Last week I highlighted a comment by Econlog reader Jim Glass. Since then, I’ve looked closely at the study he cited. The study is titled “Do Firms Underinvest in Long-Term Research? Evidence from Cancer Clinical Trials.” It’s published in the American Economic Review, Vol. 105, No. 7, 2015. Here’s an ungated version.

The title is accurate but misleading. It gives no hint that either the patent system or the FDA contributes to the problem. Of course a title can do only so much in a few words. But even the abstract, although it mentions the patent system, is silent about the FDA’s role in causing the problem.

Fortunately, the study is much better than the title and the abstract. The authors are Eric Budish of the University of Chicago’s Booth School of Business, Benjamin N. Roin of MIT’s Sloan School of Management, and Heidi Williams of MIT’s Economics Department.

Here are their opening sentences:

Over the last five years, eight new drugs have been approved to treat lung cancer, the leading cause of US cancer deaths. All eight drugs targeted patients with the most advanced form of lung cancer, and were approved on the basis of evidence that the drugs generated incremental improvements in survival. A well-known example is Genentech’s drug Avastin, which was estimated to extend the life of late-stage lung cancer patients from 10.3 months to 12.3 months. In contrast, no drug has ever been approved to prevent lung cancer, and only six drugs have ever been approved to prevent any type of cancer.

Why would this be? Think about a drug company that invests in R&D on a drug to prevent lung cancer. If the test of efficacy is its extension of life, think how many years–and how many test subjects–the drug company would have to run the experiment. It could well be decades. How long do patents last? 20 years. So if the company thought it had a winner for preventing cancer, and patented that winner, the odds are low that it would have any meaningful time in which to collect the monopoly proceeds.

Who decides that the relevant test for efficacy is extension of life? The FDA. Why couldn’t the FDA use other measures? It could. The authors suggest instead that the FDA use surrogate endpoints, and point out that the FDA has allowed surrogate endpoints to be used for drugs to prevent other diseases.

They write:

This evidence suggests that–in the case of hematologic cancers–apparently-valid surrogate endpoints were effective in increasing R&D investments on innovations that would otherwise have had long commercialization lags, and that the resulting increases in R&D translated (in this case) into real gains in patient health. While much attention has been focused on the risks and costs of using surrogate endpoints that may imperfectly correlate with real improvements in patient health, our analysis is–to the best of our knowledge–the first attempt to use the historical record to quantify how the availability and use of a valid surrogate endpoint affected R&D allocations and patient health outcomes.

The example of the Framingham Heart Study is helpful in illustrating the potential value of surrogate endpoints. Heart disease is the leading cause of death in the US, but since 1968 the age-adjusted rate of deaths from heart disease has dropped by 50 percent. Although some of these gains are due to lifestyle changes, much of the decline in heart disease has been attributed to improved pharmacological preventives and treatments for cardiovascular disease, including the development of beta-blockers, ACE-inhibitors, and statins (Weisfelt and Zieman 2007). Patients use these drugs to reduce the morbidity and mortality from heart disease, but very few of these drugs reached the market based on clinical trials using morbidity or mortality as the endpoint. Rather, almost all were approved based on evidence that these drugs lowered either blood pressure or LDL (low-density lipoprotein) cholesterol – outcomes that can be measured much more quickly than morbidity and mortality (Psaty et al. 1999). These surrogate endpoints were first identified by the Framingham Heart Study, a large-scale, multi-decade, federally-funded observational study which found that high blood pressure and LDL cholesterol are critical risk factors in cardiovascular disease. Subsequent clinical trials helped to validate these prognostic factors, which led the FDA to accept them as surrogate endpoints in cardiovascular trials (Meyskens et al. 2011). Researchers have argued that without these surrogate endpoints, it is unclear whether drugs such as beta-blockers, ACE-inhibitors, and statins would have reached the market as treatments for heart disease (Lathia et al. 2009; Meyskens et al. 2011). Note that public subsidies–such as federal support for the Framingham study–were likely important in this context, because any individual firm’s investment in discovering and validating surrogate endpoints would generate benefits that largely spill over to other firms. Both our empirical evidence on the effects of surrogate endpoints for hematologic cancers and this historical case study for heart disease suggest that research investments aimed at establishing and validating surrogate endpoints may have a large social return.

How big is that return? Huge. They write:

In total, this calculation suggests that among this cohort of patients – US cancer patients diagnosed in 2003 – the longer commercialization lags required for non-hematologic cancers generated around 890,000 lost life-years.

If we value each lost life-year at $100,000 (Cutler, 2004), the estimated value of these lost life-years is on the order of $89 billion per annual patient cohort. Applying a conservative social discount rate of 5% and assuming that patient cohorts grow with population growth of 1%, the net present value of the life-years at stake is $89 billion divided by (.05 – .01) = $2.2 trillion.

It is important to note that this life-lost estimate is rough at best. Our point estimate of the value of life lost per annual patient cohort is $89 billion, with a 95 percent confidence interval that ranges from $7 billion to $172 billion; the net present value point estimate of $2.2 trillion has a 95 percent confidence interval that ranges from $170 billion to $4.2 trillion.

Interestingly, an extensive MIT press release on their study also fails to mention the negative role of the FDA. And while the release gives 3 alternative ways to deal with the problem–more use of surrogate endpoints, government funding, and altering the patent length–it does not even hint that use of surrogate endpoints would require FDA approval.

Fortunately, the study does.

HT2 Jim Glass, Dan Klein, and Jason Briggeman.