Prize disbursement will undervalue innovation – reducing investment

A major—and as yet unresolved—problem with delinkage in general, and prizes in particular, is

governments find it very hard to determine accurately the true economic and social value of an invention.

In the past, this failure has resulted in government prize committees undervaluing inventions.

"There is an inherent conservative bias in the prizes granted by administrative and quasi-judicial bodies.

Munificence is a rare committee virtue," wrote Harvard economist FM Scherer.54 For instance, under the

U.S. Atomic Energy Act of 1946, military uses of atomic energy were made ineligible for patent protection.

Instead, monetary awards were disbursed to inventors by a specialist government committee. Professor

Scherer has observed that atomic-energy innovators—including inventors of early methods of producing

Plutonium and basic liquid rocket engines—were awarded sums far below what they could have earned

had their inventions been patented.

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.