Patents, Prizes, AMCs and Patents, Prizes, AMCs and CAMCsCAMCs

Aidan HollisAidan Hollis

University of CalgaryUniversity of Calgary

October 2007October 2007

PatentsPatents

StrengthsStrengths WeaknessesWeaknesses Reward partly Reward partly

proportional to social proportional to social valuevalue

Decision to invest Decision to invest made by person with made by person with the most informationthe most information

Risks borne by Risks borne by innovatorinnovator

Reward Reward onlyonly partly partly proportional to social proportional to social valuevalue

High prices prevent High prices prevent access and cause access and cause uncompensated uncompensated losses.losses.

PrizesPrizes

Prizes come in many varieties, which Prizes come in many varieties, which makes the word easily misunderstood.makes the word easily misunderstood.

Can increase incentives as a supplement Can increase incentives as a supplement or substitute for patents.or substitute for patents.

I will address three types of prizesI will address three types of prizesSanders-style prize fund for all drugsSanders-style prize fund for all drugsAMCsAMCsComprehensive AMCsComprehensive AMCs

Sanders-type prize fundSanders-type prize fund

This is a replacement for patent exclusivity This is a replacement for patent exclusivity rights for pharmaceuticals.rights for pharmaceuticals.

All drugs are included.All drugs are included.Basic idea is that payments would be Basic idea is that payments would be

made to innovators based on estimates of made to innovators based on estimates of the incremental therapeutic benefit of the the incremental therapeutic benefit of the innovation out of a fixed prize fund.innovation out of a fixed prize fund.

Sanders ProposalSanders Proposal

AdvantagesAdvantages AccessAccess Efficient alignment of R&D incentives with medical Efficient alignment of R&D incentives with medical

needneed Risks borne by innovatorsRisks borne by innovators

DisadvantagesDisadvantages Overturns existing systemOverturns existing system Difficulty in assessing how the reward fund should Difficulty in assessing how the reward fund should

change over timechange over time Funder needs to assess each innovation’s impactFunder needs to assess each innovation’s impact

Especially problematic for “life-style” drugs.Especially problematic for “life-style” drugs.

Advance Market CommitmentsAdvance Market Commitments

AMCs create incentives for rapid AMCs create incentives for rapid commercialization of a specific vaccine.commercialization of a specific vaccine. Essentially, they address the problem that the patent Essentially, they address the problem that the patent

system may not create strong incentives for certain system may not create strong incentives for certain products.products.

Size of payment justified by estimates of QALY Size of payment justified by estimates of QALY impacts.impacts.

They require the recipient to commit to a single They require the recipient to commit to a single price over a long period to avoid double-dipping.price over a long period to avoid double-dipping. Firm that doesn’t want to commit to a fixed price Firm that doesn’t want to commit to a fixed price

doesn’t need to accept supplementary AMC payment.doesn’t need to accept supplementary AMC payment.

The Limits of AMCsThe Limits of AMCs

The AMC administrator must pre-specify The AMC administrator must pre-specify technical standards.technical standards.

Therefore, AMCs cannot create broad Therefore, AMCs cannot create broad incentives.incentives.Eg: the pneumococcal vaccine AMC is for one Eg: the pneumococcal vaccine AMC is for one

product.product.AMCs appear suitable chiefly for incentivizing AMCs appear suitable chiefly for incentivizing

late-stage development and late-stage development and commercialization.commercialization.

Comprehensive AMCsComprehensive AMCs Basically an optional alternative to patent Basically an optional alternative to patent

exclusivity.exclusivity. Similar to AMCs – it is an optional add-on.Similar to AMCs – it is an optional add-on.

Payment made for innovative drugs based on Payment made for innovative drugs based on measured health impact.measured health impact. Payment determined after observing the product, not Payment determined after observing the product, not

before.before. Similar to Sanders-type prize.Similar to Sanders-type prize.

Recipients forgo exclusivity.Recipients forgo exclusivity. Corresponding obligation of AMC-style fixed price.Corresponding obligation of AMC-style fixed price.

Payment is a share of fixed prize fund, with the Payment is a share of fixed prize fund, with the share equal to share of health impact.share equal to share of health impact.

Comprehensive vs. Standard Comprehensive vs. Standard AMCsAMCs

Two differences from standard AMCs.Two differences from standard AMCs.Payments based on QALYs per unit, Payments based on QALYs per unit,

estimated afterwards, instead of before.estimated afterwards, instead of before.Requires open licensing to avoid double-Requires open licensing to avoid double-

dipping.dipping.Thus this mechanism can deal with any Thus this mechanism can deal with any

new medicine, not just those pre-specified.new medicine, not just those pre-specified.

CAMC PropertiesCAMC Properties

Optimizes incentives for included drugsOptimizes incentives for included drugs Ensures generic pricing from beginningEnsures generic pricing from beginning Incentivizes continuing promotional activitiesIncentivizes continuing promotional activities In effect, it uses patent system to “calibrate” In effect, it uses patent system to “calibrate”

rewardsrewards Firms can substitute in or out – if payments too high, Firms can substitute in or out – if payments too high,

more firms will give up patent exclusivity, thus driving more firms will give up patent exclusivity, thus driving payment down (and vice versa).payment down (and vice versa).

Application to drugs for developing Application to drugs for developing countriescountries

This system could be implemented with This system could be implemented with respect to sales of drugs in developing respect to sales of drugs in developing countries.countries.

In this case there may be financing In this case there may be financing available. The question is how to allocate available. The question is how to allocate the money.the money.

