Alternative Models of Financing Medical Innovation

This blog is the culmination of a semester of work by four PIJIP students, who collected a wide range of literature on different models for the funding of medical research and development.  Comments on the analysis and suggestions for other resources are welcomed.

Perfecting Patent Prizes by Michael Abramowicz (2003).

Abramowicz argues that even an imperfect prize system might improve social welfare relative to the patent system.  Suggests that a flexible system of awarding prizes is preferable to a strict formula or algorithm.  Addresses and negates concerns that flexibility in the prize system is (1) haphazard and (2) inaccurate.

The Benefits and Savings from Publicly-Funded Clinical Trials of Prescription Drugs by Dean Baker (2008).

Baker describes various benefits of a system of publicly financed prescription drug trials. This proposal focuses on the establishment of a network of independent companies that would be expected to replace the current clinical testing system performed and/or financed by the pharma industry.

Getting More for Less: The Not-So-Obvious Benefits of Publicly Funded Trials for New Drugs by Dean Baker (2008).

Outlines a proposal for publicly financed clinical trials that builds upon a prior scheme offered by Tracy Lewis, Jerome Reichman, and Anthony So of Duke University in The Economists' Voice, January 2007 (

The Patents-Based Pharmaceutical Development Process by John H. Barton & Ezekiel J. Emanuel (2005).

Recommends four reforms: (1) having no requirement to test new drug products against existing products prior to approval but requiring rigorous comparative post-approval testing; (2) international tiered pricing and systematic safeguards to prevent flow-back; (3) increased government funded research and buy-out for select conditions; (4) targeted experiments using alternative approaches to address health conditions that not received adequate attention in recent years.

An Economic Analysis of Intellectual Property Rights by Steve Calandrillo (1998).

Highlights the importance of bringing private incentives to develop socially useful information when its development cost is less than its social value.  Argues for the superiority of a government run prize system over traditional patents and includes responses to common criticisms of prize systems.

Payment for Discoveries and Innovations in the Soviet Union by Herschel F. Clesner (1962).

Discusses the prize system for discoveries and innovation in the Former Soviet Union.

Patents or Prizes: Monopolistic R&D and Asymmetric Information by Eric A.A. de Laat (1996).

Compares the benefits of research prizes and patents regarding innovation incentives.  Discusses asymmetric information about costs and the market.  Provides a formula for determining whether a patent or prize is more beneficial in a given situation - mostly based upon available information about costs and the market.

De Laat discusses the problem of asymmetric information in prize programs when governments do not know both the cost of a company's R&D and the market for the innovation.   He determines that the information asymmetry regarding R&D costs does not make a prize system or a patent system superior to the other.  Where a prize would be optimal under perfect information, a prize is always optimal regardless of information asymmetry about the market.  Where a patent would be optimal under perfect information, either a pure patent system or a mixed patent and prize system could be optimal.

It is always best for total social utility to reward a single innovator for R&D costs.  It is sub-optimal to award profit beyond R&D costs on useful innovations by too large a prize or permission to charge a monopoly price.  Where the loss to public welfare would be greater by issuing a patent, it is best to grant an innovator a prize equal to R&D costs.   Where the loss to public welfare would be greater by granting a prize, it is best to award a permanent patent and tax the deadweight loss or to grant a patent long enough to allow the innovator to recoup R&D expenses without issuing any prize.

Patents and R&D Incentives: Comments on Hubbard and Love Trade Framework for Financing Pharmaceutical R&D by Joseph A. DiMasi & Henry G. Grabowski, (2004).

Evaluates Love and Hubbard's proposal (see below).  Suggests that current levels of pharmaceutical R&D can be maintained along with lower costs for medicines if one or all of the alternative mechanisms replace the patent system.  Proposals two alternative models: (1) prizes presented for successful innovative effort; (2) government authority procures R&D effort through grants.

GlaxoSmithKline and Access to Essential Medicines by Anne Duncan (2004).

Explains Glaxo Smith Kline's attempts to promote public health by providing access to essential medicines - such as anti-retrovirals - to the least developed countries.

Essential Patent Pool for AIDS (EPPA): Background Information by Essential Innovations, Inc. (2005).

Outlines a proposed patent pool for AIDS medicines and treatment technologies.

Three Proposals for Rewarding Novel Health Technologies Benefiting People Living in Poverty: A Comparative Analysis of Prize Funds, Health Impact Funds and a Cost-Effective/Competitive Tender Treaty by Thomas Alured Faunce & Hitoshi Nasu (2008).

