Guest column : Are “prizes” to reward drug R&D a viable alternative to patents?

Given the intense public debate over access to and pricing of patented medicines, academics, policymakers, lawyers, and others have begun to think creatively about what it is that actually incentivises innovation and encourages drug development.

While doing so, it is important to identify the points in the R&D process where the failures occur. There are many : scientific and technical limitations; insufficient funding for research, particularly on neglected diseases; insufficient funding to take potentially promising research forward to the clinical development stage; and distribution problems that prevent existing treatments from reaching patients.

Broadly, there have been three approaches used to address these failures. First, work within the existing system (compulsory licensing, bulk buying, differential pricing). Second, use “push” mechanisms (research grants, government funding). Third, use “pull” mechanisms (advance market commitment, prize funds, priority review vouchers).

Push mechanisms encourage pharmaceutical innovation by subsidizing or reducing the cost of R&D. Pull mechanisms provide compensation for welfare-enhancing innovations through prizes, supplemental profits or other rewards. Fundamentally, one rewards effort, the other, results.

The pull mechanism forms the most widely-discussed alternative proposal. Which begs the question : is this truly a superior approach to removing barriers to access?

One of the most prevalent pull mechanisms, prizes – a reward for the successful development of a particular product, system, or solution to a specific challenge – have encouraged creativity and innovation in a vast array of fields for centuries.  An overwhelming list of historic examples may be found here.  Current interest in prizes, especially in healthcare innovation has attracted the attention of several notable entities.  For example, the World Health Organization is studying the potential for prizes to stimulate medical discovery.  Their report may be found here. In addition, The Gates Foundation’s Grand Challenges Explorations Initiation provides grants for the development of unusual solutions to Foundation-identified health problems.  Since 2008, 602 researchers in 44 countries have received prizes from the foundation.

That, by no means, makes them the most workable alternatives to the patent system. Prizes, and other pull mechanisms, are advantageous in many ways.

  • They only reward successful outcomes.
  • They correctly align the innovator’s incentives; resources are only devoted to projects with a likely chance of success.
  • Participation is encouraged by a large, varied and disperse group of experts and researchers.
  • Knowledge is placed in the public domain
  • They reduce the incentives for “me too” drugs and inventing around existing patents.

Yet, they also have limitations.

  • Prizes can only be used when it is possible to describe the precise characteristics of the desired innovation in advance.
  • Challenges surround the determination of how large the prize should be.
  • They may encourage wasteful, duplicative research efforts and expenditures.
  • They are largely untested in the context of breakthrough medical technologies.
  • They require significant amounts of information to estimate the value and effectiveness of the innovation, information that may be expensive and difficult to collect.
  • Administration of the prize will present its own set of operational and administrative challenges.
  • The administrative agency may be subject to bureaucratic abuses and regulatory capture.
  • Significant sources of funding are required.

Immense uncertainty surrounds whether a prize system would be superior to the existing patent system.  While overcoming some of the limitations of the current system, a different set of limitations would emerge.  Moreover, a lack of empirical evidence surrounding the utilization of a prize system to incentivize pharmaceutical innovation suggests a cautious approach is in order.

It’s important to acknowledge that drug development is expensive, difficult, and risky.  The number that is most frequently cited is $1 billion to develop a new drug.  (This figure originated with a study by Joseph DiMasi of Tufts University. See here  for an excellent review of DiMasi’s calculation from Health Affairs.)  This number is highly controversial, but even if the cost of drug development is half this amount, it is still a tremendously expensive endeavour. It is also difficult, taking an average of ten to fifteen years, with no guarantee of success. Recent studies demonstrate that only two in ten new drugs are profitable, with lifetime sales that exceed average research and development (R&D) costs. Under the existing system, pharmaceutical innovation is incentivized by potential profit.

Fundamentally, the patent system works, however imperfectly.  It is impossible to overlook the tremendous contributions that existing medicines, incentivized by the patent system, have made to longevity and quality of life.  While potential improvements and alternative mechanisms should be actively explored the costs and benefits of any alternative should be thoroughly scrutinized. We should be careful that the baby is not thrown out with the bathwater.

Dr Kristina Lybecker is Associate Professor of Economics at Colorado College in Colorado Springs. Kristina is an economist with a PhD from the University of California at Berkeley. She specialises in innovation and intellectual property rights and has been writing on these issues for 12 years. She is currently employed full-time at Colorado College. In the interests of transparency, the writer states that she has been commissioned to work for the pharmaceutical industry on issues of innovation, corruption, counterfeiting and intellectual property rights. However, she has not been compensated or otherwise rewarded for this piece which stems from her intellectual interest in the topic and closely relates to her academic research.

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