Transcript Patents, Prizes, AMCs and CAMCs

Patents, Prizes, AMCs and
CAMCs
Aidan Hollis
University of Calgary
October 2007
Patents
Strengths
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Reward partly
proportional to social
value
Decision to invest
made by person with
the most information
Risks borne by
innovator
Weaknesses
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Reward only partly
proportional to social
value
High prices prevent
access and cause
uncompensated
losses.
Prizes
Prizes come in many varieties, which
makes the word easily misunderstood.
 Can increase incentives as a supplement
or substitute for patents.
 I will address three types of prizes

Sanders-style prize fund for all drugs
 AMCs
 Comprehensive AMCs

Sanders-type prize fund
This is a replacement for patent exclusivity
rights for pharmaceuticals.
 All drugs are included.
 Basic idea is that payments would be
made to innovators based on estimates of
the incremental therapeutic benefit of the
innovation out of a fixed prize fund.
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Sanders Proposal
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Advantages
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Access
Efficient alignment of R&D incentives with medical
need
Risks borne by innovators
Disadvantages
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Overturns existing system
Difficulty in assessing how the reward fund should
change over time
Funder needs to assess each innovation’s impact

Especially problematic for “life-style” drugs.
Advance Market Commitments
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AMCs create incentives for rapid
commercialization of a specific vaccine.
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Essentially, they address the problem that the patent
system may not create strong incentives for certain
products.
Size of payment justified by estimates of QALY
impacts.
They require the recipient to commit to a single
price over a long period to avoid double-dipping.

Firm that doesn’t want to commit to a fixed price
doesn’t need to accept supplementary AMC payment.
The Limits of AMCs
The AMC administrator must pre-specify
technical standards.
 Therefore, AMCs cannot create broad
incentives.

Eg: the pneumococcal vaccine AMC is for one
product.
 AMCs appear suitable chiefly for incentivizing
late-stage development and
commercialization.

Comprehensive AMCs
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Basically an optional alternative to patent
exclusivity.
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Payment made for innovative drugs based on
measured health impact.
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Payment determined after observing the product, not
before.
Similar to Sanders-type prize.
Recipients forgo exclusivity.
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Similar to AMCs – it is an optional add-on.
Corresponding obligation of AMC-style fixed price.
Payment is a share of fixed prize fund, with the
share equal to share of health impact.
Comprehensive vs. Standard
AMCs

Two differences from standard AMCs.
Payments based on QALYs per unit,
estimated afterwards, instead of before.
 Requires open licensing to avoid doubledipping.
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Thus this mechanism can deal with any
new medicine, not just those pre-specified.
CAMC Properties
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Optimizes incentives for included drugs
Ensures generic pricing from beginning
Incentivizes continuing promotional activities
In effect, it uses patent system to “calibrate”
rewards
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Firms can substitute in or out – if payments too high,
more firms will give up patent exclusivity, thus driving
payment down (and vice versa).
Application to drugs for developing
countries
This system could be implemented with
respect to sales of drugs in developing
countries.
 In this case there may be financing
available. The question is how to allocate
the money.
 CAMC has the advantage of technically
maximizing the incentive effects of this
financing.

Comparison to Sanders Bill
CAMC proposal is an optional version of
the Sanders prize fund bill.
 Reduces concerns about how to deal with
lifestyle drugs.
 Creates options for firms.
 Allows for test run: the larger the amount
of money in the reward fund, the more this
resembles a mandatory mechanism.
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How accurately can impact be
measured?
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Imperfectly, of course.
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This shouldn’t be a big deal.
Patent exclusivity is dismal at ensuring
that the profits from a drug are
proportional to the social value…
 Prices are poorly related to health effect
and doctors don’t know prices
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Summary
Patents
 Fairly efficient
incentives
 High prices
Sanders prize fund
AMCs
Comprehensive AMCs
Summary
Patents
 Fairly efficient
incentives
 High prices
Sanders prize fund
AMCs
 Effective
 But limited to
specific wellunderstood
products
Comprehensive AMCs
Summary
Patents
 Fairly efficient
incentives
 High prices
Sanders prize fund
 Perfectly efficient incentives
 Low prices
 Complete overhaul of system
AMCs
 Effective
 But limited to
specific wellunderstood
products
Comprehensive AMCs
Summary
Patents
 Fairly efficient
incentives
 High prices
Sanders prize fund
 Perfectly efficient incentives
 Low prices
 Complete overhaul of system
AMCs
 Effective
 But limited to
specific wellunderstood
products
Comprehensive AMCs
 Perfectly efficient incentives only
for drugs in the system
 Low prices for drugs in system
 Automatically calibrated rewards
 Incremental implementation
Summary
Patents
 Fairly efficient
incentives
 High prices
Sanders prize fund
 Perfectly efficient incentives
 Low prices
 Complete overhaul of system
AMCs
 Effective
 But limited to
specific wellunderstood
products
Comprehensive AMCs
 Perfectly efficient incentives only
for drugs in the system
 Low prices for drugs in system
 Automatically calibrated rewards
 Incremental implementation
Summary
Patents
 Fairly efficient
incentives
 High prices
Sanders prize fund
 Perfectly efficient incentives
 Low prices
 Complete overhaul of system
AMCs
 Effective
 But limited to
specific wellunderstood
products
Comprehensive AMCs
 Perfectly efficient incentives only
for drugs in the system
 Low prices for drugs in system
 Automatically calibrated rewards
 Incremental implementation
Comparison to direct research
funding and subsidies
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The benefit of patents and prize-type mechanisms is that
the incentives are (relatively) efficient.
The people with the most information about the
probability of success of a research project make the
decision on whether to fund it, and bear the risk.
The problem with direct research funding and subsidies
is that decisions are made by managers with incomplete
information and without any risk sharing.
In addition, subsidies of large pharmaceutical companies
create moral hazard and may be politically difficult to
sustain.
Other incentive mechanisms
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Patent extensions
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Special tax on sick people to pay for drugs for
other sick people.
Fast track regulatory review
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Can only be a good idea if it is believed that
regulatory review is taking too long and
accelerating it cannot be separately funded.