[Ip-health] Pharmalot: Prizes, Not Patents: Jamie Love Explains The Idea

[Judit Rius Sanjuan]

Prizes, Not Patents: Jamie Love Explains The Idea
http://www.pharmalot.com/2007/10/jamie-love-interview/
October 31, 2007

Last week, Bernie Sanders, the independent from Vermont, introduced a
Senate bill that would swap prizes for patents. Essentially, the idea
would eliminate market exclusivity for new drugs, but give inventors or
developers cash rewards from a fund that would start with $80 billion a
year. By doing so, the scheme would eliminate monopolies, allow generic
competition, lower drug prices and produce savings of more than $200
billion annually.

Working behind the scenes on the concept for several years was Jamie
Love, a consumer advocate who heads Knowledge Ecology International and
who brainstormed with numerous people, including members of Sanders=92
staff and Aventis execs during a 2002 global health planning meeting.
The proposal, not surprisingly, is controversial and whether the bill
will gain traction remains to be seen. So we chatted with Love, by phone
and e-mail, to ask him more about the idea=85

Pharmalot: Why do you believe such an overhaul is necessary?
Love: The current system is very expensive, doesn=92t produce much in
terms of innovation for the money spent, and leads to hardships and
access for millions of Americans. The US also exports high prices to
developing and developed countries. Some people seem satisfied with
state of affairs, but we don=92t like status quo, or the direction we=92re
going, and believe it=92s appropriate to build a better system, that
better serves consumer interests.

Most of the criticism of the new approach is either completely
uninformed in terms of the actual mechanics of the approach, or based
upon some half-baked theory that big pharma is all-powerful, or business
models can=92t be changed, so why try. But big pharma is not all powerful,
and business models do change. If you=92re reading this on the Internet,
it=92s because of a radical change in the business model for
telecommunications that everyone now takes for granted.

The changes we=92re proposing for drug development are so large and
important they can be compared to the ones that created the Internet.
The Internet makes much information free, on the margin. The Prize Fund
would make medical inventions free, on the margin. Changes in both
business models are important in building a future that meets our needs.

Pharmalot: Why do you believe it=92s important to uncouple or de-link R&D
from prices?
Love: First, all of the distortions and unfairness associated with
access are related to links between incentives and product prices. This
is pretty basic. The higher the prices, the greater the incentives, but
also the greater the problems for consumers. We=92re constantly being
asked to trade-off innovation or access against each other.

One might tolerate the linkage of prices with R&D incentives if the
system were more efficient, but globally, only 8.5 percent of sales was
reinvested in R&D in 2005. And, when you look at where private
investments in R&D go, it is even more depressing. Only 14 percent of
new drug approvals are both new and better than older products, and
clinical trials for me-too products are about twice as large as for
innovative drugs.

Sometime the words we use are confusing. We have a prize system now, but
the prize is a government backed legal monopoly on the sale of a
product. The monopoly is only a means to an end, which is to get money
to drug developers. The drug developer has to set prices high, and spend
a lot to market products to fully exploit the monopoly. But drug
developers don=92t want monopolies or high prices per se, they want money.

The Sanders bill gets rid of the product monopoly, and uses a different
mechanism to get money to drug developers - the bill retains patents,
not as product monopolies, and as a tool to allocate prize money. There
is a competitive system for determining rewards for innovations that
improve health outcomes, and a separate competitive market for the
products. The world can work without monopolies, and it can work much
better than it does with monopolies.

Pharmalot: What if this new system so thoroughly devalues pharma stocks
that drugmakers can=92t raise capital to pursue inventions?
Love: The bill proposes annual prizes equal to .6 percent of US GDP, or
about $80 billion in terms of 2007 GDP. Drug developers would also get
rewards from other markets. The US is now about 27 percent of global
GDP, and only 36 percent of GDP from =93high income=94 countries.

If the Sanders bill passed tomorrow, and other high income countries
implemented something similar, prices for shares in companies that are
good at developing drugs that improve health outcomes would increase, a
lot, while share prices for companies that are focused on marketing of
mediocre drugs would fall, a lot. This would be a good thing, as it
would drive investment into more productive activities.

Pharmalot: Why shouldn=92t payouts take place over a shorter period of time=
?
Love: The bill uses a 10 year pay-out. If the evaluation period is too
short, you don=92t have enough information about the real value of
products. If the payout is too long, investors will require larger risk
premiums. The 10-year period is three years longer than the 7-year
period the US uses for orphan products, and probably a few years shorter
than the typical effective monopoly under the current system of patents,
patent
extensions, pediatric extensions, 30-month Orange Book stays, etc.
Sanders is certainly open to debate on the term of the payout. Ten years
is a starting point that strikes a balance between the need for
information and the investor preference for rapid returns.

