The AIDS crisis has brought to public notice what has always been generally true—that
the existing business model for drug development leads to high prices and unequal access.
There is now widespread dissatisfaction with drug prices in both the developed (Families
USA 2003) and developing world (Correa 2000). Governments and health insurers are finding
ways to deny access to the newest and priciest products. In the United States and other
countries without a universal public health system, the uninsured simply cannot afford the
newest medicines. In developing countries, life-saving medicines are priced beyond the
reach of most people, a morally offensive outcome (TrueVisionTV 2003). Huge publicity
surrounds negotiated price reductions for specific drugs in specific developing countries,
yet the effect on the overall access problem is tiny.
Today's high drug prices are a direct consequence of a business model that uses a single
payment to cover both the cost of manufacture of a drug and the cost of the research and
development (R&D) carried out by manufacturers to discover it. A 20-year patent-based
marketing monopoly is then granted to the drug's developers to prevent their prices being
undercut by ‘generic’ copies produced by manufacturers who do not have R&D costs to
recover. Preventing such ‘free riding’ on R&D has become a global trade issue at the
World Trade Organisation (WTO) (Drahos and Braithwaite 2002). The implementation of the
TRIPS (Trade-Related Aspects of Intellectual Property Rights) agreement and a growing
number of regional and bilateral agreements on intellectual property require most countries
to implement tough patent systems that discourage or eliminate competition from
manufacturers of generic medicines (Box 1).
Unfortunately, monopoly-based business models have unpleasant side effects. Since the
primary responsibility of any company is to maximise return on investment, it is
unsurprising that there is pressure on pharmaceutical companies to set drug prices to
whatever level gives the highest return, excluding those individuals who cannot afford to
pay, rather than maximising the number of patients treated. There is also pressure to
misuse the power given by patents, using them as anticompetitive weapons to block
innovation and extend marketing monopolies. And there are growing fears that the huge
growth in the use of patents is in itself starting to inhibit research (CIPR 2002;
Anonymous 2003; Royal Society 2003). Something that is less well recognised is that this
system is an enormously inefficient way of purchasing R&D. There is a considerable lack
of transparency in pharmaceutical R&D investment, but the available data indicate that
only about 10% of drug sales go towards R&D on new products. Only about one-quarter of
new drug approvals are rated by the United States Food and Drug Administration (FDA) to
have therapeutic benefit over existing treatments (NIHCM 2002; see Figure 1). Measured by
investment, only about one-fifth of the 10% is invested in innovative products (Love
2003a). There is also very little research for diseases that primarily afflict the poor
(Trouiller et al. 2001; WHO 2003).
Propping up the present structure for financing R&D (Figure 2A) is the widely held
belief that the private sector plays a key role in the development of new medicines and
that it is necessary to grant patents to incentivise private-sector financing. If this were
true, it would make sense to tolerate all sorts of bad outcomes, because the fruits of
R&D eventually benefit everyone. But granting a 20-year marketing monopoly on a
patented invention is only one way to finance R&D, and the shortcomings of the present
system are increasingly hard to ignore. Suggestions for alternatives are beginning to come
from many quarters (Baker and Chatani 2002; CGSD 2003; Hubbard and Love 2003; Weisbrod
2003). In this essay, we present practical proposals to modify trade rules based solely on
intellectual property so that alternative policy instruments can be used to encourage
innovation.
A New Trade Framework
Analysis of worldwide drug expenditure shows that spending varies, but is close to 1% of
the gross domestic product (GDP) in most developed and developing countries (Love 2003b).
Assuming that about a tenth of the revenue from the sale of drugs is ploughed back into
R&D on new products, that means that countries already indirectly contribute about 0.1%
GDP to support this. This contribution is enforced by trade agreements, which require the
granting of patents to prevent ‘free riding’ via the purchase of generic drugs (see Box 1).
Suppose the World Health Organisation (WHO) developed an R&D contribution ‘norm’ based
upon this or a more appropriate figure and that there was international agreement that
countries evaluated as meeting this norm would no longer be regarded as ‘free riding’.
Trade rules could then be modified to allow countries to meet this norm
by any means , not just by the implementation of strict TRIPS
intellectual property rules, as at present.
Countries that met the norm would then be free to decide whether they wanted to follow a
strictly patent-based system as at present, with high drug prices for 20 years, or
experiment with new models based on the creation of separate competitive markets for sales
and R&D (Figure 2B). Countries adopting the latter system would remove patents on final
drug compounds, placing them in the public domain. This would allow them to become a freely
traded commodity, creating a competitive manufacture and sales market with low generic
prices. At the same time, in order to meet the required R&D contribution norm, they
would have to create an efficient R&D virtual market alongside. However, the costs of
this would be more than offset by the reduction in drugs prices, making substantial savings
for that country overall.
Business Models for an Effective Virtual R&D Market
The existing system (Figure 2A), despite its failings, does lead to the development of
new drugs. The challenge in creating a virtual R&D market is to find viable business
models for successful drug development in the absence of marketing monopoly incentives.
One obvious approach is direct funding of drug development. For example, the National
Institutes of Health (NIH), the national agency in the United States, already spends $27
billion per year on research, a substantial amount of which is directed towards drug
development, including clinical trials. The NIH already has a track record in developing
important drugs for severe illnesses, such as cancer or AIDS, showing that this is a viable
model. It is also widely recognised that much of the research carried out across the world
by similar agencies underpins the existing commercial research that leads to new drugs.
Governments could expand direct funding for drug development, either through the
existing structures in academia or through funding R&D arms of existing companies to
carry out specific drug R&D. Such directed drug development funding could be similar to
existing nonprofit development projects, such as those currently resourced to address
treatments for neglected diseases like malaria and tuberculosis (TB). Examples of such
projects are the Medicines for Malaria Venture (www.mmv.org), the Global Alliance for TB
Drug Development (www.tballiance.org), the International AIDS Vaccine Initiative
(www.iavi.org), the Drugs for Neglected Diseases Initiative (Butler 2003b) (www.dndi.org),
and the Institute for One World Health (www.oneworldhealth.org).
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.
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.
A Change for the Common Good
We believe the economics of a change in the paradigm for funding R&D are highly
favourable. Taken together, the two core steps of changing the trade framework and moving
away from marketing monopolies can change the world in a positive way. We can raise global
R&D levels as a matter of policy and ensure that resources flow into the areas of the
greatest need, and we can do so knowing that the poor and the rich will have access to new
inventions at marginal cost. Policy-makers will be weaned from their current unhealthy
addiction to ever-higher levels of intellectual property rights as the only instrument to
raise R&D levels, a path that has increasingly reached diminishing returns or become
counterproductive. With new instruments to address the overall levels of R&D
investment, policy-makers can more constructively address the well-known inefficiencies in
the patent system without the fear that global R&D levels will suffer and explore
alternative models (Butler 2003a). At the same time, the system of prescribing medicines
will be transformed by a substantial reduction in the distorting influences of the current
multibillion-dollar industry of marketing medicines to doctors and (increasingly) directly
to the public. Similarly, without marketing monopolies to protect, there will be far less
spent to influence the governments that set the rules that regulate such monopolies. If
implemented worldwide, one of our most vexing ethical dilemmas can be resolved in a manner
that actually promotes the Doha Declaration on TRIPS and Public Health mandate to encourage
access to medicine for all.
