Finding Finding CuresCures for Tropical Diseases: for Tropical Diseases:Choosing the Right Incentives Choosing the Right Incentives

Stephen M. MaurerGoldman School of Public Policy, UC BerkeleyMay 23, 2007

European School on New Institutional Economics

Introduction

500 Million People

The Patent System Hasn’t WorkedMandatory Radicalism

A Once in a Lifetime ChanceBill Gates’ Antitrust TroublesMultiple Schemes, Complex PoliticsHow to Choose?

Introduction

Putting Innovation Theory to WorkA Clear Objective: Cost ContainmentRational – And Unsentimental – Comparison

Overview

Reforming PatentsPrice Discrimination, Strategic Investing, Harmonization & Boosted Demand.

Patent-Like SolutionsGuaranteed Purchase Commitments

Virtual Pharma CompaniesPrivate-Public PartnershipsStrategy

Conclusions

Reforming PatentsPrice DiscriminationHarmonizationStrategic InvestingBoosted Demand

Reforming Patents

Price DiscriminationA Good Solution for Rich Nation Drugs

Parallel Imports & Rich Nation Health MinistriesA Political Problem

Does Not Generate R&D Funds

J. Lanjouw, “Outline of Foreign Filing License Approach” (2004), available at http://www.cgdev.org/docs/FFLOutline.pdf.

Reforming Patents

HarmonizationMarkets are Inadequate!

Western sponsors are essential

Partial ExceptionsTB (80%)Malaria (45%)AIDS (25%)Dengue, Leishomaniasis (~ 0%)

Making Up The Difference?

Global Alliance, Economics of TB Drug Development (2001), available at http://66.216.124.114/pdf/Economics%20Report%20Full%20(final).pdf

Reforming Patents

Strategic InvestingInformation Asymmetry

& Crowding Out

Private-Public Partnerships & Access Pricing

Boosted DemandThe Sunk Costs ProblemDiscounting the Payoff

A Traditional Fix…

Reforming Patents

Patent-Like Solutions

Guaranteed Purchase Schemes“AdvancedMarkets”

Is It Feasible?

Is It Desirable?Setting the PrizeEstimating R&D Costs

Patent-Like Solutions

AdvancedMarkets Working Group, Making Markets for Vaccines: A Practical Plan to Spark Innovation for Global Health (2002).

Estimating R&D Costs (Pt. 1)The Accounting Answer

Drug Company DataMarket ArgumentsA 20 – 30% Uncertainty?

Patent-Like Solutions

Joseph DiMasi, Ronald Hansen & Henry Grabowski, “The Price of Innovation: New Estimates of Drug Development Costs,” Journal of Health Economics 22:151 (2003).

E. Berndt et al., “Advanced Markets for a Malaria Vaccine: Estimating Costs and Effectiveness” (2005).

Estimating R&D Costs (Pt. 2)Is the Accounting Answer Right?

Pro Forma EstimatesPrizes & Internal Financing

Patent-Like Solutions

Additional CostsTechnology Shocks

Who Gets The Savings?

Agency Problems (Sponsors)Risk PremiumEconomies of Scale

Patent-Like Solutions

Other IssuesWhy an Independent Adjudication Committee?

Two-stage games & bribesMe-Too Drugs & Cumulative InnovationNot The Patent System!

Can Virtual Pharma Do Better?

Patent-Like Solutions

Virtual Pharma Solutions

Virtual Pharma

Beyond Monolithic Drug CompaniesVirtual PharmaPublic-Private Partnerships (“PPPs”)

PPP StrategyPay-as-You-Go vs. End-to-EndA Preliminary DesignOpen Source & Hybrids

PPP Strategy (I)Opening The Black Box?

A Bigger ToolboxBut: How Are Incentives Affected?

Yooki Park, Essays in the Economics of Innovation Incentives (2006)

Virtual Pharma

Case 1: No Learning:PaYG:

y11 = c1/p1

y2 = c2/p2

Sponsor may pay y1 and get nothing.

E2E: y2 = [1/p2] x [c1/p1] + [c2/p2]

Sponsor must pay larger y2 than in PaYG.Payouts are the same in expectation.May not support all desired races.

