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~ ~ ~ ~ Enhancing Our Economy The previous chapter described some direct threats to the health of the American people and showed how these threats might be reduced by action for global health. This chapter shows how the U.S. economy may also benefit from the nation's active investment in solving global health problems. By investing in the health of other populations, the United States is investing in their economic development too, and therefore in its future trading partners. The discussion focuses on the pharmaceutical, vaccine, and medical devices industries, the biggest stakeholders in the global health-related economy. The incentives for these industries to develop global markets are increasing, but the constraints are formidable. Possible steps for overcoming these constraints are outlined. Four of the world's top 10 pharmaceutical producers con- trol 40 percent of the world market. _ A MARKET WITH UNFULFILLED POTENTIAL The global market for pharmaceuticals, vaccines, and medical devices is a large one. Expenditure on pharmaceuticals was $220 billion, or $40 per capita, in 1992, while expenditures on vaccines were about $2 billion and those for medical devices and equipment were about $71 billion (Ballance et al., 19929. In this global market, the share of the developing countries is surprisingly significant. In 1992, for all developing countries combined, the public and private sectors together spent $44 billion. This amount represented 10-30 percent of public-sector recurrent costs in developing countries, second only to expenditures on health personnel. In industrial countries, by comparison, drugs and vaccines represent 5-20 percent of health care spending. Innovation, rather than price, is the principal determinant of competitive advantage in the pharmaceutical industry (OTA, 1996~. Because of its strong base in science and technology, the United States therefore has significant international strengths. It invests more in R&D than other countries. It also has more new drugs under development than its parkers, at an estimated cost per new drug developed of $310-$500 million (DiMasi, 1995; OTA, 1996) Yet despite these strengths in 35

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36 AMERICA 'S VITAL INTERESTIN GLOBAL HEALTH innovation, the U.S. share of the market in developing countries is surprisingly small. In 1988, 15 countries accounted for 90 percent of pharmaceutical exports, with the European Union providing about 75 percent of all drugs exported to developing countries. North American industry represented only 13 percent of the global pharmaceutical export market in 1990. The introduction of new drugs and vaccines in developing countries will be dependent on the pharmaceutical and vaccine industries in the industrial countries. In developing countries, the domestic pharmaceuticals industry is comparatively small and faces significant constraints on its growth. These constraints include a relative lack of infrastructure and capacity for R&D and import restrictions on raw materials (Ballance et al., 1992; IOM, 1979~. With the exception of China, no developing country is self-suff~cient in essential pharmaceuticals. It is estimated that as many as 2.5 billion people have little or no regular access to essential drugs (UNDP, 1991~. Thus, for the foreseeable future, the introduction of new drugs and vaccines in developing countries will be dependent on the pharmaceutical and vaccine industries in the United States and other industrial countries. Moreover, it is likely that the rising costs of R&D will require these companies to pursue growth in emerging markets as aggressively as possible (Ballance et al., 1992~. Yet significant political and regulatory constraints currently deter the industrial countries from developing products that might primarily benefit developing countries. LACK OF ECONOMIC INCENTIVES The diseases that currently dominate the needs of developing countries- including tuberculosis, malaria, and acute respiratory infections- remain relatively neglected by the pharmaceuticals industry. For example, in the world today, there are 225 million new cases of malaria each year and the death toll among children is approaching 1 million (WHO, 1996a). Yet it is the board's understanding that not a single major Western pharmaceutical company is now developing new drugs for the disease. The question is how to make it economically feasible for the best of American science, technology, and industry to address major global health problems and to enable U.S. industry to profit, rather than suffer losses, by that engagement (see, for example, IOM, 1996c). Not a single major Western pharmaceutical company is now developing new drugs for malaria. The disincentives to investment are serious. For many diseases primarily affecting people in developing countries, R&D investments cannot be returned with

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ENHANCING OUR ECONOMY 37 the current average patent life of nine years in the pharmaceutical industry. New incentives are therefore clearly needed to enable industry to develop and market the drugs needed in developing countries; some options are discussed below. There is a vital caveat, however. It will be essential to institute effective safeguards against medically detrimental or unethical commercial activities in developing countries for example, dumping of pharmaceuticals of questionable safety or effectiveness; emphasizing short-term financial gains that, in the longer term, weaken target countries and local communities; or exporting medical interventions that are economically or culturally inappropriate for the intended recipients. OPTIONS FOR INCREASING INVESTMENT IN PRODUCTS FOR DEVELOPING COUNTRIES Multitiered Pricing. Multitiered pricing the selling of a product for different prices in different markets-will be essential if vaccines and drugs that are expensive to manufacture are to be made available to the vast majority of people in the developing countries. In the case of vaccines, multitiered pricing has enabled the poorest countries to receive vaccines at close to the marginal cost of production. This has enabled more than 80 percent of the world's children to be vaccinated against the major childhood infections each year, up from 5 percent in 1974 (WHO, 1996b). The resulting reduction in the prevalence of these infectious diseases in developing regions has not only brought benefits to their own populations, but significantly reduced the health threat to the industrial countries from imported cases. European manufacturers, and some U.S. companies prior to 1982, tendered bids to UNICEF's vaccine program to supply vaccines at a low price for use in the poorest developing countries. In congressional hearings in 1982 concerning federal and state expenditures for the purchase of children's vaccines, however, the U.S. vaccine industry was savaged for allegedly subsidizing vaccines for the poor children of the world by charging high costs to U.S. families and taxpayers (U.S. Senate Subcommittee on Investigations and General Oversight, 1982~. As a result, U.S. vaccine manufacturers have declined to tender bids to UNICEF ever since. However, a recent study by Mercer Associates for UNICEF indicated that the criticisms leveled at the U.S. vaccine manufacturers in 1982 were unwarranted (UNICEF, 1994~. The report pointed out that vaccines would have been developed and produced to protect American children, regardless of international needs. Further, the report found that it was the excess capacity in the vaccine industry that enabled global manufacturers to provide sufficient vaccines to UNICEF at marginal cost and for marginal profits. The withdrawal of U.S. companies from the VNICEF purchasing scheme has not only deprived the industry of the chance to contribute to a dramatic reduction in child mortality, but has also caused a loss of comparative advantage

