Last week, Bernie Sanders, the independent from Vermont, introduced a Senate bill that would swap prizes for patents. Essentially, the idea would eliminate market exclusivity for new drugs, but give inventors or developers cash rewards from a fund that would start with $80 billion a year. By doing so, the scheme would eliminate monopolies, allow generic competition, lower drug prices and produce savings of more than $200 billion annually.

Working behind the scenes on the concept for several years was Jamie Love, a consumer advocate who heads Knowledge Ecology International and who brainstormed with numerous people, including members of Sanders’ staff and Aventis execs during a 2002 global health planning meeting. The proposal, not surprisingly, is controversial and whether the bill will gain traction remains to be seen. So we chatted with Love, by phone and e-mail, to ask him more about the idea…

Pharmalot: Why do you believe such an overhaul is necessary?
Love: The current system is very expensive, doesn’t produce much in terms of innovation for the money spent, and leads to hardships and access for millions of Americans. The US also exports high prices to developing and developed countries. Some people seem satisfied with state of affairs, but we don’t like status quo, or the direction we’re going, and believe it’s appropriate to build a better system, that better serves consumer interests.

Most of the criticism of the new approach is either completely uninformed in terms of the actual mechanics of the approach, or based upon some half-baked theory that big pharma is all-powerful, or business models can’t be changed, so why try. But big pharma is not all powerful, and business models do change. If you’re reading this on the Internet, it’s because of a radical change in the business model for telecommunications that everyone now takes for granted.

The changes we’re proposing for drug development are so large and important they can be compared to the ones that created the Internet. The Internet makes much information free, on the margin. The Prize Fund would make medical inventions free, on the margin. Changes in both business models are important in building a future that meets our needs.

Pharmalot: Why do you believe it’s important to uncouple or de-link R&D from prices?
Love: First, all of the distortions and unfairness associated with access are related to links between incentives and product prices. This is pretty basic. The higher the prices, the greater the incentives, but also the greater the problems for consumers. We’re constantly being asked to trade-off innovation or access against each other.

One might tolerate the linkage of prices with R&D incentives if the system were more efficient, but globally, only 8.5 percent of sales was reinvested in R&D in 2005. And, when you look at where private investments in R&D go, it is even more depressing. Only 14 percent of new drug approvals are both new and better than older products, and clinical trials for me-too products are about twice as large as for innovative drugs.

Sometime the words we use are confusing. We have a prize system now, but the prize is a government backed legal monopoly on the sale of a product. The monopoly is only a means to an end, which is to get money to drug developers. The drug developer has to set prices high, and spend a lot to market products to fully exploit the monopoly. But drug developers don’t want monopolies or high prices per se, they want money.

The Sanders bill gets rid of the product monopoly, and uses a different mechanism to get money to drug developers - the bill retains patents, not as product monopolies, and as a toll to allocate prize money. There is a competitive system for determining rewards for innovations that improve health outcomes, and a separate competitve market for the products. The world can work without monopolies, and it can work much better than it does with monopolies.

Pharmalot: What if this new system so thoroughly devalues pharma stocks that drugmakers can’t raise capital to pursue inventions?
Love: The bill proposes annual prizes equal to .6 percent of US GDP, or about $80 billion in terms of 2007 GDP. Drug developers would also get rewards from other markets. The US is now about 27 percent of global GDP, and only 36 percent of GDP from “high income” countries.

If the Sanders bill passed tomorrow, and other high income countries implemented something similar, prices for shares in companies that are good at developing drugs that improve health outcomes would increase, a lot, while share prices for companies that are focused on marketing of mediocre drugs would fall, a lot. This would be a good thing, as it would drive investment into more productive activities.

Pharmalot: Why shouldn’t payouts take place over a shorter period of time?
Love: The bill uses a 10 year pay-out. If the evaluation period is too short, you don’t have enough information about the real value of products. If the payout is too long, investors will require larger risk premiums. The 10-year period is three years longer than the 7-year period the US uses for orphan products, and probably a few years shorter than the typical effective monopoly under the current system of patents, patent
extensions, pediatric extensions, 30-month Orange Book stays, etc. Sanders is certainly open to debate on the term of the payout. Ten years is a starting point that strikes a balance between the need for information and the investor preference for rapid returns.

