December 14, 2017 Print

Photo: Geneva Network

There have increasingly been calls for the market-based system of patent-driven drug research and development to be replaced with centrally planned systems driven by tax-funded innovation prizes and research contracts. Geneva Network, an Atlas Network partner in Salisbury, United Kingdom, explores this issue thoroughly in its recent policy brief Delinked from Reality, arguing that replacing research and development with bureaucracy will likely do more harm than good.

“The market-based system of drug research and development – underpinned by property rights and competitive markets – is under attack from critics who argue that using patents as the primary innovation incentive makes drugs too expensive, while failing to provide cures for those in need who may be unable to pay, such as people in developing countries,” said Philip Stevens, founder and director of Geneva Network and author of Delinked from Reality. “Their vision is to replace patents with a mixture of government-financed innovation prizes, research contract and grants, thereby ‘delinking’ the cost of R&D from the final price paid for a medicine.”

Geneva Network’s policy brief examines this proposed system of delinkage. Under delinkage, developers would no longer secure investment and patents from their new drug, but instead be awarded a cash prize from the government. In return, companies would hand their intellectual property over to the government, which would allow generic manufacturers to enter the market immediately. The idea is that this competition between generic manufacturers would drive down costs, allowing greater access to medicine. Delinking would literally delink the cost of research and development from the price of medicine and make government the central-planners of drug development.

One frequent criticism of the current patent-based system is that it inflates medicine prices well beyond the cost of production, thus creating losses for patients. But Geneva Network believes that an innovation system based on prizes could create even more economic losses – taxpayers would be footing the bill for the prize fund, and such a cost is projected to be at least the $141 billion that the private sector currently spends on research and development every year. Not only would tax hikes be needed to pay for the prize fund but also for the considerable bureaucracy that would be created to manage the delinkage system.

Innovation prizes present their own set of challenges as the proposed mechanism of research and development. Centrally planned government prize committees would conceivably struggle to ascertain the true economic and social values of prospective medicines. Stevens detailed this problem: “If the value of the prize is set lower than the true market value of the invention, drug developers – and the venture capitalists so instrumental for startups – would direct their capital away from medicine R&D towards politically safer but less socially useful areas. New medicines would dry up. If a government prize committee overvalues the prize, on the other hand, it would trigger duplication of R&D and waste as competitors swarm.”

The issue of politicization adds its own significant challenges. If governments are to get involved in awarding money for research projects, political factors – and not clinical need – would influence the allocation of funding. “Diseases that could summon the most vocal lobby groups would get attention from prize bureaucrats, while less fashionable diseases may be ignored,” said Stevens. “Political connections and lobbying could both play a role in securing a prize, while elected officials may attempt to influence R&D spending by government agencies.”

Replacing patents with prizes would almost certainly do more harm than good, resulting in a politicized drug development system that misaligns incentives, raises costs and delivers fewer new drugs. “Most prize advocates assume free money,” said Daniel Spulber, professor of International Business at the Kellogg School of Management, Northwestern University. “In fact, the government raises money for the prizes through taxation, which causes economic distortions that involve significant deadweight losses. The deadweight welfare losses resulting from a government prize system are likely to substantially exceed any such losses from competitive markets – replacing prices with prizes would lower social welfare.”

The current market-driven system has led to several medical advancements, as incentives to cure diseases afflicting large populations of people spur research and development toward meaningful innovation.

“The market-based system of drug development has been tremendously successful at driving innovation in medicine,” continued Stevens. “Take hepatitis C, until recently an incurable disease afflicting up to 3% of the world’s population. Since 2013, no fewer than 10 new treatments have come onto the market, offering clinicians a huge range of options. The disease is now relatively easy to cure. Such breadth and speed of innovation under a winner-takes-all prize system is hard to picture. Replacing markets with a system of government-planned R&D would have a terrible chilling effect on innovation, by misaligning incentives and introducing new layers of politicisation and bureaucratision.”

Geneva Network seeks to make this highly technical debate accessible to the average taxpayers who would be financially responsible for the proposed delinkage system.

“Geneva Network is leading thought-leadership around this issue, producing research and materials that challenges some of the assumptions behind delinkage,” concluded Stevens. “One of our major strengths is translating these relatively technical issues in simple language that journalists and non-specialist policymakers can understand. We also work with like-minded think tanks, many of whom are Atlas Network partners, to amplify and spread these messages in capital cities outside of Geneva.”

Read Delinked from Reality