[Ip-health] Why is there resistance to prize funds?

Thiru Balasubramaniam thiru at keionline.org
Sun May 23 21:59:40 PDT 2010


Why is there resistance to prize funds?

I was recently asked the following question:


    What is your view on the treatment of prize funds. By all standards
it is treated as a radical off the wall proposal when in fact it is
market based. Why is there so much resistance?

My response was as follows:

The prize fund approach is of course a market mechanism. The early
formulations of the prize fund approach [1] as it applied to drug
development, in 2002 to 2004, focused on two different problems. One was
how to replace the reward for the final product development. The other
concerned the management and design of prizes that would stimulate
earlier achievements in science or the drug development process.

A February 17, 2004 paper in PloS, A New Trade Framework for Global
Healthcare R&D [2], discussed prizes and other approaches as follows:

    Many are doubtful that increased direct funding would generate
sufficient incentives or be managed efficiently enough. An alternative
market-based approach is one in which R&D organisations compete for
rewards for specific R&D output, referred to by economists as a prize
model (Wright 1983; Kremer 1998; Shavell and van Ypersele 2001). In a
simple formulation, governments would place large sums into a fund that
would be allocated every year to firms that bring new products to
market. This could work with or without patents. If products were
protected by patents or other intellectual property claims, the
government could grant compulsory licenses (a procedure allowed by trade
agreements to override monopoly rights on a patent, in return for
compensation to rights owners; see Box 1) and permit rapid introduction
of generic competition. The reward system could be a lump-sum payment,
eliminating any incentive to continue to market the product, or a
long-term payout structure, which would depend upon evidence of both
usage and efficacy. Prize systems could be designed to be fairly similar
to the current system, with big payoffs for successful entrepreneurs,
but even with this approach, there would be huge opportunities to
improve welfare. The reward system could be more rational than the
existing system, allocating greater rewards for innovative products and
less for ‘me too’ products that do not work better than existing
products. Premiums could be given for therapies that address treatment
gaps or for inventions that pave the way to new classes of drugs.

    Organisations competing for prizes might be expected to behave
secretly to ensure that they are the ones to obtain ‘credit’ for the
fruits of their work. However, progress in research is also driven by
free exchange of information. It may be possible to design models that
both reward R&D outputs and at the same time encourage complete and
continuous openness with intermediate research outputs. There are now a
number of examples of open collaborative public goods models (Cukier
2003), such as those used for the Human Genome Project. The proponents
of such models point to the success of GNU/Linux in the software field
as evidence that major projects can be undertaken with radically
different business models. One of the benefits of complete openness is
that it allows independent and open evaluation of R&D outputs, which
helps in the allocation of ‘credit’ whether in the form or prizes or new
research grants. The open-access publishing movement (Brown et al. 2003)
has the potential to help in this process by allowing independent
analysis of published science, which will help research funding agencies
measure research outputs.

By the Spring of 2004, Representative Bernard Sanders (now Senator
Sanders) asked to see a fully specified legislative proposal that would
only address the issue of replacing the monopoly reward for the final
product, without changing other aspects of the drug development process.
The result was a bill, drafted through the Spring and Summer of 2004,
(HR 417, 109th Congress [3], later reintroduced as S. 2010, 110th
Congress [4]) that would create a competitive mechanism where:

   1. the amount of the prize fund would be fixed,
   2. there would be a low technical threshold for qualifying for the
prize money (just registering a drug for sale),
   3. the amount of the prize money to any one drug developer would be
driven by a competition among qualifying products, and
   4. rewards would be based (in part) upon evidence that a product was
improving health outcomes, over and above the results one could expect
with existing products and technologies.

A draft of the Sanders bill was shown to Aidan Hollis when he visited
our offices in 2004. Our signature marketing pitch for the bill then was
that it would create a system to reward drugs for their impact on health

This early work that Tim and did on prize funds was designed in part to
overcome one major objection to prizes for specific technical
achievements -- namely that you have to have information about the
actual (high) technical standard to qualify for *a* prize, and that you
would have to know the amount of money to set aside for the prize,
risking always guessing wrong on the technical specifications, or
putting up too little or too much money.

The prize *fund* approach, offered the possibility of a new incentive
system for drug development that:

   1. refashioned the poorly designed economic incentive of the patent
monopoly (which encourages "me too" drug development and excessive
investments in socially wasteful and often harmful marketing), and
   2. which allows the copying of technologies at a zero cost, on the
margin, eliminating the dead weight cost of prices above marginal costs.

This is all about economics and markets, so far.

