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We have seen the indirect ways that our actions aid and abet the origination and spread of pandemics. But what about cases where we have a much more direct hand in the process – where we deliberately use, improve or create the pathogens? Our understanding and control of pathogens is very recent. Just 200 years ago, we didn’t even understand the basic cause of pandemics – a leading theory in the west claimed that disease was produced by a kind of gas. In just two centuries, we discovered it was caused by a diverse variety of microscopic agents and we worked out how to grow them in the lab, to breed them for different traits, to sequence their genomes, to implant new genes and to create entire functional viruses from their written code. This progress is continuing at a rapid pace. The past 10 years have seen major qualitative breakthroughs, such as the use of the gene editing tool Crispr to efficiently insert new genetic sequences into a genome, and the use of gene drives to efficiently replace populations of natural organisms in the wild with genetically modified versions. This progress in biotechnology seems unlikely to fizzle out anytime soon: there are no insurmountable challenges looming; no fundamental laws blocking further developments. But it would be optimistic to assume that this uncharted new terrain holds only familiar dangers. To start with, let’s set aside the risks from malicious intent, and consider only the risks that can arise from well-intentioned research. Most scientific and medical research poses a negligible risk of harms at the scale we are considering. But there is a small fraction that uses live pathogens of kinds that are known to threaten global harm. These include the agents that cause the Spanish flu, smallpox, Sars and H5N1 or avian flu. And a small part of this research involves making strains of these pathogens that pose even more danger than the natural types, increasing their transmissibility, lethality or resistance to vaccination or treatment. In 2012, a Dutch virologist, Ron Fouchier, published details of an experiment on the recent H5N1 strain of bird flu. This strain was extremely deadly, killing an estimated 60% of humans it infected – far beyond even the Spanish flu. Yet its inability to pass from human to human had so far prevented a pandemic. Fouchier wanted to find out whether (and how) H5N1 could naturally develop this ability. He passed the disease through a series of 10 ferrets, which are commonly used as a model for how influenza affects humans. By the time it passed to the final ferret, his strain of H5N1 had become directly transmissible between mammals. The work caused fierce controversy. Much of this was focused on the information contained in his work. The US National Science Advisory Board for Biosecurity ruled that his paper had to be stripped of some of its technical details before publication, to limit the ability of bad actors to cause a pandemic. And the Dutch government claimed that the research broke EU law on exporting information useful for bioweapons. But it is not the possibility of misuse that concerns me here. Fouchier’s research provides a clear example of well-intentioned scientists enhancing the destructive capabilities of pathogens known to threaten global catastrophe. Of course, such experiments are done in secure labs, with stringent safety standards. It is highly unlikely that in any particular case the enhanced pathogens would escape into the wild. But just how unlikely? Unfortunately, we don’t have good data, due to a lack of transparency about incident and escape rates. This prevents society from making well-informed decisions balancing the risks and benefits of this research, and it limits the ability of labs to learn from each other’s incidents. Security for highly dangerous pathogens has been deeply flawed, and remains insufficient. In 2001, Britain was struck by a devastating outbreak of foot-and-mouth disease in livestock. Six million animals were killed in an attempt to halt its spread, and the economic damages totalled £8bn. Then, in 2007, there was another outbreak, which was traced to a lab working on the disease. Foot-and-mouth was considered a highest-category pathogen, and required the highest level of biosecurity. Yet the virus escaped from a badly maintained pipe, leaking into the groundwater at the facility. After an investigation, the lab’s licence was renewed – only for another leak to occur two weeks later. In my view, this track record of escapes shows that even the highest biosafety level (BSL-4) is insufficient for working on pathogens that pose a risk of global pandemics on the scale of the Spanish flu or worse. Thirteen years since the last publicly acknowledged outbreak from a BSL-4 facility is not good enough. It doesn’t matter whether this is from insufficient standards, inspections, operations or penalties. What matters is the poor track record in the field, made worse by a lack of transparency and accountability. With current BSL-4 labs, an escape of a pandemic pathogen is only a matter of time. One of the most exciting trends in biotechnology is its rapid democratisation – the speed at which cutting-edge techniques can be adopted by students and amateurs. When a new breakthrough is achieved, the pool of people with the talent, training, resources and patience to reproduce it rapidly expands: from a handful of the world’s top biologists, to people with PhDs in the field, to millions of people with undergraduate-level biology. The Human Genome Project was the largest ever scientific collaboration in biology. It took 13 years and $500m to produce the full DNA sequence of the human genome. Just 15 years later, a genome can be sequenced for under $1,000, and within a single hour. The reverse process has become much easier, too: online DNA synthesis services allow anyone to upload a DNA sequence of their choice then have it constructed and shipped to their address. While still expensive, the price of synthesis has fallen by a factor of 1,000 in the past two decades, and continues to drop. The first ever uses of Crispr and gene drives were the biotechnology achievements of the decade. But within just two years, each of these technologies were used successfully by bright students participating in science competitions. Such democratisation promises to fuel a boom of entrepreneurial biotechnology. But since biotechnology can be misused to lethal effect, democratisation also means proliferation. As the pool of people with access to a technique grows, so does the chance it contains someone with malign intent. People with the motivation to wreak global destruction are mercifully rare. But they exist. Perhaps the best example is the Aum Shinrikyo cult in Japan, active between 1984 and 1995, which sought to bring about the destruction of humanity. It attracted several thousand members, including people with advanced skills in chemistry and biology. And it demonstrated that it was not mere misanthropic ideation. It launched multiple lethal attacks using VX gas and sarin gas, killing more than 20 people and injuring thousands. It attempted to weaponise anthrax, but did not succeed. What happens when the circle of people able to create a global pandemic becomes wide enough to include members of such a group? Or members of a terrorist organisation or rogue state that could try to build an omnicidal weapon for the purposes of extortion or deterrence? The main candidate for biological existential risk in the coming decades thus stems from technology – particularly the risk of misuse by states or small groups. But this is not a case in which the world is blissfully unaware of the risks. Bertrand Russell wrote of the danger of extinction from biowarfare to Einstein in 1955. And, in 1969, the possibility was raised by the American Nobel laureate for medicine, Joshua Lederberg: “As a scientist I am profoundly concerned about the continued involvement of the United States and other nations in the development of biological warfare. This process puts the very future of human life on earth in serious peril.”

