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POLIS Working Papers - Working paper n. 181

Economic sustainability of an alternative form of incentives to pharmaceutical innovation. The proposal of Thomas W. Pogge

march 2011


Research and development of new drugs and vaccines is a complex and expensive activity. Developing a new medicine needs huge investments, from preliminary investigation of active principles to market approval. Current economic incentives to pharmaceutical research come from intellectual property laws, giving a monopolistic position for the marketing of new discoveries to the innovators. However, traditional patent system does not encourage the development of medicines whose sale would not deliver enough high earnings. This situation especially harms the search of remedies to diseases affecting developing countries. Thomas Pogge has proposed an original solution to the problem. Starting from an ethical approach to the issue he has suggested an alternative incentive system based on the therapeutic effectiveness of the new products. Reward would be proportional to the health improvement contribution due to the new medicines that would be sold at a price close to production marginal cost. Required financial resources for reward would be collected at international level, mainly by affluent countries. In a later work Pogge and Aidan Hollis have proposed a scheme contemplating a health international fund for the administration of the system. The peculiarity of the proposal is that it does not invoke the abolition of current patent system. Traditional patents would coexist with the alternative solution and would be the preferred option for the developers of drugs with large and affluent potential markets.
Current work examines the proposal of Pogge primarily from an economic point of view. The key issue is whether the alternative incentive system is enough effective to promote the discovery of new medicines for the neglected diseases, considering the high development costs. To calculate the reward of pharmaceutical innovation in the frame of the alternative system a theoretical model has been defined. The approach is mainly based on the investment under uncertainty concept. Specifically, the model derives from that proposed by Longstaff and Schwartz to estimate the value of financial American options and subsequently adopted by Hsu and Schwartz in their work about the assessment of economic convenience of vaccine research, in the frame of traditional patent system. As usual, pharmaceutical research activities may be divided in two distinct phases. The former includes the preliminary research of active principles that may cure a specific illness and preclinical development and testing of candidate products. The latter mainly consists of clinical trials, leading to the individuation of an effective product. For both the phases uncertainty in the time and cost to completion and in the quality of the final product, corresponding to its therapeutic effectiveness, are considered. Furthermore, expected reward from the health international fund also depends on the eventual concurrent discovery of new remedies for other diseases, affecting the share of resources available to the product developer. Simulations have been done, showing that the solution proposed by Pogge may be effective for largely spread or harmful diseases, like malaria and HIV. However, problems may arise for diseases that are not very diffuse, at least with health fund design as proposed by Hollis and Pogge.


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Monthly online jounal "POLIS Working Papers" - Registration n.591, 12/05/2006 - Tribunale di Alessandria
ISSN: 2038-7296

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