David Beier On The Value of Innovation: An RPM Report Op-Ed

Booby Prize: Why Replacing Patents With Prizes Would Harm Innovation

Executive Summary
Presidential candidate Senator Sanders has proposed replacing patents with a government run scheme that offers prize money to innovators who create new medicines. This approach misunderstands the vital role of patents in society especially for new medicines. Using prizes for new medicines — rather than patents — risks assigning to the government the role of picking winners and losers in science.

Vermont Senator and Presidential Candidate Bernie Sanders proposes ending patent rights for medicines and instead relying on prizes as an incentive for drug development.

As envisioned by Sanders, rather than award patents to innovators, the government should award a sum of money to inventors or firms who secure a particular goal in the discovery and development of a particular product or outcome. Think of the “X-prize” –with the important difference that the “X-prize” is offered as an addition to, not a replacement for, patents.

The intellectual underpinnings for some of Sanders proposal to use economic prizes have a long history in the United States, Britain and elsewhere.

In recent years leading economists, including Nobel Prize winner Joseph Stiglitz, have argued that ending patents for medicines will lower prices and expand access, especially in developing countries. Others who have supported the use of prize money (i.e., the Obama Administration, the Gates Foundation and other charities) have done so as a supplement to and not a substitute for patents, or as a voluntary option for the innovator to choose between the two approaches.

The Sanders proposal seeks to use the apparent incentive effect of prizes, but fails to fully grasp the risks of such an approach. There is a reason why prizes as an incentive have been undertaken in addition to patents, not in place of patents.

The Merits of Patents
While there might be theoretical arguments in favor of prize incentives for narrow tasks (e.g. a reusable rocket), there is insufficient evidence or experience to merit a wholesale shift to prizes over patents. Before turning to the defects of the prize system Sanders proposes, it is important to outline how the patent system works and why it can offer a superior approach to stimulating inventive activities.

The arguments in favor of the basic patent bargain remain strong. The patent right is a government reviewed and granted authorization that permits the owner to exclude or prohibit another person or commercial entity from copying an invention for a limited period of time. The bargain involves multiple elements:

• The inventor must prove that their discovery is new, useful and non-obvious (a technical legal term meaning other knowledgeable people in the same field could not have anticipated the subsequent invention based on what was known publicly about the state of the field at the time of the invention in question).

• The inventor must disclose publicly the metes and bounds of their invention using the best mode of securing the applicable outcome — be it product or process.

• The protection ends after a period of years. Generally, this is 20 years from patent filing. For medicines – due to premarket regulatory reviews (and even with patent restoration for part of that time) – the effective patent life is usually between 10-14 years.

A patent grant does NOT:
• Provide for a market monopoly, but rather only the right to prevent “free riding”. Nothing prevents intra-therapeutic competition from other products or medicines. In fact the average period before innovative products face competition has been declining.

• Prevent research by non-commercial researchers.

• Prevent work on generic or biosimilar products to prepare for market launch post-patent expiration. Inventing around a patent, especially for high value medicines is common.

• Preclude patent validity challenges during a patent’s term either in the Patent Office or through the courts.

The public benefits from patents by receiving access to the details published with the patent, and by putting the patented invention into the public domain at the end of patent term.

Patents have a long and deep history in Western economies. No developed country has been able to fashion a workable alternative to a strong patent system. Patents offer an essential component to limit unfair dealing in the marketplace. They protect innovators and inventors from the risks of unfair copying or expropriation.

More importantly, patents provide a neutral incentive for conducting research. Patent grants are not made with a government recipe in mind for what research is good or bad. Patents do not prejudge the pace or direction of science. In fields like pharmaceutical and biotechnology R&D, a patent system permits advances to occur as a result of following the science rather than presupposing a single path to success.

The merits of a patent system are sufficiently well-established that they should not be abandoned without a compelling case in favor of the alternative policy being proposed.

Who Picks The Winners?
The single most negative feature of a government mandated prize system (when coupled with the end of patents for medicines) is the untoward role the government would play in setting the conditions for any competition and making decisions about who merits the prizes.

For decades researchers have shown that patents are far more important for the development of medicines than in any other industrial sector. The evidence is irrefutable that nations without a strong patent system have a weaker innovation capacity and discover and develop very few, if any, new medicines. If, in place of a market-driven approach seen with patents government officials were to determine winners and losers there are multiple risks.

Most importantly, the development of new medicines requires much basic research and acknowledges that an overwhelming percentage of potential new medicines taken into human clinical trials fail before approval.

This winnowing process is not linear. Very smart people and informed investors make investments (or bets) every day– in thousands of labs on university campuses, biotech firms and larger pharmaceutical companies — on which approach to a particular disease may work.

The government does not have sufficient expertise or experience to make judgments about which approach to a disease will work.