Pharmalot: How do you find qualified, unconflicted people to manage this
fund?
Love: How do you find qualified, unconflicted people to set prices or
reimbursement rates? We=92re doing a study of the structure of national
programs that deal with drug prices and reimbursements, to illustrate
some of the possibilities. One could have something like an arbitration
model, where experts are chosen by drug developers themselves to decide
how the fund is divided each year.

The Sanders bill has a fixed Prize Fund, so rewards to one party reduce
the funds available for everyone else. Each drug developer has an
incentive to minimize the benefits attributed to their competitors
products, and collectively everyone has an interest in transparent and
predictable rules.

Pharmalot: Will there be any compensation for additional indications
beyond an initial indication? And what about off-label use?
Love: Like now, any innovation, including line extensions or new
formulations will be eligible for rewards. You would have to show that
follow-on innovation did something, however, in terms of improved health
outcomess.

We rejected the notion that the prizes should seek to approximate the
monopoly rents now earned by patent owners, in part because we didn=92t
want an incentive to create products that were only =93as good=94 as
existing products. The marketing monopolies do this now. A product as
good as Lipitor can make a lot of money, even though it only gives us
something we already have.

We also wanted to make sure that there would be follow-on innovation and
that the prize fund would work well when doctors and patients switched
to the best medicines available. If someone brought into the market a
product that was a small improvement over Lipitor, patients should
rationally switch to the newer and better product. The incentive has to
encourage both the first product, and the follow-on improvement.

The Sanders bill is designed to reward the first product, even if its
market share falls to zero, when a follow-on product with even a small
improvement comes along, such as Lipitor replacing Zocor. Both products
are rewarded in the Sanders bill, but the incentives are different, and
better than you have when incentives that are linked to prices.

Pharmalot: How do you measure benefits provided by one product versus
another?
Love: The starting point would be estimating quality adjusted life years
(QALYs). In a simple model, you add them all up, and look at the shares
of QALYs produced by each product (e.g. 100x / 10,000x =3D 1 percent),
subject perhaps to some set asides for orphan products.

You can do better than this, however, by considering the positive value
of each new chemical entity (NCE), in terms of protections against
failures of other products, or possible discoveries of new uses, or
using options modeling to address the value of new antibiotics, or
treatments for risks like
avian flu, which no one would need unless there is a pandemic. If you
think this is hard, ask yourself, how are product prices evaluated now?

Pharmalot: How will stacking royalties be handled? Or won=92t they?
Love: Under the Sanders bill, drug developers get the prize money, and
they have to take care of the various investor demands or intellectual
property owners from the prize payments. Right now, it seems from IRS
data that patent owners are collectivey getting royalties roughly equal
to 6 percent of product sales. Prizes under the Sanders bill are a lot
higher than current royalty payments to patent owners.

In many respects, royalties are easier to calculate against a prize than
against a price. You don=92t have to worry about production or
distribution costs, or even calculate or monitor =93net sales,=94 since the=
y
aren=92t addressed by the prize.

Incidentally, it is also much easier to address the issue of subsidies
for drug development costs. According to the NIH, through 1996, 50 of
77 new anticancer agents were registered on the basis of evidence from
federally funded clinical trials. But the government funded drugs were
often more expensive than those without government funding. If you ask
how should the government share in the benefits from federally funded
R&D? Well, with the Prize Fund approach, it would be simple. The donor
could negotiate for a share of the prize.

Universities would also be in a more comfortable position, ethically.
They would no longer have to support situations such as pricing of
Xalatan much higher in the US than in Europe, dubious extensions of
product patents, or other anti-consumer measures. Instead, universities
would negotiate over the shares in the prizes, something that was not
fundamentally contrary to the interests of consumers.

The Sanders bill would also make it easier to implement patent reform in
the US. Today, pharma and biotech companies think they need super-strong
exclusive rights to justify high industry revenues. But under the
Sanders bill, the Prize Fund determines the overall level of industry
rewards, and patent rights have nothing to do with the overall level of
return to drug developers. Weaker patent rights, that make it easier to
use patented inventions, would no longer be associated with weaker
industry revenues.

Pharmalot: How can the Sanders bill be improved?
Love: Te next version will benefit from more feedback from experts and
stakeholders. There may be some tweaking on the management structure,
which is uses a large board. One idea we=92re exploring would be take a
portion of the prize generated by a product, and give some of the money
to reward researchers who don=92t patent inventions, when their
contributions were considered instrumental in moving the science toward
a solution.

--
Judit Rius Sanjuan
Attorney
judit.rius@keionline.org

Knowledge Ecology International (KEI)
www.keionline.org / www.cptech.org
1621 Connecticut Ave, NW, Suite 500 Washington, DC 20009 USA
Tel.: +1.202.332.2670, Ext 18 Fax: +1.202.332.2673