Delinkage Debunked: Why Replacing Patents With Prizes for Drug Development Won’t Work

Philip Stevens Stephen Ezell February 3, 2020
February 3, 2020
Separating the cost of biopharmaceutical research and development from the final market price of medicines would misalign incentives, raise bureaucratic costs, and limit innovation.
Delinkage Debunked: Why Replacing Patents With Prizes for Drug Development Won’t Work

Introduction

Prizes as Innovation Incentives

Weaknesses of the Delinkage Approach

Tackling Global Health Care Challenges

Endnotes

Introduction

Should the market-based system of drug development, which relies on IP as its primary incentive, be replaced by a system of government-funded prizes?

The answer is an emphatic “yes” according to proponents of the idea, who claim the current market- and patent-based system makes drugs too expensive, while failing to provide cures for those in need who may be unable to pay, such as citizens of developing countries.[1]

Under a prize system, the developers of new drugs would no longer receive the investment and legal certainty patents provide to incentivize R&D and innovation, but would be rewarded for the successful development of a new medicine via a cash prize from a government or group of governments.

In return, winning companies would have to surrender their IP to that government or group thereof, allowing generic manufacturers to enter the market immediately. Subsequent competition between generic drug manufacturers, so the theory goes, would allow new drugs to be sold at their marginal cost of manufacture (plus extra for a reasonable rate of profit), enabling access to those in need.

Meanwhile, countries’ governments and international organizations would control and determine which disease areas are rewarded by prizes, supposedly ensuring funding is allocated to health priorities in a fair and transparent fashion.

Delinking the cost of R&D from the final price paid for a medicine, and making governments the planners and funders of drug development, sounds like a simple solution to the complex range of factors that are responsible for poor health care provisions in many nations. Although the idea is constantly promoted at international multilateral organizations by a small coalition of developing countries and nongovernmental organizations (NGOs), no country has yet taken the plunge.

The reason for this hesitance could be that replacing patents with prizes would almost certainly do more harm than good, resulting in a politicized drug development system that misaligns incentives, raises bureaucratic costs, and stifles innovation.

Prizes as Innovation Incentives

Using prizes to encourage inventors to solve problems is not a new idea. The Longitude Prize, sponsored by the British government, was famously awarded in 1737 to John Harrison for his novel, clock-based solution for determining a ship’s longitude. Prizes were also offered in Napoleonic France for a functional water turbine, and for a method of preserving food for the army: the precursor of the now ubiquitous tin can.

Innovation prizes fell out of academic and political fashion for most of the 20th century (with the exception of the technologically backward Soviet Union), as patents and other forms of IP rights prevailed as the main driver of technological innovation. This move away from innovation prizes toward today’s market-based system of innovation reward was hardly surprising given the deep structural problems with prizes, as documented by economic historian Dr. Zorina Khan in her 2015 analysis of dozens of 19th-century innovation prizes administered in Britain, France, and the United States.[2] As Khan concluded, “History indicates that the evolution of the institution of innovation prizes over the past three centuries serves as a cautionary tale rather than a success story.”[3]

Nevertheless, since the early 2000s there has been a resurgence of academic and political interest in replacing intellectual property rights with prizes, particularly within the field of drug development. Proponents of prizes see two fundamental problems with the current system of drug development, which they believe could be solved by government-funded prizes.

First, the intellectual property system’s mechanism for encouraging innovation—granting patents and an attendant temporary period of market exclusivity to inventors—creates what economists call “deadweight losses.” Put simply, patents theoretically enable their holders to exploit their market monopoly by inflating prices many multiples beyond the marginal cost of production. Under this view, this leads to significant welfare losses to society: Patients who may be unable to pay are prevented from accessing the new medicine, while those who do have access are forced to spend money on expensive drugs rather than on other items within the wider economy, thus creating economic distortions. But while patents may harm short-term allocation efficiency, they are critical to dynamic efficiency—the development of new products and services—and the economic literature is clear that the benefits of dynamic efficiency are vastly larger than the modest allocation efficiency losses.[4]

While patents may harm short-term allocation efficiency, they are critical to dynamic efficiency—the development of new products and services—and the economic literature is clear that the benefits of dynamic efficiency are vastly larger than the modest allocation efficiency losses.

Second, delinkage proponents assert that the IP system misdirects innovation activity, leaving it focused mainly on disease areas that affect large patient populations in well-to-do countries at the expense of citizens in developing nations. But this is wrong. It’s not that the IP system fundamentally misdirects innovation activity, it’s that there are market failures in drug development related to some markets that are too small, from diseases that either only affect a small number of patients or are prevalent in nations where incomes are so low people cannot afford to spend very much on medicines.

