Emergent challenges and opportunities in drug discovery and commercialization

Abstract

We review medical economics literature presented at the 2023 annual AEA-ASSA convention, the largest gathering of economists worldwide. Pharmacoeconomic papers addressed a wide range of issues, including gender and racial gaps in clinical trials, hospital credit financing, drug rebates, covid-19 vaccine equality, and the opioid epidemic. Yet, they had some common identifiable themes. We examine them in the context of the “twin towers” of biopharmaceutical innovation: discovery and commercialization. Implementation outcomes and relative success of innovative solutions — whether in terms of products and services, structural design and arrangements, or policies — depend on how adequately they respond to questions and challenges that arise in drug discovery and commercialization, and who gains from them. That innovation’s beneficiaries might not equally gain from its intended advantages is another unifying theme in the reviewed literature. Against this backdrop, biopharmaceutical innovation can breed new challenges and opportunities. And health policy can perform a critical, leveling function that reduces cost, increases access, and ensures quality of biopharmaceutical solutions.

Keywords:

• Pharmacoeconomics
• biopharmaceutical
• discovery
• commercialization
• healthcare innovation
• R&D
• health policy

JEL CLASSIFICATION CODES:

• I11
• I13
• I14
• I18
• I19

Introduction

Medical economics is an established and thriving sub-field of economics. From an academic literature standpoint, it is often construed more narrowly in terms of efficiency, effectiveness, and value in the production and utilization of biopharmaceutical or drug products and treatments.^1,2 In recent years, medical economics has also become a major contributor to normative health policy and decisions concerning the allocation of resources and the quality of healthcare.³

The core economic considerations in healthcare provision and management continue to evolve and change simultaneously and in various directions. These underpin the many emergent challenges that confront today’s decision-makers. With these challenges arguably come opportunities to proactively address the needs of both healthcare consumers and public health and the economic and social issues that bear on them. Medical economists thus continue to search for broader perspectives on healthcare systems and policy, including healthcare financing, operations and the supply chain, markets, evaluation methods, technology, insurance, and their intertwining regulatory and ethical questions.³

The 2023 annual AEA-ASSA convention⁴ showcased some of the more recent achievements in economic research, including those in medical economics. Although more than 450 panel sessions were held during this convention, only about a dozen of them related one way or the other to health economics—the smallest number of sessions in recent memory—and none particularly devoted to pharmacoeconomics or the biopharmaceutical industry. The health economics sessions were expectedly dominated by the pandemic (six in all, ranging from its economic and financial impact to increasing vaccination rates and health insurance coverage to post-covid macroeconomic policies), followed by mental health and the opioid crisis (respectively allotted three and two sessions each). The rest of the sessions discussed (non-biopharmaceutical) healthcare decision-making and utilization, reproductive health access, and healthcare market competition.

The fewer pharmacoeconomic studies presented at the 2023 convention nonetheless highlight some of the directions that the medical economics subfield has taken in more recent years, especially in terms of newly-charted research terrains and new trajectories. Many of these studies have sought to better integrate biopharmaceutical discovery and commercialization. The discovery or first stage in this science-based industry is rooted in inventing or developing an innovative drug product, and submitting it for clinical testing by the mandated government regulator. Commercialization or the second stage includes creating the clinical information required for product approval by the regulator, bringing the product innovation to the market, and getting healthcare providers to adopt and prescribe it. And it is from this so-called innovation “twin towers” perspective that we primarily examine these studies through this annual review of recent medical economics literature that we write for this journal.

Approach

We review eight papers that represent the entirety of pharmacoeconomics-related scholarship presented at the 2023 AEA-ASSA convention. These papers were distributed in a dozen health economics panel sessions, and we gathered them using the pertinent JEL classification codes. Posters were excluded from this search.

