A great post, in which you rightly focus on incentives. But I was unimpressed by this point: “Patents provide too much incentive to game the system by trying to maximize the value of the patent relative to the actual innovation involved.” Any system, including your (very sketchily described) prize system, can and will be gamed. What we need is a system that works rather well *even though it is being gamed*.
This analysis is ignorant. Many small companies exist solely to discover/develop drug candidates to sell to big pharma. This model exists in large part due to the cost and knowledge required to take drug candidate through the fda approval process. Take away the money to buy drugs from small discovery companies, what happens?
I don’t think prizes would work well. Many truly new drugs aren’t that good, how would you set rewards for the next drugs that come and are very significant improvements? How would you capture off label uses? A prize system would quickly degrade to academic paper issues, only new targets will be pursued, at the expense of improving existing drugs.
1) the big pharma companies strike me as mostly focusing on their core strengths of marketing, legal, and lobbying. They let smaller entities develop drugs and then acquire them. The difference between what they pay the developer and when they ultimately make off the drug is the value of those things.
2) there was a big stink recentely about an Alzheimer’s drug that technically got approved but didn’t really work. Since everything not forbidden is mandatory, insurers would be forced to cover it. There was ultimately a partial approval that made us very hard to get after an uproar.
3) the best way to get accurate information on how useful a drug is to make the user pay for it. They have skin in the game. But we’ve been moving in the opposite direction
4) most peoples complaints about drugs have little to do with profits or r&d, but with obscure rules related to government reimbursement that drive odd nominal price dynamics
I wonder how much litigation there would be by companies trying to game the rules of the prize system. "You said you would award $X for producing measured outcome Y, our drug produced Y in a trial we cleverly fixed to do so, you refused to grant the prize because we didn't meet the spirit of Y but the rules don't say we can't do that" etc. There is some need here for what you would call "principles based regulation" but it seems hard to do that without depending too much on the interpreters of the principles to not play favorites, especially since the people expert enough to be good judges may have revolving door type conflicts of interest.
Ultimately, the issue is that current drug profits are exactly like a prize system - almost a lottery. What you are asking for is a prize system that rewards an outcome the prize organizations can crow about; and what I want is a system that has a reliable feedback loop so that reliably enhanced therapy is the most reliable route to a more likely payout. Currently the biggest issue in medicine is the lack of effective personalized medicine - 'patients needed to treat' numbers are high for many of the most effective drugs, which in essence means that they work great for some people, but nobody knows in advance who those people will be. In short, I don't need better drugs, I need a way to tell who will benefit over the long term from an existing drug. This is not quite orthogonal to other potential ways of measuring progress, but it's pretty far off many.
I was in the biopharma business for 30 years, mostly working with the small biotechs that got snapped up by Big Pharma (BP). There are several things that AK misses here.
One is that the time from discovery (finding biological targets, rodent studies) to market is 10-20 years (in large part because FDA-imposed 3-stage clinical trials take so much time & money), and the failure rate is huge. So not only is the fixed cost large, the risk of failure is also huge and unpredictable. Many drugs flop in Phase 3, after '00s of millions of dollars have been spent.
Moreover, BP buys small biotech innovators because BP is organizationally/bureaucratically incapable of innovation. That's why Roche bought Genentech, which no longer innovates. What BP is best at is gaming the regulatory system and marketing to payers.
Moving from patents to prizes will not fix any of this, although it might fix gaming the patent system, e.g. AbbVie's Humira ($60k/year autoimmune drug), which has been strung out through legal manipulation of the patent system so that despite being approved in 2002(!), has been able to keep out biosimilar competition until 2023, well beyond the original patent date.
The entire premise of the patent system, why it is good for society, is not 'because it lets some people and companies become stinking rich, much richer than they would be without the monopoly right'. This is the downside of a patent system, and one which we agreed to put up with in exchange for the benefit. The benefit we were supposed to get was the revealing of a trade secret. Before the patent system existed, businesses guarded their trade secrets jealously. When the inventor died, or the company went bankrupt, or it was purchased by a firm that had no interest in that particular invention -- the secret was lost as society as a whole lost, because we no longer knew how to do such a thing. So we promised to use the entire force of the state to keep the competitors off the backs of the inventors for a good long time, as long as they would tell us the secret. That was the deal.
The patent system is therefore not ideally set up to handle pharmaceuticals -- in the way it handles mechanical inventions. You get a patent on a chemical formula, and the process by which you made it, but it is exceedingly rare for this to be a secret that anybody would willingly pay for. We are not living in the times when hucksters are marketing 'Doctor Jim's Miracle Blue Pills' and we all want to know what is in the pills - this is information you get by reading the 'Ingredients' label on the bottle. Take this information to any industrial chemist, and say you want some, and they will nearly always answer 'how much do you want?'. It's rare for there to be any secret in how to make the stuff.
