Patents vs Prizes

21 July 2023


Photo: Painting of John Harrison (Thomas King, 1767). The original hangs in the Science and Society Picture Gallery in London.

For a number of years, Sen Bernie Sanders (I-VT) has been pushing a proposal to replace drug patents with a system of prizes. But the idea didn’t originate with him; it’s been around for centuries.

In the 16th and 17th centuries, a major barrier to safe ocean navigation was the ability to measure least-west position (longitude). North-south/latitude estimation was straightforward based on the sun and stars, but east-west required accounting for the earth’s rotation, which was hard. Many shipwrecks resulted. The British government passed the 1714 Longitude Act offering up to £20,000 (equivalent to several million pounds today) for anyone who could invent a solution. John Harrison, a Lincolnshire clockmaker is widely acknowledged as the winner. He spent most of his lifetime refining a highly accurate pocket watch that could be used on ships in order to make the necessary calculations. Despite never being officially declared the winner by the stingy Longitude Board, Harrison ultimately received enough prize money from a combination of the board and from Parliament to die wealthy.

How crazy is the idea of replacing patents with prizes? Not completely. A number of prominent academic economists are fans of the approach, including Joseph Stiglitz and Dean Baker.

Why is this being proposed now? It’s all about lowering drug prices. Under the current patent-based system, patent holders (pharmaceutical companies) have a time-limited monopoly on manufacturing and selling that drug, which means they can price it at whatever level they choose (which in recent years has seemed almost limitless). Under a prize-based system, inventors would instead receive a cash prize, known in advance, in exchange for the government or other nonprofit organization retaining the intellectual property. This would allow the drug to be licensed out to generic manufacturers immediately, rather than waiting decades for the patent to expire. Once patents expire, at least in theory, generic manufacturers will be forced by competitive forces to price drugs closer to the marginal manufacturing cost. Not that generic pricing always plays out that way (everyone remembers Martin Shkreli and Daraprim), but that’s the theory.

Do patent-based monopolies really last decades? Technically, a drug patent lasts for 20 years after the date of filing. The clinical trials to bring the drug to market can easily take 10 years, which would leave about a decade of monopoly rights. But in practice, pharma companies have gotten really good at “evergreening”, which is filing additional patents over time on the same drug, allowing exclusivity to extend far beyond the original expiration date. Sometimes the additional patents cover slight chemical modifications; sometimes they cover aspects of the delivery system (e.g. pill), but the end effect is the same. Overall, 3/4 of drug company patents are extensions to existing patents, which suggests that the majority of pharma R&D is devoted to evergreening, rather than developing new drugs. (Note that patent games aren’t the only way that pharma companies extend their monopolies; sometimes they simply bribe generic manufacturers (so called “pay for delay”) to not compete with them. How this tactic is legal is a huge mystery to me.)

So why is pharma so dependent on patents? Essentially, intellectual property law is intended to allow creators (inventors, artists, etc.) to profit off of their hard work rather than letting people simply copy them. From a societal perspective, it’s all about incentives — if people could legally copy creative works and inventions, no one would have an incentive to create them in the first place, so we’d all be worse off. With pharmaceuticals, the stakes are even higher, because the vast majority of patented molecules don’t turn out to be safe and effective drugs for humans. According to the Congressional Budget Office, only 12% of drugs entering clinical trials are ultimately approved. And that’s not counting the 99.9% of candidate drugs that don’t make it into human trials at all. As it turns out, drug development is a steep, expensive funnel. And to pay for it all, biotech companies and investors expect a huge payout for the small number of successful drugs that make it to commercialization.

So what’s wrong with this system? For one thing, the big financial rewards in the current system aren’t accruing to the innovators, but rather the marketers. The general public thinks of the big pharma companies (Pfizer, Glaxo Smith Kline, Roche, etc.) as being inventors (because that’s what the pharma lobby wants people to think) but they’re really huge sales and marketing engines. If you break down the lifecycle of a drug, you have the early basic science, the applied medicinal chemistry, the clinical trials, and the post-approval manufacturing and sales. Early basic science is almost entirely performed in universities, funded by a mixture of government and medical charities. The translational part, of which medicinal chemistry is a part, is sometimes done in universities, but more commonly in early stage biotech companies. When the candidate drugs have sufficient promise at that point, the rights are typically sold to larger biotechs, who take them through the three stages of clinical trials. And then at some point along that spectrum, the drug (or the entire company) may be acquired by a major pharma where it will likely remain for the rest of its lifecycle.

The goal of replacing patents with prizes, from an overall societal perspective, is to optimize total innovation at the different steps through better-aligned incentives. The basic science part already has this: career academic scientists make comfortable but not extravagant incomes, funded through grants, while enjoying the perks of academic life. It’s the biotech part where prizes would be applicable. As for the role of major pharma? Those companies could be replaced by generic manufacturers, with essentially no cost to society. No more drug reps, no more drug ads. One can only hope.

Here’s some  evidence that the profit motive isn’t as critical to pharma as commonly believed:

  • Recent FDA approval of over-the-counter naloxone, distributed by the nonprofit Harm Reduction Therapeutics
  • Civica Rx, a nonprofit generic company started by Intermountain Healthcare and joined by over 50 other health systems. Their mission is to reduce the impact of drug shortages by sourcing commonly used hospital medications. (I’m including this in my list even though I’ve been disappointed at their rate of progress, given that they’re now 5 years old and only have a handful of products so far. But I’m hopeful for them.)  
  • The Corbevax patent-free(!) COVID-19 vaccine developed by Peter Hotez’s academic lab in Texas. Obviously it was overshadowed by the Pfizer and Moderna versions but is an impressive proof-of-concept for development (not just manufacturing) of drugs of global health importance.

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Jamie Larson