De-linkage of R&D Costs and Prices of Products

James LoveKnowledge Ecology International

31 July 2010

Context for de-linkage

● Economics● Policy objectives● Trade related aspects● Political considerations and implementation

strategies

Markets for Knowledge Goods

1)Knowledge is more valuable when shared, but

i. Some knowledge goods are expensive to create

2)Society does not want to rely entirely upon governments to allocate investments in R&D.

3)Enclosure (IPR) can allow entities to recoup some of the value of new knowledge goods, but

i. Transaction costs are high

ii. Costs of monopoly often high in terms of harm to innovation and access

4)There are insufficient mechanisms to reward investments in open science

Delinkage for final products

“THE CORE IDEA

“The current system of financing research and development (“R&D”) for new medicines is deeply flawed by the impact of high prices on access to medicine, the wasteful spending on marketing and R&D for medically unimportant products, and the lack of investment in areas of greatest public interest and need. It can and should be replaced with something better.

“The system for financing new drug development can be radically improved—spending less overall, aligning investment incentives more efficiently—while making drugs available to everyone at cheap generic prices. Reforming the way we pay for R&D on new medicines involves a simple but powerful idea. Rather than give drug developers the exclusive rights to sell products, the government would award innovators money: large monetary “prizes” tied to the actual impact of the invention on improvements in health care outcomes that successful products actually deliver.

James Love and Tim Hubbard. "The Big Idea: Prizes to Stimulate R&D for New Medicines." Chicago-Kent Law Review, Volume 82, Number 3 (2007).

Prize design issues

● Prizes with high threshold/qualification standards.● InnoCentive, typical X-Prize design, Netflix prize,

MSF/3B+S TB diagnostic prize, etc

● Prize funds with low thresholds● Medical Innovation Prize Fund● Cancer, Chagas, Donor, Priority Medicines, etc, prices● Lyon Prize Fund (1711)● Will Masters proposal for agriculture innovations

● See http://www.keionline.org/prizes● ISELECTED INNOVATION PRIZES AND REWARD PROGRAMS, KEI Research Note 2008:1

Radical IPR Scenario # 1

● In 2002, Aventis, the pharmaceutical and life sciences firm, held a three-day scenario planning session in Ottrott-le-Haut, France, to consider what might happen if there were radical changes in the business models for new drug development. The meeting was authorized by the Aventis CEO and the company’s board of directors, and included more than two dozen high-level Aventis executives and two critics of the existing regime . . .

● One product of this meeting was initially dubbed “Radical IPR Scenario # 1.” It involved a proposal to eliminate marketing monopolies for new pharmaceutical drugs, in return for a system of large cash prizes. In order to ensure the entire world shared the costs of drug development, there would be a global treaty that set minimum levels of support for R&D, either through similar prizes funds or other research projects, including open source research similar to the Human Genome Project.

Burton A. Weisbrod on delinkage in 2003

"Solving the Drug Dilemma," Washington Post August 22, 2003

● Economists have long recognized similar dilemmas when start-up costs are very high but marginal production costs are low. Pharmaceuticals are a clear example, as are telephone and electricity distribution. In all these cases, the economically efficient solution is two-part pricing—a flat charge for access plus a variable charge that depends on level of usage.

● Drug companies have two distinct outcomes but only one instrument for pricing them. They develop new drugs and they manufacture the actual pills or products consumed by individual patients, but they can price only the pills. The patent system is the root problem. It encourages innovation by granting a monopoly and then allowing the owner to set prices for the resulting product. Thus the only way that R&D, including clinical testing, costs can be covered is through high prices for the resulting pills.

● When R&D costs are small, there is no serious problem. But when R&D costs are very large relative to production costs—as is the case for pharmaceuticals—using price for pills as the only mechanism for rewarding the product developer drives price upward. Prices become far higher than they should be, far higher than the cost of producing the pills, and far higher than is economically efficient.

● The solution: Two prices—one for the R&D, another for the resulting pills. This solution is not painless, but neither is the course that public policy is now on.

