Hey everyone,
I hope last week’s economics overview provided a beneficial background to the subject. That background will be important today as I review the past week of interviews. This past week I conducted two interviews—one with the CEO of a small vaccine technology company and the other a chief business officer of a small pharmaceutical company. During the interviews I was able to learn a few things—1) I still have much to learn on the business side, 2) companies experience financial strain that academics don’t always discuss, 3) in order to avoid financial strain, companies are exploring business alternatives 4) there is unfamiliarity with prize funds and 5) I learned some new perspectives of ethics in the industry. In the subsequent paragraphs I will be elaborating on these points.
In both conversations I quickly discovered the business side of the industry is very complex. There are many factors affecting the development and operations of the business that I had not understood well until the interviews. Among these lessons was an emphasis on the financial strain businesses face bringing the patent to product. In the past 15 years, the interviewees stressed the different investment atmosphere. Because of the high R&D costs, companies rely on attracting investors or receiving funding from a variety of sources. I was told that 15 years ago it was possible to receive investment from venture capitalists solely with a patented idea. Now, companies must first be able to demonstrate the efficacy of the product and in many cases safety in the form of stage 1 clinical trials before venture capitalists are willing to invest.
I was also described an additional strain due to unpredictability of the approval process by the FDA. One interviewee described an instance in which a company had worked with the FDA all the way through clinical trials, an incredibly costly process (millions of dollars), only to be told not enough information was provided on a specific age group.
Both cases demonstrate a heightened strain on the R&D side of the business that increase costs due to the unpredictability of the approval process as well as the increased development costs companies must bear before they receive crucial investments.
In both interviews, I learned of the wide spread exploration of various alternatives that are being explored in order to deal with the heightened R&D pressures. One of these alternatives was a public-private partnership. In the case described, the Cystic Fibrosis Foundation works with private companies by providing investments in their research (lowering the R&D cost the company bears) and when a successful product is developed the foundation asks for a return on their original investment that they then invest into other promising research.
Another alternative described to me was collaboration between pharmaceutical companies developing similar products. If a company X and Y are developing similar products A and B they can choose to develop products A & B together in order to share together the costs of R&D (subsequently each company bears less cost than before).
I also learned in one interview that there is still limited familiarity with the idea of prize funds and therefore uncertainties about the usefulness of such measures. The concern expressed to me was how the prize fund would be able to help small companies who experience the most trouble in the patent to product stage. In response to this concern, the answer can be summed up as this: the prize fund system would not be any different in this stage then the current model or if the prize model contains interim benchmarks for the development stage, it would actually ease the strain the companies currently face. For more discussion on prize fund system please refer to my post from last week.
Finally I would like to discuss some of the ethical perspectives in the industry discussed in the two interviews. In both interviews I found a strong emphasis on business ethics. Both interviewees placed a strong priority on maintaining a sound reputation within the industry due to its critical role in receiving outside investments. The business ethics were also tied to an ethics of science which was described to me as maintaining research as a pursuit of truth. This “pursuit of truth” would largely be manifested in the case of producing accurate studies that reflected the true performance of the product. The science ethics were an unexpected viewpoint that I had not previously considered. And then of course there were the social ethical considerations for access to medications. In particular this was explicitly discussed in my interview at the vaccine technology company, where the company itself only pursues vaccine technology that can be applied to diseases that affect the developing world. Therefore they have made a conscious decision to address the needs of the world’s poorer populations.
While I am out of space for this blog post, I would love to expand on any of the ideas discussed in today’s post. So please leave a comment and hopefully we can start a great conversation.
-Mark
Mark Herzog is a rising sophomore at Duke University interested in the economics of healthcare focusing on distribution and access to healthcare systems and the subsequent impact on effected communities. Mark grew up and lives in the Appalachian region of North-East Tennessee/South-West Virginia. Apart from his studies, he can be found enjoying the outdoors whether running, hiking or climbing. Throughout his project, Mark will be based in Durham, NC and Washington, DC where he will be conducting research and interviews. He also enjoys a good discussion, so if you have any questions or comments feel free to comment on his posts or email him at mark.herzog@duke.edu.
Hi Mark,
I loved reading this post! Sounds like you’ve had your work cut out for you, but I can’t wait to hear about similar interviews in the future. And I loved how you ended your post with a bit about the ethics driving these companies, especially the bit about a certain desire for scientific veracity behind research efficacy. Nicely done!
After reading all three of your posts, I feel safe in saying that you have a preference for a prize fund system as THE alternative, not just AN alternative, given your continued attention to it in your first several interviews.
From what you’ve written about, my understanding of the prize fund system is that patents exist until the product reaches the point when a company is ready to mass produce and market, then the patent ceases to exist for marketing and manufacturing. BUT the patent still exists to make a claim for a piece of the prize fund. I understand that you appreciate how this model separates R&D and marketing, but I’m still not convinced that this model would lessen the burdens of financial strain during the phases of R&D. Are there real world examples (where this system has been implemented) that testify to its ability to ease these burdens? Or is this speculation based on research (which there is nothing wrong with by the way)? Do you prefer a prize fund system to the public-private partnerships you described above?
Also, I think my final question would be this: are there any drawbacks to a prize fund system?
Keep up the good work. Looking forward to next week’s post!
Thank you for your continued readings Regina. It really seems as like you have good background knowledge of this discussion and a genuine interest.
I would like to first address your concern that the prize fund system does not help alleviate the high R&D strain felt by companies. Simply, the prize fund system is at least as good as the current system, but likely better. The prize fund system would not interfere with capital investment from private players (venture capitalists) or other funding sources such as the gov’t or public organizations that the companies rely on in the current system. Many proposed prize fund models do include interim benchmarks which would provide financial support to promising research during R&D. In these models there is actually less financial strain during the R&D stage since the companies are receiving partial prizes before they complete their products.
So largely, the prize fund system is untested in the healthcare industry. The system has been successful in other industries. Particularly NASA and the Department of Defense have used prize funds to stimulate innovation over the past decade. With this said, much research has been done on the use of the prize fund system for healthcare and I would encourage you to read some of the articles recently published (see the one I attached to this blog post.) But when it comes to healthcare, the prize fund system has largely been untested.
To me this is the large drawback of the prize fund system. It is a drastic change in business policy for the companies and with all change there is both uncertainty and resistance.
On the other hand, there is less uncertainty on other alternatives that have been tested in the industry (for example the public-private partnerships). Public-private partnerships do not address business policies in the industry (namely that 10% of expenditures go into R&D and more like 30% goes to marketing). A prize fund system would make it so the companies actually put more money into R& innovation and very little or none at all into marketing, which means the companies are focusing on producing drugs for patient needs. But public-private partnerships can correct one shortfall of the current system: redirect innovation to areas of public need. Instead of more “me too” drugs, public private partnerships direct innovation to areas may have been previously neglected (including orphan diseases such as cystic fibrosis).
So to answer your question, I believe the prize fund system allows for sweeping reforms, but I understand that such drastic change will likely take more time, and so I believe other alternatives are incredibly beneficial to begin addressing the shortfalls of the current system.
Simply, the prize fund system might prove to be the final answer but right now other alternatives are still great policies producing change.