Finding Cures for Tropical Diseases: Choosing the Right Incentives

1. 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

2. 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?

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

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

5. Reforming Patents Price Discrimination Harmonization Strategic Investing Boosted Demand

6. 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.

7. 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

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

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

10. Patent-Like Solutions

11. 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).

12. 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).

13. Patent-Like Solutions Estimating R&D Costs (Pt. 2) Is the Accounting Answer Right? Pro Forma Estimates Prizes & Internal Financing

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

15. 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?

16. Virtual Pharma Solutions

17. 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

18. 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)

19. 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.

20. 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

21. 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).

22. 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 http://gspp.berkeley.edu/iths/MAURER_DrugRsch.pdf.

23. 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

24. 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 Problems (Researchers) Cost

25. 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

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

27. 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

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

29. 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

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

31. 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

32. 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)

33. Do Hybrids Make Sense? Economies of Scale A Strategic Investing Story Picking Winners vs. Science Politics

34. Conclusion

35. 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

36. Conclusion Putting Innovation Theory to Work…

37. 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