Analyzes three different academic proposals for addressing the needs of the poor in relation to new, rather than essential medicines.  It focuses primarily on: (1) R&D prize funds; (2) a health impact fund system, and (3) a multilateral treaty on health technology cost-effectiveness evaluation and competitive tender.  The paper compares the different types of proposals, analyzing respective strengths and weaknesses.

Global Justice in Healthcare: Developing Drugs for the Developing World by William Fisher & Talha Syed (2007).

Examines two issues that prevent accessibility of existing drugs - at low prices - to developing countries: 1) Drug patents and patentees who generally pursue pricing strategies designed to maximize profits and 2) Pharma companies concentrating their R&D on diseases prevalent in developed nations (such as the U.S. & EU) rather than diseases afflicting individuals in poorer nations.

Article also discusses justifications for potential intellectual property reform based upon theories of social utility, deontological and teleological theories of distributive justice, and the universal human right to global health.

Increasing R&D Incentives for Neglected Diseases - Lessons from the Orphan Drug Act by Henry Grabowski (2003).

Investigates the feasibility of developing an orphan drug-type program oriented to the neglected diseases of developing countries.

Intellectual Property: When is it the Best Incentive System? by Nancy Gallini & Suzanne Scotchmer (2001).

Reviews the economic reasoning that supports patents and other IP over the alternatives as the best incentive scheme to promote R&D.   Compares IP, procurement contracts, and prizes.  Argues that when sponsors know the value of innovations, a system with prizes linked to the social value of innovation is optimal.

Toward Allocative Efficiency in the Prescription Drug Industry by Robert C. Guell & Marvin Fischbaum (1995).

Sets forth an analytic case for a prize system which focuses on the prescription drug industry.  Describes the inefficiency associated with the grant of a limited monopoly.  Recognizes that the static efficiency from elimination of the patent system might be outweighed by the system's dynamic efficiency.  Proposes that the government would buy prescription drug patents at a price equaling the net present value of the profit they would have generated and distributes the patents to U.S. drug manufacturers.

An Efficient Reward System for Pharmaceutical Innovation by Aidan Hollis (2005).

Proposes a novel reward system for pharmaceutical innovation, in which innovators are rewarded based on the incremental therapeutic benefits of their innovation.  Argues that when rewards are paid directly to innovators, patents could be compulsorily licenses to enable competitive pricing.  Reduced expenditures on patent drugs would enable governments to fund rewards.

An Optional Reward System for Neglected Disease Drugs by Aidan Hollis (2005).

Proposes offering rewards to drug innovators who give up exclusive patent rights.  Rewards are based on the incremental effects of the innovations in developing countries.

The Health Impact Fund Making New Medicines Accessible for All by Aidan Hollis & Thomas Pogge (2008).

Proposes the Health Impact Fund (HIF), an optional pay-for-performance scheme for new pharmaceuticals, which includes a stream of payments based on the assessed global health impact of the pharmaceutical. 

Rewarding Sequential Innovators: Prizes, Patents, and Buyouts by Hugo Hopenhayn, Gerard Llobet, and Matthew Mitchell (2006).

Discusses cumulative innovation with multiple innovators and innovations of unknown value.  The authors argue that a revised patent system that permits mandatory buyout prices (i.e. compulsory licensing) by competitors would be preferable to prizes and traditional patents.

The authors believe that the optimal reward for innovation is a patent with no statutory expiration date, which gives an owner constant protection against future improvements forever.  However, innovators must commit to a buyout price for which they will relinquish exclusive ownership rights as a condition of the patent.

A New Trade Framework for Global Healthcare R & D by Tim Hubbard & James Love (2004).

Discusses business models for an effective Virtual R&D Market.  Proposes various approaches: (1) direct funding for drug development; (2) prize model - R&D organizations compete for rewards for specific R&D output; (3) in a simple formulation, governments would place large sums into a fund that would be allocated every year to firms that bring new products to the market.  Prizes paid in one lump sum.  New innovations to address current gaps could be further incentivized.

Pharma Scenarios for Sustainable Healthcare by Tim Hubbard & James Love (2001).

Suggests that policy makers should shift focus from standardized rules of minimum levels of IP protection to agreements between countries to support investment in R&D.  This would provide a more flexible system and would recognize the value between different approaches.  In the 2002 proposal for development of medicine, prizes would be tied to a country's GDP.

Prizes for Technological Innovation by Thomas Kalil (2006).

Describes Advanced Market Commitments, in which governments commit to buy a given quantity of a product or service that meets pre-specified performance goals.  Proposes expanding the US government's use of prizes and AMCs in five areas: space exploration, African agriculture, vaccines for diseases of the poor, energy and climate change, and learning technologies.  Funding sources could include the government, foundations, philanthropists, and contestants.