So why have some companies been so opposed to the prize fund approach?
One reason dates back to the earlier 19th century debate over prizes vs
patent monopolies. Prizes were perceived to be inferior because they
were small, relative to the profits from patent monopolies. Without
confidence the size of the prize funds would be realistically big, the
industry would prefer to rely upon patent monopolies.

Another reason, and I believe even more important, is that some
companies, like Merck, Pfizer, GSK, Sanofi-Aventis, etc, do not
internally see themselves as being primarily about innovation. They are
strong on the marketing of products, developed by others. Sanofi-Aventis
told us their growth came through acquisitions, rather than through
their internal pipeline.

Note that today many of these companies are run by people from legal
departments (Pfizer) or marketing (A ketchup saleman now runs Novartis).

Look at the analogy of the music industry and proposals for alternative
rewards to authors and performers. If you allow peer to peer file
sharing to be legal, but provide for an alternative reward system, the
interests of the artists can be protected, or even improved. But the
music industry lobby is today dominated by the publishers and
distributors of music, not the authors or performers. If the public
organizes its own distribution and marketing mechanisms, outside of the
current commercial business model, it may eliminate or marginalize a
support industry that would no longer be needed. Something similar is at
work in the prize fund discussion. If you can create are a reward system
that does not depend upon a marketing monopoly, what happens to the
firms that are largely about marketing?

In September 2002, Aventis held a scenario-planning exercise in
Ottrott-le-Haut, France, on “Pharma Scenarios for Sustainable
Healthcare.” It was at this meeting that the R&D treaty and the prize
fund approach were presented as an alternative a world of tough global
IPR norms and legal monopolies on the sale of medical products. Several
Aventis executives made it clear to Tim Hubbard and myself that they
were unhappy with anything that would do away with the marketing
monopolies -- and only reward the company for innovation -- an activity
that then employed less than 10 percent of the company work force.
Likewise, a few years back, I was in a meeting in London hosted by
several agencies and departments of the UK government, including Health,
Treasury and Development. They were discussing the Advanced Marketing
Commitment (AMC) model, which featured a monopoly by the seller, at
subsidized prices. The prices to the consumer were supposed to be a
regulated "zero profit" price. I asked the audience, which included also
a number of pharmaceutical company executives, if it would be possible
to just offer an open license, and allow generic competition -- given
the promises that the AMC price to consumers would be a "zero profit"
price. I was soon taken aside by a government official and told that
because of instructions from the Prime Minister's office and others, the
UK government would only consider proposals that allowed the seller of
vaccines or drugs to maintain control over the manufacturing and
distribution of the products. It turns out that some companies,
including but not limited to GSK, were very focused on measures to
protect the monopoly in the marketing of products. The thinking was that
if the generics industry could manufacture *and* distribute one product,
they could more easily and efficiently manufacture and distribute other
products. This describes "economics of scope" [5] in the production and
distribution of medicines, an important and sometimes overlooked issue.

This discussion also illustrates the reason why the pharmaceutical
industry has been anxious to push the Health Impact Fund as an
alternative to the prize fund proposals that operate with an open
license. They see these debates as being critical to the future of the
protection of existing high fixed cost marketing operations that are the
principle costs of doing business for big pharma companies, and in
further marginalizing the generics industry, as the effects of the TRIPS
and new FTA agreements become more constraining over time. Hollis and
Pogge are essentially collaborating with big pharma to kill off or
marginalize the competitive generics sector. Indeed, the major argument
that Hollis and Pogge are promoting are tortured arguments as to why
marketing monopolies are not bad for consumers.

There is also a different set of objections to some early versions of
prize funds that should be discussed, and which have been addressed in
the newer proposals by developing countries, small firms, academic
experts, medical researchers, MSF, KEI and others. Prize funds that only
reward final product development are a good replacement for patent
monopolies on products, but they also suffer from some of the same
shortcomings of patent monopolies on products, including the fact that
many actors do not have access to capital markets, and do not anticipate
being able depend upon developing an approved commercial product. There
are also concerns about access to knowledge, and incentives to be

Tim and I have written about these issues in our 2009 paper, which was
prepared for one of the groups working on the Obama transition team:
"Prizes for Innovation of New Medicines and Vaccines [6]," Annals of
Health Law.

The secrecy issue is perhaps the easiest one to address.