Nevertheless, delinkage proposals have emerged worldwide. In the United States, Senator Bernie Sanders (D-VT), as part of his campaign to become the 2020 Democratic presidential nominee, has called for the creation of a Medical Innovation Prize Fund that would launch a prize fund equal to 0.55 percent of U.S. gross domestic product (GDP), an amount greater than $80 billion per year, with the federal government supplying half the fund and private health insurance companies the other half.[5] Nobel Prize-winning economist Joseph Stiglitz has backed prizes, as has U.S. economist Dean Baker of the Center for Economic and Policy Research, who has written that “a prize system would have enormous advantages over the current [life-sciences innovation] system.”[6] At the international level, a small coalition of NGOs and countries (including Brazil, China, Egypt, India, Indonesia, and South Africa) have for many years tried to get delinkage written into international law by pushing it at rule-setting intergovernmental organizations such as the World Health Organization (WHO) and the United Nations (UN) Human Rights Council.[7] For these countries, it’s a clear opportunity for them to convince developed nations to spend money on drug development (through prizes) to address diseases in their nations, and to also lower drug prices for them.

Thanks to the efforts of this coalition, delinkage featured in a 2017 WHO resolution on cancerand the 2018 declarations for UN High-Level Meetings on Tuberculosis and Non-Communicable Diseases.[8]The 2016 UN High-Level Panel on Access to Medicines mentioned delinkage 32 times, and even included a recommendation for a binding R&D Treaty.[9]

While the use of prizes can make important and meaningful contributions to helping address some global health care challenges, prizes cannot represent the “be all end all” approach to underpinning the global biomedical innovation system or tackling difficult public health challenges.

More recently, delinkage was adopted in 2019 by the UN Human Rights Council’s agenda on access to medicines, while in July 2019, delegates in New York considered a range of delinkage provisions in the Political Declaration for the UN High-Level Meeting on Universal Health Coverage.[10]

There is clearly a great deal of political and diplomatic energy being expended on making delinkage a policy reality. But is this effort appropriate and worth it?

Weaknesses of the Delinkage Approach

Prizes have a place, but as the following sections argue, there are many weaknesses with a delinkage approach that would make prizes the primary mechanism for incentivizing global life-sciences innovation.

The first and most significant is that it is extremely unlikely governments would truly adequately fund such prizes as the primary mechanism for underpinning global life-sciences innovation. If anything, a pure prize system would likely stimulate more free-riding by nations, and thus actually exacerbate underinvestment.

The second is a prize approach would be unlikely to engender the risk-intensive innovative activity necessary to develop new medicines, and certainly not in comparison with a global life-sciences innovation system that is generally working effectively today toward new drug discovery.

Third, there are significant administrative, mechanical, and operational challenges associated with administering prize systems that would likely introduce inefficiency and politicization.

Fourth, while there are certainly myriad challenges in the provision of global health care, other approaches can more effectively help solve many of these problems.

Put simply, while the use of prizes can make important and meaningful contributions to addressing some of these challenges, prizes cannot represent the “be all end all” approach to underpinning the global biomedical innovation system or tackling difficult public health challenges.

Governments Would Be Unlikely to Adequately Fund a Delinkage System

Governments worldwide would need to come up with nearly $200 billion a year to comprehensively replace the current market- and patent-based system with a prize system. As noted, in America, U.S. Senator Bernie Sanders’s plan calls for an $80-billion-a-year prize fund. As Dean Baker has written, “The [U.S.] government already spends more than $30 billion a year to finance biomedical research through the National Institutes of Health. It would probably be necessary to increase this amount by $50–$60 billion a year in order to replace the funding currently supported through patent monopolies.”[11] In fact, drug companies invest in excess of $180 billion per year in R&D related to drug development.[12] But even accepting Baker’s lower number, in a political and fiscal environment wherein the U.S. Congress cannot even index the gas tax to inflation to pay for badly needed roads and bridges (even with gas prices close to their lowest levels in nearly a generation), the chances Congress would be willing to appropriate the funds needed for any of these proposals is close to zero.[13]

In fact, the U.S. Congress’s modus operandi is to enact policies to shift public-sector costs to the private sector through mandates, not to take away private-sector costs with public-sector spending. And with government balance sheets tight everywhere (government debt as a share of GDP in Europe reached an all-time high in the mid-2010s, for instance), it is equally unlikely governments in other countries would be willing to allocate the sums needed. Given the general unwillingness of the public or lawmakers to support higher taxes or spending (in the United States or elsewhere), such proposals to replace private revenue with government spending would almost certainly lead to reduced overall investment (combined private and public) in biomedical innovation.