Addressing Global Health Inequities: An Open Licensing Approach for University Innovations by Amy Kapczynski et al. (2005).

Focuses more on licensing than prizes, but good overview of alternative approaches to current patent regime.  Reviews existing proposals to eliminate the burdens patents can impose on the global poor, and demonstrate the acute need for new approaches.  Discusses a class of commons-based initiatives.  University settings are particularly equipped for alternative licensing agreements.  Proposes licensing models.

Property Rights and Property Rules for Commercializing Inventions by F. Scott Kieff (2001).

Kieff argues against prize systems and advocates for patent systems.  He provides various rationales for this opinion while critiquing proposals such as Kremer and Shavell & Van Ypersele.

One argument offered for the patent system is that prize systems do not guarantee that there will be a marketable product.  When a market advantage, like a monopoly, is the incentive innovators aim for, they not only have the incentive to invent, but also to market their inventions.

Another argument is an immediate reward upon invention may cause rent dissipation, a decrease in the perceived value of the reward due to an increase in the number of people seeking the reward.

Furthermore, under the current system, patents are constantly screened and tested by a company's competitors.  A prize system would not have the same validity-screening effect.

Kieff argues that a patent holder's ability to price discriminate eliminates the problem of dead weight loss.

Offers new view on patents that embraces property rights and property rules as essential elements for achieving core goals of the patent system.

Creating Markets for New Vaccines by Michael Kremer (2001).

Kremer examines the economic rationale for committing - in advance - to purchase vaccines for infectious diseases.  Kremer gives a general overview of particular diseases such as malaria, HIV, & TB, and the current progress in vaccine development - specifically discussing market distortions regarding these diseases.

Kremer proposes an advanced purchase commitment program for vaccines that he argues will benefit both the public and vaccine producers better than a patent monopoly.  Kremer compares his proposal to other pull programs such as cash prizes, research tournaments and discusses the benefits/disadvantages of both a "push and pull-based" system.

One of the major advantages of an advanced vaccine purchase commitment is, like other pull programs, the government pays nothing unless a specific vaccine is created.  However, unlike other pull programs, Kremer argues that advanced purchase commitments avoid the problem of legislators making technical decisions about vaccine research.  Also, unlike one-payment prizes, advanced purchase commitments can be cancelled if the vaccine developed has unwanted side effects. 

Patent Buyouts: A Mechanism for Encouraging Innovation by Michael Kremer (1998).

Kremer proposes that the government offer to buy out pharmaceutical patents using a described auction system to determine the price.  First auction bids are solicited to determine the patent's private value.  During the second auction, the government offers to buy the patent at a marked up price - at least twice the estimated private value.  The patent holder either accepts or declines the offer.  Lastly, the government determines whether to sell to the highest private bidder or place the patent into the public domain.  

Price determination of patent buyouts is a major concern because the government may not have the ability to create a proper cost/benefit analysis of the research.   Kremer suggests a limited trial of patent buyouts to evaluate buyout success rate.

The article discusses the potential problems with public finance for R&D through grants and private funding for ex-post/ex-ante prizes, but argues that a prize system may be more beneficial because it creates stronger R&D incentives.

Kremer warns against potential collusion in auction system by introducing methods to prevent collusion with a price ceiling as an alternative if collusion cannot be prevented.

Briefing Note on Advance Purchase Commitments by Michael Kremer, Adrian Towse & Heidi Williams (2005).

Kremer presents taxonomy of products to which an advance purchase contract (APC)[1] can be applied, as well as, a classification of firm types. The article also illustrates common business interactions in pharmaceutical R&D markets.

Kremer discusses how APC differ from other advance contracting arrangements.

The article reviews potential APC(s) and describes for which products they are most appropriate, various firm responses, and what design issues are critical to APC implementation.

Kremer proposes APC as an alternative mechanism to incentivize private sector investment in diseases concentrated in poor countries.

Prominent Innovation Prizes and Reward Programs by Benjamin Krohmal (2007).

Describes prominent examples of innovation prizes and reward programs that have been implemented with the primary purpose of stimulating innovation.

This webpage does not address particular elements of a prize system, but gives a chronological list of both ex ante/ex post prizes awarded throughout history.

Patents, Price Controls and Access to New Drugs: How Policy Affects Global Market Entry by Jean Lanjouw (2005).

