Friday, July 28, 2006

Bio-generics and prize systems

by Aidan Hollis
Salon has a recent article on the difficulties of creating an approval process for bio-generics. The problem is that "large molecule" drugs may be very difficult to replicate, unless the entire process is perfectly known and the mechanism for creating the molecule can be exactly duplicated.

The result of this is that even after the expiry of all relevant patents, generic firms may not be able to show bio-equivalence, which would mean that they would have to go through exactly the same clinical trials to be able to sell their product; and even then it is not obvious that they would be able to claim bio-equivalence.

Large molecule drugs, in this situation, may be able to retain their monopoly for a very long time, until a better drug comes along. This is good for encouraging investment in new large-molecule drugs. But if that were optimal, we should have a system of patents with no expiry date. Instead, most countries have adopted a system of patents with durations of approximately 20 years, to balance the incentive for more innovation against the benefits which come from lower prices. So we probably don't want firms to enjoy monopolies forever, even if it increases investment into R&D.

How would a prize system deal with large molecule drugs? A key aspect of a prize system is that the reward for innovation is separated from the price of drug, which should be based on manufacturing costs. But if there are no competitive manufacturers, the drug price will be based on willingness to pay, not cost to produce. Then the manufacturer could charge a high price, and it would earn profits from high prices in addition to whatever reward was due to it under the reward system.

I suggest here a couple of solutions.

Solution 1: Base rewards on some dollarized version of therapeutic value less the cost of the drugs. Then the reward is reduced the higher is the price of the product.

Solution 2: Given the structure of the reward system, it might be possible to require licensing of all the technologies -- not just patented ones -- involved in the manufacturing process, as a condition of participating in the reward system. This would enable bio-generics to be genuinely bio-equivalent. (Note, however, than in some markets with large economies of scale in production, you might not want to have multiple manufacturers, which brings you back to solution 1.)

It would be valuable to hear others' comments about the feasibility of either of these work-arounds, as well as about other problems which might be foreseen with respect to large-molecule drugs.


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