But there are secrets we want, which pretty much boil down to 'When should I prescribe this, and to whom?' All of these secrets are part of the clinical trial. But these secrets are not the ones that are traded for. The public is getting swindled on the deal. You need to file a FOI request in order to get the results of a trial and when you do you get a stack of paper with tons of things redacted because they are a trade secret. But that violates the whole premise of the deal -- you give up your trade secrets in exchange for a monopoly. The deal where you get the monopoly and get to keep your trade secrets too is not one that benefits the public.
So, the reason that your proposal has merit, according to me, is not because of the Prize incentives. I figure they will be gamed as much as anything else, and end up not doing much. What will do much is to get rid of the monopoly, which is a great good on its own.
We now have very good evidence that the regulatory agencies that were supposed to protect us from bad actors in the pharmaceutical industry have been entirely captured by them instead. When you discover that the clinical trials cannot be independently verified, and that an Emergency Use Authorisation means 'give it to everybody without running serious safely checks, if enough people are damaged we can pull it later' and individual doctors are receiving kickbacks for the drugs they prescribe, it's time to end the monopoly.
Just to be clear, you are asking for a bureaucratic determination of value instead of a poorly functioning market.
The details of what you propose are a bit sketchy but I'm rather skeptical about this prize. In 2021, three drug companies had profits of $20-25 billion. I can't envision a successful method of awarding prizes on that scale but maybe I'm too pessimistic.
As an innovator, when I see price controls I assume that hitting a real winner will result in some government bureaucrat taking my winnings while I pay for all my losing ideas. At that point I should only innovate in areas that are of interest to me, independent of whether they can make a profit.
Isn't reworking regulations concerning the costs of the approval process a big part of the problem?
Under either patents or profits, other countries that negotiate less than US prices or did not contribute to the prize money still free ride. Is this just part of the package of being a hegemon or can we do better as we do in space.
Like this approach. For example the price for a drug that significantly improves the treatment of Alzheimer’s should be huge…$50B or more based on results. The price ongoing, as you stated, would be closer to marginal costs. Everyone wins.
A great post, in which you rightly focus on incentives. But I was unimpressed by this point: “Patents provide too much incentive to game the system by trying to maximize the value of the patent relative to the actual innovation involved.” Any system, including your (very sketchily described) prize system, can and will be gamed. What we need is a system that works rather well *even though it is being gamed*.
This analysis is ignorant. Many small companies exist solely to discover/develop drug candidates to sell to big pharma. This model exists in large part due to the cost and knowledge required to take drug candidate through the fda approval process. Take away the money to buy drugs from small discovery companies, what happens?
I don’t think prizes would work well. Many truly new drugs aren’t that good, how would you set rewards for the next drugs that come and are very significant improvements? How would you capture off label uses? A prize system would quickly degrade to academic paper issues, only new targets will be pursued, at the expense of improving existing drugs.
1) the big pharma companies strike me as mostly focusing on their core strengths of marketing, legal, and lobbying. They let smaller entities develop drugs and then acquire them. The difference between what they pay the developer and when they ultimately make off the drug is the value of those things.
2) there was a big stink recentely about an Alzheimer’s drug that technically got approved but didn’t really work. Since everything not forbidden is mandatory, insurers would be forced to cover it. There was ultimately a partial approval that made us very hard to get after an uproar.
3) the best way to get accurate information on how useful a drug is to make the user pay for it. They have skin in the game. But we’ve been moving in the opposite direction
4) most peoples complaints about drugs have little to do with profits or r&d, but with obscure rules related to government reimbursement that drive odd nominal price dynamics
I wonder how much litigation there would be by companies trying to game the rules of the prize system. "You said you would award $X for producing measured outcome Y, our drug produced Y in a trial we cleverly fixed to do so, you refused to grant the prize because we didn't meet the spirit of Y but the rules don't say we can't do that" etc. There is some need here for what you would call "principles based regulation" but it seems hard to do that without depending too much on the interpreters of the principles to not play favorites, especially since the people expert enough to be good judges may have revolving door type conflicts of interest.
That all might still be a lesser evil than patent monopolies. Interestingly, the last time I remember hearing this proposal it was from the leftist economist John Quiggin in an old Crooked Timber post: https://crookedtimber.org/2004/08/04/how-should-we-pay-for-medical-research/
Ultimately, the issue is that current drug profits are exactly like a prize system - almost a lottery. What you are asking for is a prize system that rewards an outcome the prize organizations can crow about; and what I want is a system that has a reliable feedback loop so that reliably enhanced therapy is the most reliable route to a more likely payout. Currently the biggest issue in medicine is the lack of effective personalized medicine - 'patients needed to treat' numbers are high for many of the most effective drugs, which in essence means that they work great for some people, but nobody knows in advance who those people will be. In short, I don't need better drugs, I need a way to tell who will benefit over the long term from an existing drug. This is not quite orthogonal to other potential ways of measuring progress, but it's pretty far off many.