Moreover, if the United States did not step up to the plate, the effort would be stillborn from the start. That is because the United States currently accounts for just under half of global biomedical R&D investment.[14] And even that figure belies how significant U.S. contributions have been to biomedical R&D in recent years, with one study finding that the United States has been the world’s largest global funder of biomedical R&D investment over the past two decades, with a share some analyses suggest reached as high as 70 to 80 percent over that time period.[15] A prize-based system would largely replace U.S. private capital with U.S. taxpayers as the leading funder of global biomedical innovation, and make the resulting IP and innovation a freely available global public good—a key reason why so many developing countries favor the scheme.

Indeed, in a prize system, innovators would hold few cards. Their R&D costs would already be sunk at the time of prize disbursement, and to qualify for the prize, details of the invention would have to be disclosed to the government (or an international agency) at a level of detail far beyond that currently required by the patent system. Thus, the main advantage of a delinkage system for countries such as China—which as part of its “Made in China 2025” plan has targeted building the largest generic drug industry in the world—would be to obtain free IP for its budding industry, the lion’s share of which would be funded by prizes paid for by taxpayers from developed nations.[16] In other words, what delinkage proponents really want is for taxpayers in developed countries (principally the United States) to finance the bulk of global biomedical research and innovation, which would then become freely available for generic drug manufacturers to immediately copy at marginal cost and then export back to the countries paying the most for the prizes. As such, a prize model would almost surely mean large trade deficits in biopharmaceutical products for developed nations.

Delinkage would further advance proponents’ fundamental goal of undermining a global IP system they abhor, as reflected in reports such as Dean Baker’s “Is Intellectual Property the Root of All Evil? Patents, Copyrights, and Inequality.”[17]  Or, as Baker wrote with Joseph Stiglitz and Arjun Jayadev in a Project Syndicate article, “The IP standards advanced countries favor typically are designed not to maximize innovation and scientific progress, but to maximize the profits of big pharmaceutical companies and others able to sway trade negotiations.”[18] In this way, delinkage isn’t much different from the compulsory licensing policies they’ve advocated for several middle-income countries—including Brazil, Colombia, India, Indonesia, Malaysia, and Thailand—to issue on patents for innovative medicines over the past 20 years. Whether through delinkage or compulsory licenses, advocates want to weaken global IP rights, and force divulgence of IP at prices that would usually be far below market (if not outright free).

What delinkage proponents really want is for taxpayers in developed countries (and principally the United States) to finance the bulk of global biomedical research and innovation, which would then become freely available for generic drug manufacturers to immediately copy at marginal cost and then export back to the countries paying the most for the prizes.

But returning to the underlying underinvestment and free-riding challenge; this challenge isn’t just theoretical, it’s already a reality. That’s because a drug development system in which prizes replaced intellectual property would have very limited impact if only one country chose to adopt it. Companies would be discouraged from applying for prizes in that country because unless the award were large enough to cover what otherwise would have been their global revenues from development of a patent-protected drug, they would not apply. Instead, they would focus their efforts elsewhere on countries that retained robust standards of IP protection.

This explains why proponents of a prize-based delinkage system have also been pushing for a global and legally binding Medical R&D Treaty (MRDT). In its most complete form, such a treaty would place R&D spending obligations on all countries, and centrally direct public funding toward disease areas the treaty secretariat considers a priority. Under such a treaty, intellectual property rights would gradually be replaced by delinkage mechanisms such as prizes.

Various efforts have been made to promote this treaty at WHO over the years, without success. Perhaps this is because the idea, while appearing simple on the surface, would give rise to all manner of complexities and perverse incentives. For instance, in his analysis of the feasibility of a global medical R&D treaty, Oxford University’s Andrew Farlow has raised several pertinent questions, including:

How would it be possible to compel countries to meet their R&D funding obligations and prevent free-riding, particularly in the face of historic government underinvestment in R&D? How would the treaty secretariat be able to properly value medical inventions, and accurately measure R&D spending flows? How could politics be removed from the determination of R&D spending priorities, and how could countries be prevented from gaming the system? These are complex issues which an R&D treaty would struggle to overcome.[19]

Answers to such questions thus far have been clearly wanting. As part of WHO’s push to increase investment in global health R&D, WHO member states in 2013 agreed to establish a Global Observatory on R&D to monitor spending and set priorities, and also to undertake a number of global health R&D demonstration projects. At the World Health Assembly in Geneva in May 2017, Marie-Paule Kieny, WHO assistant director-general for Health Systems and Innovation, remarked on the chronic underfunding of this “critically important” agenda, noting that one of the demonstration projects (on a nano-based malaria drug delivery system) is being cancelled unfinished due to a lack of funding.[20]