Making Do in Making Drugs: Innovation Policy and Pharmaceutical Manufacturing

INTRODUCTIONM&M chocolate candies are made with a precision far beyond the capabilities of many drug manufacturers.1 This disparity is surprising because the drug industry is tightly regulated by the U.S. Food and DrugAdministration (FDA)- which also regulates food production-and the quality of drugs has major implications for human health. Nevertheless, drug manufacturing is expensive, inefficient, and non-innovative, which leads to major problems for the healthcare system and society as a whole.2Drug recalls based on quality issues are one such problem. For example, in 2011, a record 2329 drug products were recalled.3 Quality issues and contamination during manufacturing or repackaging caused most of the recalls.4 Similarly, in 2009, two drug manufacturers recalled contaminated batches of the crucial anesthetic drug propofol, causing long-lasting shortages of the drug and one manufacturer's exit from the market.5 In early 2012, Novartis recalled Excedrin and other popular over-the-counter pills because some pill bottles contained powerful opiates and broken tablets in addition to their intended contents.6 The drugs did not return to the shelves for seven months.7 And in 2012 and 2013, fungal contamination of steroid injections made by the New England Compounding Center resulted in forty-eight deaths from fungal meningitis8 and hundreds of additional infections across twenty-three states.9Drug manufacturing problems are not limited to recalls and contamination. Over 15% of the nation's soaring healthcare costs are spent on drugs.10 And up to $50 billion is wasted on inefficient drug manufacturing annually.11 Overall, manufacturing costs comprise anywhere from 15% to over 50% of firm-level revenue.12 Reducing manufacturing expenses would create tremendous positive social externalities, whether the savings were passed on to consumers (and the government) through lower drug prices or reinvested into research and development (R&D) to increase future health gains. Depending on how the firm uses the savings, a 20% reduction could create an annual consumer surplus worth $47.4 billion to $574 billion.13 Despite these potential benefits, firms frequently use outdated production techniques and old manufacturing plants with little innovative change to increase efficiency or quality.14This lack of innovation in drug manufacturing is striking because the drug industry is otherwise a major and successful focus of innovation policy.15 Intellectual property and the FDA's regulatory barriers create carefully calibrated incentives for firms to discover and develop drugs.16 In addition to their independent effects, intellectual property and regulation work together because regulation not only creates hurdles to overcome, but also enhances patent incentives.17Although the effects of innovation policy on drug discovery and development have been well studied, policy and academic debates about innovation incentives have largely ignored the important role of manufacturing innovation.18 One of the goals of this Article is to secure a place for manufacturing in innovation theory. Manufacturing is important, but usually unproblematic. Innovative products require successful manufacture and distribution to create significant social welfare gains. In most industries, firms have sufficient incentives and face sufficiently low hurdles to innovative manufacturing.19As a result, firms in other industries improve manufacturing and reliably provide marketable products.20 Yet, in the pharmaceutical industry, manufacturing has suffered from innovation policy myopia. Patent law does not reward manufacturing innovation and FDA regulations impede it, so firms tend not to innovate.21 If manufacturing is better understood through innovation theory, then policy prescriptions can use that theory to improve innovation in manufacturing in general and in the pharmaceutical industry in particular.Incentives are much weaker for innovative manufacturing than for innovative drug discovery. …