Economic Evaluation seminar - Re-evaluating dynamic efficiency in pharmaceutical innovation: the joint role of private payment and public investments in research and development

Event details

Authors: Karl Claxton, James Lomas, Francesco Longo, Andrea Salas-Ortiz, and Beth Woods

Abstract:

The ongoing international policy debate regarding pharmaceutical pricing focuses on the complex trade-off between ensuring affordable access to existing medicines (static efficiency) and maintaining robust incentives for future drug development (dynamic efficiency). Previous analyses have shown that pull incentives, such as expected future drug-related revenue, are critical drivers of  pharmaceutical innovation. However, this established literature gives less attention to push incentives, which focus on public efforts, such as investments in research and development (R&D). The risk of failing to  account for the contribution of public R&D to innovation is that society may ‘pay twice’ for new medicines: by funding basic science and applied biomedical research through grants and institutions, and then by paying high prices to the private sector for the final, patented product. In response to this gap, we propose a formal extension of a previous model that identifies the long-term static and dynamic benefits and costs of providing manufacturers with different levels of reward and the opportunity cost of investing in R&D. To address this, we generalise the innovation production function adopted in previous work to include additional parameters which reflect the causal effect of public R&D on innovation. Building upon a comprehensive scoping review, we will integrate and explicitly account for public R&D investment as a distinct and simultaneous input into the innovation process. Our primary analytical objective is to empirically explore the sensitivity of innovation rates and optimal policy settings to three critical, interacting policy levers within this expanded framework: the share of value in the form of revenue paid to manufacturers, the level of public R&D expenditure, and the share of public R&D expenditure that should be paid for by manufacturers. This paper will inform debates about how public sector contributions to R&D should be reflected in pharmaceutical pricing policy and the appropriate level of public sector R&D to support pharmaceutical innovation. 

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