry, as well as patient groups and national regulatory
authorities, who could speak to industry practices, approval practices and
the benefits of oncology therapies. As a result, this assessment does not
reflect the full economic value to society from these innovations.”

Dr Mariângela Batista Galvão Simão, assistant director-general for drug
access, vaccines and pharmaceuticals, informed the executive board during
the discussions, “We believe that it would have been a case of perceived
conflict of interest by consulting industry on this report. We would have
been open to receiving information about net prices of individual cancer
medicines their specific R&D costs, for example. But we believe this
information would have been difficult to obtain from industry
stakeholders.” She added that information from pharmaceutical companies can
be included in an addendum to the report. The information furnished in the
report is based on publicly available data.

What concrete actions will follow this report, remains unclear for now. But
countries see an opportunity to work on high prices of medicines, in the
wider context of the WHO roadmap on access to medicines and vaccines, that
was also taken up at the Board meeting.

Specifically, the roadmap on access mentions that the WHO will coordinate
actions on health research and development including, “Promotion of
transparency in research and development costs; development of incentive
mechanisms that separate/delink the cost of investment in research and
development from the price and volume of sales; and establishment of
additional incentives for research and development of new products where
there are market failures. Support for implementation of schemes which
partially or wholly delink product prices from research and development

Certainly for patients and for shareholders of pharmaceutical companies,
the industry would do well to critically examine their pipelines and review
how to invest more efficiently in R&D for cancer medicines, one expert said.

Priti Patnaik is a Geneva-based journalist and researcher. She has
previously worked as a consultant in the UN system including at the WHO.
She tweets at @pretpat and can be reached at patnaik.reporting at gmail.com.

Thiru Balasubramaniam
Geneva Representative
Knowledge Ecology International
41 22 791 6727
thiru at keionline.org

More information about the Ip-health mailing list