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lecture12_2_16_11_large - LECTURE 12: Technological...

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LECTURE 12: Technological Progress: Incentives for Research and Development
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•Thus far, we’ve been talking about supply-side incentives for the provision of existing technologies and services…
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•Don’t forget the importance of technological progress for population health gains •New health technologies are continually being developed…
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•But private sector R&D heavily emphasizes the needs of wealthy countries – Why?
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•Because the major diseases that afflict wealthy countries and poor countries differ, market forces direct private R&D toward health conditions prevalent in wealthy countries
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•This mismatch between private R&D and the global burden of disease is commonly referred to as the “90-10 Gap” •Less than 10% of global health research funding is targeted to the health problems of developing countries, which account for 90% of the world’s burden of disease (as estimated in 1990) •(This is slightly misleading – cardiovascular disease is prominent in low income countries too, etc.) •Of 1,233 drugs licensed worldwide between 1975 and 1997, only 13 were exclusively for “tropical diseases” •5 grew from veterinary research, 2 were modifications of existing medicines, and 2 were produced for the US military •(History of the CDC anyone? Prevent malaria and syphilis among US troops in basic training in the South) •Only 4 were developed by private pharmaceutical companies specifically for tropical diseases affecting humans
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•(“90-10 Gap” continued) •About 1/2 of global health research funding in 1992 was in the private sector, but only 5% of this was spent on diseases specific to poor countries •Nonetheless, the scientific prospects of developing vaccines for “tropical diseases” are not so dismal •In this lecture, we want to explore how society might better (efficiently) steer R&D efforts towards the health needs of developing countries, capitalizing on the strengths of private incentives for R&D
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•Pharmaceuticals are characterized by large fixed costs and low marginal costs •To make matters worse, developing new drugs is very risky – many projects fail, making no money at all Î So for expensive R&D to be worthwhile, earning large profits on the small number of successes is necessary
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•How risky is pharmaceutical R&D? Most profits come from a handful of “blockbuster” drugs, while most R&D projects leading the development of a new chemical entity (NCE) lose money (old data…) – and not taking into account failures early in the pipeline
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•For pharmaceutical companies to be able to make large profits on this handful of “blockbuster” drugs, they need to be able to cover both their enormous fixed costs as well as the losses of many falling below the break-even line – i.e., price above marginal cost •They therefore require:
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