A new approach to pharmaceutical innovations

The lives of about 50,000 human beings, mostly children, are cut short every day by avoidable poverty-related causes. These account for one third of all human deaths - 18 million every year. Hundreds of millions more suffer grievously from such avoidable medical conditions. The lives of even more are shattered by severe illnesses or premature deaths in their families. These medical problems strain the economies of many poor countries, thereby perpetuating their poverty which in turn contributes to the ill health of their populations.

These huge mortality and morbidity rates can be dramatically reduced through improved access to medical interventions (which include preventative measures and treatments) achieved by reforming the way we encourage and reward pharmaceutical innovations.

Under the present regime - the TRIPs (Trade-Related Aspects of Intellectual Property Rights) Agreement, as complemented by bilateral treaties - we grant inventors temporary monopolies on their inventions, typically for 20 years from the time of filing a patent application. With competitors barred from copying and selling any newly invented drug during this period, the inventor firm can sell it at the profit-maximising monopoly price far above its cost of production. This way, the inventor firm can recoup its research and overhead expenses, plus some of the cost of its other research efforts that failed to bear fruit.

This solution solves one market failure (undersupply of medical innovation in a free market). But its monopoly feature creates another: during the patent’s duration, the profit-maximising sale price of the new medical intervention is typically many times greater than the drug’s cost of production. This large differential is socially harmful by causing a “deadweight loss”: It precludes mutually beneficial sales to patients who are willing and able to pay more than the cost of production but not the much higher monopoly price.

There is a further problem inherent in the current regime. Inventor firms have incentives to try to develop a new medical intervention only if the expected value of the temporary monopoly pricing power they might gain, discounted by the probability of failure, is greater than the full development and patenting costs. They have no incentives, then, to try to develop any intervention needed by those unable to afford it at a price far above its cost of production.

Consequently, many diseases mainly affecting the poor (for which medical interventions priced far above production cost could be sold only in small quantities) remain unaddressed. Of the 1,393 new drugs approved between 1975 and 1999, only 13 were specifically indicated for tropical diseases. And of these 13, 2 were commissioned by the military and another 5 were byproducts of veterinary research.

The solution I propose would add a second scheme of rewards. Pharmaceutical innovators would have the option to forego the conventional patent and to claim instead an alternative patent that would reward them, out of public funds, in proportion to the health impact of their invention. By offering such alternative multi-year patents, we would be stimulating additional pharmaceutical research especially into serious diseases that are common among the global poor.

This reform would encourage inventor firms to develop the most cost-effective medical interventions and to ensure that their innovations have maximum health impact. Specifically, such firms would have incentives to address the diseases that contribute most to the global disease burden. They would have incentives to prioritise prevention over treatment. (The conventional patent system has the opposite effect, with new treatments offering much greater profit opportunities than new vaccines.) They would have incentives to ensure that patients have the knowledge and motivation to use their medicines to optimal effect. Any inventor firm would have incentives to sell its new medicines cheaply, often even below production cost, so as to achieve health improvements even among the very poor.

Any such firm would have reason to encourage and support efforts by cheap generic producers to copy its medicines, as this would further increase the number of users and hence the invention’s favourable impact on the global disease burden. Rather than ignore poor countries as unlucrative markets, inventor firms would be led to co-operate towards improving the heath systems of these countries to enhance the impact of their inventions there.

The reform would greatly mitigate the problem of neglected diseases that overwhelmingly affect the poor. And it would open new profitable research opportunities for pharmaceutical companies, which may help overcome their resistance to reform.

The basic reform idea must still be specified into a concrete reform plan. Such a plan must be fully informed by all the relevant facts and insights from science, statistics, medicine, economics, law, and moral philosophy; and it must also be politically feasible and realistic.

To be feasible this plan must, once implemented, generate its own support from governments, pharmaceutical companies, and the general public (taking these three key constituencies as they would be under the reformed regime). To be realistic, the plan must possess moral and prudential appeal for governments, pharmaceutical companies, and the general public (taking these three constituencies as they are now).