The relative scarcity of pharmacoeconomic studies at this convention in a way helped simplify the task of identifying their unifying themes for analytical purposes: 1) the (rather slow) emergence of new drugs in the marketplace calls for more seamless integration of the discovery/invention and commercialization phases of biopharmaceutical innovation; and 2) the ensuing challenges and opportunities in innovation can be approached from a (multi-) sectoral or industry-based perspective for which health policy has a key role to perform. Based on these major themes, we look into the topical issues addressed by the selected papers, which ranged from clinical drug trials and drug rebates, to covid-19 vaccine delivery and utilization, to opioid addiction. Insights and implications on healthcare decision-making and public policy derived from the reviewed literature are presented by way of conclusion.

Clinical drug testing

The question of how representative clinical drug trials are from a demographic standpoint draws attention to emergent challenges and opportunities in biopharmaceutical innovation, besides those that already exist and have been studied. It also has important health policy implications. Recent studies estimate that average R&D cost for every new drug range from slightly less than $1 billion to more than $2 billion. These include “the costs of both laboratory research and clinical trials of successful new drugs as well as expenditures on drugs that do not make it past the laboratory-development stage, that enter clinical trials but fail in those trials or are withdrawn by the drugmaker for business reasons, or that are not approved by the FDA. Those estimates also include the company’s capital costs—the value of other forgone investments—incurred during the R&D process.”⁵ These substantially affect total drug development cost. Moreover, drug development, including the four phases of clinical testing by the FDA (Food and Drug Administration), takes over 10 years on average. During that time the drug maker faces considerable risks, in part because they do not receive any financial return on investment in developing that drug. ^5,6

Research on certain demographic variables shared at the 2023 convention, particularly the panel session on drug innovation and inequality, is insightful. Michelman and Msall⁷ consider the consequences of unequal gender representation in clinical drug trials. From 1977 to 1993, the FDA issued regulatory guidance for the exclusion of “women of childbearing potential” as human subjects in the early-stage trials. Using their (predictive) model of drug development, the authors found that biopharmaceutical industry compliance decreased the informativeness of clinical trials for drugs intended to treat predominantly female diseases and also resulted in higher costs. Contrasting between drug and non-drug biomedical patents, regulating female enrollment in clinical trials was shown to have resulted in a 14% sex-specific innovation gap (meaning, less innovation for female-focused drugs).

Confirming low female participation in clinical trials as a “persistent pattern” that tends to yield adverse outcomes for female patients, Gupta⁸ follows up by asking whether female researchers might increase female enrollment in these trials. He finds for the affirmative. Using a linear model, Gupta shows that a standard-deviation increase in the share of female researchers is associated with an increase in the share of female trial participants, albeit somewhat conditional on disease and year fixed effects. Designing inclusive trial criteria, hiring (more) female facility staff, and targeted advertising are proposed in addressing gender-based underrepresentation in drug innovation and its implications on drug commercialization.

Pairolero et al.⁹ analyzed the gender gap at the patenting stage. In finding further underrepresentation of women, and a gap that is “not closing quickly,”⁹ the authors gather evidence from a randomized controlled trial at the United States Patent and Trademark Office. Evidence indicate that female patent applicants were 11% more likely than men to benefit from patent examination assistance for obtaining patent rights. Pairolero et al. find that benefits were largest for new inventors and in areas of technology where women had the worst relative outcomes, suggesting that the gender gap could be reduced or perhaps eliminated through additional resources and assistance for patent prosecution.

The fourth and last paper presented at the drug innovation and inequality panel examined the underlying causes and consequences of low Black enrollments in clinical trials. In developing a similarity-based extrapolation model, Alsan et al.¹⁰ find that perceived drug benefits for a racial group depends not only on the average benefit from clinical testing, but also on the enrollee share of that group in the trial. For instance, doctors who treat Black patients appear to be more willing to prescribe drugs tested in representative patient samples, an effect, which the authors find, is “substantial enough to close observed gaps in the prescribing rates of new medicines."¹⁰ Black patients were also found to “update more on drug efficacy when the sample that the drug is tested on is more representative, reducing Black-White patient gaps in beliefs about whether the drug will work as described.”¹⁰

While Alsan et al. concur with the three gender-based studies in concluding that drug innovation does not benefit patients equally, the race variable in their study offers an interesting twist: Low enrollment of certain groups in the R&D process likewise creates gaps in how those groups utilize drug innovations once diffused and commercialized. In this case, Black patients, and their physicians, consider trial evidence less relevant for their care when trial samples are unrepresentative. But when the evidence base appears to be more racially representative, updating, and prescribing gaps close. One implication we might gather from these four demographically-oriented papers is that medical economics can be a major contributor to normative health policy as we noted at the outset of this review.