Pharmalot: How do you find qualified, unconflicted people to manage this fund?
Love: How do you find qualified, unconflicted people to set prices or reimbursement rates? We’re doing a study of the structure of national programs that deal with drug prices and reimbursements, to illustrate some of the possibilities. One could have something like an arbitration model, where experts are chosen by drug developers themselves to decide how the fund is divided each year.

The Sanders bill has a fixed Prize Fund, so rewards to one party reduce the funds available for everyone else. Each drug developer has an incentive to minimize the benefits attributed to their competitors products, and collectively everyone has an interest in transparent and predictable rules.

Pharmalot: Will there be any compensation for additional indications beyond an initial indication? And what about off-label use?
Love: Like now, any innovation, including line extensions or new formulations will be eligible for rewards. You would have to show that follow-on innovation did something, however, in terms of improved health outcomess.

We rejected the notion that the prizes should seek to approximate the monopoly rents now earned by patent owners, in part because we didn’t want an incentive to create products that were only “as good” as existing products. The marketing monopolies do this now. A product as good as Lipitor can make a lot of money, even though it only gives us something we already have.

We also wanted to make sure that there would be follow-on innovation and that the prize fund would work well when doctors and patients switched to the best medicines available. If someone brought into the market a product that was a small improvement over Lipitor, patients should rationally switch to the newer and better product. The incentive has to encourage both the first product, and the follow-on improvement.

The Sanders bill is designed to reward the first product, even if its market share falls to zero, when a follow-on product with even a small improvement comes along, such as Lipitor replacing Zocor. Both products are rewarded in the Sanders bill, but the incentives are different, and better than you have when incentives that are linked to prices.

Pharmalot: How do you measure benefits provided by one product versus another?
Love: The starting point would be estimating quality adjusted life years (QALYs). In a simple model, you add them all up, and look at the shares of QALYs produced by each product (e.g. 100x / 10,000x = 1 percent), subject perhaps to some set asides for orphan products.

You can do better than this, however, by considering the positive value of each new chemical entity (NCE), in terms of protections against failures of other products, or possible discoveries of new uses, or using options modeling to address the value of new antibiotics, or treatments for risks like avian flu, which no one would need unless there is a pandemic. If you think this is hard, ask yourself, how are product prices evaluated now?

Pharmalot: How will stacking royalties be handled? Or won’t they?
Love: Under the Sanders bill, drug developers get the prize money, and they have to take care of the various investor demands or intellectual property owners from the prize payments. Right now, it seems from IRS data that patent owners are collectivey getting royalties roughly equal to 6 percent of product sales. Prizes under the Sanders bill are a lot higher than current royalty payments to patent owners.

In many respects, royalties are easier to calculate against a prize than against a price. You don’t have to worry about production or distribution costs, or even calculate or monitor “net sales,” since they aren’t addressed by the prize.

Incidentally, it’s also much easier to address the issue of subsidies for drug development costs. According to the NIH, through 1996, 50 of 77 new anticancer agents were registered on the basis of evidence from federally funded clinical trials. But the government-funded drugs were often more expensive than those without government funding. If you ask how should the government share in the benefits from federally funded R&D? Well, with the Prize Fund approach, it would be simple. The donor could negotiate for share of the prize.

Universities would also be in a more comfortable position, ethically. They would no longer have to support situations such as pricing of Xalatan much higher in the US than in Europe, dubious extensions of product patents, or other anti-consumer measures. Instead, universities would negotiate over the shares in the prizes, something that was not fundamentally contrary to the interests of consumers.

The Sanders bill would also make it easier to implement patent reform in the US. Today, pharma and biotech companies think they need super-strong exclusive rights to justify high industry revenues. But under the Sanders bill, the Prize Fund determines the overall level of industry rewards, and patent rights have nothing to do with the overall level of return to drug developers. Weaker patent rights, that make it easier to use patented inventions, would no longer be associated with weaker industry revenues.

Pharmalot: How can the Sanders bill be improved?
Love: Te next version will benefit from more feedback from experts and stakeholders. There may be some tweaking on the management structure, which is uses a large board. One idea we’re exploring would be take a portion of the prize generated by a product, and give some of the money to reward researchers who don’t patent inventions, when their contributions were considered instrumental in moving the science toward a solution.