In the past two centuries, we went from discovering the world of microbes invisible to the human eye to growing them in petri dishes, sequencing their genomes and now, altering their DNA. Just in the past 10 years, we have seen major breakthroughs in our biotechnological capabilities, such as the use of gene drives, the genetic cut-and-paste tool CRISPR-Cas9, and the world’s first genetically modified babies. A gene drive is a genetic mechanism by which a desired genetic sequence can be spread through a population faster than traditional inheritance. This strategy can be so effective that traits can spread even if they result in a disadvantageous trait, such as sterility. Thus, gene drives present potential new solutions for a variety of issues facing humanity, including eradicating, or altering disease carriers such as mosquitoes and controlling invasive species of plants, insects, or toads. What is worrisome, however, is that these biotechnological breakthroughs are not only in the hands of state actors and institutions. The rapid democratisation of biotech has made these powerful tools increasingly available to groups from the undergraduate biologist to the DIY biohacking communities. When the first human genome was sequenced in 2001, it took almost 15 years and the cost was around $2,6 billion. Today, a genome can be sequenced in an hour for a price of less than $1.000. While our growing biotechnological knowledge has benefits, it is a double-edged sword and can be misused — intentionally or unintentionally — in ways that can cause great harm. As the number of people with access to the technology grows, so does the risk for the technologies to be misapplied with deadly and global impact. Error or terror: bad bugs or bad guys? A biotechnological catastrophe may be caused by an engineered organism being accidentally released from controlled research environments, by the planned release of such an organism which then turns out to have unforeseen and catastrophic interactions with ecosystems, or by intentional usage of biological agents in biological warfare or bioterrorism attacks. The existential risks posed by most scientific and medical research is negligible. However, there is ongoing research into live agents of smallpox, SARS, H5N1, and avian flu, which, if escaped mistakenly, could wreak havoc. It is likely possible to engineer pathogens that are even more dangerous than the natural strains by increasing their incubation time, transmissibility, lethality, or resistance to vaccination and treatment. Research by well-intentioned actors into potential pathogens of pandemic, both natural — and down the road synthetic — is a path society can pursue to try to stay one step ahead of bad actors by exploring the space of possibilities and prepare adequately. Engineering pathogens to study them of course comes with its own set of dangers, but the benefits to resiliency might outweigh the risks and thus presents a fine line to be walked by the scientific community and its regulators. The technological means to genetically modify pathogenic characteristics are likely to become more widely available in the future. The main candidate for biological existential risk in the coming decades thus stems from our own technology and particularly the risk of misuse by groups or even individuals. Capabilities that were once only in the hands of governments and universities are increasingly moving into the living rooms and garages of individuals. Nick Bostrom from The Oxford Future of Humanity Institute estimates from a survey among researchers a 5% probability of a pandemic of catastrophic proportions (1 billion deaths) from natural sources by 2100 and estimate a 10% probability from an engineered pandemic.