Lanjouw analyses how patent rights and price regulation affect whether new drugs are marketed in a country and how quickly.  Covers samples of 68 countries from a variety of income levels.  This is the first systematic analysis of the determinants of drug launch in developing countries.

The article focuses on how policy choices affect whether new drugs are marketed in a country, and how quickly.  It addresses variables such as: pricing, patent regime, date & location of the drug launch in the market, and discusses when drugs actually reach consumer.

One significant finding regards the effect of the strength of patent enforcement on new medicine launches. Lanjouw found that short-term patent protection that includes products, or long-term protection that includes only manufacturing processes, are both patent policies that tend to encourage more or faster launches in the developing world. Increasing the strength of patent protection to include long-term protection on pharmaceutical products appears to spur market entry among high-income countries.  For low- and middle-income countries the evidence that extending protection enhances access to new pharmaceuticals is mixed. Some evidence suggests that strong patent protection encourages more frequent entry of innovative products in the short term, but in the long term a country offering extensive patent protection may lose the benefits of local drug production and have fewer new products in the market overall as a result.

Lanjouw proposes that multinationals might be reluctant to launch in developing countries when they face price competition, and that local firms could be an alternative source of new drug entry.

A Patent Policy Proposal for Global Disease by Jean Lanjouw (2006).

This proposal would tailor patent protection to fit different worldwide markets for drugs aimed at different types of disease.  Lanjouw proposes a mechanism that would only affect inventors whose patents relate to a global disease.  Patentees would be required to choose to make use of their patent protection in either developed or developing countries, not both.

Lanjouw aims to lower the price of pharmaceuticals in developing countries on important diseases while at the same time maintaining the R&D incentives of research firms.

This policy proposal is intended to improve on the current patent regime by acknowledging the differences in high and low income markets and what they imply for optimal patent protection.

Treating Clinical Trials as a Public Good: The Most Logical Reform by Tracy Lewis, Jerome Reichman, & Anthony So (2006).

Lewis et al. propose an alternative to the current system by removing the direct link between the clinical trial sponsor and the drug tester.  One approach would be to establish an independent testing agency to conduct clinical trials under specified conditions of transparency.  Rather than drug companies compensating the scientists evaluating their own products, the scientists would now work for the testing agency, supported by general funds collected from the pharmaceutical industry.

The authors believe this proposal would lower drug company costs, and therefore drug costs, through government funding of clinical trials. 

The Case for Public Funding and Public Oversight of Clinical Trials by Tracy R. Lewis, Jerome H. Reichman, and Anthony D. So (2007).

This is an abridged version of prior article written by Lewis (see above). Lewis argues that as long as drug companies retain primary responsibility for conducting or funding clinical trials, these trials will not be conducted in the best interest of public health and safety.  Thus, clinical trials should be treated as a public good - funded and administered by the public - rather than as a private matter.

Pricing Prozac: Why the Government Should Subsidize the Purchase of Patented Pharmaceuticals by Douglas Gary Lictman (1997).

This article builds on Kremer's patent buyout proposal.  Lichtman argues that Kremer's proposal is insensitive to the efficiency costs associated with taxation and outlines an alternative mechanism to the traditional prize system for minimizing the social cost of pharmaceutical patents while better balancing tax and monopoly market distortions.

However, Lichtman is concerned that it will be difficult to coordinate a consumer-funded subsidy program.  Consumers will be tempted to misstate financial status to receive subsidies and others may refuse to cooperate.

Lichtman addresses these concerns with a mandatory tax contribution which leads to government intervention and market distortion.  But, even if subsidy dollars are misplaced due to consumer misstatement and potential governmental error, the subsidy scheme is still a more cost effective option in contrast to a high tax distortion created by Kremer's patent buy-out plan.

Lichtman argues that consumers will reap the benefits of a prize system through an alternative subsidy scheme.

Two Ideas Regarding Innovation and Access by James Love (2005).

Love presents the Medical Innovation Prize Fund (MIPF) approach to prizes in which drug companies receive no market exclusivity to encourage generic companies' competition.

The aim of this proposal is to separate the market for medical innovation from the market for the medical product.

MIPF provides a prize for new medicines to encourage organizations to invest in R&D.  One advantage to this approach is that the prize fund could incentivize research in neglected diseases that the free market does not provide.

Note: Describing H.R. 417 which was enacted as S. 2210 - Medical Innovation Prize Act of 2007. (see Specific Proposals below).

Drug Development Incentives to Improve Access to Essential Medicines by James Love (2006).

Love discusses human rights issues related to access to medicines.  He highlights that the Medical Innovation Prize Fund and Medical R&D Treaty have the potential of advancing the global movement to improve international access to medicines.