Drug spending

The 2023 convention produced one panel session on healthcare and finance, but the three papers it received were more about corporate incentives, financing, and governance, rather than the efficiency, effectiveness, and value of healthcare products and services, or even health policy. These included the effect of credit supply shocks on hospital health outcomes,¹¹ survival and profitability of private equity-acquired hospitals,¹² and how bank presence in underserved areas can substantially improve and insure household health and offer credit to hospitals.¹³

In terms of drug expenditure, the drug cost study of Lee and Ho¹⁴ is of particular interest, especially considering the high and increasing cost of prescription medication in the U.S. Presented in the contracts and markets panel—which strictly speaking was not one constituted for health economics—their study investigates whether drug formulary structure developed by pharmacy benefit managers (PBMs) on behalf of plan sponsors can constrain spending by affecting drug manufacturer rebates. A theoretical model of a single PBM contracting with multiple drug makers over a menu of rebates corresponding to different formularies was constructed by the two authors, partly to examine how the PBM selects a formulary. Large employer data from Princeton University, which contracts with a single PBM in offering employee prescription drug coverage, was gathered to estimate a model of enrollee demand for statins, and then to simulate the impact of changing the number of tiers or allowing for exclusion on predicted rebates. The authors find that rebates increase substantially when PBMs can move drugs to less preferred tiers, thereby validating rebate magnitudes estimated in other pharmacoeconomic and healthcare innovation studies.

Yet, we hasten to point out that while reassigning drug tiers opens up opportunities for PBMs, considering that rebates are a vital negotiation tool in promoting expensive branded drugs, pharmaceutical firms also gain prominent placement on formularies to increase their market share. And this could come at the expense of generic drugs and weaker competitors. In turn, PBMs and health plans and insurers typically receive a lower cost for the brand-name drug. The two sides of the same coin will likely continue to evolve and change in form and/or magnitude, given their economic premises. This may well be the case, especially as plan sponsors, insurers, providers, and consumers alike grapple with their cost and benefit implications that ostensibly go beyond drug pricing and rebates.

Drug accessibility and equity

Beyond questions of drug testing and expenditure lie questions of accessibility and consumer equity. Hakobyan, Rawlings, and Yao¹⁵ looked into access and equity in a paper presented at one of several panels convened for the covid-19 pandemic. Vaccination rates vary significantly across countries. Low- and middle-income countries report much lower rates than industrialized countries. Lower utilization has raised the issue of vaccination inequality, even as the pandemic declined. With limited vaccine supply easing by the end of 2021, the focus shifted to in-country distribution challenges and vaccine hesitancy in these low- and middle-income countries. The authors identified and quantified potential drivers of unequal vaccination rates across countries, including vaccine deliveries, demographic structure, health and transport infrastructure, and development level (i.e. per capita income, urbanization, human development index), along with their impact on vaccination inequality. They discovered that lack of vaccine accessibility (measured by the delivery of vaccine doses) is beyond these countries’ control and remains the dominant driver (>70%) of vaccination inequality even in the aftermath of the pandemic.

Because vaccines are drugs,¹⁶ the macroeconomic and policy implications of this study on drug access, utilization, and equity across countries and within national populations are critical. Ensuring timely production and delivery of vaccine doses, improving their domestic distribution networks, and promoting proper educational/information dissemination campaigns are proposed by the authors of this study to drive up vaccination rates, especially in less developed countries.