The recent SARS-CoV-2 pandemic, which is causing COVID 19 disease, has taught us unexpected lessons about the dangers of human extinction through highly contagious and lethal diseases. As the COVID 19 pandemic is now being controlled by various isolation measures, therapeutics and vaccines, it became clear that our current lifestyle and societal functions may not be sustainable in the long term. We now have to start thinking and planning on how to face the next dangerous pandemic, not just overcoming the one that is upon us now. Is there any evidence that even worse pandemics could strike us in the near future and threaten the existence of the human race? The answer is unequivocally yes. It is not necessary to get infected by viruses of bats, pangolins and other exotic animals that live in remote forests in order to be in danger. Creditable scientific evidence indicates that the human gut microbiota harbor billions of viruses which are capable of affecting the function of vital human organs such as the immune system, lung, brain, liver, kidney, heart etc. It is possible that the development of pathogenic variants in the gut can lead to contagious viruses which can cause pandemics, leading to destruction of vital organs, causing death or various debilitating diseases such as blindness, respiratory, liver, heart and kidney failures. These diseases could result in the complete shutdown of our civilization and probably the extinction of human race. In this essay, I will first provide a few independent pieces of scientific facts and then combine this information to come up with some (but certainly not all) hypothetical scenarios that could cause human race misery, even extinction. I hope that these scary scenarios will trigger preventative measures that could reverse or delay the projected adverse outcomes.

Disease X is not a specific disease but is the name given to a potential novel infectious agent. It represents an illness which is currently unknown but could pose a serious microbial threat to humans in the future. It is necessary to be prepared because there is a vast reservoir of viruses circulating among wildlife which could become a source of a new infectious disease to which humans do not have immunity. In 2018, the World Health Organization (WHO) added Disease X to a list of pathogens that are a top priority for research, alongside known killers like Severe Acute Respiratory Syndrome (SARS) and Ebola. Labelling this potential threat as “Disease X” is meant to prioritise preparations for dealing with a disease that does not yet have vaccines or drug treatments, and could give rise to a severe epidemic. How much damage could Disease X cause? The WHO has warned that Disease X could result in 20 times more fatalities than COVID-19. COVID-19 has killed approximately seven million people around the world. In 2023, healthcare professionals warned that any new pandemic could be even deadlier – killing an estimated 50 million people worldwide.

‘It is likely that we are entering an age of pandemics,’ said Prof. Peter Piot, director of the UK’s London School of Hygiene and Tropical Medicine, who co-discovered the Ebola virus in 1976 and is now special advisor to the president of the European Commission on Covid-19.

He told the audience of researchers, policymakers and industry players that while he believes the risk of zoonoses – infectious diseases that cross from animals to humans – and pandemics will increase, the past year has shown the value of investing in research and innovation. He particularly singled out the value of basic research, with vaccines being developed in record time based on mRNA technology that has been decades in the making.

With the world today in the grip of the Covid-19 pandemic, a leading expert in infectious diseases has warned that another pandemic is a disaster waiting to happen.

Professor Kevin Ariën is head of the virology unit of the Institute of Tropical Medicine (ITM) in Antwerp, and has worked on the HIV pandemic, Ebola and the problem of emerging and re-emerging viruses.

