A Review of Medicine for the Many

The 2019 Labour conference was largely overshadowed by the Supreme Court ruling on the illegality of the lengthy prorogation of Parliament. The event found itself dramatically impacted, and the audience found themselves observing a shortened version of Corbyn’s speech, which (presumably) omitted a number of key policy announcements, such as the uncomplicatedly positive move to scrap universal credit. In the end the speech contained only one new policy announcement. This was Labour’s new policy regarding the production of pharmaceuticals, which they have detailed in the accompanying document titled Medicines For the Many: Public Health Before Profit. 

By and large, the document and policy seem well intentioned - while the driving factor of NHS woes is simply underfunding, it behoves us to consider other systemic features of the economy that work against an effective British health system. Overall, the positives of the document outweigh the negatives. Many proposals on how to work within the existing framework to deliver better outcomes are thoughtfully explored, and a rethink on the conditions (or current lack thereof) of government subsidies for research are needed and given. However, in many respects, this document misses the mark.

These deficiencies seem to be attributable to the underlying ideology of the leadership - that market structures are inherently bad and cannot achieve socially beneficial outcomes. This leads to an exaggeration of the industry’s failures (though failures which we should acknowledge); a disingenuous omission of discussion regarding the UK’s exceedingly successful generic drug industry; misrepresentation of the nature of the industry; and a naive optimism that government direction would represent a socially optimal design. These flaws are not specific to the debate about the pharmaceutical industry, but rather a myriad of debates regarding the suitability of various industries for nationalisation. It is also possible that Labour’s policy on the pharmaceutical industry is not motivated by the unique issues of this industry, but rather the belief that a nationalised industry is 

 better than an industry composed of private companies, regardless of the goods or services produced and rendered. 

A more generous reader, however, may suppose that the most radical of the suggestions in the document are simply the result of the application of tools familiar to socialists to a misunderstood problem, and note that praise should be awarded the document’s Croslandite conception of nationalisation, which represents an expansion of thought in the labour leadership’s approach to public ownership. A still more generous reader may argue that the structure suggested in the most radical portion is a necessary prerequisite to the very ambitious and optimistic structure of internationalised, government-led drugs production worldwide, though in practice this is little discussed in the policy proposals.

As the article is more positive than negative, it is worth beginning with its praiseworthy elements. A great injustice is done to the taxpayer when they purchase patented drugs that were partly the result of government-funded research. As pointed out by Global Justice Now and Stop AIDS, the taxpayers find themselves paying twice for such drugs, having paid for both development and having subsequently paid market prices. Beyond supporting industry in the UK, research subsidies lack any sort of meaningful mutual benefit. Government should foster our high tech industries, such as medical R&D, in order to both reap the benefits of external increasing rates of return (which is to say, enjoy the higher productivity that high-tech industries enjoy when situated in an environment of many high-tech industries), and to foster an industry which presents great capacity for taxation through its high profits. It is particularly important to cultivate high tech industry as increasingly globalised markets push lower tech industry to the global south, and, given the necessity of pharmaceuticals and the predatory nature of the US market, it is important to maintain a vibrant home industry. However this cannot be the only return the state should expect in return for taxpayer money. Professor Richard Sullivan at King’s College London posits that the public sector contributes up to 90% of the intellectual input of R&D. The scale of the subsidies on offer justifies an expectation of a tangible return, or greater reciprocity in the current arrangements.

Like the Global Justice Now and Stop AIDS report, the Labour policy document argues that the NHS should be charged more favourable prices for such drugs (although it does note that this doesn’t address the party’s concerns regarding lower and middle income countries), and suggests the possibility of financial returns on drugs made possible by the public sector’s involvement. 

More interestingly, however, are suggestions that data collected by such R&D is made available to the state for use in other state-funded research programs. This idea has great merit. The underlying principle is simple: work and research made possible by public funds should belong to the public. The demand is not ownership of the drug, but ownership of the research that made the development of the drug possible. This is a fair exchange for public funds. One presumes that such data, now belonging to the public, would then be made available to other drug development companies in the UK. The proposal is not completely novel; arguments surrounding the available of data and research from universities (themselves great beneficiaries of public funding) have been made for a great while now. 

