Lessons of Covid-19 for Reward Alternatives to Patents

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Ordinarily, pharmaceutical companies are motivated by the prospect of profits from legally guaranteed exclusivity, provided either by the patent system or the FDA. Life-savings drugs are priced aggressively, leading to familiar debates about whether the costs are worth the benefits in promoting innovation. Covid-19 vaccines enjoy at least the possibility of patent protection, but companies like Moderna have pledged not to enforce their patent rights during the pandemic. Meanwhile, the companies are charging governments bargain basement prices for the vaccines they produce. Researchers have estimated the value of a vaccine at between 5% and 15% of global wealth, but pharmaceutical companies will receive nowhere near that much. Moderna's market capitalization, for example, is only around $54 billion, while global wealth is around $360 trillion.

While the vaccine companies deserve kudos, self-interest is presumably playing a significant role. Moderna will surely make money on its vaccines, but much of the company's value is likely attributable to the possibility that its mRNA and other technology will be useful for diseases besides Covid-19. This may help explain why the vaccine companies were willing to part with vaccine so cheaply. The demonstration that their vaccine platform can be safe is valuable. The goodwill that the vaccine companies earn with the public, and at least as importantly with drug regulators around the world, may be worth a lot too. The vaccine companies may also have suspected that they would not be granted Emergency Use Authorization if they did not promise to distribute their vaccines relatively cheaply. There is little sense in developing a vaccine for a pandemic if the government will slow-walk approval.

The result is that the incentives for vaccine development more closely resemble those of grants and rewards rather than those typically afforded by the patent system. The grants were the ex ante funding, from sources like Operation Warp Speed, and the rewards came in the form of government contracts, plus earned goodwill, after vaccines proved successful. Of course, it's nothing new for governments to purchase drugs. Benjamin Roin has argued persuasively that even though prizes and reward systems of intellectual property are often seen as alternatives to the patent system, in fact various government purchasing and subsidy arrangements amount to de facto prize and reward systems that act as complements to our patent and regulatory exclusivities. Can we then draw any conclusions about prize or reward systems from the Covid-19 experience?

One tempting conclusion might be that intellectual property is unnecessary or that government should take patents, paying considerably less than what the patentees could earn on the market. For example, Hannah Brennan, Amy Kapczynski, Christine Monahan, and Zain Rizvi have urged the government to use 28 U.S.C. § 1498 to involuntarily license various pharmaceuticals. The government would be required to reimburse the pharmaceutical companies, but Brennan et al. urge a payment formula based on risk-adjusted research and development costs that, they say, would result in much lower revenue for the pharmaceutical companies. More radically still, one might imagine abolishing the patent size and creating a reward system in its place. Jamie Love, for example, has argued for a system in which a fixed amount of money is devoted annually to pharmaceutical innovation. Supporters of such systems might point out that the non-patent rewards during the Covid-19 pandemic were sufficient to lead to the development of vaccines and that if the pharmaceutical companies instead had set prices at their profit-maximizing value, the vaccines would have been much more expensive.

In my view, Covid-19 cuts in the opposite direction, for three reasons. First, governmental funding of COVID-19 was way too low, as Alex Tabarrok has repeatedly pointed out. If profits, from whatever source, had been at all proportional to the benefits provided, the population would likely have been vaccinated by now. The elasticity of supply of vaccines is not zero. Sure, the vaccine companies have worked very hard at producing vaccines, starting their supply chains much earlier than would have been the case with a typical vaccine. But if they had invested ten or a hundred times more money, writing incentive-laden contracts with their own suppliers, the supply chain would have responded. The U.S. government has just now brokered a deal between Merck and Johnson & Johnson for the former to produce the latter's vaccine. With enough incentives, the market could have produced such a deal without any government interference. More importantly, it could have done so long ago, so that the new capacity would already be available, instead of anticipated in several months, after there will already be enough vaccine capacity for the United States. Meanwhile, vaccine manufacturers have built new factories. With enough incentives, they could have built more such factories. Those factories may be competing for other supply chain inputs, but government spending commensurate with the challenge could have generated much more supply. If a patent prize or reward system requires the government to be sensible in allocating an appropriate amount of money ex ante, the fact that the United States invested too little money does not inspire great confidence. And the rest of the world, other than Israel, was even more short-sighted.

