Eyes on the Prize: Incentivizing Drug Innovation without Monopolies

Multinational Monitor, May-June 2009 | Go to article overview

Eyes on the Prize: Incentivizing Drug Innovation without Monopolies


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An Interview with James Love

James Love is director of Knowledge Ecology International, a Washington, D.C.-based not-for-profit. He is also co-chair of the Trans-Atlantic Consumer Dialogue Working Group on Intellectual Property and chair of Essential Inventions.

Multinational Monitor: You've proposed substituting prizes for patent monopolies to reward innovation in the pharmaceutical sector. Don't patents provide an effective incentive for innovation?

James Love: Exclusive rights on inventions provide an effective incentive for innovation in some areas, but not in other areas. For example, a monopoly is not an effective incentive for investments in basic science, for projects that are pre-commercial or for the re-purposing of medicines that are sold off patent for a different indication. Nor are monopolies an effective incentive for research that establishes a drug has harmful effects.

In the areas where a legal monopoly does stimulate investment, there are very significant inefficiencies. If the cost of the incentive was not an issue, the answer would be yes, the prospect of a legal monopoly will stimulate investment. But in the area of new medicines, it is quite inefficient.

At the core of the problem are the inefficiencies associated with any monopoly, but amplified by the special characteristics of the market for medicines, which is structured in ways quite different from most other goods.

Monopolies often lead to high prices, particularly in areas where substitution is not possible, such was when patients are required to use particular treatments for severe illnesses.

There are also distortions caused by the complex chain of actors who are involved in prescribing and paying for medicines.

Products are prescribed by doctors who don't pay for the medicines. When insurance exists, the third parties that do have to pay (employers, governments or private insurance) resort to various tactics to discourage utilization of expensive products, including both explicit and non-explicit forms of rationing.

The current granting of marketing monopolies is also inefficient for a different reason that is not widely appreciated. By linking the research and development (R&D) reward to the price of the product, it necessarily provides incentives for investors to develop products that do little more than existing medicines. The well-known tendency of companies to launch "me too" or "copycat" products is a rational response to the reward mechanism.

If an existing drug is receiving $100 for a monthly prescription, a new product that works about the same will often get about the same amount, all other things being equal. But in this stylized example, the second product is in fact not offering much that we don't already have, in terms of health outcomes. What you should be paying for are the improvements in health outcomes, not replicating what we already have. Any system that combines monopolies with rewards linked to the prices of products suffers from this major inefficiency.

The two areas of the greatest waste in the current system are the vast sums spent marketing products that have few if any medical benefits relative to other medicines already on the market, and the costs of developing these "me too" products.

MM: Can you provide a thumbnail sketch for your prize proposal for the U.S. pharmaceutical market?

Love: In the U.S. market, the first proposal was to retain much of the current system, in terms of the granting of patents, but to eliminate the market exclusivity for prescription medicines. The reward for a successful R&D effort would not be a legal monopoly, but rather a share of the Medical Innovation Prize Fund.

The Medical Innovation Prize Fund would base its rewards on the impact of new products on health care outcomes. The rewards would be based upon objective evidence. …

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