Access to this data coupled with anonymised data collected by the NHS secured either as part of an agreement related to public subsidy or via payment to the state, would make the UK an exceptionally attractive place to do research. Obviously there would be concerns about a company’s willingness to collect new data if such data is then made available to rival companies, but this simply requires that the collection of genuinely new data - rather than duplications of proprietary data - is subsidised at current rates, whereas companies that no longer need to generate costly data that already exists can expect either lower subsidies due to the lower cost of R&D implied, or the same subsidy but a charge to access this data, to the same net effect. Such a policy seems like it can only have benefits, and in any future campaigns that take place in a more normal, less Brexit dominated, context, this is the kind of policy that should be front and center.

Relatedly, the policy document condemns the opacity of price negotiations. It is hard to see how this lack of transparency regarding the prices charged to each country is beneficial to social wellbeing, and it is hard for companies to justify it through any argument that is not immediately odious. 

This applies equally to drugs not subsidised by public funds as to those which are, and hence the party’s argument for price transparency should be whole-heartedly and uncompromisingly supported. There is otherwise little to say on this.

The document also outlines tools - called TRIPS flexibilities - that allow governments to respond to drugs that are charged at exaggerated prices. The example provided in the policy paper is the use of Crown use licenses, which allow a government to give second companies the ability to use a patent to produce a drug at a reduced price when patents are restricting patients’ access to drugs. This option is already open to governments, and Labour should have used this opportunity to highlight the Tory government’s unwillingness to use such measures to the benefit of UK citizens;the example they give is Orkambi, a cystic fibrosis drug. The suggestion that the UK increase its use of TRIPS flexibilities isn’t radical - examples of governments using this tool include the center-right German government, the UK government of the 1990’s using the threat of them in price negotiations to achieve a lower price, and the Italian government recently using the same negotiating tactic. International treaties designed to protect some aspect of intellectual property, private liberties, or bilateral trade and investment always include some mechanism to protect consumers and citizens - if they didn’t, government’s wouldn’t sign them for fear of imminent electoral failure. Governments that fail to use these features of the treaties they sign do so at their own peril. That the Tory government is unwilling to use such mechanisms is not a failure of the current market system, and Labour is quite right to point out ways in which we can immediately improve UK welfare, thereby signalling its potential role as a responsible government that proactively protects patients’ rights to access innovative medicines. This again presents fertile ground for a future campaign. 

Finally, Labour is to be commended for at least part of its approach for nationalising generic drug production. It shall be argued later that on the whole, this policy proposal is misguided, but here let us note the aspects in which it is sensible, and hopefully provide the direction for future moves towards nationalisation that the party pursues. The form of nationalisation envisaged here is that of competitive public enterprise. Rather than creating a monopoly - either by legislation or through buying and consolidating existing large players - the suggestion is that the state set up a generic drug producer in order to compete with existing producers. Many states have done this with many industries, and it is the most appropriate response to an industry which is inefficient or moves in directions antithetical to the public good. When shown no contractual favour, and given the maximum degree of independence possible while still being subject to Parliamentary scrutiny, such bodies, able to compete on the terms of the industry, should either fill gaps that the market currently does not, or otherwise be inoffensive to the industry in question.

It would also be inoffensive to the public’s well-being. State monopolies are concerning precisely because they lack competitive pressure to improve or reduce costs, because of the tendency to bureaucratic madness, and because of concerns regarding the relationship between private enterprise, personal liberties, and ownership rights. Also particularly relevant in this context is state corporations’ general unwillingness to attempt risky but high reward strategies. This method of operation is arguably justified - the taxpayer doesn’t want to see the money they contributed wasted on speculative strategies when it could profitably be used elsewhere (though we should note that we need someone to pursue risky strategies to drive improvement, justifying the role of the private company in society). State monopolies in the vast majority of industries confer no additional advantage to society than a private monopoly, and is subject to all of the same criticism. Public competitive enterprise, however, lack all but the latter, and can, at worst, do no harm beyond the expenditure of the money required to run them.

The case that generic drug production is such an industry where this action is suitable is not strong, but this does not diminish the significance that Labour has adopted public competitive enterprise into its body of policies.

Before we discuss the flaws of the proposals, it is important to distance these criticisms from other arguments made against it where those arguments have been fallacious or, more often, disingenuous. 

After the document was released, a number of drug producers and MPs at the Conservative party conference argued that the policy amounted to state seizure of private assets. This is clearly absurd, and an overreaction. The only argument regarding ‘seizure’ of assets that could be made must relate to either the use of TRIPS flexibilities, or the discussion in the policy document surrounding changing the conditions of patents awarded in the future. 