Second, Covid reinforces what has long been apparent, that pharmaceutical research is highly risky, with the vast majority of research efforts ultimately failing. Covid-19 vaccines have been quite successful, but there have still been many failures, such as that of Sanofi and GlaxoSmithKline. Brennan et al. are not oblivious to considerations of risk and would insist that the government should reimburse pharmaceutical companies for their risk-adjusted R&D. But there is a danger that the government will underestimate risk. Hindsight bias may make it seem that a successful drug was destined for success from the beginning. Moreover, the government may focus more on spending narrowly targeted toward the particular problem, rather than spending to create the company and infrastructure that then were able to address the problem. Most of the value provided by the pharmaceutical companies was provided before the pandemic, and absent the pandemic, investors in companies like Novavax would have been empty-handed. A risk-adjustment allocation may place too little emphasis on dangers of wasted investment long in the past, when companies and facilities were created. Completely ex post rewards set by the government also might be set too low.

Third, when the government decides how much a pharmaceutical company should be reimbursed for its efforts, it may tend to place too little emphasis on non-R&D investments. Love, for example, has criticized pharmaceutical companies for "wasteful spending on marketing." That may often be the case, but Covid-19 at least has helped illustrate the importance of pharmaceutical competencies in clinical trials, in production, and in scaling up inventions. As has been pointed out before, Moderna's vaccine was invented by January 13, 2020. The challenge was not invention but all of the subsequent steps. And one might wonder whether some of the logistics of rolling out the vaccine would have been smoother if the pharmaceutical companies were charged with distribution and paid based on a reasonable measure of lives saved. If the patent system were replaced with a reward system, the government would likely shortchange non-R&D contributions, just as it has not relied on pharmaceutical companies or big businesses to get the produced vaccines into arms.

The knock on governmental reward systems has always been that the government might shortchange inventors, once their inventions are complete. The famous story used to illustrate this tendency is that of John Harrison, who invented a timepiece that could be used by navigators to determine longitude but was not awarded all of a promised prize. My colleague Jonathan Siegel argues that in fact Harrison was fairly treated, as the Board of Longitude reasonably interpreted the statute creating the prize. After all, Harrison invented a single timepiece, not a production line that could churn out timepieces that could be used to solve the longitude problem. Ultimately, the episode may show both that government rewards will be too low relative to their social value and that a benefit of reward systems is that they can take into account a range of considerations, not only the occurrence of an invention but also efforts by the inventor and others that contribute to effective commercialization and distribution.

It is possible to imagine a reward system that could only increase innovation and that could provide incentives for the diverse contributions needed to bring successful drugs and other inventions to market. In my own writing on patent rewards, I have argued for an optional system. The government would create a fund, committing some amount of money ex ante, but inventors would be able to choose between exploiting patents and seeking money from the fund. If the government puts too little money in the fund, we'd be no worse off than in the absence of the fund, and probably a little bit better off, because those most likely to take advantage of it would be those who have contributions that are hard to monetize through patents. The experience with Covid-19 suggests to me that the government probably would put too little money in such a fund. That's not a reason to give up on prize and reward alternatives to patents (for my review of the literature on this topic, see here), but it highlights that any design for a reward system cannot rely entirely on governmental grace to set an appropriate compensation level.

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  1. Now that you mention it, I’ve noticed they didn’t spend the customary $2 billion or whatever on marketing, which companies usually insist is an integral and necessary part of the development process, despite the absurdity of advertising to the general public when only doctors can prescribe the stuff.

    1. Most patients are on some form of insurance. I suspect that much of the drug advertising is not attempting to convince doctors that the drug should be prescribed but rather to get the patient to pressure the doctor to spend the time to justify the use of the drug to the patient’s insurance company and to get the patient to push on the insurance company as well.

      In rural areas where a patient is much more likely to go to a “GP” for conditions that would result in a referral to a specialist in more populous areas, the advertising may serve the important and useful purpose of getting the patient to raise the possibility to the doctor that the drug may be more effective than other treatments — something the doctor may not have considered. Nothing against GP’s, but in the last 75 years the array of recognized conditions and array of treatments has expanded to the point that a GP is, by necessity, not going to be able to keep up with what they would ideally if they had infinite time and brain capacity.

  2. Oh boy….there’s a lot in this that is problematic.

    1. The pharmaceutical companies are charging a “reasonable” profit margin. Rather than an “unreasonable” margin as might be suggested. That’s for a lot of reasons. 1) The pre-existing, guaranteed purchase agreements and the agreements that went into the financing of the drug via Operation Warp Speed (OWS). Neither of those traditionally exist for pharmaceuticals. 2) The competition aspect. There IS too high a price, when people will simply use another company’s vaccine. 3) The potential for the Government to simply seize the vaccine production if prices are unreasonable. All reasons why.

    2) “But if they had invested ten or a hundred times more money, writing incentive-laden contracts with their own suppliers, the supply chain would have responded.”

    No, they don’t, not in that type of time frame. Or at least not in the way you would expect. You’d see a LOT of fraud, poor supplies, mismanagement, and more. It might actually cost time.