Measures to Enhance Access to Medical Technologies, and New Methods of Stimulating Medical R & D by James Love (2007).

Love explains the Medical Innovation Prize Act of 2005.  He describes the funding and incentive mechanisms in the bill.

The chief benefit of this system is that it separates the market for innovation from the market for the product - the public gains access to the innovation while the innovators still receive monetary compensation.

The act would offer a reward for new product that improves an existing product.  It also sets out minimum levels of funding for: (1) global health priorities; (2) diseases under US Orphan Drug Act; (3) neglected diseases.

The article also discusses the remuneration guidelines of UNDP HDR, 1998 Japanese Patent Office, 2004 Canadian Guidelines, and 2005 Tiered royalty method.  (See table below).

Medical Innovation Prize Fund System of Remuneration by James Love (2005).

Love explains the Medical Innovation Prize Act of 2005 and Medical Research & Development Treaty.  He argues that technology transfer and capacity building that would result from a prize fund would help achieve some of the development goals of the TRIPS Agreement.

Paying for Public Goods by James Love & Tim Hubbard (2005).

This proposal would establish "competitive intermediaries" responsible for funding medical research and development.  These competitive intermediaries would be funded by mandatory employer/employee monetary contributions for various scientific projects.  These are similar to venture capital funds, but would target investment in projects that focus on scientific rather than financial returns.

Love and Hubbard examine the problem of financing public goods in three settings: (1) The problem of compensating artists in a world where the most efficient distribution systems are peer-to-peer file-sharing networks. (2) Concerns the problems of funding the development of new drugs and other medical inventions. (3) A proposal for new intermediators to facilitate voluntary collective action to finance public goods is considered.

The Big Idea: Prizes to Stimulate R&D for New Medicines by James Love & Tim Hubbard, (2007).

Love and Hubbard argue that it would be beneficial to reform the way that we pay for R&D on new medicines.  Rather than give drug developers the exclusive rights to sell products, the government should award innovators money - large monetary prizes tied to the actual impact of the invention on improvements in healthcare outcomes delivered.

Marchant - Managing Prize Systems: Some Thoughts on the Options by Ron Marchant (2008).

Considers the constraints and objectives and how they may influence the design of prizes.  Proposes ways to use prizes, focusing on the diseases and conditions that disproportionately impact developing countries. The proposal would combine R&D grants with a variant of the existing framework of patent protection, building in voluntary agreements to offer a "license of right" in order to promote competition and access to the patented inventions.

Requirements for a prize system to be viable: (a) Must be sufficiently attractive to entice researchers to participate, must also meet the needs of funding agencies. (b) Must also be acceptable to government. (c) Rewards system should work along the research process - from initial research, to reach process, to end of results and implementation of treatments.

Consequences:(a) Size, timing, and predictability must be sufficient to encourage researchers and companies to participate.

Those who design the prize system will have to decide how to handle IP rights.

Meloso, Copic, & Bossaerts - Promoting Intellectual Discovery: Patents Versus Markets by Debrah Meloso, Jernej Copic, & Peter Bossaerts (2009).

Conducts a study comparing a "market system" to a "patent system"

Prizes and Incentives: Towards a General Theory of Compensation and Competition by Barry J. Nalebuff & Joseph E. Stiglitz (1983).

Analyzes competitive compensation schemes, where pay is based upon relative performance, in economies with imperfect information.

Highlights 3 important aspects of any reward system: (1) Risk - there is a certain level of risk in different types of reward schemes.  If innovators are too risk-adverse, this may thwart innovation. (2) Incentive levels - in order to deal with the problem of risk discouraging innovation, a large part of most compensation is not directly linked to outcome. (3) Flexibility - different types of incentive schemes may be appropriate in different situations.  There should be flexibilities to accommodate specific situations.

Aligning Pharmaceutical Innovation with Medical Need by Carl Nathan (2007).

Identifies that aligning three basic processes - innovation, incentive and access - will help (1) promote production of pharmaceuticals for infectious diseases; and (2) bring vaccines and medicines to poor populations.  Proposes two reforms to the patent system: (1) open access drug companies: drug companies collaborate with academics and biotechnology and pharmaceutical professionals.  This research would be funded by the government and by users; (2) a patent track that rewards innovation based upon its impact on the global burden of disease.

Patent Buy-Outs for Global Disease Innovations for Low- and Middle-Income Countries by Kevin Outterson (2006).