Are short effective patent terms for some pharmaceuticals a problem in practice? As we have argued, there is tremendous empirical uncertainty about whether longer patent terms encourage innovation. This naturally raises the question: Would changes to effective patent terms have real effects on pharmaceutical investments? It is important to stress that our (preferred) justification for this proposed reform does not rest on an affirmative answer to that question. Rather, our preferred justification is more direct: the patent system is meant to provide uniform patent terms across inventions, but fails to do so in practice. Pharmaceutical markets are the obvious case where direct evidence of this failure exists, and there are practical policy levers that could address this failure without distorting other (nonpharmaceutical) markets. That said, we of course recognize that policymakers will be interested in whether the policy reform we are proposing would have real effects on pharmaceutical investments. While there is no definitive evidence on this question, the closest available evidence comes from Budish, Roin, and Williams (2015). The authors start by empirically establishing that longer commercialization lags are associated with less R&D investment in cancer drugs. As suggested by the two New England Journal of Medicine examples discussed above, clinical trials can be completed more quickly for late-stage cancers with low survival rates, such as recurrent and metastatic cancers, because differences in survival in a treatment group relative to a control group in a randomized trial can be observed more rapidly. Given that patents essentially must be filed before the start of clinical trials, late-stage cancer drugs thus receive longer effective patent terms than do early-stage cancer drugs that require lengthier clinical trials. As illustrated in figure 1, this difference in commercialization time correlates with the number of clinical trials conducted for different cancer stages. The same pattern holds when adjusting for measures of market size. Two additional empirical tests conducted by Budish, Roin, and Williams (2015) suggest that, when taken together, figure 1 reflects a distortion of private R&D investments in cancer drugs away from the ideal balance. First, the negative correlation between commercialization lags and R&D does not hold when firms are permitted to rely on surrogate endpoints for clinical trials (i.e., outcomes other than survival rates, which can be observed more quickly), suggesting that the relationship is causal rather than reflecting, for example, fewer scientific opportunities for early-stage treatments. Second, the observed negative correlation is stronger for private investments than it is for publicly funded research investments, suggesting again that the relationship does not merely reflect the lack of scientific opportunities to develop early-stage cancer drugs. As further support for this interpretation, all six FDA-approved cancer prevention drugs—the cancer drugs with the longest commercialization lags—either relied on surrogate endpoints or were approved by the FDA entirely on the basis of publicly funded clinical trials. What Budish, Roin, and Williams (2015) do not show is definitive evidence that longer effective patent terms would fix this distortion. As they discuss, at least one other potential mechanism—namely, private firms preferring to invest in projects that pay out over a short time horizon—could explain these results. While both mechanisms could merit a public policy response, reforms to Hatch–Waxman would only address the problems generated by the first mechanism. Even with that caveat, Budish, Roin, and Williams (2015) are nonetheless able to estimate that underinvestment by private firms in long-term cancer research—generated by either or both of these mechanisms—generates a quantitatively large loss in patient health. The authors estimate that, even focused solely on the subset of U.S. cancer patients diagnosed in 2003, this distortion generated around 890,000 lost life-years, which translates to a total net present value of life-years at stake of between $170 billion and $4.2  trillion. While these specific estimates should of course be taken with a grain (perhaps a spoonful) of salt, they suggest that this distortion is empirically important enough that policymakers should seriously consider potential reforms.

VI. CONCLUSION The problem explored in this Article is the paradoxical relationship between drug innovation and its reward. The reward shrinks (or, at best, stays flat) when premarket innovation takes longer. On the whole this should lead to post-invention efficiency, minimizing the impact of any endogenous factors contributing to the premarket program length.285 It also means that companies are unlikely to make choices specifically to delay market entry. With the clock ticking on post-approval market exclusivity, there is no benefit to doing so.286 The historical and empirical work in this Article leads to three important insights about the paradoxical relationship between drug innovation and its reward. First, the length of any particular drug’s premarket research and development program may depend heavily on factors like the disease and its therapeutic category, our current understanding of the causal pathways of the disease, the proposed therapeutic outcome, the chemical structure of the active ingredient, its mechanism of action, its physiological effect, and FDA’s innate conservatism. These exogenous factors are beyond the sponsor’s control in the sense that any seasoned firm with qualified personnel picking one premarket program instead of another would face the same issues.287 Second, certain drugs are simply going to take longer to develop. These will include some drugs for some early stage cancers that have a longer time to progression and mortality, for instance, as well as drugs for use in the earliest stages of neurodegenerative diseases if the therapeutic goal is delay or prevention of the ultimate outcome. They will include drugs for long-term use for conditions (such as diabetes mellitus) that significantly precede clinical events of interest (such as heart disease, stroke, and kidney damage). They will include drugs intended for less well understood body systems, like the central nervous system, where even novel surrogate markers may be years off. Third, the choices faced by a company in the new drug paradigm are generally not choices among more and less efficient routes to the same end result. A new drug in the federal drug scheme is a particular combination of active ingredient, product features, and the labeling (disease and outcome). The research performed by a drug’s sponsor thus defines the product approved by FDA at the end of the day. This means the sponsor’s choices during the research and development period are tantamount to choices about the product to be pursued. The Paraplatin example illustrates why it may generally be more rational to select a short runway with a limited approval than a long runway with a broader approval. This decision may be due to the time value of money, but the innovation paradox suggests that it may also result from the price paid in lost effective patent life when clinical programs run longer. As a matter of public policy we may prefer that companies facing this choice select the product with the shorter runway. But in some cases a company will not have that option. If a company must choose between a long runway and a different product altogether, the innovation paradox may mean whole areas of medicine remain underdeveloped. The implication for social welfare is that we may have a profound interest in breaking the paradox – in ensuring that longer research programs no longer lead to shorter rewards.

