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Delinkage: can prizes replace patents for medicine innovation?

Delinkage: can prizes replace patents for medicine innovation?

November 2017

Interested in delinkage? Read more.

The patent-based system of drug development comes under further pressure from key countries aiming to increase access to medicines at a joint World Health Organization and Government of India meeting in New Delhi this week.

Critics of the system want reform, arguing it makes drugs too expensive and fails to provide cures for those in need who may be unable to pay, such as people in developing countries.

The Delhi meeting is part of an international push led by countries, including India, and backed by NGOs, to slash drug prices. They want to do that by replacing intellectual property rights with government-funded prizes as the primary innovation incentive for medicines.

Developers of new drugs would gain government cash prize rewards for the successful development of a new medicine.

In return, companies would be forced to hand over their intellectual property rights to the government, allowing generic manufacturers to enter the market immediately. Competition between generic drug manufacturers would boost access to those in need as new drugs would be sold at their marginal cost of manufacture, so the theory goes.

Meanwhile, governments would control and plan what disease areas are rewarded by prizes, ensuring that funding is allocated to health priorities in a fair and transparent fashion.

“Delinking” the cost of R&D from the final price paid for a medicine, and making governments the funders and planners of drug development, sounds like a simple public healthcare solution. But so far, no country has taken the plunge.

Delinkage: no silver bullet

This is not surprising; “delinkage” is not the silver bullet claimed by its supporters.

One charge levelled against the patent-based system is that it creates losses for patients by inflating medicine prices well beyond their manufacturing costs.

This downplays the economic benefits of new medical technologies from averted hospitalization and fewer sick days for workers. But more to the point, an innovation system based on prizes could create just as many, if not more, economic losses.

The prizes fund would have to come from taxpayers; their burden would be at least the USD141bn spent by the private sector on R&D each year. Income tax hikes would distort labour markets and interfere with job creation.

Then there would be the added costs of the enormous new bureaucracy to manage the delinkage prizes system.

In the absence of private sector investment, which country would be willing to fill this funding gap? Here the rhetoric of many countries, including India, at World Health Organization meetings in Geneva has not been matched by serious action. Even modest WHO R&D delinkage “demonstration projects” fall USD73m short of the USD85m required, with contributions from only 10 countries.

This new world of government-funded prizes and delinkage to drive medicine innovation does not look promising.

Money apart, designing prizes that work is even more of a problem. Government committees would struggle to determine the true economic and social value of medicine before it is even created.

With estimates for developing a new medicine between $1.2bn and $2.6bn, this matters.

For prizes lower than the true market value of the invention, drug developers – and the venture capitalists so instrumental for startups – would direct their capital away from medicine R&D towards politically safer but less socially useful areas. New medicines would dry up.

If a government prize committee overvalues the prize, it would trigger duplication of R&D as competitors swarm. Curious then that proponents of these prizes argue they will end the supposedly “wasteful” and duplicative R&D under the patent system.

Delinkage means politics

Finally, there is the problem of politicisation. Under delinkage, a prize system would hand significant new discretionary powers to government officials as the judges of which medicines win prizes. Political factors would influence decisions on where to allocate funding, rather than clinical need. Diseases that could summon the most vocal lobby groups would get attention from prize bureaucrats, while less fashionable diseases may be ignored.

Political connections and lobbying could both play a role in securing a prize, while elected officials may attempt to influence R&D spending by government agencies.

Patents, on the other hand, represent a far less arbitrary form of innovation incentive than delinkage. Government merely sets the framework of patent law, under which all companies compete. And competition is the key to innovation.

Take hepatitis C, until recently an incurable disease afflicting up to 3% of the world’s population. Since 2013, no fewer than 10 new treatments have come onto the market, offering clinicians a huge range of options. Such breadth and speed of innovation under a winner-takes-all prize system is hard to picture.

Despite their superficial attraction, no country (other than the technologically-backward former Soviet Union) has yet replaced intellectual property rights with delinkage mechanisms such as prizes. The reasons are clear. Prizes risk economic distortions, undermining incentives for innovators, and adding a new layer of bureaucratization and politics.

Claims that delinkage is the answer to the world’s myriad health problems need to be taken with a large pinch of salt.

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