[Ip-health] Should the government start handing out prizes for science breakthroughs?

[heeseob nam]

http://www.slate.com/id/2182663/

Invent a Drug, Win $1 Million
Should the government start handing out prizes for science breakthroughs?
By Catherine Rampell
Posted Wednesday, Jan. 23, 2008, at 1:16 PM ET

The X Prize trophy
Right now, senators, inventors, and tech companies are squabbling
about how to reform the patent system to encourage more innovation.
Some version of the embattled patent-reform legislation is expected to
pass next month, and stakeholders are preparing for a gory fight over
all sorts of itty-bitty nitty-gritties, such as how to calculate
damages for patent infringement.

Meanwhile, some scholars and politicians are proposing something far
more radical: They want to junk, rather than just rejigger, the patent
system. Instead of handing out patent monopolies, they say, the
government should offer cash prizes for inventions. In an ideal world,
this would lead to cheaper products and motivate more research and
development in fields that are unprofitable but socially valuable=97such
as new treatments for diseases that affect poor people. This solution
may seem extreme, but targeting certain elements of the idea to
particular inventions would be both politically feasible and
entrepreneurially effective.

Patents are supposed to motivate innovation by guaranteeing monopolies
on sales of inventions. Let's imagine, for example, that you invent
and patent a vaccine for malaria. For 20 years, no one can compete
with you in selling your invention to your customers.

The problem with malaria drugs, though, is that few manufacturers want
to compete over your (almost entirely poor, almost entirely African)
clientele. The few that do=97mostly nonprofits and the governments of
developing countries=97can't afford to pay the colossal licensing fees
you'd need to cover your $1.2 billion research and development costs.
As a result, inventors like you, or big drug companies like Merck and
Pfizer, aren't developing drugs for poor people. Like any other
profit-driven industry, drug companies devote their resources to
products that earn them money. In fact, in the most oft-cited case
where a major pharmaceutical company developed a drug just for poor
Africans, the drug was initially intended to treat an ailment with
much deeper pockets: worms in domesticated animals (PDF).

What if the reward for innovation were an upfront cash prize,
independent of the market for the invention? This is what Sen. Bernie
Sanders, I-Vt., is proposing in a bill that's escaped the notice of
the heavyweights fighting over the patent-reform legislation. Sanders'
bill would eliminate drug monopolies; instead, all medical
developments would automatically enter the public domain, so more
companies could manufacture each new drug. With increased
manufacturing competition and zero licensing fees, drug prices should,
theoretically, plummet.

It's an enticing idea, and one that's not original to Sanders. Perhaps
because it relies on using market forces to motivate socially
conscious entrepreneurship, politicians and scholars from all over the
political spectrum have had their eyes on prizes. This past year
alone, John Edwards (PDF), Lindsey Graham, Hillary Clinton, Newt
Gingrich, and Nobel laureate Joseph Stiglitz, among others, have each
suggested prize systems for medical and environmental inventions. And
there are well-known precedents for this scheme: Over the past few
centuries, prizes have been designated for a longitude-measuring
device (announced 1714, for up to 20,000 British pounds), a nonstop
flight from New York to Paris (announced 1919, for $25,000; eventually
awarded to Charles Lindbergh), and private space travel (announced
1996, the $10 million X-Prize).

The successful prizes=97that is, those that found a winner=97tended to
have a few features in common. They were usually for solutions to
specific, clearly defined problems, rather than being part of a
blanket system to reward all innovations. They also allotted a
generous amount of time for the feat to be accomplished before the
prize expired (if it expired at all); they offered high rewards that
presumably outweighed the costs of research as well as the profits
that could be earned from diverting resources into alternate
endeavors; and they were high-profile, guaranteeing the prizewinner
fame as well as fortune.

But there were failures, too=97most notably the wholesale prize systems
offered by the Soviet Union (set up in 1919, for virtually all
inventions) and the U.S. Patent Compensation Board (established in
1946 for private innovations in atomic energy, which couldn't be
patented for national security reasons). By most accounts, these
initiatives failed to generate much entrepreneurial creativity because
the pots weren't big enough to motivate investment in multiple
large-scale research programs. Perhaps also because they were so
generalized, they didn't seem to attract the same attention to
whatever problems they were trying to solve.

These two failings would likely afflict the industrywide
prizes-not-patents system Sanders proposes. That is, if it ever
survived the U.S. drug lobby's reflexive defense of its precious
business model. Even if the bill could pass, its $80 billion annual
price tag would make the prize fund difficult to sustain. Inventors
and venture capitalists would have little reason to believe that the
government would make good on its prize promises.

The good news is we don't need to punt the whole patent system to
promote research for neglected diseases or other worthy causes.
Instead of setting up an industrywide prize system, a few reputable
charities (or a government agency with a brilliant PR team and an
ironclad escrow account) should offer attractive prizes for solutions
to carefully chosen problems. After all, if a malaria-vaccine prize
could match or even surpass the expected profits for a
weight-loss/hair-growth/allergy drug, companies would follow the
money. And if the prize were given on condition of forgoing a patent,
the drugs could still be manufactured royalty-free. As for which
unprofitable causes to target, these types of prizes may be most
helpful for problems that look the most hopeless. (Research grants,
after all, are the traditional way of subsidizing worthy but
unprofitable causes, but they are less useful than prizes in areas
where there are no promising leads on which specific research or
researchers will succeed.)

One of the best ideas in the Sanders bill could be adapted to this
more-targeted system of prizes. The legislation proposes an
interesting way to solve the problem of incremental drug development.
The development of a new drug tends to happen in small steps, often
contributed by different companies. Under the traditional patent
system, there's seldom incentive to do the expensive initial legwork,
since a newcomer could reverse-engineer your drug, improve upon it
slightly, and push you out of the market. One alternative is to offer
an advanced market commitment, in which a government or nonprofit
guarantees purchase of a minimum number of doses. But with AMCs, such
as the one the Gates Foundation promised for a pneumococcal-disease
vaccine, there's no incentive to make those incremental improvements.

The Sanders solution rewards both the pioneer and the newcomer, who
must share prizes every year over the course of a decade, based on an
annual recalculation of how many people (or quality-adjusted life
years) each drug is responsible for saving. Here's how this system
might be applied to a prize for curing malaria: Let's say Company A
developed an AIDS treatment that cured some percentage of the
disease's victims; at first it would receive the entire payout from
the prize fund every year. But Company B would get a share if it
figured out a way to improve the formula. If the new drug were twice
as effective as the original, the two companies would split the annual
prize 50-50 every year thereafter.

Sanders' bill reminds us that adapting incentives to specific
industries' research processes and business models is key. This
observation explains why the lawmakers brokering the comprehensive
patent-reform legislation are being drawn and quartered by different
industries that want different provisions suited to their very
different business models. There may be no all-encompassing solution
to bring morality to the inherently amoral marketplace. But there are
niches where=97through private charities or more targeted legislation=97we
can create new markets that steer the entrepreneurial spirit toward
the social good.

--
Heeseob Nam
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