The former must be dismissed immediately - a country cannot be seizing assets if it uses features of treaties that regulate the industry internationally. It is acting within a framework of law to which the companies agreed when they conducted business within the UK (and any of the vast number of states that operate within the TRIPS framework). Further, when Crown use licences are used, compensation according to the lost potential profit is issued to the patent-holding company. To call the compensated use of a legal instrument to provide patients access to otherwise unaffordable drugs a seizure of assets is to lie. 

Similarly, changing the terms on which future production is done does not amount to any seizure of assets. Labour go to pains to stress that the effect of reducing the length of patents, or changing the conditions of patents would take time to make positive change, since these could not be extended retroactively to current patents. That is - no one is taking anything that someone else could reasonably have expected. No seizure of assets has been suggested.

The Tories have also used the opportunity to condemn the plans of nationalisation, aware that this word tends to evoke the state monopolies of which voters - or at least older voters - have a very poor experience. But as discussed earlier, the form of state ownership proposed, public competitive enterprise, lacks the shortcomings of which they wish to remind the electorate. The response is either a disingenuous attempt to nip in the bud the idea of public competitive enterprise before it gains traction among voters, or it is simply the result of a misunderstanding (perhaps not reading) Labour’s policy proposals.

Let us now turn to criticism of the proposals. The chief flaw is a misunderstanding of the necessity of incentives to innovate, and how the innovative side of the sector interacts with the generic drugs sector. One would not get this impression reading the policy paper, but there is very little to be concerned about in the generic drug industry. It is in fact the case that generic drugs in the UK are four to four and a half percent cheaper than in comparable European states. This is attributed to the market conditions. In the UK, once a patent has expired, free market mechanisms are allowed to operate. There are myriad generic drug producers in the UK and across the EU which sell to the UK market, and the cheap cost of production coupled with the immense competition within the sector drives prices down to near marginal cost, as one would expect. This stands in contrast with the many European states that operate some sort of central price-setting mechanism, which has the perverse effect of increasing the cost of drugs compared to what we observe in the market mechanism employed in the UK. The upshot of this is that a nationalised generic drug producer would have nothing to offer the UK market. As mentioned before, it would certainly do no harm, but it would represent a waste of public funds, which, in the absence of a clear and strong justification for the policy casts doubts on its desirability. 

Further, while much of the criticism levied towards the innovative side of the industry is justified (the recurring example of Orkambi was certainly well chosen), much of it seems to miss the point. In particular, describing enforcement of a patent as “the largest subsidy” the UK offers drug developers is exceedingly disingenuous. Would we describe any other industry expecting protection of intellectual property through the courts as being subsidised? There is no incentive, in any industry, to innovate if the product of that innovation is simply replicated elsewhere. Free-riding is anathema to innovation and hence we expect those who innovate to have their product protected. One can argue about the appropriate length of the patent protection (currently fifteen to twenty years), but it is necessary that some operating period is granted to drug developers so as to drive the development of drugs, particularly given that such research is massively costly, and profits from generic production (and hence production in an environment without patent protection) are so slight.

There are at least two ways in which Labour seem to have misunderstood this. Firstly is the argument that it would require a period of only five years of monopoly power to recoup the cost of R&D. This seems irrelevant to the question at hand, which is that of what period of monopoly is appropriate. 

The Labour leadership’s economics often assumes a naive economic setting principally directed by some sort of free entry conditions, which is to say that the expected profit from entering a market should be zero, for if it were negative, no one would enter, and were it positive, more would enter, thus driving down the profit. This is the principle that motivates the suggested relationship between monopoly duration and time to recoup R&D costs. However, even taking this as the basis of our argument, we should not expect a monopoly period to last only five years, since drug developers also expend vast amounts of capital on research that doesn’t yield useful results, an unavoidable aspect of drug development. To argue that five years is all that is needed to recoup R&D costs for a given drug ignores the plethora of other costs that the industry incurs.The amount of actualised profit for any successful drug must at least compensate losses made in failed developments of other drugs for companies to even begin to invest in development.