In medicine today, we face an innovation paradox. Companies that develop new medicines depend on a period of exclusive marketing after approval, to fund their research and development programs. This period is made possible by patent protection and regulatory data exclusivity. But when a particular premarket research and development program is more challenging and time consuming than other programs, the period for exclusive marketing is not longer and may, in fact, be shorter. This is a paradox; the relationship between the incentive (exclusive marketing) and the behavior we seek to encourage with the incentive (research and innovation) is the opposite of what one would expect. The scheme contradicts itself.1 This Article explores the drug innovation paradox, using scientific and historical regulatory sources and a new dataset constructed from publicly available sources. Its findings have profound implications for innovation policy. The length of the premarket period may correlate with particular drug types, disease targets, and studied outcomes, which means we may not be providing adequate incentive to develop new medicines in entire areas of need. Federal patent law stimulates scientific and technological progress – innovation – by ensuring that innovators can enjoy a period of exclusivity in their inventions, meaning a period during which no others may manufacture and sell embodiments of their inventions.2 Federal drug law prohibits the sale of new medicines, however, until those medicines have been approved by the U.S. Food and Drug Administration (“FDA”).3 The tension between these two frameworks – one protecting exclusivity in an invention, the other precluding commercialization of that invention – gives rise to the paradox that is the topic of this Article. Obtaining approval of a new drug generally entails testing the medicine in a laboratory and in animals (“preclinical” testing) and then completing several rounds of trials in humans (“clinical” trials), followed by preparation and submission of a marketing application. This process can take years and can cost in the high hundreds of millions of dollars (or more), and its outcome is uncertain.4 After a new medicine reaches the market, it may face competition from other medicines for the same condition, but it generally enjoys a period of exclusive marketing before FDA will approve generic copies. Generic copies are usually priced at a fraction of the price of a new medicine (often known as the “brand” product) and are usually substituted by pharmacists for the brand product at the point of sale.5 Their approval ends the brand product’s exclusivity in the marketplace, and in fact, they usually take the lion’s share of the market.6 There is a paradoxical relationship between the period for exclusive marketing and the premarket research and development performed for FDA approval. If a particular premarket research and development program is more challenging and time-consuming than other programs, the period for exclusive marketing is not longer and may, in fact, be shorter. The exclusive marketing period prior to generic market entry is largely a function of the company’s patents. Certain aspects of patent law doctrine effectively require the application for a patent claiming the active ingredient of a new drug to be filed early in the research and development process. Patents last for a fixed term, which used to start when the patent issued but now starts on the date of the patent application. Either way, much of the patent term can elapse while the company is performing the research needed for approval.7 And the more research performed, the more of the patent term elapses. The period for exclusive marketing of a medicine is also a function of the “data exclusivity” available to the innovator. During this time, generic companies may not rely on the research generated and submitted by the innovator for approval of their own drugs.8 Data exclusivity suffers from a slightly different problem; even where the premarket study period is much longer, the length of the data exclusivity period does not change.

Undervaluing a new medicine in a prize system matters for future innovation. In a situation wherein innovators know their inventions are unlikely to be properly rewarded, they are less likely to invest in R&D and compete for the prize. With the cost of drug development approaching $3 billion, innovators—and the venture capitalists on which many biopharmaceutical start-ups rely—need to be certain the potential rewards are worth the risk of this capital.[55] If there is a real prospect of under-reward, innovators could direct their capital away from medicines and toward sectors in which the expected rate of return would be higher.