Describes drug prices as a significant variable to evaluate governmental and inter-governmental intervention in the pharmaceutical industry.  Believes that patent drugs sold at the marginal cost of production (i.e. generic price) would allow for cost effective treatments to become more attractive and other interventions more affordable. 

Illustrates two case studies: (1) Recently developed HPV vaccines for cervical cancer and (2) Second-line ARV treatments for AIDS - to examine the mismatch between the global pharmaceutical markets and global disease burdens.

Proposes a patent buyout to assure reimbursement of R&D and to further promote innovation.  Identifies the purchaser as the government, intergovernmental organization or foundation donor where the target market is split between the Top 30 richest nations and all other countries. 

Pharmaceutical Arbitrage: Balancing Access and Innovation in International Prescription Drug Markets, by Kevin Outterson (2004).

Addresses the issues of U.S. consumers purchasing drugs from Canada due to differential pricing, and the role of IP laws in fighting the AIDS epidemic in Africa.  Outterson believes modification of the TRIPS agreement is the optimal method to improve access to medicines while maintaining market incentives to promote innovation.

Explores primary functions of pharmaceutical arbitrage, which occurs when buyers in a lower priced market sell to consumers in a high priced market.

Creates a theoretical framework for understanding pharmaceutical markets by utilizing optimal patent rents and applies this framework to two case studies involving: (1) Anti-retrovial therapies for AIDS and (2) Response to CAN-U.S. pharmaceutical arbitrage.

AIDS and Drug Pricing: In Search of a Policy by Steven R. Salbu (1993).

Argues that prize systems may be incompatible with the open marketplace of scientific competition.  Even prize systems must be competitive at some level.  Concludes that policy related to the prize or patent system must enhance both competition and innovation, while protecting both public and private interests.

On the Optimality of the Patent Renewal System by Suzanne Scotchmer (1999).

Discusses that renewal mechanisms are equivalent to direct revelation mechanisms and therefore cannot be improved upon.  Argues that patents should have a uniform life, rather than varying in length.

Rewards versus Intellectual Property Rights by Steven Shavell & Tanguy van Ypersele (1998).

Highlights that one of the largest difficulties with the reward system concerns the government's need for information to calculate rewards.  Argues that the better system between standard patents and mandatory prize system, and between a mandatory and an optional prize system depends on factors like information asymmetry.  Concludes that an optional reward system where the size of rewards is based upon sales would be better than the standard patent system.

2 elements arise in the comparison between the patent system and the reward system: (1) reward system superior to patent system because deadweight loss is avoided under rewards; (2) incentive to invest in research is imperfect in both systems

Authors propose various potential award systems: (1) first-best outcome; (2) patent regime; (3) reward regime; (4) patent versus reward; (5) optional reward regime; (6) rewards conditional on quantity sold (See table below).


Economic Foundations of Intellectual Property Rights by Joseph Stiglitz (2008).

Proposes a mixed system, which involves both patents and other elements, such as prizes and government support of basic research.

Discusses why patents may impede innovation by monopolization, raising the cost of knowledge, and creating patent thickets.

"A Portfolio Approach to Innovation" (a) Argues that there should be a broad range of potential incentives to pharma R&D - both prizes and patents. (b) The prize system is usually preferable to the patent system, except the prize system cannot work when the objective is not well defined.

Prizes, Not Patents by Joseph Stiglitz (2007).

Proposes a global prize fund paid by foreign assistance budgets of industrialized nations that would reward new drug and vaccine developments on the basis of their health impact.  A scientific panel could establish priorities by assessing the number of people affected and the impact on mortality, morbidity, and productivity. 

Scrooge and Intellectual Property Rights by Joseph Stiglitz (2006).

Proposes a medical prize fund.  Argues that the medical prize fund would ensure that we make the best possible use of whatever knowledge we acquire, rather than hoarding it and limiting use to those who can afford it.

Advance Price or Purchase Commitments to Create Markets for Treatments for Diseases of Poverty: Lessons from Three Policies by Adrian Towse & Hannah Kettler, (2005).

Looks at advance price or purchase commitments (APC) and analyzes three case studies: (1) introduction of the meningitis C vaccine in the United Kingdom; (2) the Orphan Drug Act (ODA) in the United States; (3) newly legislated US Project BioShield for bioterrorist interventions.  Concludes that APC(s) have the potential to be a powerful tool and should be tried.

Considers 5 elements when designing advance price or purchase commitments to tackle diseases of poverty.

Orphan Drug Act: Background and Proposed Legislation in the 107th Congress by M. Angeles Villarreal (2001).