Prizes, arguably more even than patents, can give incentives to keep
knowledge and materials secret -- for example, to prevent competitors
from winning the prizes. The "open source dividend" approach, which was
embraced in several of the Bangladesh, Barbados, Bolivia, and Suriname
proposals to the WHO Intergovernmental Working Group (IGWG) on Public
Health, Innovation and Intellectual Property Rights, and the WHO Expert
Working Group (EWG) on R&D Financing, would share a percentage of end
product prize money with those who openly, freely and without
discrimination shared knowledge materials and technology. This new
feature in the prize funds would extend the benefits to thousands of
individuals, academic researchers, universities, government agencies,
non-profit institutions and businesses that open source knowledge. It is
an incentive to share. If the open source dividend is large, it is a
large incentive to share.

But how do you address the aspiration of small businesses, researchers
or non-profit organizations to win prizes, if they can't realistically
manage the whole drug development process? Can you offer lots of smaller
prizes, for interim progress toward drug development or scientific
progress? The answer is, yes you can, and you probably should, but you
also have to address the management of those prize programs, and address
issues such as the criteria for the selection of winning projects,
standards and mechanisms to address conflicts of interest, how to value
the prizes, the licensing of IP rights, and other issues. Several of the
Bangladesh, Barbados, Bolivia, and Suriname proposals include interim
prizes, such as the TB diagnostics [7] or the Chagas disease prize fund
[8] proposals, for example.

Tim Hubbard and I have also explored a competitive mechanism to manage
various types of open source projects, where you recognize the
complexity and/or ad hoc nature of some valuation or selection issues,
and also want private actors to respond to dynamic incentives.
Competitive intermediaries were discussed during the 2002 Aventis
exercise. In a crude first model, there was a proposal to create and
resource 4 funding entities, that would fund various open source
projects, including possibly interim results prizes or clinical trials.
After a period of experience and evaluation -- everyone working for the
worst entity would be fired, to be replaced by a new competitor.
Subsequently, there were models of resourcing competitive intermediaries
from decentralized parties (such as employers with health plans, or
insurance companies) who would be motiviated to resource the ones
expected to make the most productive funding decisions. These ideas were
explored further in our February 2004 PloS paper, and in 2005 book
chapter: "Paying for Public Goods, [9]" in Code: Collaborative Ownership
and the Digital Economy. Edited by Rishab Aiyer Ghosh. MIT Press,
Cambridge, 2005. (pp. 207 229), and explored in the 2009 Annals paper
[6]. I believe this is quite an important area to explore, for those who
want to create sustainable sources of funding for open source projects,
including but certainly not limited to those involving prizes.

    Competitive Intermediators

    An R&D contribution norm, established by treaty, would ensure that
the amount of money being spent on R&D is maintained. However, new
mechanisms would be needed to collect the money to finance the R&D, as
it would no longer come via drug sales. This could be via general
taxation, although in countries with a private health insurance system
this may be anathema. Many will also worry that a centralised national
drug development agency taking decisions on R&D priorities and
allocation of funds (via prizes or grants as discussed above) could
easily become bureaucratic and inefficient.

    As a possible alternative, we propose a competitive financing scheme
that would work through R&D investment intermediators. These R&D funds
would be licensed and regulated (like pension funds). Their role would
be to manage R&D assets on behalf of consumers. Individuals (or
employers) would be required to make minimum contributions into R&D
funds, much as there are mandatory contributions to social security or
health insurance or to pension funds. Government would set the required
contribution, but the individual (or employer) would be free to choose
the particular intermediator that received their contributions.
Intermediators would compete to attract funds to invest in R&D on the
basis of their prowess for drug development and upon their priorities.
Different business models for financing R&D could be tested in such a
market, with intermediators experimenting with prize systems, direct
investments in profit or nonprofit entities, open collaborative public
good models, or other approaches.

Finally, it goes without saying that prizes should only be part of an
overall ecology of instruments to support R&D, including most obviously
the systems of grants that we rely upon today to provide relatively
steady and predictable sources of funding for established research
organizations and their staffs. Prizes are really about reforming the
pull mechanisms -- now largely implemented as the creation of legal
monopolies for products. The reform of push funding is also potentially
important, and as we go forward, the benefits of competition, freedom,
transparency, collaboration and access to knowledge and to the end
products will be important to consider in all aspects of innovation

[1] http://www.cklawreview.com/wp-content/uploads/vol82no3/Love.pdf
[3] http://www.cptech.org/ip/health/prizefund/hr417-summary.pdf
[4] http://www.govtrack.us/congress/bill.xpd?bill=s110-2210
[5] http://en.wikipedia.org/wiki/Economies_of_scope
[9] http://keionline.org/sites/default/files/lovehubbard-code.pdf


Thiru Balasubramaniam
Geneva Representative
Knowledge Ecology International (KEI)
thiru at keionline.org

Tel: +41 22 791 6727
Mobile: +41 76 508 0997

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