Some prize advocates have suggested the problems of under-valuation and expropriation could be avoided by allocating a fixed amount to prize agencies and legally requiring them to disburse all their monies according to pre-set rules and criteria.56 But this would not prevent governments from underfunding the prize committee in the first place. Another challenge is that even for a prize winner, there would still be no guarantee the prize amount would sufficiently cover costs of development. Moreover, the prize would have to be large enough to account for the expected value of winning, which would be low given not only the technical challenges of successfully developing a drug that could be approved by governments, but that is ahead of all other competitors globally that would also hope to win the prize. The problem of under-rewarding invention is likely to be a fatal flaw in a prize system that could seriously disrupt innovation. In turn, that would harm society, as fewer new medicines would be developed.

In addition, as the reward system does not provide for licensing copycat drugs, it prevents welfare losses from free riding and excessive market entry. This is in line with the reasoning of [36], who argued that if an entrant causes incumbent firms to reduce output, entry is more desirable to the entrant than to society. Further, there is no need to subsidise start-up and production costs of generic manufacturers. Litigation costs because of patent infringement lawsuits against generic manufacturers also vanish. Finally, firms currently allocate substantial resources to marketing8 in order to protect their profits. Restricting excessive entry and competition for market share could change the proportion between R&D and marketing expenditures.

Therefore, an IVPE + AMC Fund can generate billions of dollars in revenue from payers due to cost savings through the development of new low-cost therapies that reduce reliance on expensive therapies. It can also address misaligned incentives under the patent system by encouraging pharmaceutical companies to (1) “de-link” profits from maximizing sales of a monopoly-priced drug, (2) ensure that patented drugs are value for money rather than pursuing “evergreening” strategies such as patenting slight modifications of generic drugs to extend the period of monopoly pricing, and (3) pursue the most effective therapies rather than the most patentable. AMCs can also be used to incentivize development of low-cost therapies to address unmet medical needs if an expensive comparator treatment is not available or otherwise, the IVPE methodology can compare usual care.

A Market Failure Caused by a Tragedy of the Commons

Earlier this week, Ezra Klein published a column at the Times pegged to the very intriguing announcement from the Biden administration about a new government agency called Advanced Research Projects Agency-Health or ARPA-H, modeled after the legendary DARPA that helped bring the age of networked digital computers into being. The launch of ARPA-H alone was an interesting development, and certainly one worth tracking over the coming years. But it was another, almost parenthetical, reference in Klein’s piece that caught my eye. In talking about potential approaches that the government could take to support risk-taking and innovation, he mentioned an initiative that I have long been fascinated by:

Bernie Sanders used to promote an idea for creating a system of prizes to run parallel to the patents we normally use to make drug development profitable. The government could identify, say, 12 conditions that it wants to see a drug developed for. The first group to develop and prove out such a drug would get a princely sum — $100 million, or $500 million, or a billion dollars, depending on the condition and the efficacy. In return, that drug would be immediately off-patent, available for any generic drug producer to manufacture for a pittance (and available for other countries, particularly poor countries, to produce immediately).

The savings to governments from lower pharmaceutical prices would be substantial and could allow even a very large PIF to be approximately revenue neutral. Currently, US federal, state, and city government spending on pharmaceuticals is approximately $80bn28, of which around $10bn is spent on drugs available generically. Under the proposed plan, assuming modest expansion of the quantities of drugs financed, and a 65% decrease in average price for branded products, government spending on pharmaceuticals would fall to approximately $35bn annually, for a savings of $45bn. Suppose that the US financed its own national PIF of $60bn (with other national governments funding their own PIFs for another $60bn, approximately in line with current global pharmaceutical revenues). Then US governments would require only a small increase in revenues under the proposed system. Consumers would benefit from substantial savings. In other countries, where the government share of pharmaceutical spending is higher, savings could likely be realized even with very substantial contributions to the PIF.29

In order to lessen the risks of “regulatory capture”, the PIF should be of a fixed amount. Each firm could put forward its best case of how many points it should be awarded, and perhaps even present evidence to show why other firms should get less. The fixed total payout of the PIF would lead to a zero-sum game so that firms would compete to obtain points. In these circumstances, collusion seems more difficult to sustain, although direct bribes by individual firms to PIF employees could always be a risk. BrillEdwards (1999) discusses some problems with regulatory capture in the context of pharmaco-economic evaluation.

