European School on New
Institutional Economics
Finding Cures for Tropical Diseases:
Choosing the Right Incentives
Stephen M. Maurer
Goldman School of Public Policy, UC Berkeley
May 23, 2007
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
http://www.cgdev.org/docs/FFLOutline.pdf.
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
http://66.216.124.114/pdf/Economics%20Report%20Full%20(final).pdf
Reforming Patents
Strategic Investing
Information Asymmetry
& Crowding Out
Private-Public Partnerships
& Access Pricing
Reforming Patents
Boosted Demand
The Sunk Costs Problem
Discounting the Payoff
A Traditional Fix…
Patent-Like Solutions
Patent-Like Solutions
Guaranteed Purchase Schemes
“AdvancedMarkets”
Is It Feasible?
Is It Desirable?
Setting the Prize
Estimating R&D Costs
AdvancedMarkets Working Group, Making
Markets for Vaccines: A Practical Plan to
Spark Innovation for Global Health (2002).
Patent-Like Solutions
Estimating R&D Costs (Pt. 1)
The Accounting Answer
Drug Company Data
Market Arguments
A 20 – 30% Uncertainty?
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).
Patent-Like Solutions
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?
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
Virtual Pharma
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:
y1 = 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 Learn
E2E Costs Less
The Sunk Costs Argument
Case 3: Firms & Sponsors Both Learn
PaYG Costs Less
Sponsors Adjust y2
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
Stephen M. Maurer, “The Right Tools”
(2005) (report for World Health
Phase III Tests
Organization), available at
Approval
http://gspp.berkeley.edu/iths/MAURER_Dr
Phase IV Tests
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
Eliciting
Information
Agency
Cost
Problems
(Researchers)
Virtual Pharma
Social Challenges:
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
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
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
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
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
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…
European School on New
Institutional Economics
Finding Cures for Tropical Diseases:
Choosing the Right Incentives
Stephen M. Maurer
Goldman School of Public Policy, UC Berkeley
May 23, 2007