Economics - Innovation - Inclusive Growth - Public Purpose
Creating a more symbiotic medical innovation eco-system

Creating a more symbiotic medical innovation eco-system

In recent days, my name has been mentioned by John McDonnell in relation to policies he and Jeremy Corbyn have been floating relating to the patent box policy and funding of medical innovation in the UK. I should say first off that I was once a member of Labour’s Economic Advisory Committee (EAC) performing a similar role to that which I have for Nicola Sturgeon in her Council of Economic Advisors (CEA) and, in various ways, with other policy makers worldwide. And although Labour’s EAC is not currently operating, I actually never discussed pharmaceutical innovation and patents while it was.

However, given this is an area which I am very interested in and have been working on for years, I wanted to set out my own views on what is wrong with the current medical innovation model. I have also written about this today in the BMJ – specifically on the issue of high prices for medicines. The high cost of medicines paid by the patient, or in the UK by the NHS, is often nothing to do with the costs of innovation but is a key dysfunction of the current innovation model, as I set out in more detail below.

I, like other researchers in this area, have been arguing for a serious reform of the private, profit and patent-driven model of pharmaceutical innovation which dominates the field of medical innovation, mainly due to its failure to meet critical medical needs. The needs of significant populations – in developed as well as developing countries – go unserved, due to both the direction of innovation (not enough focus on essential medicines) and the prices that are charged. [1] Problems – such as multi-drug resistant bacterial – go unsolved because the incentives do not exist to solve them.[2] Over two thirds of new medicines reaching the market do not represent any therapeutic advance for the patients, with many patents based on a reshuffling of old combinations or on second uses for existing ones.[3]  The solution is not to get all the research funded by the public sector. It is to seriously reform the system so it is not narrowly focused on drugs, profits and patents, but on health, public value and patients. This means building a more dynamic and symbiotic innovation eco-system between public, private and third sector actors.

 

Why the Patent Box doesn’t encourage innovation

I have been a long-standing critic of the patent box – which has made headlines this week – as a tool for innovation policy. This is because I believe it does not make innovation happen that would not have anyway (ie additionality, see, for example, chapter 2 of my book The Entrepreneurial State: debunking public vs. private sector myths). In this, I am not alone. The IFS warned of the risks before its implementation.

The basic problem is that a patent is already a reward for the past behaviour of an innovator. A patent in essence gives a 20-year period of monopoly profits. There is no reason to give an additional tax relief on those profits – the monopoly entitlement is already the reward. The patent box is simply a second, additional reward for this same past behaviour. It would be far better to target money (and all tax incentives for innovation, including R&D tax credits) on behaviours that produce new innovations. This includes targeting the research labour that will produce the next wave of innovations rather than the profits that are produced from past innovations (as is the case in the WBSO credit in the Netherlands – see Pierre Mohnen’s work on this).

 

Patents – rights or contracts?

The issue of patents more generally is also an area ripe for confusion – as the past misguided bipartisan and cross-national support for the patent box policy shows. Interestingly, many periods of exuberant innovation were not characterised by patents. A great study by F.M Scherer once found that many innovators use other ways – copyrights, first mover advantages, secrecy, et cetera – to protect their innovations.

However it is certainly true that in the pharmaceutical industry patents have been important. The questions we should be asking are not about the existence of patents per se, but their characteristics: what is patented (at what point in the innovation chain), how broadly, and how strongly? Dick Nelson, from Columbia University, has argued that the best patenting regimes is one that is narrow and weak: narrow in the sense that it does not block all the innovations around a broadly defined area; and weak in the sense that it can be easily and widely licensable to promote diffusion of innovations.

Enforceable patents are an essential part of a good knowledge governance system. They are a deliberate disruption to the neo-classical ideal of perfect competition – given to inventions that are novel, non-obvious and useful when considered against what already exists. In this way they are a reward for innovation – existing to achieve two public objectives, which are in tension. On the one hand patents are granted to reward past innovative behaviour. By granting a time-limited monopoly over inventions this also gives encouragement to other, would-be inventors.[4] This is known as the appropriability function of a patent. But on the other hand, patents also support the rapid diffusion of new knowledge through an economy. To get a patent, the inventor must give up detailed information about the invention, which is available to all once the patent expires. This is known as the disclosure function.

In this way, patents are best understood not as ‘rights’ in a universal or immutable sense, but as contracts or deals based on sets of policy choices. The two functions – appropriability and disclosure – are balanced. Something is given up (information about the invention) in exchange for what is gained (limited monopoly powers). Policy-makers face a trade-off: stronger, longer, wider patents are more valuable to inventors and can increase the rates of technical progress; but they also increase their market power, reducing ‘economic efficiency’ and slowing knowledge diffusion.

 

Is the current patent model stifling innovation?

Four trends in recent years have disturbed this delicate balance to the extent that I now worry that – instead of facilitating innovation – the patent system is actually inhibiting it.