I was in the biopharma business for 30 years, mostly working with the small biotechs that got snapped up by Big Pharma (BP). There are several things that AK misses here.
One is that the time from discovery (finding biological targets, rodent studies) to market is 10-20 years (in large part because FDA-imposed 3-stage clinical trials take so much time & money), and the failure rate is huge. So not only is the fixed cost large, the risk of failure is also huge and unpredictable. Many drugs flop in Phase 3, after '00s of millions of dollars have been spent.
Moreover, BP buys small biotech innovators because BP is organizationally/bureaucratically incapable of innovation. That's why Roche bought Genentech, which no longer innovates. What BP is best at is gaming the regulatory system and marketing to payers.
Moving from patents to prizes will not fix any of this, although it might fix gaming the patent system, e.g. AbbVie's Humira ($60k/year autoimmune drug), which has been strung out through legal manipulation of the patent system so that despite being approved in 2002(!), has been able to keep out biosimilar competition until 2023, well beyond the original patent date.
The entire premise of the patent system, why it is good for society, is not 'because it lets some people and companies become stinking rich, much richer than they would be without the monopoly right'. This is the downside of a patent system, and one which we agreed to put up with in exchange for the benefit. The benefit we were supposed to get was the revealing of a trade secret. Before the patent system existed, businesses guarded their trade secrets jealously. When the inventor died, or the company went bankrupt, or it was purchased by a firm that had no interest in that particular invention -- the secret was lost as society as a whole lost, because we no longer knew how to do such a thing. So we promised to use the entire force of the state to keep the competitors off the backs of the inventors for a good long time, as long as they would tell us the secret. That was the deal.
The patent system is therefore not ideally set up to handle pharmaceuticals -- in the way it handles mechanical inventions. You get a patent on a chemical formula, and the process by which you made it, but it is exceedingly rare for this to be a secret that anybody would willingly pay for. We are not living in the times when hucksters are marketing 'Doctor Jim's Miracle Blue Pills' and we all want to know what is in the pills - this is information you get by reading the 'Ingredients' label on the bottle. Take this information to any industrial chemist, and say you want some, and they will nearly always answer 'how much do you want?'. It's rare for there to be any secret in how to make the stuff.
But there are secrets we want, which pretty much boil down to 'When should I prescribe this, and to whom?' All of these secrets are part of the clinical trial. But these secrets are not the ones that are traded for. The public is getting swindled on the deal. You need to file a FOI request in order to get the results of a trial and when you do you get a stack of paper with tons of things redacted because they are a trade secret. But that violates the whole premise of the deal -- you give up your trade secrets in exchange for a monopoly. The deal where you get the monopoly and get to keep your trade secrets too is not one that benefits the public.
So, the reason that your proposal has merit, according to me, is not because of the Prize incentives. I figure they will be gamed as much as anything else, and end up not doing much. What will do much is to get rid of the monopoly, which is a great good on its own.
We now have very good evidence that the regulatory agencies that were supposed to protect us from bad actors in the pharmaceutical industry have been entirely captured by them instead. When you discover that the clinical trials cannot be independently verified, and that an Emergency Use Authorisation means 'give it to everybody without running serious safely checks, if enough people are damaged we can pull it later' and individual doctors are receiving kickbacks for the drugs they prescribe, it's time to end the monopoly.
Just to be clear, you are asking for a bureaucratic determination of value instead of a poorly functioning market.
The details of what you propose are a bit sketchy but I'm rather skeptical about this prize. In 2021, three drug companies had profits of $20-25 billion. I can't envision a successful method of awarding prizes on that scale but maybe I'm too pessimistic.
As an innovator, when I see price controls I assume that hitting a real winner will result in some government bureaucrat taking my winnings while I pay for all my losing ideas. At that point I should only innovate in areas that are of interest to me, independent of whether they can make a profit.
Isn't reworking regulations concerning the costs of the approval process a big part of the problem?
Under either patents or profits, other countries that negotiate less than US prices or did not contribute to the prize money still free ride. Is this just part of the package of being a hegemon or can we do better as we do in space.
The The Foundation for Research on Equal Opportunity doesn't sound like a free market think tank. They might support capitalism or socialism.
Agree 100%
Like this approach. For example the price for a drug that significantly improves the treatment of Alzheimer’s should be huge…$50B or more based on results. The price ongoing, as you stated, would be closer to marginal costs. Everyone wins.