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Despite this history, the present era is a time of
hope. Since the 1990s, increased
contributions from the Gates Foundation and other sources have led to a
fivefold increase in worldwide R&D spending. If present trends continue, annual worldwide R&D could
reach $500 million by 2010. This
figure is still only about one-fourth what large commercial drug companies
typically invest in R&D. Progress
is possible – but only if we are clever.
Commentators have proposed various strategies for spending
this money. While details vary, most
proposals fall into two categories.
Advanced Purchase Commitments (“APCs”) argue that sponsors can
restore patent incentives by promising to purchase new drugs at a fixed
price. The alternative, Virtual Pharma, strategy notes that private
sector R&D relies heavily on outsourcing. It argues that non-profit
entities should identify promising compounds and outsource R&D to private
partners. Since the late 1990s, the Gates Foundation has spent large
amounts of money helping non-profit entities replicate management skills
normally found in commercial companies.
Advocates usually try to portray these strategies as
incremental changes from existing commercial programs. In fact, existing
R&D systems have worked so badly that no amount of "tweaking" is
likely to fix them. All serious proposals are inherently and unavoidably
radical.
Drawbacks of APCs. In conventional patent
systems, inventors can never receive a larger reward than consumers are
willing to pay. This provides a practical "market test" by
ensuring that society never pays more than a drug is actually worth. This safety feature does not apply to APCs. The
reason is that prices are set by sponsors instead of the market. If
sponsors set the price too low, nothing will happen. If they set it too
high, sponsors will waste money that would have been better spent on other
projects.
The size of this cost penalty can be estimated. In
principle, each possible price will elicit a particular level of R&D
effort. Unfortunately, very little is known about this relationship. For
example, estimates of how large a market is needed to make any given drug
"commercial" are usually uncertain by forty to sixty percent. Worse,
these estimates are unlikely to improve for the foreseeable
future. This implies sponsors will normally overpay by twenty to
thirty percent for any given level of effort.
Drawbacks of Virtual Pharma. Virtual Pharma
systems do not suffer from this handicap. Because sponsors pay for R&D
directly, there is no need to estimate how much reward is needed to elicit
invention. On the other hand, Virtual Pharma strategies have other
drawbacks. In the private sector, shareholders enforce efficiency by
de-funding entities that fail to contain costs or manage research
inefficiently. In principle, foundations can play this same role for
public sector firms. In practice, they may be reluctant to do so.
Virtual Pharmas may also be less efficient in other
ways. Large commercial drug companies possess proprietary data that
makes their R&D more efficient. Furthermore,
their buying power probably lets their outsourcing dollars go
further. Virtual Pharmas lack these advantages.
The Choice. So far, Virtual Pharma and APC
advocates have spent most of their time pointing out flaws in each others'
strategies. Such arguments are useful but limited.
Innovation economics teaches that all known incentives have
drawbacks. For this reason, the fact that a particular strategy has
flaws is no objection. The real question is whether it has fewer
flaws than all the others. No amount of discussion will produce an
"ideal" solution and it is both pointless and irresponsible to wait
for one.
This observation should not dishearten us. Finding
the best way to fund neglected disease research is fundamentally a business
decision, and businessmen face similar tradeoffs every day. Policymakers who
want to meet this standard will have to be both clever and decisive.
That is not too much to expect. In fact, the stakes are too high to
expect anything less.
On-Line Course
R&D Strategies for Neglected Diseases. Download extensive class notes, video lectures, and related readings from leading researchers. A comprehensive introduction covering all phases of the neglected disease problem.
Papers
S. Maurer, "When Patents Fail: Finding New Drugs for the Developing World," (2005)
S. Maurer, "The Right
Tool(s): Designing Cost-Effective Strategies for Neglected Disease Research," (2005).
A.
Huang & C. Weber, “The Health of Nationas: Open-Source Research and the Economics of Life and Death in the Developing World,” Berkeley Science Review 7:45 (Fall,
2004).
Links
World Health Organization, Commission
on Intellectual Property Rights, Innovation and Public Health, Submissions
Page
Video Lecture: Drugs for the Developing World (Stanford Medical School: Feb., 2006). |