Implementation of de-linkage as public policy

● Medical R&D Treaty discussions at the WHO

● Proposal for WTO schedule for supply of public goods

● 2005/2007 Medical Innovation Prize Fund bills

● April 2008/2009 Barbados/Bolivia prize proposals to the WHO IGWG● Cancer Prize Fund

● Chagas Disease Prize Fund

● Diagnostic Test for Tuberculosis

● Prize Fund for Donor Supported Markets

● Priority Medicines and Vaccines

● MSF/DNDi

● MSF TB Diagnostic Prize

● DNDi interim results prizes

● Prizes with strong IPR and product monopolies

● The Hollis/Pogge voluntary prize fund

● Gates Foundation/X-Prize TB diagnostic prize

● Other academic proposals

● Reasonable Rx: solving the drug price crisis By Stan Finkelstein, Stan N. Finkelstein, Peter Temin, 2008

● Burton A. Weisbrod, "Solving the Drug Dilemma," The Washington Post on August 22, 2003.

● Joseph Stiglitz. “Give Prizes, Not Patents.” New Scientist, p. 21. JSeptember 16, 2006.

● Open Source dividend

● Competitive Intermediaries

SIXTY-FIRST WORLD HEALTH ASSEMBLY - WHA61.21 24 May 2008 Global strategy and plan of action on public health, innovation and intellectual property

Element 5. Application and management of intellectual property to contribute to innovation and promote public health

(5.3) exploring and, where appropriate, promoting possible incentive schemes for research and development on Type II and Type III diseases and on developing countries’ specific research and development needs in relation to Type I diseases

(a) explore and, where appropriate, promote a range of incentive schemes for research and development including addressing, where appropriate, the de-linkage of the costs of research and development and the price of health products, for example through the award of prizes, with the objective of addressing diseases which disproportionately affect developing countries

World Health Assembly (WHA61.21)24 May 2008 Global strategy and plan of action on public health, innovation and intellectual property

2.3 Improving cooperation, participation and coordination of health and biomedical research and development.

(c) Encourage further exploratory discussions on the utility of possible instruments or mechanisms for essential health and biomedical r&d, including inter alia, an essential health and biomedical R&D treaty

Open Source Dividend

James Love and Tim Hubbard, "Prizes for Innovation of New Medicines and Vaccines," Annals of Health Law, Vol. 18, No 2, pages 155-186, Summer 2009.

● First developed in connection with a prize for TB diagnostics● Generalized to all 3 generation prize proposals● To be introduced in the U.S. Congress, in connection with a

new version of the Medical Innovation Prize Fund, and as a separate standalone proposal

Basic idea of the open source dividend

● New products benefit from the contributions of investors in the R&D for the commercial product, but also access to knowledge, materials, and technology that are openly shared

● Share a fraction of the commercial reward with persons/communities/entities that earlier open sourced important knowledge, databases, materials, and technology.

Key challenge for open source dividend

● Government, management of open source dividend prize fund● Agency approach● Jury approach● Competitive intermediary approach

Competitive intermediary approach

● Mandates to resource open source dividend programs

● Competition to manage the rewards● Choice by

– Government agencies– Insurance companies– Employers– Individual– Drug development companies

Possible US implementation of open source dividend in the area of prescription medicines

● Each 1 percent of US pharmaceutical sales would fund about $4 billion in open source dividends

● Creation of an independent agency to administer the open source dividend rewards

● Consider licensing of multiple intermediaries to manage parts of the open source dividend rewards● Provide a role for decentralized decision making by entities that have

incentives aligned with patient interests in terms of innovation

● Possible set-asides for rare, neglected diseases and areas of social priority

Key de-linkage policy debates

● Donor prize fund and sustainability of HIV/AIDS treatment in developing countries

● TB diagnostics prize● European Parliament interest in innovation

inducement prizes for new medicines and vaccines

● Possible application of de-linkage for cancer in developing countries, antibiotics, or HIV treatments in the U.S.