[Ip-health] Economic Report of the President: "Creative Ways to Encourage Innovation"

[Mike Palmedo]

http://a257.g.akamaitech.net/7/257/2422/17feb20051700/www.gpoaccess.gov/eop=
/2005/2005_erp.pdf

Economic Report of the President
Transmitted to the Congress, February 2005

Chapter 7: The Global HIV/AIDS Epidemic

[snip]

(Pages 168-170)

Box 7-2: Creative Ways to Encourage Innovation

Patent rights and direct government funding are currently the two
primary means by which the United States government spurs research. To
drive development for an AIDS vaccine, the Bush Administration endorsed
the Global HIV Vaccine Enterprise this past June at the G-8 summit. This
initiative will accelerate HIV vaccine development by enhancing
coordination, information sharing, and collaboration globally. There is
also a critical role for the private sector to play in promoting
innovation, especially in the development of a commercially viable
product such as a vaccine.

When a disease predominantly affects a poor population, the private
return to investment in vaccine research is likely to be quite low, even
under well-established patent laws, and even if the social value of
developing a vaccine is high. In other words, society as a whole may
place great value on the lives saved by a new vaccine, but the ability
to pay for vaccines by poor patients will not adequately represent this
social value and will be insufficient for firms to recover their
research expenditures. Patent rights alone can therefore, in some
contexts, provide insufficient incentives for innovation. They can also
create strong incentives to imitate existing successful inventions
rather than to take on new problems, because competitors can slightly
alter a patented approach in order to develop a competing product. While
this "free-riding" off initial research investment creates competition
and drives down prices, it also prevents the original developer from
recouping its research expenditure. Furthermore, imitation of existing
drugs may not be the socially optimal use of scientific research, since
the benefits of saving additional lives with novel products may very
well outweigh the benefits of lowering the prices of existing drugs.

Direct government funding of basic research can have an important role
but is inefficient when the motivation of the research is a commercially
viable product. It is difficult to know the best projects to fund and
pharmaceutical firms have an advantage over government officials when it
comes to evaluating the potential of vaccines. Moreover, organized
interests can influence the allocation of government funding resources,
and academics may be more interested in novel scientific discoveries
than in the technical challenges of commercial development.

Advocates of exploring alternate systems for encouraging pharmaceutical
innovation argue that patents and government funding alone have had
difficulties stimulating sufficient research to develop vaccines for
diseases such as malaria, tuberculosis, and HIV/AIDS. Most research on
HIV/AIDS drugs is currently focused on treatments that will likely be
sold in rich countries, instead of on vaccines, which would likely be
less expensive and could be disseminated widely in poor countries.
Indeed, the research that is currently being conducted toward an AIDS
vaccine focuses predominantly on strains of the disease prevalent in
rich countries rather than the strains most common in Africa, even
though two-thirds of all new infections occur there.

Several mechanisms have been suggested by economists as promising ways
to further encourage new research and development in pharmaceuticals.
For example, foundations can offer monetary prizes for vaccine
development in order to encourage innovation without restricting
competition in the market once the product is developed. However, a
prize alone would not ensure access to the vaccine by those who need it.
Alternatively, a foundation could =93buy out=94 a patent (that is, it could
essentially compensate a firm for letting its patent expire early). Like
a prize, the patent buyout would provide incentives for innovation that
are not tied to the market for purchasing the drug, thereby promoting
research and development even in markets of poor patients. However, the
buy-out may similarly fail to ensure large-scale access to the vaccine
since there is no guarantee that competition in the vaccine=92s market
will be attractive to other producers. Particularly if the vaccine is
technically difficult to produce and if safety regulations are
burdensome, firms may not wish to enter the market for a new vaccine.

Some scholars have also suggested that another approach to encouraging
vaccine research would be for a foundation or group of foundations to
make an advance commitment to purchase a vaccine at a pre-specified
price and quantity. Pharmaceutical firms then would have a secure
financial incentive for researching vaccines and treatments, even if a
disease affects predominantly poor populations, and, once developed,
widespread production of the vaccines could be ensured.

[snip]