The Orphan Drug Act (P.L. 97-414) was signed into law on January 4, 1983.  The Act provides incentives for pharmaceutical manufacturers to develop drugs, biotechnology products, and medical devices for the treatment of rare diseases and conditions (orphan products).  Incentives for orphan product development include marketing exclusivity for orphan drug sponsors, tax incentives, and research grants.

Perspectives on Stimulating Industrial Research and Development for Neglected Infectious Diseases by David Webber & Michael Kremer (2001).

Discusses 5 barriers limiting industry focus on R&D for neglected diseases: (1) lack of understanding of some diseases; (2) insufficient access of patients to medicines that they need; (3) fears of inadequate intellectual property protections; (4) it is difficult for companies to identify priority diseases and pharmaceuticals; (5) markets of medicines for neglected diseases are small. Discusses Push and Pull Factors.

Should Prizes Replace Patents? by Marlynn Wei (2005).

Suggests that a small-scale, operational prize system that provides insight into how companies will participate and invest in R&D will allow the government to establish a larger prize system.

Analyzes the Medical Innovation Prize Act (2005): (a) Offers some benefits of a prize system. (b) Defines prize system for "medical innovation related to a drug, a biological product, or a new manufacturing process for a drug or biological product." (c) Could reduce incentives for "me too" drugs. (d) Provides awards based on incremental benefit, thus the Act encourages parties to invest in major breakthrough drugs.

Discusses problems with Prize Systems: (a) Gov. does not have enough info. about how a prize system compares with the patent system. (b) Details of a prize's administration determine the value of the prize system.

General discussion of Prize Systems: (a) Weakness of the prize system is administration - it is difficult for Gov. entities to determine the amount of the prize and to distribute prizes.

Information asymmetry: (a) If the Gov. is less informed about the cost of innovations, then prizes and contracts are better than patents. (b) If the Gov. does not know the private or social benefits, then patents may be better. (c) The prize system may lead to the inefficient results of duplication of resources because pharma. Cos. Vying for a prize may work in overlapping areas.  This problem exists in the patent system as well. (d) Loss of commercial and marketing development. (e) Administrative costs.

Suggests a prize system that is more modest than the Medical Innovation Prize Act.  One that is optional and focused on particular gaps left unaddressed by current private sector or NIH funding.  Prize system should be used to close gaps in the current patent system.

Solving the Drug Dilemma by Burton A. Weisbrod (2004).

Offers a plan with two components: (1) Massive awards for those who develop safe and effective new patented pharmaceuticals.  In effect, government would purchase drug patents; developers of successful new drugs would be rewarded for successful R&D.  (2) Use of the patents would be freely offered to any firms wishing to produce the pills.  This would ensure active competition among generic producers and low prices, as competition forced prices down toward their low marginal production cost.

Sustain by World Business Council for Sustainable Development (WBCSD) (2007).

WBCSD organized the first of two meetings between industry, academics, and NGOs to discuss intellectual property rights in biotechnology and healthcare.  This meeting sparked interest in new business models for drug development, including these of prize funds, as well as other approaches to supporting "open source" medicines.

The Economics of Investment Incentives: Patents, Prizes and Research Contracts by Brian Wright (1983).

Analyzes the choice between three alternative means of public intervention in the research market: patents, prizes, and direct contracting for research purposes.

Barbados & Bolivia Submission to WHO IGWG - TB

The Grand Prix is offered for 7 years.  If there is no winner after 7 years, the reward could be withdrawn, or offered with a different level of funding and/or terms of reference.  Until the Grand Prix is claimed, the $100 million would be invested and the earnings would be used to fund small technical challenges prizes and the biannual best contributions prize.  The winner must grant licenses to all patents, data and know-how needed for competitive supply of the test, worldwide.

The small technical challenges prize is focused on solving small technical challenges.  Research is done in-house or outsourced to firms or non-profit organizations that have special abilities to manage these types of innovation prizes.

The biannual best contributions prize is awarded every two years.  Up to 3 prizes available if entrants considered sufficiently good, however no prizes will be awarded if no entrants meet necessary criteria.  If no prize is awarded, money would be reallocated for the next round of prizes.  At least ½ of the remaining "best contributions" prize money would be set-aside for research teams working in developing countries.

Barbados & Bolivia Submission to WHO IGWG - Cancer

Developing countries de-monopolize the sector of medicines and vaccines for cancer, and permit free entry for generic suppliers.  Domestic system of rewards for developers of new medicines and vaccines related to cancer.

Barbados & Bolivia Submission to WHO IGWG - Chagas Disease

Explains that few academic researches have focused on Chagas Disease, and many academic and private sector researchers do not share relevant information, materials, or technology. 