    The issue is, a lot of this is extremely specialized equipment and skillsets. This equipment, and especially the skillsets, simply can’t be obtained overnight. This isn’t WWII building tanks. This is WWII’s Manhattan project. There are only so many Fermis and Oppenheimers who have the skillset. You can train more…but it takes time. Often years. And that actually takes the trainers away from the project at hand. The mRNA system and lipid formulation is that sort of problem.

    3. Lastly, I would be remiss not to mention that apparently Operation Warp Speed wasn’t explicitly congressionally funded. It was an Administration Operation that needed to shift other funds around. Something to consider…

    1. Well, yes an no.

      More money equals more factories. We have people with the skillet to develop factories. More money equals more distribution. Amazon manages the most complex distribution system in the world, why, because they profit from it. There is absolutely no reason why we couldn’t have had a better distribution system in place.

      The cold storage was a problem, but again, there are people who develop that storage systems. Not to mention we had months to figure that problem out.

      Sure, there aren’t a lot of people who had the skills to develop the vaccines. But the vaccines were developed fairly quickly, within the first month or so, so we didn’t need those people. We needed clinical trial people, and there are quite a few of those.

      Not to mention that so much of this was useless regulatory nonsense, and not actual needs for money. Had we run human challenge trials it would have been cheaper. Had the FDA convened earlier once we knew for a fact that it was safe it would have been cheaper. Had we had a solid reciprocity system in place (if I have to hear Thalidomide one more time from a random person who doesn’t understand what actually happened there I will scream) it would have been cheaper.

      It isn’t helpful to simply say, oh there wasn’t enough people ot equipment. Money doesn’t buy expertise to a limit but it does buy a lot of things. Expecially when so much of the problem were government issues, not technical issues.

      “I would be remiss not to mention that apparently Operation Warp Speed wasn’t explicitly congressionally funded. It was an Administration Operation that needed to shift other funds around.”

      Which most conservatives would complain about inappropriate delegation of power unless the Trump White House had a solid legal argument that the funds were appropriated … and fine, but is anyone really arguing that was a bad decision? The vaccines are gonna get us out of this. The other stuff wasn’t!

      If anything, the fact that they had to develop workarounds to get the program going adds some marginal respect to the administration, they were not just doing what they were told they actively searching for ways to implement a the right program.

    2. “This is WWII’s Manhattan project. There are only so many Fermis and Oppenheimers who have the skillset. ”
      That is a gross exaggeration. To be sure timely innovation that is readily translational to production takes highly skilled professionals. But fundamental biology and techniques are well known in contrast to the almost complete lack of relevant physics and engineering knowledge at the start of the Manhattan project. There never had been and likely never will be such an assemblage of the greatest scientific and engineering minds of the century as worked at and with Los Alamos during the Manhattan project.

      1. ^

        It is amazing to me that the UK discovered the neutron in 1932, and like 13 years later the US had enough of a handle on this entire new vista of physics we were making atomic bombs, piles, and particle accelerators.

        1. To me the most important mis-discovery was by Fermi and his collaborators in Rome. They actually produced (but did not interpret correctly) neutron induced fission in 1937, two years before the phenomenon was seen and correctly understood in Germany. That Fermi and associates failed to understand what they had done may be one of the great fortunes in modern history.

          1. That story about the paraffin and slow neutron effect observation does stick with you. I’ve always thought of it as part of a larger narrative with Meitner and Frisch completing it. Great look at how nonlinear basic research can be.

            Have you read the Fermi biography “The Last Man Who Knew Everything?” It doesn’t touch on everything (Fermi was awful to his wife, I hear), but it’s pretty good.

    3. Remember too that there is the mandated subsidy of the product — while it is being provided free of charge to the individual, they wouldn’t be requesting insurance information.

      People are getting reimbursed for these shots, I’m guessing something in the $600-$1000 range for the two of them, and if $5 copay would preclude women from being able to obtain birth control pills — well, I have a $5 bill in my wallet right now, but I definitely don’t have $600-$1000 and I’d have to make a serious decision about not getting the vaccine if I had to come up with that.

      A mandate that it be free to the recipient is a form of guaranteeing demand….

  3. The government covering “risk” would put it into the same game as when government purchases art.

    The supply of worthless vaccines would skyrocket.

  4. The name of the Moderna vaccine is actually the NIH-Moderna vaccine. So the development of that vaccine was initiated by a Fauci underling in December 2019 when he was about to begin work on another vaccine and Covid started making news. The code of Covid was put on line on January 10th 2020 and that’s when the Moderna vaccine development got into high gear. So a member of the Deep State developed the NIH-Moderna vaccine with no prompting from the Trump White House.

  5. When I read that a drug developer could be “paid based on a reasonable measure of lives saved” I know that I’m reading fantasy.