More than this, the motivation of achieving a free-entry condition is unhelpful, as it is not at all clear that we should,

, wish to attain it (though it must certainly provide a lower bound). The issue is rather more complicated. The ideal period of monopoly power is one which delivers the best for public health. This must take into account the rate of innovation within the drugs industry, which improves public health in the long term; as well as the health of the industry within the UK as a whole, because the sector and the production chain of which it is a part is particularly large (the UK is the third largest producer of new drugs) and hence affects the incomes - and therefore the health and well-being - of so many. Additionally, the UK should be wary of any decrease in its own drugs innovation sector lest it find itself and its neighbours relying more heavily on the US industry, which will certainly offer less protection for patients than the UK industry would, and decrease public access to innovative drugs in the long term. These effects all provide an upward pressure on the ideal duration of monopoly that competes with the downward pressure that lower monopoly time reduces prices faster. This balance is complicated, and depends on so many factors that one should be sceptical of any author who offers a concrete number as doing exactly this. This in no way precludes the possibility that the current situation is suboptimal, but it should put to rest the argument that we must consider only the time needed to recoup R&D costs, and that any period of monopoly is unjustified. 

The second error the party makes in this regard is quicker to deal with, both for its simplicity, and for how often the argument has already been made, making this the far more egregious of the mistakes. The document states that “patents provide the owner with market exclusivity so that the patent owner can charge a premium on new medicines, rather than reducing the price to the cost of production or that of competitors.” This is undeniably true. This is meant to be read as immoral, or unjust. Hopefully the argument above convinces enough that the option to charge a premium is not necessarily bad. But worse is the disapproval that developers do not charge the cost of production, where it is presumed that this refers to the marginal cost of production (since the average cost of production changes depending on the number sold, due to the high fixed cost of R&D, and hence depends on how long the next drug takes to be developed). As many before have pointed out, while the second pill on any production line may cost pennies to produce, the first costs several million pounds. We do not expect the first person treated with this drug to bear that cost, and nor do we expect producers to accept a form of industry which can only deliver excessive losses.

One might respond with the evidence from the document that these concerns are all moot, since much research is undertaken by smaller firms which are then bought by the large players. This is not a fatal blow on the above argument, since smaller companies are aware of the landscape in which they operate. They innovate so that they can make a profit by being bought - bigger firms in turn buy them to generate a profit. This incentive structure is by-and-large successful, and any idea that firms “should” operate at zero-profit is a declaration of how we would like humans to be, rather than a statement about optimal conditions for public health in both the short term (that is, cheap medicines) and long term (which requires innovation).

The party’s criticism of industry in its current form seems to misunderstand the practicalities of scientific research - namely the incremental and disparate nature of such work - and ignores the possibility of diminishing returns. 

Two stylistic facts are employed to criticise the drug development industry as it stands today. The first is a measure that is employed several times in the document as evidence of the industry’s waning productivity: the number of new drugs created per a given R&D spend. This is intimately tied to the party’s fairly consistent argument that developers do not focus on ‘breakthrough developments.’ But the fall in the number of new drugs created for a given R&D spend could easily be for the same reason that the rate at which an apple-picker picks apples declines over time - diminishing returns to scale. The strategy of someone with such a task would presumably be to start by harvesting the low-hanging apples, and having done so, proceed to harvest the more difficult to reach fruit. Obviously the former would take little time and the latter would take a lot. It is perfectly possible that as our knowledge of medicine and biology advances, and as the problems we are trying to solve get more and more complicated, the advances needed are simply harder, and hence require more resources. If companies could spend less producing drugs, they would have no reason not to do so - and if a company chose to spend more than it had to on development, another company would exploit that. The fact is that drug development is hard and will get harder. We do not exist in the days where a major breakthrough is made by accidentally growing penicillin in a petri dish overnight. ‘Breakthrough developments’ are unicorns. The intellectual input of development and the capital requirement for research in, say, gene therapy or targeted cancer drug research, is vast. It is no surprise that R&D spending produces fewer drugs per pound spent now than it did in the past. Perhaps this is exacerbated by deficiencies in the system, but this is not evidenced in the document that Labour have published, and I am not aware of arguments to that effect concerning the industry in the UK.

The second commonly cited fact is more confusing given the premise of the policy. The authors assert more than once that “the patent system rewards the pharmaceutical industry for developing medicines that have little or no added therapeutic value.” There is presumably a wide literature on the output of pharmaceutical developers, with a correspondingly wide array of measures that one can use to assess this claim, but the statement itself seems almost irrelevant for the purpose of challenging the patent system. A patent on an expensive product that offers nothing that a far cheaper product does not is worthless. Let these companies patent their drugs. The NHS and consumers can continue to purchase cheaper drugs with equivalent effect. One might object that this represents a waste of resources, but market access should incentivise companies to produce drugs that people actually buy, and it is not at all clear that research as directed by the Government would be an improvement - as noted previously, the UK has a poor experience of state-owned monopolies. 