Drug addiction: the opioid crisis

The last two papers we review here inquire into opioid addiction, a special topic in health economics that for the past several years has occupied the attention of the AEA-ASSA, and to which several panel sessions have been devoted at each of their annual conventions. Opioid addiction remains at epidemic levels in the U.S. and worldwide. It afflicts over three million Americans at an annual cost of at least $596 billion, and 16 million more people in other countries. The afflicted come from all socio-economic and educational backgrounds.¹⁷

Maclean et al.¹⁸ review quasi-experimental studies of the relationship between opioids and personal health, healthcare, and crime in the U.S. Their study offers support to the popular perception that the opioid crisis adversely affects a range of health outcomes and increases healthcare costs. Opioids are linked to crime, although the relationship does not appear to be that strong or straightforward. On the other hand, Maclean et al. see limited evidence that opioid use improves quality of life and work capacity by allowing for better management of chronic pain (which it is designed to reduce). The healthcare system, their study finds, has contributed to the rise and continuation of the epidemic: Opioid prescriptions reinforce aggressive pharmaceutical company efforts to increase use against the backdrop of limited prescription regulation. Yet, the authors also find in the health system a pivotal role in ending the public health crisis by combining increased addiction treatment of a chronic medical condition, alternatives to chronic pain treatment, and reduced opioid access.

Peet’s study¹⁹ can be taken as a response to the health system challenge posed by Maclean et al. Increasing access to naloxone—a life-saving drug that reduces the effects of an opioid overdose—is a central pillar of the U.S. federal government’s response to the opioid crisis. Peet approaches the subject from the perspective of biopharmaceutical innovation. He examines how the introduction of the Narcan Nasal Spray (the first non-injectable naloxone product) impacted naloxone access and opioid-related overdose death rates. The Narcan innovation permits laypersons to successfully administer it with little training, significantly improving the naloxone delivery system and increasing drug usefulness. It has become the most dispensed type of naloxone barely six years after FDA approval and commercialization in 2016. In comparing Narcan’s role to the independent effects of policies, such as naloxone access laws (NALs) and insurance expansions, Peet finds that states with the most permissive NALs reported significantly larger increases in overall naloxone dispensing by pharmacies after Narcan’s introduction. This contrasts with those states that have legal barriers or require physician prescriptions. In this regard, the author concludes that rising naloxone claims outpace the independent effects found with standing order and prescriptive authority NALs as well as insurance expansions.

Of particular interest to medical economists is the trade-off between opportunities and challenges fostered by the opioid crisis. On the one hand, the breadth and depth of the epidemic has driven the quest for innovative alternatives to chronic pain treatment as well as scientific discoveries and policies that address opioid dependence and addiction. The literature reviewed in this section provides empirical analysis of this two-pronged approach. As with the commercialization of pharmaceutical innovation, questions and challenges arise. For example, if the beneficial effects of opioid use on quality of life and work capacity are minimal, are existing or emerging biopharmaceutical alternatives adoptable from a cost-benefit, cost-effectiveness, or some other valuation standpoint? And what are the trade-offs between cost, quality, and access among these innovations when they are valued at both the micro (consumer or household) and macro (public policy and resource expenditure) levels? Once trade-offs are established, there may also be systemic challenges and implications to contend with. For one, would naloxone or Narcan access be the same under a carve-in contracting model where the plan sponsor “consigns” everything to the insurer (which manages medical care but usually contracts with PBMs for drug coverage) and a carve-out where the sponsor contracts separately with an insurer and PBM? These and other questions once again suggest how medical economics has become a major contributor to normative policy and decisions about resource allocation and healthcare quality.

Summary and conclusion

The “twin towers” of innovation in the biopharmaceutical industry are discovery and commercialization. The first, based on applied science, involves the development of a new molecule, patent acquisition, and the knowledge and processes necessary to establish drug safety, efficacy, and utility. The second consists of market authorization (e.g. information necessary for FDA approval and product registration), market access (pricing, timing, volume decisions, market positioning and competition, PBM selection), promotional activities (e.g. sales and marketing to get clinicians to prescribe the drug), and product evaluation (consumer feedback, etc.).²⁰

