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Driving Innovation: Drug Patents vs. Prizes

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pharmaceutical innovation: prizes vs patentsJoseph E Stiglitz, American economist and professor at Columbia University, states that prizes should be favored over patents to reward and stimulate innovation. The uniqueness of the patent system referred in the paper is that the reward for innovation should be in the form of a monopoly, preventing competitors from entering the market and enabling innovators to derive the maximum possible benefit from the ability to fix prices for a given period after a patent has been granted.

Critics of patents state that in conjunction with other exclusive rights patents lead to increased drug prices, restricted access to potentially life-saving drugs and medical technologies, global health inequities, and the production of medicines that have negligible incremental therapeutic value like follow-on drugs, which are similar to established blockbuster drugs, very commonly referred to as “me-too drugs.” The current patent system compensates patent owners by enabling them to have temporary market protection of their patented products to consumers who can pay prices that can cover the costs of R&D and marketing. Under this system companies under this system have little incentive to invest in R&D for minimal returns, and consequently “non-profitable” or neglected diseases. Additionally, the patent-protected prices can result in drugs being unaffordable to patients in developing nations. According to the WHO, millions of lives have been lost because patients could not get access to existing drugs and vaccines. Many different proposals have been put forth to balance access to medicines and address R&D gaps.

The Benefits of Patents

Based on industry estimates, patents contribute to roughly 70% to 80% of overall revenues of pharmaceutical companies. They are normally treated equivalent to their product portfolio and also one of the most effective methods to safeguard the innovation and generate significant ROIs. Patents also assist in recouping investments related to R&D and marketing of the drug.

By awarding market protection to inventors with novel inventions, the government facilitates publication of new inventions and how to implement them while simultaneously protecting the rights of inventors. This free exchange of information is the key to fast-paced technological advancement and makes new ideas accessible to consumers in the shortest possible time. The key to this entire process is novelty; protecting obvious improvements would stifle innovation.

The Benefits of Prizes

In the quest to find an improved system, the concept of offering prizes to innovators who find successful solutions to pressing problems has seen increased interest. Proponents argue that governments spend billions of dollars on basic medical research, only to have private corporations earn exclusive rights to sell these innovations. At the same time, there are classes of drugs that patients desperately need that do not attract interest from companies and are therefore not developed. This is where prizes come in. By offering direct incentives for innovation governments can complement the demand-driven patent system and encourage desired innovations. A recent report by McKinsey supports the use of prizes to incentivize social changes.

A False Dichotomy

A system comprised of purely prizes or purely patents is not optimal as each system bears substantial drawbacks.

Prizes can have a number of pitfalls when compared to patents. An apparent barrier is that incentives need huge up-front expenses on the part of the prize sponsors. Many prizes that are the main focus of the McKinsey report were given away by affluent philanthropists who undertook the responsibility of offering a particular contest independently. The main difficultly in this case is it leaves the task of selecting and prioritizing innovation objectives. And when this system has to be implemented on a large scale, it translates to sponsorship by a large organization or the government that would decide on and offer prizes for innovation in an equitable manner. This translates to substantial costs being borne by taxpayers. This system also means that the innovator is not accountable for the failure or success of their inventions as the prize could be rewarded to the wrong party before there is sufficient information about the failure or success of the given invention.

The Best Of Both The Worlds

Using patents as the main innovation incentive can make drugs prohibitively expensive. Simultaneously, patents fails to incentive development of drugs for needy, but not profit-enabling, conditions. Patents work best when employed in combination with innovation prizes, grants and research contracts.  This enables governments to maintain influence over the directions of drug development while still encouraging demand-driven solutions.

Stiglitz backs prize-based innovations in the drug industry. An important reason for this is that pharmaceutical spending greatly favors profitable treatments for conditions common in developed nations. So prizes can provide a strong complement to patents in cases where there is otherwise little commercial motivation.

Sole reliance on patents or on prizes has many negative sequelae. As described above, both system have benefits and drawbacks. Further, the systems are not mutually-exclusive — they can both be employed to drive innovation. For example the FDA offers prizes in the form of market exclusivity for patent challenges, development of new drugs, or for development of drugs for rare diseases.


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