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Innovative drugs: The complementary roles of the public and private sectors

Montreal, September 3, 2014 – The “Ice Bucket Challenge” for amyotrophic lateral sclerosis that has gone viral on social media these past few weeks has helped the ALS Association raise $100 million to fund research. How will an innovative drug to treat this disease be discovered and developed? What will the public sector and the private sector contribute to this process?

In an Economic Note published today, the Montreal Economic Institute (MEI) shines a light on the roles played by the public and private sectors in pharmaceutical innovation, where they pursue distinct but complementary objectives.

In the early stages of the process of discovering and developing a new medication, the basic research carried out in public research centres and universities plays a crucial role. University researchers generate new knowledge that leads to a better understanding of the factors responsible for a disease.

This is the point of departure on a path littered with obstacles. So begins the whole applied research aspect that leads to the discovery of a molecule capable of curing or preventing the disease. Thousands of molecules are tested in order to determine which ones have the characteristics required to become a potential medication. From this point on, it is primarily private biotech firms and large pharmaceutical companies that fund or carry out this work.

“The benefits that flow from public subsidies for university research can be reaped only once effective treatments have been developed,” explains Yanick Labrie, author of the study.

In the vast majority of cases, however, it is not university researchers who discover new drugs. For example, barely 9% of new drugs approved by the Food and Drug Administration in the U.S. between 1990 and 2007 were discovered by public sector research institutions.

The development of a new medication requires the investment of considerable sums of money in what is a very risky process. Indeed, 80% of drugs that make it to market generate insufficient sales revenue to cover average R&D costs. As a result, 20% have to generate sufficiently high profits to cover the revenue shortfalls of the rest.

Only pharmaceutical companies are ready to invest the considerable sums required to discover and develop drugs and to take on the risks associated with those investments. “Even though the pharmaceutical industry is often the target of criticisms, we must conclude that a substantial proportion of drugs would not have seen the light of day if not for its contribution,” adds Yanick Labrie.

The Economic Note entitled “What Role Do the Public and Private Sectors Play in Pharmaceutical Innovation?” was prepared by Yanick Labrie, economist with the Montreal Economic Institute. This publication is available on our website.

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The Montreal Economic Institute is an independent, non-partisan, not-for-profit research and educational organization. Through its studies and its conferences, the MEI stimulates debate on public policies in Quebec and across Canada by proposing wealth-creating reforms based on market mechanisms.

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Interview requests: Mariam Diaby, Communications Director, Montreal Economic Institute / Tel.: 514-273-0969 ext. 2231 / Cell.: 514-668-3063 / Email: mdiaby@iedm.org

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