First, since 1995 the domain of patenting has moved ‘upstream’ to cover ‘discoveries’ so that the tools of research are themselves being patented. This means patents now restrict access to the knowledge base itself, inhibiting innovation. This change followed the Bayh-Dole Act of 1980, which had made it possible for universities and research labs to hold patents on the result of publicly funded research. The Act was intended to encourage university-industry collaborations, but this has not always been the consequence, instead leading to more proprietary approaches to research. And where the US led, other countries followed. It is also curious that the Bayh-Dole Act allows government to cap the prices of drugs that are produced with publicly funded research so the taxpayer does not pay twice, yet the US government has never exercised this right. (See my article for Foreign Affairs, and my editorial for the BMJ on the dysfunctional pricing model of big pharma).

Second, patent protections have been extended, by allowing for renewal in controversial ways, which are seen to benefit the patenting company more than the medical needs or the needs for diffusion. For example the Hatch-Waxman Act of 1984, which allows patents on drug to be extended if the drug is also tested on children, has been notably misused.

Third, the US FDA has become more likely to grant patents and the (underfunded) courts have become more likely to enforce them.

Fourth, there has been an increase in the use of ‘strategic’ patent, where companies patent around areas to block competitors. This works especially well when a technology is in early stages of development and a standard has not yet developed, or in fast-paced or patent-intensive fields like ICT or biotech where innovations are inter-dependent or
complementary.[5]

The consequence is to limit the diffusion of knowledge. There has been an increase in ‘patent trolling’, where firms hold patents not to develop the technology but simply to collect royalties. Here the patent has become an end in itself, disconnected from productive purposes.

I agree with William Baumol who has argued that these changes have led to a patent regime that creates not productive, but unproductive entrepreneurship.[6] It does so by creating too many opportunities for firms to reinforce monopolistic positions, abuse market power, block knowledge diffusion, stand in the way of subsequent innovation, and privatize the creation of knowledge that has been publically funded and collectively created. This is not what is supposed to do.

The patent box is a particularly silly additional distortion to this already distorted regime. But the underlying regime needs to be rebalanced if it is once again to support its true purpose: the encouragement of innovation and the diffusion of knowledge.

Key to any solution for the patent problem is to begin by viewing the role of policy in this area not as an ‘intervention’ but as a dynamic part of the shaping and creating of markets. Patents must be viewed through a lens not of ‘rights’ but of contracts that must be negotiated to foster innovation not to limit it. This is not about ‘fixing markets’ but about governing knowledge in ways that fuel a more dynamic, and inclusive, innovation system. The pricing structure should reflect the collective form that value creation takes, with the taxpayer having been a key player. I am starting to work with the Open Society Foundation on rethinking the pharmaceutical innovation model through a mission-oriented lens, which addresses both the innovation problem and the accessibility problem. I look forward to reporting more on this in the coming year.

Tags: Financing Innovation, Innovation Policy, Pharma, Risks and Rewards

 

Further reading 

Mazzucato, M., High cost of new drugs, BMJ, July 28, 2016

Mazzucato, M., Evidence to the UN Secretary General’s High Level Panel on Access to Medicines, February 28, 2016

Mazzucato, M., How taxpayers prop up big pharma, and how to cap that, LA Times, October 27, 2015

Lazonick, W. and Mazzucato, M., Innovation: Let the good risk takers get their reward, The Guardian, November 29, 2012

Mazzucato, M. Pfizer’s bid for Astro Zeneca shows Big Pharma is as rotten as the banks, The Guardian, May 11, 2014

Dosi, G. and Mazzucato, M. (eds.) (2006), Knowledge Accumulation and Industry Evolution: pharma-biotech, Cambridge University Press: Cambridge, UK, ISBN 0-521-85822-4: 1-446

Demirel, P. and Mazzucato, M., “The evolution of firm growth dynamics in the US pharmaceutical industry,” Regional Studies, 44(8): 1053-1066

 

Notes and References

[1] Prescrire International 2015; 24(159): 107-110. New drugs and indications in 2014. Some advances this year, but many drugs are poorly evaluated, too expensive, or more dangerous than useful. http://bit.ly/1Amp61o

[2] Eduardo Porter. “A Dearth of Innovation for Key Drugs”. The New York Times, July 22, 2014. http://nyti.ms/1PX7n2s

[3] Angell, M. The Truth About Drug Companies. Random House. New York. 2004

[4] More formally, a patent holder is awarded a ‘probabilistic’ right to exclude others from using and commercializing an invention (Lemley and Schapiro, 2005). The patentee must be willing and able to enforce against infringement of the patent. The patentee can license others to use the invention in exchange for royalties.

[5] Mazzoleni R. Nelson R. (1998) “The Benefit and Costs of Strong Patent Protection: A Contribution to the Current Debate,” Research Policy 27: 273-284

[6] Baumol, W. (1990), Productive, Unproductive, and Destructive. The Journal of Political Economy, 98, 5, pp. 893-921

 

photo credit: Meds via photopin (license)