Perhaps this misdiagnosis of the industry in another context would not be particularly noteworthy, but for a significant period following the electoral woes of Labour in the 80s, the party turned towards the belief that the nationalisation of an industry has to be justified by features of that industry. Viewed in this light, the mischaracterisation of the industry’s flaws (and indeed the ability of the state to fix them by direct intervention) lead the party down a bad road, though it is likely the mischaracterisation results from a desire to reach a foregone conclusion. This is particularly damaging in this context. The state is not composed of experts on the country’s health or world health, and in general centralised decision making removes the ability of self correction that is of the utmost importance in vital industries.

The injustice of the current subsidy scheme in its current form is unsustainable, and it is undeniably positive that Labour have brought this issue to the political debate (though we should not accept the premise that patents constitute a subsidy anymore here than we would in any other industry). While it is important to support British industry and innovation, cultivate a high-tech economy as we navigate highly globalised markets, and take advantage of external increasing returns to scale, this cannot be the only reward. Labour offers a couple of solutions for this problem, all of which are sensible, but what is more valuable is the discussion being initiated. A financial return to the state is a positive suggestion, but what is greater for UK productivity is the suggestion that the state should own the data that was generated by state funding. It is not suggested in the document, but this data could be sold or shared with UK developers to increase the productivity of the sector by reducing unnecessary and costly duplications in research, and increase the attractiveness of the UK as a country to invest in. This would improve the outlook of both our economy and longer term health interests by driving innovation in medicine. This argument is of course multiplied by the possibility of using data collected and anonymised by the NHS.

Labour are correct in arguing that measures already exist to improve costs for patients and the taxpayer, and that they need to be used more. TRIPS flexibilities, in particular Crown Use licenses, are underutilised, and it seems that other countries have provided examples of how their use can reduce NHS costs that we should take greater notice of. A vision of a state more actively involved in drugs pricing should focus its attention here. 

However, even taking the diagnosis of the state of the industry on face value, the role of nationalism in its solution seems questionable. Generic drug pricing is incredibly competitive due to low costs of entry into new medicines. We observe cheaper drug prices than in most of Europe, and notably those with centralised price setting mechanisms. Given this, it is unclear what the role of a nationalised generics producer would bring. Corbyn seemed to attempt to breathe more life into this proposal more recently by arguing that the cystic fibrosis drug for which the state has recently concluded price negotiations should be produced by a nationalised producer, but this seems to only replicate the role of Crown Use licenses. The ability to achieve what he wants already exists - why spend taxpayers money creating redundant capacity? 

The evidence that the patent system is deficient seems confused at best. The industry is criticised both for producing drugs that are hard to access, and for not producing drugs worth accessing. The discussion on the role of the NHS and NICE (the body responsible for assessing the number of quality-adjusted life years a drug adds to an average patient to determine value-for-cost estimates) seems plagued with inconsistency, with the policy paper arguing at once that the NHS exists as a price taker, and going to length to explain the various mechanisms through which price and rebates to the NHS are negotiated (and how they can be used more), including the voluntary rebate scheme whereby the NHS is refunded for drugs spending above a certain cap. It is perhaps the case that this confusion and inconsistency arises from a policy that has been pursued through ideological motivations, and has imported the talking point of access to medicines from US political discourse into our own, where it does not fit well.

Perhaps the most fundamental flaw in its criticisms of the industry are the missteps in understanding the incentive to invest in risky research. This seems to be rooted in ideological flaws of the party, which is unwilling to countenance that market structures and rewards lead to positive outcomes, and picture the state as the ideal director of important activities. As this is an inherently ideological position, there is little to say in response, other than the view of an omniscient state seems unfounded by historical example, and is unlikely to be one that the electorate shares or should share.

Nevertheless, the vision of public competitive enterprise should be praised, and it is to be hoped that this will gather pace in the Labour movement. It is high time that the party shifts its focus on ownership structures from state monopoly to a wider array, including public competitive enterprise, as well as cooperative structures and locally owned firms (as well as accepting the role of markets in many sectors).