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Managing Prize Systems: Some Thoughts on the Options
Cite as: Marchant, Ron, “Managing Prize Systems: Some Thoughts on the Options,” KEStudies, Vol. 2 (2008).
Managing Prize Systems: Some Thoughts on the Options*
Ron Marchant CB FRSA**
The expanded use of cash prizes has been suggested as an incentive to stimulate investments in medical research and development . In considering the use of prizes, one must keep in mind the institutional context and constraints, as well as the policy objectives prizes would seek to fulfil. This note considers the constraints and objectives and how they may influence the design of prizes. The note ends with a tentative proposal for using prizes, focusing on the diseases and conditions that disproportionately impact developing countries. The proposal would combine R&D grants with a variant of the existing framework of patent protection, building in voluntary agreements to offer a “license of right” in order to promote competition and access to the patented inventions.
Objectives of Prize Systems
While prizes have been considered to address a variety of R&D objectives, the initial experiments with prizes to induce innovation for new medicines and vaccines should focus on areas where there is a lack of affordable medical treatment. The current system, which utilizes ex post rewards, expressed as a monopoly on an invention, is not effective in stimulating investments for markets where populations lack purchasing power. Among the possible approaches to the application of prizes in developing countries are the following:
The narrowest approach is to target treatments for specific diseases or conditions that are mostly prevalent in developing countries. The World Health Organization distinguishes between three types of diseases . Type I diseases are incident in both rich and poor countries. Type II diseases are incident in both rich and poor countries, but have the larger proportion of cases in developing countries. Type III diseases are those that are overwhelmingly or exclusively incident in developing countries. Experiments with prizes could focus on particular diseases, like tuberculosis, malaria or American trypanosomiasis, or more generally on Type II or III diseases.
A broader approach would be to address more generally unmet health needs. In addition to treatments for Type II and III diseases, this would include cases where existing treatments for diseases with large prevalence in rich country markets (Type I diseases) are inappropriate or ineffective in resource-poor settings. An example of this would be the needs for medicines that are less expensive to manufacture, more robust with regard to storage and refrigeration requirements, or which require less expensive diagnostic or monitoring technologies.
Even broader would be a nationally administered prize competition, such as that proposed by the Sanders Bill in the USA . This approach would involve offering prizes as an alternative to the reward of a monopoly, as the reward for all new drugs, so that generic competition would lead to lower prices and more access to all products.
Among the three options, an experiment focusing only on Type II and III diseases would be less controversial, and result in less opposition from the private sector. Also, the narrower the targets, the less demanding the funding requirements.
A prize system can be funded privately or by governments, and through one-off funding or with an ongoing commitment. While one-off funding, whether privately or publicly generated, may be appropriate to tackle a specific disease, a sustained program to address the health of developing countries cannot depend on the transient interests of individuals or private foundations, and would ongoing commitments by governments. This is not to disparage the value of such voluntary offerings which would undoubtedly continue, but recognises the need for predictable and stability in any prioritised programme.
Prize funds can be designed in a variety of ways, towards a variety of ends. It is not always clear whether proposals for prizes are being advocated as an alternative to the patent system, or whether they are intended to work alongside of the existing patent system. If the prize system allows the patenting of inventions, does it allow the patent-owner to exercise exclusive rights, or require open licensing of the inventions, either for free or for reasonable royalties? The answers to these questions are important in determining how attractive prize systems will be to different stakeholders.
Regarding the design of new reward schemes, are the terms aimed at maximizing the participation of and benefits to producers, or will they be driven by consumer needs and government priorities? How will policy makers address the implications of a clash of interests?
Any workable prize system introduced in the near future would seem to have to meet a number of requirements.
Obviously, the scheme must be sufficiently attractive to generate participation by researchers and industry and at the same time meet the needs of funding bodies and consumers if it is to make any difference. In addition, such a scheme has to be acceptable to governments if it is to be more than a privately funded effort aimed at a specific disease along the lines of existing schemes and charities. The scheme has to have credibility in relation to objectivity and fairness.
The reward system must work all along the chain of activities, from initial research through to production and supply of medicines leading to the implementation of treatments.