  6. Query whether the value of any nostrum is “five to ten percent of global wealth”. How does one arrive at a conclusion like that? And if that’s its value, how does one collect it?

  7. Another horrifying dumbass lawyer mistake, the patent terms of 14 years and of 17 years.

    Patents are to promote innovaton. No?

    Which patent term will promote more innovation, one for 14 years or one for 5 years, you lawyer dumbass? This is not fourth grade math where lawyer math stops, that needed to count money. This is a first grade word math problem, lawyer dumbass.

    1. Probably the one for 5 years, if modern economic research is to be believed, with an exception for pharmaceuticals, which likely need the full 20 years (in the absence of a prize).

      Now which part of that could have been solved by a 1st grader?

      1. The part that implies that you go to get something more often if you run out earlier. You need to go to the fountain more often if your glass has 5 oz of water than if your glass has 14 oz. Once you have been taught 14 is more than 5, you can solve it with average 6 year old mental ability.

  8. Problem with this: I really would rather not have a single individual or government decide which drugs are “important” as would be the case in a prize system.

    Consider the orphan drug act. An act designed to encourage companies to focus more time on rarer diseases. The net effect is that millions of dollars are wasted to produce drugs that cost $500,000 and help 100 people when the money could have been spent on drugs that are more helpful.

    Congress decided to shift incentives to rarer diseases, and it ended up being insanely problematic. Companies are in the best position to decide what drugs are most important based on who they can sell it to.

  9. This article puts too much emphasis on the immediate application (making this vaccine) and not enough emphasis on the previous work, by a great many people, which uncovered the basic biochemistry (and synthetic chemistry) which made it possible to invent an mRNA-vaccine (or a vaccine based on DNA in an adenoviral vector) at all. There’s no really good, rigorous way to evaluate how important a discovery will be later, especially given that its applications will require using results of many different basic-science projects.

    No matter how much or how little credit you give Trump for the vaccines coming online so quickly, none of it makes up for his repeated attempts (EVERY budget-proposal) to cut the biggest granting agencies which fund the basic research most likely to enable big improvements in the near and intermediate future (which is NIH and Dept. of Energy). This research– basic, not applications — cannot usually be funded the usual capitalist way, by persuading people to invest their savings in hope of scoring profit for themselves, because the profit, if it comes at all from any given project, usually comes to someone else, who brings together results from many basic-science projects and applies them together in a new way. But without the no-immediate-direct-profit basic science, no one can invent anything. That is why most “minimal government” libertarians are wrong about this.

    1. Good points. Almost from the beginning of history governments have taken on the task of basic research with applied research being the realm of free market. Ultimately we need both, because the vaccines we have today have a foot in each of the realms.

  10. Moderna’s generous offer not to sue mRNA patent infringers might be a little disingenuous. Moderna licensed those patents from a subsidiary of Arbutus Biopharma awhile back. In 2016 they lost the case in patent court. In June 2020 Moderna, again lost the case in front of the Patent Trial and Appeal Board (PTAB) and they filed an appeal in the the US Court of Appeals Federal Circuit, which is scheduled to be heard in early May. Might be a pre-emptive strategy to rein in attorneys’ fees and imposed royalties by the Court of Appeals!

  11. “First, governmental funding of COVID-19 was way too low”

    Pelosi refused to fund Operation Warp Speed because it would give Trump a win. Trump had to take the funds from existing programs, then the NYTimes tried to make a scandal over it:

    Coronavirus Attacks the Lungs. A Federal Agency Just Halted Funding for New Lung Treatments.

    “The shift, quietly disclosed on a government website, highlights how the Trump administration is favoring development of vaccines over treatments for the sickest patients.”

    1. The link you provide doesn’t support your claim that Pelosi refused to fund Operation Warp Speed. On March 6, 2020, Congress passed the Coronavirus Preparedness and Response Supplemental Appropriations Act, which included $3.4 in contingent appropriations for countermeasures and vaccines. On March 27, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which included another $27 billion. (The money went to the Public Health and Social Services Emergency Fund, which funds BARDA.)

      On May 15, the Trump Administration announced the formation of Operation Warp Speed to facilitate, “the development, manufacturing, and distribution of COVID-19 countermeasures.” The announcement included the following statement: “Financial resources: Congress has directed almost $10 billion to this effort through supplemental funding, including the CARES Act, and Congress has appropriated other flexible funding….” It does not say that additional funding would be required. Nor does it say what, if anything, the rest of the $27 billion in the CARES act was being spent on which would prevent it from being spent on Operation Warp Speed if additional money was required.

      If there was any subsequent request from the Trump Administration for additional money for Operation Warp Speed, I haven’t found it. Your suggestion that Pelosi would have refused such a request “because it would give Trump a win” makes me think you don’t understand Democrats very well.

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