Relevant literature presented at the 2023 AEA-ASSA convention and reviewed in this paper shows the many ways pharmacoeconomics “permeates” the twin towers of innovation and their respective phases and activities. From clinical trials to corporate financing to drug rebates, from consumer accessibility and equity issues to policy initiatives to address the opioid epidemic, authors at the 2023 convention have underscored the role and implications of R&D in innovation. After all, there is no gainsaying that R&D underlies the value of any biopharmaceutical firm or product (e.g. their stock prices reflect drug prospects). And such firm operates within a truly global industry. For this reason, an overriding business model defines the biopharmaceutical industry: one based on the interplay of high risk, long timelines for drug development and testing, and the financial returns to motivate stakeholders to invest over an unknown time horizon with relatively unpredictable market changes and challenges.²⁰

Against this contextual backdrop the reviewed studies investigated tradeoffs from underrepresentation of women and racial minorities (to which could be added pregnant people and the elderly) in clinical testing; survival, profitability, and employment in private equity-acquired and credit-dependent hospitals; rebate size resulting from drug tier (re)assignment by PBMs; drug dispensing under different legal and structural environments for naloxone/Narcan; and health policy for increasing (covid-19) vaccine equality, reducing opioid accessibility, and promoting alternative approaches to chronic pain treatment. Biopharmaceutical innovations addressed in these studies were intended to correct underrepresentation and inequities in the R&D process from invention and clinical trials to patenting (discovery), and from physician prescription to patient updating (during and following commercialization). Experimental data and models indicated firm (drug makers, PBMs, pharmacies) behavior and incentives that reduce drug cost, increase or decrease consumer access, and promote equitable drug distribution under conditions of relative uncertainty, and how public policy could support or impede them. These contributions offer useful theoretical frameworks and insights, and enrich our understanding of the processes, dynamics, and unexpected consequences of drug innovation.

These contributions also have practical implications to the biopharmaceutical industry: they seamlessly link the first innovation tower’s “invention business” and the second tower’s “innovation adoption” process.²⁰ In doing so, they also point to potential hotspots. This is important considering the upward trend in spending for drug R&D. R&D expenditure devoted by drug companies under each tower “is determined by the amount of revenue they expect to earn from a new drug, the expected cost of developing that drug, and policies that influence the supply of and demand for drugs.”⁵

Yet it goes without saying that, similar to the action-reaction pair of Newton’s third law,²¹ implementation and success of innovative solutions—whether products and services, structural design and arrangements, or policies—will also depend on how adequately they respond to questions and challenges that arise in drug discovery and commercialization, and who gains from them. We assert that these are two sides of the same (innovation) coin. As the old adage reminds us, “good intentions are not enough.” And neither are good solutions enough. After all, there is no gainsaying that how a product, therapy, or technology is developed and marketed variedly affects who adopts it. That innovation’s beneficiaries might not equally gain from its intended advantages is another unifying theme we gathered from the reviewed literature.

In this regard, public policy has a pro-active and creative function to perform in reducing cost, increasing access, and ensuring the quality of biopharmacoeconomic solutions, notwithstanding the generally much higher risk aversions of regulators.²⁰ However, health policies that seek to lower or contain drug prices and reduce government drug spending could arguably reduce the biopharmaceutical industry’s incentive to develop new or novel drugs and technologies. Such courses of action tend to trigger equal and opposite reactions (to paraphrase Newton once again).²¹ There lies one more challenge to healthcare innovation.

Transparency

Declaration of funding

No funding was received to produce this article.

Declaration of financial/other relationships

The author has no relevant affiliations or financial involvement with any organization or entity with a financial interest in, or financial conflict with, the subject matter or materials discussed in the manuscript. This may include employment, consultancies, honoraria, stock ownership or options, expert testimony, grants or patents received or pending, or royalties.

Reviewer disclosures

Peer reviewers on this manuscript have no relevant financial or other relationships to disclose.

Acknowledgements

The author acknowledges with thanks the comments and suggestions of this journal's anonymous peer reviewers, insightful conversations with Lawton Burns of the University of Pennsylvania, and the editorial assistance of Sarah Webster and Laxmi S. Dharmapuri. As with any work of this nature, the usual caveat applies.

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.