How will the scheme relate to the current innovation paradigm? This has become increasingly collaborative and based on partnerships between universities and other researchers with biotech companies and large pharmaceutical firms. Would prizes encourage a return to a narrower approach returning to individual effort, or will they be implemented in a way that will encourage even more collaboration? 
Much of the literature supporting the use of prizes is hostile to so-called “me too” drugs. This may be too simplistic disregarding the reality of incremental innovation, and may understate the benefits of greater choice between medicines with similar therapeutic effects, or the potential for minor differences to be beneficial in relation to side effects and maintaining effectiveness in the face of increasing disease resistance against mainstream treatments. Will prizes be designed in such a way as to enable incremental innovations to flourish and steadily improve the portfolio of medicines and vaccines?
If it is to be attractive, the size, timing and predictability of the awarding of prizes must be sufficient to encourage researchers and companies to take part. Thus the amount must realistically reflect the cost of R&D inputs, and take into account any changes in the rewards offered by patenting. In addition, given liquidity constraints and risk aversion, payments must be reasonably early or be staged to attract investors. Having to wait until after the proven success of a solution is similar to the potential reward offered by patents and is likely to constitute a high risk in relation to investment, but staged payments, could help ensure that costs can be recovered at agreed milestones , or as a product is used .
Whether privately or publicly funded, any prize system will have to meet modern principles of governance; that is, it will have to be transparent and accountable. The method of deciding winners must be seen as being fair and objective, requiring a clear set of rules and procedures and bodies for exercising them. The requirements will be tighter if public money is involved and the schemes are linked to overall development objectives. It may be difficult to put these in place without a considerable regulatory burden, which will not only reduce the attractiveness of the schemes to participants, but also increase the costs of administration. Such increased costs would reduce the alleged advantage of economic efficiency over the deadweight losses associated with the patent system's associated exclusive rights approach.
As noted above, designers of prize systems have to decide how to handle intellectual property rights (IPRs). If they rule out participants taking or exploiting monopoly privileges, or take the IPRs for themselves as part of the prize agreement, they will need to replace the benefits that would otherwise have been available. Either way, decisions will have a significant impact on the production and distribution of medicines discovered and rewarded by prize systems. And, in the absence of existing exclusive rights approaches, would suppliers engage in substitute behaviours or even increase the amount spent on marketing their specific products?
A Possibility? A Tentative Proposal
Many people are not ready to support the use of a prize system in the most ambitious or radical forms. However, prizes could be used in connection with existing reward mechanisms to enhance research into diseases of the developing world. The basic package would retain early funding through research grants, followed by patenting, but with licensing built in. The package could be balanced so as to either enhance or replace the benefits of the patent's exclusive rights.
The prize would be linked to an agreement by the drug developer to agree to a “license of right” provision that would ensure that the product could be obtained from generic competitors, leading to lower prices and greater access to products. The license of right provision would cover both patents and know-how, and have pre-set royalties anywhere from zero to a reasonable amount, or, like many commonwealth statutory patent license of right approaches, it could designate an independent third party to negotiate reasonable licensing terms .
The scheme would be open to partnerships between pharmaceutical companies and research bodies in developing countries and the resulting prizes and licence royalties would provide reasonable rewards to drug developers, while allowing for lower costs to consumers. The benefits and comforts of the existing patent system are retained, the open licensing of patents and know how would encourage technology transfer, and bureaucratic intervention would be reduced. The scheme could be administered by the WHO.
Charlton, Bruce G., “Mega-Prizes in Medicine: Big Cash Awards May Stimulate Useful and Rapid Therapeutic Innovation,” Medical Hypotheses 68, 1-3, 2007.
Consumer Project on Technology, “Submission to the (WHO) IGWG Public Hearing,” November, 2006.
DiMasi, J. A. and Grabowski, H. G., “Should the Patent System for New Medicines Be Abolished?” Clinical Pharmacology & Therapeutics 82 (5), 488–490, October 2007.