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38 AMERICA '5 VITAL INTERESTIN GLOBAL HEALTH in the global marketplace and has limited the industry's strategic options. For example, the continued use of multitiered pricing has enabled European manufacturers to price products in their core markets to cover the full cost of production, investments in R&D, marketing, and all overhead costs, while also allowing them to sell large volumes of low-price vaccines to the poorest countries of the world. These global sales have, in turn, enabled manufacturers to take advantage of economies of scale in production and for the cost per dose. As the Mercer study points out, because vaccine production is a fixed-cost business, revenue from each additional dose sold at a price above the marginal cost directly contributes to profits. The ability to pursue multitiered pricing strengthens the competitiveness of national industries, provides adequate prices and thus revenues for product innovation, and allows manufacturers to sell higher volumes at a lower per-unit cost. There is clearly a need for new incentives to enable industry to develop and market drugs needed in developing countries. The board, therefore, believes that there is a need for the United States to reconsider the issue of multitiered pricing for vaccines and drugs to enable U.S. manufacturers to compete in the global market, and to allow them to make available the products of the scientific advances achieved in this country to as many people around the world as possible. Intellectual Property Rights and the Problem of Piracy. Intellectual property rights are critical to the pharmaceutical and vaccine industries, which invest heavily in R&D for their continued profitability. National failure to respect and enforce intellectual property rights leads to the pirating of drugs, vaccines, and medical devices, a phenomenon that is estimated to cost the global industry some $12 billion a year. Piracy constitutes a major disincentive to U.S. industry to provide scientific and medical products to certain countries with enormous health needs, such as China and India. Although several countries have indicated a desire to join the World Trade Organization and a willingness to respect intellectual property conventions, government subsidization of local industries that violate those conventions continues to discourage greater engagement of the U.S. pharmaceutical, vaccine, and medical devices sectors. While there is a requirement for compliance with intellectual property rights to obtain membership in the World Trade Organization, there remains an urgent need to prevent piracy through better surveillance mechanisms and international law. In addition to piracy, there are two other major disincentives to the sale of products to developing countries by U.S. manufacturers. These are parallel and reverse trade, in which drugs sold by a company to a country at an agreed price are resold-back to the country of manufacture or to a third country at a different price that competes with the same drug in those markets and siphons off the

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ENHANCING OUR ECONOMY 39 manufacturer's rightful profits. Recent estimates indicate that parallel trade from a single country in Europe cost the seven leading drug manufacturers $300 million in 1996 (The Economist, 19969. Appropriate mechanisms to prevent such abuses- and sanctions to enforce them need to be created. Public-Private Cooperation. It is recognized that the private sector alone may not be able to develop products for all health needs. Joint efforts between the public and private sectors to research, manufacture, and field test limited numbers of new drugs, vaccines, diagnostics, and other products for significant and neglected health problems of developing countries must be encouraged. Such joint ventures would reduce costs and increase benefits to manufacturers in industrial and developing countries and the populations they serve. Use of rotating funds, long-term loans at favorable rates from the World Bank and regional development banks, and mechanisms for facilitating currency conversions and recycling could be valuable in ensuring markets for such products. Guaranteeing such markets could provide a greater incentive for a company to pursue R&D in the health technologies needed for global disease prevention and control (IOM, 1996c). Where markets for drugs relevant to diseases prevalent in developing countries- such as malaria, TB, and AIDS-cannot provide sufficient returns to justify development of drugs arid vaccines, the possibilities for extending patent life In special circumstances should also be considered. Harmonization of Regulatory Standards. The efforts of the International Congress of Harmonization to establish standard regulations on quality control, quality assurance, good manufacturing practices, and practices for animal and human testing should be accelerated. Success in these efforts will ultimately mean that a new drug meeting these guidelines can be safely licensed In any county of the world. SUMMARY OF RECOMMENDATIONS FOR ENHANCING OUR ECONOMY The U.S. government should take steps to increase incentives for the pharmaceuticals, vaccines, and medical device industries to invest in R&D on products that would benefit primarily poor populations. This investment is likely to increase returns to the industry as well as improving the long-term health and economic growth of future trading partners. Suggested incentives include: allowing multitiered pricing of drugs and vaccines safeguarding intellectual property rights . increasing the incentives for product development for example, by extending patents . forging public-/private-sector partnerships to develop certain essential products for the needs of the poorest populations where necessary.