Fixing broken pharmaceutical R&D

There is a broad consensus among market participants (including pharmaceutical firms, policy analysts and demand management organisations) that the R&D system for the pharmaceutical industry is not working properly.

Its two main failures are, first, its failure to produce medicines with the greatest health impact, and, second, the prohibitive costs of the whole R&D process, particularly for developing countries. These R&D failures result in a large-scale market failure, with dramatic consequences for the eradication and treatment of epidemic diseases.

According to critics such Joseph Stiglitz, one of the main culprits of this situation is the US patent system, which provides the wrong incentives to big pharma firms and R&D industry. Alternative solutions, devised primarily by academics, have been have been discussed for over ten years. Recently, the discussion of alternatives has gained new momentum and visibility, with articles in such mainstream publications as Financial Times and debates at WHO.

Two main alternatives are:

• The nationalisation of key patents
  
  
• A specialised fund to finance the most socially desirable drugs.

The nationalisation alternative was first formulated in 1995 by two economists from Indiana State University, Robert Guell and Marvin Fischbaum. They suggested that the government uses its power of eminent domain to purchase pharmaceutical patents, at the present value of the patent's expected future monopoly profits. Patents acquired this way would be then licensed at cost to anybody interested in producing and distributing drugs, based on patents.

Competition from the public sector

A similar proposal was formulated in 1997 by Michael Kremer, Harvard Professor of economics and in 2004 by Peter Stein and Ernst Valery, from Cornell University. Kremer proposed intervening in cases where there is a risk that patent would not be used; Stein and Valery wanted to set a public sector institution that would compete with private industry for patents.

Nationalisation proposals have met with a largely sceptical reception. The main doubt is whether they would work. If the goal is to stimulate the research in currently neglected areas, then buying existing patents will not help. Furthermore, if the purchase is made at the “fair compensation” price, it would not provide additional incentives for new research.

There is also a widespread doubt whether the public sector can make choices about patents objectively or manage alternative production and distribution arrangements effectively. The criticism has been recently summarised in op-ed piece in Financial Times by Richard Epstein, Law Professor at the University of Chicago, which would suggest that for all its faults the nationalisation concept remains on the public policy agenda.

Specialised solutions

In the meantime, some of the early partisans of patent nationalisation, such as Michael Kremer, evolved their thinking towards the other alternative: setting up specialised funds to finance socially desirable drugs (or in Kremer’s case, vaccines). Several approaches have been proposed.

Kremer (in cooperation with Rachel Glennester), for instance, proposed that a fund should pay for advance commitments for a defined quantity of a specified medicine. A symmetrical proposal is for a fund to make contingent payments when the medicine is being actually sold or distributed. Many proponents suggest combining the fund with a prize, thus adding a reputational element to financial incentives.

The fund concept appears easier to implement than nationalisation, as it would not require any specific legislation. Financing could be either public or private or mixed. The involvement of private sector would provide a guarantee of neutrality and efficiency and it would increase the potential pool of funds.

The new generation of philanthropists such as Bill Gates or Warren Buffett have shown willingness to commit very substantial sums to large-scale medical programmes in the developing world. It remains to be seen whether Gates, who is funding Kremer’s chair at Harvard and who made his fortune through extremely skilful use of proprietary intellectual property, is willing to contribute to an initiative that seeks to reduce the impacts of IP in the health sector.