Barbados & Bolivia Submission to WHO IGWG - Priority Medicines & Vaccines Prize Fund: Final Product Prizes

Final Products Prizes: Prize to promote R&D in: (1) Type II Diseases; (2) Type III Diseases; (3) New Antibiotics; (4) Emerging Public Health Threats.  FPPs are large cash rewards for the development of new medicines or vaccines.  Minimum allocation for each category.

Upstream prizes: Competing institutions that run upstream prizes will be evaluated periodically to determine how successful they were in investing in products that were successful.  The upstream prize managers who invest in products that are successful and improve outcomes will be rewarded by earning points that will entitle them to shares in the final product prizes.  Upstream prize managers that do poorly will face reduced allocations or termination.

Barbados & Bolivia Submission to WHO IGWG - Donor Programs

Acknowledges that the challenge is to ensure that the humanitarian programs are as cost-effective as possible, while preserving appropriate rewards for product developers.  Offers a solution for donor-support markets - rewards linked to competitive supply of products for HIV-AIDS, TB, Malaria, and other humanitarian uses.

Specific Proposals

H.R. 417, 109th Cong. (2005): ‘Medical Innovation Prize Act of 2005'

Bill proposed to provide incentives for investment in R&D for new medicines, to enhance access to new medicines, and for other purposes.  Would provide generic producers non-voluntary authorizations to use patents related to the manufacture and sale of all prescription drugs in the U.S. market.  Bill provides for remuneration to developers of new medicines through a medical innovation prize fund (MIPF) with funding of .5% of US GDP.

S. 2210, 110th Cong. (2007): ‘Medical Innovation Prize Act of 2007'

Medical Innovation Prize Act of 2007 introduced by Vermont Senator, Bernard Sanders, based on prize fund research and proposals developed by James Love and Tim Hubbard.  The Act creates a prize fund to award yearly payments for a 10 yr-period to persons for medical innovation relating to a drug, biological product or new manufacturing process for a drug/biological product. 

The FDA Priority Review Vouchers: An Effective Incentive to Develop Drugs and Vaccines for Neglected Diseases? by the International AIDS Vaccine Initiative (2008).

Advanced Market Commitments (AMC) for Pneumococcal Vaccines: Consultation & Advisory Process by AMC for Vaccines (2009).

This report recommends a monitoring and evaluation (M&E) framework for a pilot Advance Market Commitment (AMC) for a pneumococcal vaccine.  It was prepared for the M&E Sub-Group, on behalf of the AMC Donors' Committee  The issues for evaluation are grouped into four categories:

  1. Rationale Issues: These issues deal with the need for the AMC initiative, and whether there were alternatives and possibly more cost-effective ways of achieving the same objectives.
  2. Design Issues: deal with the fundamental concept of the AMC and the terms, conditions, and mechanics of the AMC concept.
  3. Process Issues: These issues deal with the overall efficiency of the AMC structures, whether the governance and oversight processes were adequate and whether timelines and budgets were respected;
  4. Outcome Issues: these constitute the court issues of the evaluation over the longer term and deal with whether the targeted results were achieved.
The M&E framework described in this report has four components: (1) A baseline study to establish a point of comparison for future M&. (2) Annual monitoring of both the AMC and the complementary activities required to support the public health goal of the AMC. (3) A process evaluation about two years after the launch of the AMC to assess whether the AMC mechanism is working as expected and to obtain information on the AMC design issues. (4) Outcome evaluations every four years after the signing of the first AMC Supply Agreement.

Medical Research & Development Treaty (2005); Letter to World Health Assembly Executive Board & World Health Org. Comm'n on Intellectual Property, Innovation & Health (2005).

The proposed draft R&D treaty provides new obligations and economic incentives to invest in priority research projects, and addresses several other important topics such as open access publishing. It includes agreements that member countries reduce intellectual property protection in certain areas, such as to permit research exceptions for patents, and exceptions to patentability relating to certain open source medical databases.\

Acceptable methods of finance include: direct public funding, tax credits or other expenditures, philanthropic spending, research funding obligations imposed on sellers of medicines, purchases of relevant medical products, and innovation prizes.

Submission of CPTech to IGWG  by James Love (2006).

Explains the CIPIH's proposal: recommends that patent owners voluntary license inventions to generic producers, or that governments issue compulsory licenses to facilitate generic production of medicines.

[1] Binding contract - typically offered by government or other financial entity - used to guarantee viable market if vaccine or other medicine successfully developed.

Teaser image of round doorway (cc) by Erin Watson.

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