Financial Incentives for Innovation
The pharmaceutical industry, which serves as the "sponsor" of the development of most new therapies, is currently investing $40+ Billion in R&D annually. The biotech industry, a major source of innovation for new therapies, has been funded during its first 20+ years primarily by the private sector, including venture capitalists, equity markets, and the pharmaceutical industry. This approach to driving innovation is in marked contrast to the development of other society-changing industries, such as the chemical or computer industry, which were funded initially by the military or other government agencies.
While the financial returns to innovators in the private sector—primarily the shareholders of pharmaceutical and biotechnology companies—can be huge from certain successful therapies, the majority of potential new medicines will fall below the benchmark "blockbuster" level of $1B in revenues per year. Yet the costs of development, currently estimated at $800 million per successful drug (a composite figure that includes the cost of failed drugs) drive R&D attention primarily to huge clinical markets.
Incentives to motivate discovery and development of new therapies in the "grey area" of products that might generate $25—800 million in revenues per year would be likely to fill the pipeline of potential new cures much faster.
In addition, it is clear that market incentives are not adequate to stimulate research into certain therapeutic areas, either because the potential financial return for even a successful product for that illness is too small, or because the potential therapy cannot be patented and a return on the research investment would be marginal.
To overcome this obstacle, Congress in 1983 granted incentives to developers of "orphan drugs," intended for the treatment of populations smaller than 4,000 patients, ensuring seven years of market exclusivity after gaining FDA approval. That program has results in some 200 commercialized therapies.
Key Questions:
- What changes in tax policy would most effectively stimulate research? Should the capital gains tax on equity investments be changed to create incentives for equity investors in research-innovative enterprises?
- Are there alternative financing sources and/or vehicles that would ensure an appropriate return to investors in innovation?
- Are the legislative initiatives currently underway regarding R&D tax credits at the state or federal level likely to incentivize more and faster research?
- Is there a centralized source of information concerning "orphan" illnesses, and the putative treatments that could be developed for them to facilitate the process for innovators?
- Should there be a "registry" of potentially efficacious drugs that are not in development because they are unattractive investments, for which the government underwrites the costs for a developer?
- Are there additional legislative measures, comparable to the Orphan Drug legislation, which would provide incentives to developers?
- Are there other means that could be developed, perhaps including a public/private partnership, to ensure that developers are compensated for efficacious therapies regardless of market size or patentability of the compound?