Virtual Pharma

Case 2: Firms LearnE2E Costs LessThe Sunk Costs Argument

Case 3: Firms & Sponsors Both LearnPaYG Costs LessSponsors Adjust y2

Mixed Cases

Virtual Pharma

PPP Strategy (II)A Preliminary Design

Characterizing the PipelineSocial ChallengesToolboxDesign

Stephen M. Maurer, “Choosing the Right Incentive Strategy for Research and Development in Neglected Diseases,” WHO Bulletin 84:376 (2006).

Virtual Pharma

Characterizing The Drug Discovery Pipeline:

Basic ResearchFinding TargetsValidating TargetsFinding Lead CompoundsOptimizing Lead CompoundsProcess DevelopmentPre-Clinical TestingPhase I TestsPhase II TestsPhase III TestsApprovalPhase IV Tests

Stephen M. Maurer, “The Right Tools” (2005) (report for World Health Organization), available at http://gspp.berkeley.edu/iths/MAURER_DrugRsch.pdf.

Virtual Pharma

Science TasksBasic ResearchFinding TargetsValidating TargetsFinding Lead CompoundsOptimizing Lead CompoundsProcess DevelopmentPre-Clinical TestingPhase I TestsPhase II TestsPhase III TestsApprovalPhase IV Tests

How Disease Works

Points of Intervention

Finding Drugs

Learning to Make Drugs

Testing

Virtual Pharma

Social Challenges

Basic ResearchFinding TargetsValidating TargetsFinding Lead CompoundsOptimizing Lead CompoundsProcess DevelopmentPre-Clinical TestingPhase I TestsPhase II TestsPhase III TestsApprovalPhase IV Tests

Agency Problems(Researchers)

Cost

Virtual Pharma

Eliciting Information

Basic ResearchFinding TargetsOptimizing TargetsFinding Lead CompoundsOptimizing Lead CompoundsProcess DevelopmentPre-Clinical TestingPhase I TestsPhase II TestsPhase III TestsApprovalManufacturingPhase IV Tests

Social Challenges: Eliciting Information

Virtual Pharma

Toolbox: Eliciting InformationPrizesGrantsContract ResearchOpen Source

Virtual Pharma

Social Challenges:Agency Problems (Researchers)

Basic ResearchFinding TargetsOptimizing TargetsFinding Lead CompoundsOptimizing Lead CompoundsProcess DevelopmentPre-Clinical TestingPhase I TestsPhase II TestsPhase III TestsApprovalManufacturingPhase IV Tests

Virtual Pharma

Toolbox: Agency Problems (Researchers)

PrizesGrantsContract ResearchOpen Source

Virtual Pharma

Social Challenges: Getting the Best Price

Basic ResearchFinding TargetsOptimizing TargetsFinding Lead CompoundsOptimizing Lead CompoundsProcess DevelopmentPre-Clinical TestingPhase I TestsPhase II TestsPhase III TestsApprovalManufacturingPhase IV Tests

Virtual Pharma

Toolbox: Getting the Best Price

PrizesGrantsContract ResearchOpen Source

A Happy Coincidence

Virtual Pharma

Getting the Best Price, ctd…Enforcing The Best Price

Buying Power & Repeat GamesEconomies of Scale

Can Non-Profits Pick Winners?Is Pharma Efficient?Foundations as Shareholders?An Empirical Question

Virtual Pharma

Room for Open Source?

Software ~ DNA?Advantages

VolunteersEfficient Pricing TransparencyNew Science?

Tropical Disease Initiative

Stephen M. Maurer, Arti Kaur Rai & Andrej Sali, Finding Cures for Tropical Diseases: Is Open Source An Answer? 1 Public Library of Science: Medicine 56 (2004)

Do Hybrids Make Sense?

Economies of Scale

A Strategic Investing StoryPicking Winners vs. Science

Politics

Conclusion

Conclusion

Price DiscriminationRich Nation DrugsA Political Problem

Strategic InvestingTuberculosis? Malaria? AIDS?Crowding out & access pricing

AdvancedMarkets vs.Virtual PharmaDengue, Leishomaniasis , etc. Uncertain R&D Costs vs. Cold-Blooded FoundationsBill Gates, Businessman

Conclusion

Putting Innovation Theory to Work…

Finding Finding CuresCures for Tropical Diseases: for Tropical Diseases:Choosing the Right Incentives Choosing the Right Incentives

Stephen M. MaurerGoldman School of Public Policy, UC BerkeleyMay 23, 2007

European School on New Institutional Economics