CAMC has the advantage of technically CAMC has the advantage of technically maximizing the incentive effects of this maximizing the incentive effects of this financing. financing.

Comparison to Sanders BillComparison to Sanders Bill

CAMC proposal is an optional version of CAMC proposal is an optional version of the Sanders prize fund bill.the Sanders prize fund bill.

Reduces concerns about how to deal with Reduces concerns about how to deal with lifestyle drugs.lifestyle drugs.

Creates options for firms.Creates options for firms.Allows for test run: the larger the amount Allows for test run: the larger the amount

of money in the reward fund, the more this of money in the reward fund, the more this resembles a mandatory mechanism.resembles a mandatory mechanism.

How accurately can impact be How accurately can impact be measured?measured?

Imperfectly, of course.Imperfectly, of course.This shouldn’t be a big deal.This shouldn’t be a big deal.

Patent exclusivity is dismal at ensuring Patent exclusivity is dismal at ensuring that the profits from a drug are that the profits from a drug are proportional to the social value…proportional to the social value…

Prices are poorly related to health effect Prices are poorly related to health effect and doctors don’t know pricesand doctors don’t know prices

Summary Summary

PatentsPatents FairlyFairly efficient efficient

incentivesincentives High pricesHigh prices

AMCsAMCs

Sanders prize fundSanders prize fund

Comprehensive AMCsComprehensive AMCs

Summary Summary

PatentsPatents FairlyFairly efficient efficient

incentivesincentives High pricesHigh prices

AMCsAMCs EffectiveEffective But limited to But limited to

specific well-specific well-understood understood productsproducts

Sanders prize fundSanders prize fund

Comprehensive AMCsComprehensive AMCs

Summary Summary

PatentsPatents FairlyFairly efficient efficient

incentivesincentives High pricesHigh prices

AMCsAMCs EffectiveEffective But limited to But limited to

specific well-specific well-understood understood productsproducts

Sanders prize fundSanders prize fund Perfectly Perfectly efficientefficient incentivesincentives Low pricesLow prices Complete overhaul of systemComplete overhaul of system

Comprehensive AMCsComprehensive AMCs

Summary Summary

PatentsPatents FairlyFairly efficient efficient

incentivesincentives High pricesHigh prices

AMCsAMCs EffectiveEffective But limited to But limited to

specific well-specific well-understood understood productsproducts

Sanders prize fundSanders prize fund Perfectly Perfectly efficientefficient incentivesincentives Low pricesLow prices Complete overhaul of systemComplete overhaul of system

Comprehensive AMCsComprehensive AMCs PerfectlyPerfectly efficient incentives only efficient incentives only

for drugs in the systemfor drugs in the system Low prices for drugs in systemLow prices for drugs in system Automatically calibrated rewardsAutomatically calibrated rewards Incremental implementationIncremental implementation

Summary Summary

PatentsPatents FairlyFairly efficient efficient

incentivesincentives High pricesHigh prices

AMCsAMCs EffectiveEffective But limited to But limited to

specific well-specific well-understood understood productsproducts

Sanders prize fundSanders prize fund Perfectly Perfectly efficientefficient incentivesincentives Low pricesLow prices Complete overhaul of systemComplete overhaul of system

Comprehensive AMCsComprehensive AMCs PerfectlyPerfectly efficient incentives only efficient incentives only

for drugs in the systemfor drugs in the system Low prices for drugs in systemLow prices for drugs in system Automatically calibrated rewardsAutomatically calibrated rewards Incremental implementationIncremental implementation

Summary Summary

PatentsPatents FairlyFairly efficient efficient

incentivesincentives High pricesHigh prices

AMCsAMCs EffectiveEffective But limited to But limited to

specific well-specific well-understood understood productsproducts

Sanders prize fundSanders prize fund Perfectly Perfectly efficientefficient incentivesincentives Low pricesLow prices Complete overhaul of systemComplete overhaul of system

Comprehensive AMCsComprehensive AMCs PerfectlyPerfectly efficient incentives only efficient incentives only

for drugs in the systemfor drugs in the system Low prices for drugs in systemLow prices for drugs in system Automatically calibrated rewardsAutomatically calibrated rewards Incremental implementationIncremental implementation

Comparison to direct research Comparison to direct research funding and subsidiesfunding and subsidies

The benefit of patents and prize-type mechanisms is that The benefit of patents and prize-type mechanisms is that the incentives are (relatively) efficient.the incentives are (relatively) efficient.

The people with the most information about the The people with the most information about the probability of success of a research project make the probability of success of a research project make the decision on whether to fund it, and bear the risk.decision on whether to fund it, and bear the risk.

The problem with direct research funding and subsidies The problem with direct research funding and subsidies is that decisions are made by managers with incomplete is that decisions are made by managers with incomplete information and without any risk sharing.information and without any risk sharing.

In addition, subsidies of large pharmaceutical companies In addition, subsidies of large pharmaceutical companies create moral hazard and may be politically difficult to create moral hazard and may be politically difficult to sustain.sustain.

Other incentive mechanismsOther incentive mechanisms

Patent extensionsPatent extensionsSpecial tax on sick people to pay for drugs for Special tax on sick people to pay for drugs for

other sick people.other sick people.Fast track regulatory reviewFast track regulatory review

Can only be a good idea if it is believed that Can only be a good idea if it is believed that regulatory review is taking too long and regulatory review is taking too long and accelerating it cannot be separately funded.accelerating it cannot be separately funded.