Political interference with rewards might also be a concern. Government preferences for giving points to domestic firms would certainly be a problem. This suggests that the rationale for how points were to be awarded would have to be made public and fully documented. In addition, since the order of approval of new drugs could influence reward amounts, one could expect political interference on behalf of domestically developed therapies.

The outlined VBP approach to reward medical innovation minimizes the failures of the patent system outlined above. First, as long as threshold value λ reflects real willingness/ability to pay for health gains, the VBP approach is superior to monopoly profits under patents because no unrealized social benefits (deadweight loss) are created. Note that even if drug prices are higher than the marginal costs of their production, a deadweight loss may not occur. A deadweight loss does not occur as long as, from societal perspective, marginal costs equal marginal benefit (i.e., costs of a drug including downstream cost effects equal societal WTP). Note that manufacturers may set the price just below the level of the threshold ICER, which could lead to higher prices than without a VBP system. Still, this may not necessarily be an undesirable reaction as it may increase future R&D activities. In any case, a threshold based on the cost of palliative or nursing care, which in Germany, e.g., is no more than €23,000 per life year, does not seem to allow for much upward shifting of prices.

Second, as long as the expected social benefits exceed costs, private research incentives are in line with social incentives. If a drug price is based on the threshold cost-effectiveness ratio reflecting the social value of incremental health benefits, the innovator will be rewarded for the net health benefit actually created over time. Hence, the innovator also has an incentive to conduct trials on new indications for a drug that is already approved.

Alternatively, we can side‐​step these difficulties by moving to a prize system to reward pharmaceutical innovation. The competition spurred by a prize regime would also make it much harder for drug companies to set inflated prices. Under a prize regime, drug companies could only charge the marginal cost of production and payers could even run an auction to determine which manufacturer would have the right to supply any given drug to their beneficiaries.

Substituting prizes for patents would also make it possible to rationalize the financial incentives for developing new drugs. Currently, expected prices and sales volumes determine the strength of these incentives. This arrangement encourages pharmaceutical companies to create new cancer treatments that retail for hundreds of thousands or even millions of dollars despite extending patients’ lives only briefly. By contrast, it gives the drug makers little reason to develop new antibiotics with the potential to save lives because doctors will use the new antibiotics only when all previously existing medications fail. By linking financial rewards to delivered benefits, prizes will focus researchers on drugs that are needed.

THE ENTIRE U.S. patent system needs serious repair, but the most broken thing about it is the way we patent prescription drugs. Federal and state governments spend billions of dollars on basic medical research, and the resulting science winds up informing (at least indirectly) the development of blockbuster pharmaceuticals. But our patent system then grants drug companies the exclusive right to sell their innovations without "generic" competition for years. Big Pharma points out that such patents are necessary because without them it can't recoup the massive costs of creating new products. Meanwhile, there are some classes of drugs that the world desperately needs—new lines of antibiotics, for example, or treatments for tropical, emerging, and rare diseases—but that the current system, dependent on blockbusters, doesn't readily produce. The incentives are out of whack.

There's another solution to this problem—a way to directly fund the drugs we're not getting and avoid the high cost of artificial monopolies. Let's take a page from some of our deep-pocketed philanthropists, who have used competitions to rejuvenate space technology (the X Prizes), mathematics (the Millennium Prize), and more. Instead of granting patents, the government should offer lump-sum payouts.

Pharmaceuticals cost too much. That seems to be the consensus of most Americans. It is certainly the view of many congressmen.

The Senate has passed the McCain‐​Schumer bill, reducing the protection of pharmaceutical patents. Contended Sen. Edward Kennedy, D‑Mass.: “Today’s action puts us one step closer to the goal of lowering the cost of prescription drugs for all Americans.” The issue now moves to the House, setting up a dangerous election‐​year fight. It’s easy to believe that drugs cost too much. At least it is if you aren’t the member of my church who just died of stomach cancer; my next‐​door neighbor and running partner who has been diagnosed with multiple sclerosis; my friend who endured experimental chemotherapy to fight breast cancer; and my journalistic colleague killed by liver cancer last year.

David Austin and Tamara, Yale and University and California Berkely and Economist at Congressional Budget Office, Chief of Health Policy Studies Unit in the Health Analysis Division of the Congressional Budget Office, Hayford  “Overpatented, Overpriced: How Excessive Pharmaceutical Patenting is Extending Monopolies and Driving up Drug Prices”, , accessed 6/30/24. Cinj - WH

Anticipated Revenues