Moreover, those choices are fraught with problems. In an era of precision medicine it is not advisable to award prizes only for the most effective approach to a disease, but rather it is highly desirable to fashion solutions that match with the genomic make up of individual patients

It is also true that advances in medicine are frequently the product of incremental advances in multiple dimensions, including efficacy, safety, side effect profile and compliance and convenience. If the government were to only reward the first product across the finish line for a disease the benefits of a prize system may miss the need to incentivize incremental improvements

Implementation Challenges
Economic prizes also give rise to at least nine practical implementation problems:

• An economic prize system must include a permanent funding stream. Sanders secures his from a tax on health insurance companies. However, this is problematic: if Sanders’ single payor health care scheme were to be adopted, insurance companies would not exist.

• The Sanders proposal lacks clarity about goals for or the specifics necessary to secure a prize. The criteria for determining winners may be too complex to be workable – or too simple to drive true innovation. Even clear criteria may discourage incremental innovation. For example: if there is a competition, the developer of the first-in-time product may have an inferior product but the follow on inventor may give up if the prize has already been awarded.

• The Sanders proposal is not transparent about how a board of overseers will determine winners. Sanders’ suggested membership criteria assumes that virtually all members of the board would by occupation be likely to lack technical or scientific skills. That risks politicizing the award process.

• Setting award amounts. If the amount of the awards are set before the competition, the amounts could be too high or too low to reflect the value of the resulting innovation. If done after the competition, the uncertainty about the financial reward could deter participation in the contest

• If the application and award process do not require disclosure, then science is hurt. If, however, it requires disclosure of trade secrets beyond securing a resulting invention, it could deter participation.

• In a prize system the entity awarding prizes is — in essence — making bets. Depending on how a prize system is arranged those bets could be around which approach to take to a disease (e.g. radiation or chemotherapy for cancer) or to distinguish between diseases. If the latter approach is taken, the prize administrators could end up discriminating for or against diseases on the basis of prevalence (with more or bigger prizes for more common diseases against the 20 million Americans who suffer from a rare disease) or on the basis of political influence. None of these approaches works as well as a more unfettered market-driven approach which is inherent in a patent system.

• A transition period from patents to prizes will be necessary for legal reasons and will mean a long time before the full effect of a prize system is in place. The US constitution precludes suspending patent rights without due process and just compensation. There is no doubt that a patent is a piece of property. It is likely that courts would find that the existing patent system — which has been in effect for many, many decades — creates a reasonable , investment-backed expectation that it will remain in general terms in place from the time that research on a new invention is undertaken. To date, the courts have measured the reasonableness of those expectations with two criteria: (1) did the inventor invest resources based on those expectations; and (2) were the expectations reasonable? In the case of R+D on new medicines it is unchallenged that the time from discovery to approval is between 12 and 14 years on average.

During this period, any change away from a patent system to the mandatory use of prizes would unsettle these investment-backed expectations leading to a taking of property. This likely means that the effective date of a new system would need to be well after any existing R&D was undertaken.

• It is not clear how prizes will lower costs. The logic for the argument that prizes will lower the costs of innovation is not clear. One undeniable fact is that it takes longer and costs more now than it did decades ago to move a new medicine from discovery through the development process to approval and post-approval compliance. These increased costs will not be altered by a prize system. While it is possible to alter prices for patented products over time as input costs increase, it is less clear whether the amount awarded for prizes will change over time. If the prize system assumes that the rewards are too great now for patents and that companies would innovate just as much with fewer rewards, there is no evidence to support this conclusion.

• The process of drug development is different than rocket development or other fields of research and development for prizes have been used. Biology-based experiments are not engineering projects; the chances of success from any experiment or new drug are far from certain. The role of adjacent research within a lab demonstrably leads to things one might not expect. If the whole prize system is about whether research produces a new treatment using one approach, then all the incremental and broader work might be ignored, with the cost on innovation as a result. Many, many drugs were developed for one thing and then approved for another. The industry makes billions of dollars in contributions to the storehouse of biological/chemical and genomic knowledge through their work on basic research that are not directly attributable to a specific drug or cure. This work would be discouraged by a prize system.

Accepting at face value the argument that drug prices at launch, price increases for existing drugs or the overall level of drug expenditures are worthy government and societal attention, the idea of ending the patent system in favor of prizes is an unwarranted, overly broad solution to a problem where other less intrusive means can be used.

The risk of a prize approach for medicines is that far fewer drugs are developed. The adverse consequences of other measures affecting drug prices are less draconian. Mandatory prices transparency by therapeutic category (so as to determine the average discount between and among competing drugs), for example, coupled with a rational approach to risk sharing contracts for the purchase of medicines have potentially salutatory effects, but fewer of the risks of a prize system.

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