Finding Cures for Tropical Diseases: Choosing the Right Incentives Stephen M. Maurer Goldman School of Public Policy, UC Berkeley May 23, 2007 European School on New Institutional Economics

Introduction 500 Million People The Patent System Hasn’t Worked Mandatory Radicalism A Once in a Lifetime Chance Bill Gates’ Antitrust Troubles Multiple Schemes, Complex Politics How to Choose?

Introduction Putting Innovation Theory to Work A Clear Objective: Cost Containment Rational – And Unsentimental – Comparison

Overview Reforming Patents Price Discrimination, Strategic Investing, Harmonization & Boosted Demand. Patent-Like Solutions Guaranteed Purchase Commitments Virtual Pharma Companies Private-Public Partnerships Strategy Conclusions

Reforming Patents Price Discrimination Harmonization Strategic Investing Boosted Demand

Reforming Patents Price Discrimination A Good Solution for Rich Nation Drugs Parallel Imports & Rich Nation Health Ministries A Political Problem Does Not Generate R&D Funds J. Lanjouw, “Outline of Foreign Filing License Approach” (2004), available at

Reforming Patents Harmonization Markets are Inadequate! Western sponsors are essential Partial Exceptions TB (80%) Malaria (45%) AIDS (25%) Dengue, Leishomaniasis (~ 0%) Making Up The Difference? Global Alliance, Economics of TB Drug Development (2001), available at

Reforming Patents Strategic Investing Information Asymmetry & Crowding Out Private-Public Partnerships & Access Pricing

Boosted Demand The Sunk Costs Problem Discounting the Payoff A Traditional Fix… Reforming Patents

Patent-Like Solutions

Guaranteed Purchase Schemes “AdvancedMarkets” Is It Feasible? Is It Desirable? Setting the Prize Estimating 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 Data Market Arguments A 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 Estimates Prizes & Internal Financing Patent-Like Solutions

Additional Costs Technology Shocks Who Gets The Savings? Agency Problems (Sponsors) Risk Premium Economies of Scale Patent-Like Solutions

Other Issues Why an Independent Adjudication Committee? Two-stage games & bribes Me-Too Drugs & Cumulative Innovation Not The Patent System! Can Virtual Pharma Do Better? Patent-Like Solutions

Virtual Pharma Solutions

Virtual Pharma Beyond Monolithic Drug Companies Virtual Pharma Public-Private Partnerships (“PPPs”) PPP Strategy Pay-as-You-Go vs. End-to-End A Preliminary Design Open Source & Hybrids

PPP Strategy (I) Opening The Black Box? A Bigger Toolbox But: How Are Incentives Affected? Yooki Park, Essays in the Economics of Innovation Incentives (2006) Virtual Pharma

Case 1: No Learning: PaYG: 1 y 1 = c 1 /p 1 y 2 = c 2 /p 2 Sponsor may pay y 1 and get nothing. E2E: y 2 = [1/p 2 ] x [c 1 /p 1 ] + [c 2 /p 2 ] Sponsor must pay larger y 2 than in PaYG. Payouts are the same in expectation. May not support all desired races. Virtual Pharma

Case 2: Firms Learn E2E Costs Less The Sunk Costs Argument Case 3: Firms & Sponsors Both Learn PaYG Costs Less Sponsors Adjust y 2 Mixed Cases Virtual Pharma

PPP Strategy (II) A Preliminary Design Characterizing the Pipeline Social Challenges Toolbox Design 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 Research Finding Targets Validating Targets Finding Lead Compounds Optimizing Lead Compounds Process Development Pre-Clinical Testing Phase I Tests Phase II Tests Phase III Tests Approval Phase IV Tests Stephen M. Maurer, “The Right Tools” (2005) (report for World Health Organization), available at ugRsch.pdf. Virtual Pharma

Science Tasks Basic Research Finding Targets Validating Targets Finding Lead Compounds Optimizing Lead Compounds Process Development Pre-Clinical Testing Phase I Tests Phase II Tests Phase III Tests Approval Phase IV Tests How Disease Works Points of Intervention Finding Drugs Learning to Make Drugs Testing Virtual Pharma

Social Challenges Basic Research Finding Targets Validating Targets Finding Lead Compounds Optimizing Lead Compounds Process Development Pre-Clinical Testing Phase I Tests Phase II Tests Phase III Tests Approval Phase IV Tests Agency Problems (Researchers) Cost Virtual Pharma Eliciting Information

Basic Research Finding Targets Optimizing Targets Finding Lead Compounds Optimizing Lead Compounds Process Development Pre-Clinical Testing Phase I Tests Phase II Tests Phase III Tests Approval Manufacturing Phase IV Tests Social Challenges: Eliciting Information Virtual Pharma

Toolbox: Eliciting Information Prizes Grants Contract Research Open Source Virtual Pharma

Social Challenges: Agency Problems (Researchers) Basic Research Finding Targets Optimizing Targets Finding Lead Compounds Optimizing Lead Compounds Process Development Pre-Clinical Testing Phase I Tests Phase II Tests Phase III Tests Approval Manufacturing Phase IV Tests Virtual Pharma

Toolbox: Agency Problems (Researchers) Prizes Grants Contract Research Open Source Virtual Pharma

Social Challenges: Getting the Best Price Basic Research Finding Targets Optimizing Targets Finding Lead Compounds Optimizing Lead Compounds Process Development Pre-Clinical Testing Phase I Tests Phase II Tests Phase III Tests Approval Manufacturing Phase IV Tests Virtual Pharma

Toolbox: Getting the Best Price Prizes Grants Contract Research Open Source A Happy Coincidence Virtual Pharma

Getting the Best Price, ctd… Enforcing The Best Price Buying Power & Repeat Games Economies 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 Volunteers Efficient Pricing Transparency New 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 Story Picking Winners vs. Science Politics

Conclusion

Price Discrimination Rich Nation Drugs A Political Problem Strategic Investing Tuberculosis? Malaria? AIDS? Crowding out & access pricing AdvancedMarkets vs.Virtual Pharma Dengue, Leishomaniasis, etc. Uncertain R&D Costs vs. Cold-Blooded Foundations Bill Gates, Businessman

Conclusion Putting Innovation Theory to Work…

Finding Cures for Tropical Diseases: Choosing the Right Incentives Stephen M. Maurer Goldman School of Public Policy, UC Berkeley May 23, 2007 European School on New Institutional Economics