Erren, Thomas C., “Prizes to Solve Problems in and beyond Medicine, Big and Small: It Can Work,” Medical Hypotheses 68, 732-734, 2007.
Hollis, Aidan, “Incentive Mechanisms for Innovation,” Institute for Advanced Policy Research Technical Paper TP-07005, June 2007.
Horrobin, D. F., “Glittering Prizes for Research Support,” Nature 324:221, 1986.
Hubbard, Tim and Love, James, “A New Trade Framework for Global Healthcare R&D,” PLOS Biology 2(2): e52 2004.
Knowledge Ecology International, “KEI Comment to the World Health Organization (WHO) Intergovernmental Working Group (IGWG) on Public Health, Innovation and Intellectual Property Rights: The Role of Prizes in Stimulating R&D,” September 30, 2007.
Love, James and Hubbard, Tim, “The Big Idea: Prizes to Stimulate R&D for New Medicines,” Chicago-Kent Law Review Vol. 82 No. 3, November 2007.
Marcus, Amy Dockser, “Will Sharing Ideas Advance Cancer Research? Hedge-Fund Managers Offer $1 Million Prize to Combat Scientists' Culture of Secrecy,” Wall Street Journal, September 18, 2007.
Penin, Julien, “Patents versus ex post rewards: A new look,” Research Policy 34 (2005) 641–656
Pogge, Thomas, “A New Approach to Pharmaceutical Innovations,” Online Opinion, June 21, 2005.
Sanders, Representative Bernard, “Medical Innovation Prize Fund,” United States Congressional Record. Extensions of Remarks, E149. May 18, 2005.
Stiglitz, Joseph, “Scrooge and Intellectual Property Rights: A medical prize fund could improve the financing of drug innovations,” British Medical Journal, 333:1279-80, December 23, 2006.
Weisbrod, Burton A., “Solving the Drug Dilemma,” Washington Post, August 22, 2003.
Wei, Marlynn, “Should Prizes Replace Patents? A Critique of the Medical Innovation Prize Act of 2005,” Boston University Journal of Science and Technology Law, 2007.
World Health Organization, Public Health, Innovation and Intellectual Property Rights: the Report of the Commission on Intellectual Property Rights, Innovation and Public Health (CIPIH), 2006.
* This note is partly but not entirely based upon remarks made during a KEI & UNU-MERIT Workshop on Medical Innovation Prizes, in Maastricht, the Netherlands, on January 28-29, 2008.
** Ron Marchant was previously Chief Executive of the UK Intellectual Property Office, and in collaboration with the development NGO ICTSD, follows the WIPO Development Agenda and global discussions on innovation and access to medicines.
 Stiglitz (2006), Hubbard and Love (2004), Love and Hubbard (2007), Knowledge Ecology International (2007), Hollis (2007), DiMasi and Grabowski (2007), Wei (2007), Erren (2007), Charlton (2007), Consumer Project on Technology (2006), Sanders (2005), Pogge (2005), Weisbrod (2003), Horrobin (1986).
 See, for example, the discussion in Public Health, Innovation and Intellectual Property Rights: the Report of the Commission on Intellectual Property Rights, Innovation and Public Health (CIPIH) , World Health Organization (2006) pp. 12-15.
 S. 2210, the Medical Innovation Prize Fund, 110th Congress.
 For two different views on this topic, see: Julien Penin, “Patents versus ex post rewards: A new look,” Research Policy 34 (2005): 641–656 and Amy Dockser Marcus, “Will Sharing Ideas Advance Cancer Research? Hedge-Fund Managers Offer $1 Million Prize to Combat Scientists' Culture of Secrecy.” Wall Street Journal, September 18, 2007. http://online.wsj.com/public/article/SB119007362996330515.html.
 The approach favoured by some smaller biotechnology firms, or in prizes now offered for basic research by InnoCentive and others.
 As has been proposed by Love and Hubbard (2007) or Hollis (2007) or would be implemented in S. 2210, 110th US Congress, the Medical Innovation Prize Fund.
 Voluntary linkages between prize type rewards have been proposed by Hollis (2005), CPTech (2006), Pogge (2005) and Nathan (2007).