Scientists and innovators all over the world are doing their bit to combat the pandemic, be it through developing vaccines, testing antiviral drugs on patients, coming up with apps to help people mitigate its social effects, or ramping up production of ventilators and testing kits.
Yet the world may also need to experiment with different ways of encouraging innovation. We can rest assured that there will always be people to bend their minds to such tasks, but the more we can support and encourage them to do so, and for more people to join their ranks, the better.
Direct Funding
Governments all over the world have generally responded to the threat by pouring more money into funding scientists and innovators directly. The European Commission, for example, allocated €164m in grant money and other kinds of investment towards startups and smaller businesses that came up with innovative solutions to the crisis. Similarly, the UK government offered £500,000 to technology companies coming up with ways to support people having to stay at home, as well as pouring tens of millions of pounds into vaccination research. Many charities, larger businesses, and wealthy individuals have also offered support.
Prizes
In addition to direct funding, some governments have responded with prizes — to be awarded only in the case of success. Economist Tyler Cowen, for example, has announced a series of prizes totalling $1m for innovations in promoting social distancing, finding an effective treatment, and for written analyses of the virus. His colleague and long-time collaborator, Alex Tabarrok, has likewise called for governments to offer much larger prizes, in the billions, to find effective vaccines and treatments.
As Tabarrok points out, prizes for a vaccine should ideally be large enough that a pharmaceutical company would rather accept the prize and make the innovation available to the public, than patent it and use their monopoly to sell the vaccine at high prices. As much of the current work to find a vaccine is necessarily conducted by pharmaceutical companies — they have the resources and experience required, both to find a vaccine and then mass-produce it — any such prize needs to take their incentives into account.
Prizes of this sort might be in the form of a lump sum, but for a vaccine it probably makes more sense to tie it to application. We don’t want a situation where a company creates a vaccine, receives the prize, and then it and its competitors have little incentive to actually produce it at scale. The model that may work best here, instead, is to adopt a policy developed by Nobel-prize-winning economist Michael Kremer, the Advance Market Commitment.
Advance Market Commitments
The policy was used in 2007 to promote the creation of a pneumococcal vaccine for use in developing countries. The problem was that pharmaceutical companies lacked the incentives to create and sell such a vaccine, as those who most needed it would not be able to afford a price that would allow the companies to recoup their research costs.
In response, five governments, along with the Bill and Melinda Gates Foundation, committed $1.5bn to a prize fund. Rather than an up-front prize, pharmaceutical companies bid for 10-year contracts to create and produce the vaccine, to be sold for no higher than $3.50 per dose. The prize money was then used to supplement the amount the company received for each sale. Over the following years, three vaccines were developed, now available for only $2 per dose, which have been administered to over 150 million children. An estimated 700,000 lives have been saved. Thus, although vaccines and treatments against coronavirus are already being developed, the use of such a policy might help make it affordable all over the world — wealthier governments have the funds necessary, though some private benefactors might also be encouraged to commit.
Patents
For the most part, however, businesses will tend to put their own financial resources into developing solutions to the crisis. There is, after all, plenty of demand, and patent protection gives them a temporary monopoly to sell whatever they find. Yet there have been a few cases during the crisis where patents have got in the way of finding solutions. In Italy, for example, when some hospital ventilators broke down the manufacturer was unable to supply new parts quickly enough to save lives. A couple of local 3D-printing companies stepped in to fill the gap, but when they asked the manufacturer for the schematics, it refused and even threatened to sue them for patent infringement. Although the 3D-printing companies went ahead with their infringement anyway and have thus saved many lives, this is not an isolated case. Two patents formerly owned by Theranos, which collapsed when its much-vaunted blood-testing equipment turned out not to work, were apparently being used by their new owners to prevent BioFire from making much-needed testing kits for the coronavirus. Following public outcry, however, the patents’ new owners clarified that their legal action would not cover anything to do with coronavirus.
In both such cases, the public’s reaction has been enough to stem legal action, or to at least embolden the infringers. But when designing innovation policy, we should be careful not to throw the baby out with the bath water. We want pharmaceutical companies to have sufficient incentive to devote major resources to solving the pandemic’s problems, for which we would want to preserve patent protections. We should not rely on their charity or public spirit alone, and patents will be especially vital if we are to find solutions to future pandemics as well as the current one. Ideally, we should preserve the incentives conferred by patent protection, both to invent and to make the details of inventions public, but without the downsides of monopolistic pricing: something achieved by another policy, the patent buyout.
Patent Buyouts
Rather than a prize, the patent buyout involves the government purchasing a patent from its owners and making it open and available to the public to use. The British government has in the past purchased patents or secrets in order to make them public: in 1732, for example, instead of extending the duration of Thomas Lombe’s patent for silk-spinning machinery, it awarded him a large reward. The only condition for receiving the reward was that Lombe had to submit a scale model of the machinery, which was exhibited for public view in the Tower of London. Likewise, the government purchased the secret to Joanna Stephens’s “cure” for bladder stones in 1738 (despite extensive testing by fellows of the Royal Society, it did not work for the reasons they thought it did — rather than a cure, it was in the nineteenth century revealed to be merely palliative). As for purchasing patents, rather than secrets, the best-known example is the French government’s 1839 purchase of Louis Daguerre’s patent for photography, which it then made available to the rest of the world (except the UK, where Henry Fox Talbot had invented a rival process).
The issue with buying out patents, however, is in how to price them. If the government sets a price that is too low, then inventors will be unwilling to sell their rights. And if it purchases the patent compulsorily, as might become necessary during an acute crisis, then offering a price that is too low would be expropriative, thereby damaging the incentive effects of the entire patent system. Fortunately, economists have been exploring how to resolve this issue for the past two decades, again drawing upon the work of Michael Kremer.
In 1998, Kremer suggested using auctions to discover patent prices for a government buyout. In his scheme, private parties would bid on a number of patents being simultaneously considered for a buyout, but only a small and randomly selected proportion of the patents would actually be sold to the private bidders rather than being purchased by the government — that way, even if they actually only received a few of them, the bidders would still have an incentive to provide accurate valuations for all of the patents, allowing the government to discover their market prices. Rather than seeking to replace patents, as prizes often try to do, the patent buyout would be a useful supplement.
And it is a policy that would make a difference to the long-term fight against pandemics, too, by removing bottlenecks to future innovation against pandemics. The buyout and opening up of Daguerre’s patent in 1839 unleashed a period of extraordinary creativity in photography, and the expiry of important patents can often have a similar effect. It was only in the 2010s, for example, that many of the patents for fundamental techniques in 3D-printing began to expire, unleashing even more innovation in the area. Although the technology had been around since the 1980s, the number of related patent applications in the US had never exceeded 3,000 per year. But since their expiry, it has steadily and dramatically increased, to almost 45,000 last year. A buyout of those patents, rather than waiting for their expiration, might have given us this progress decades earlier.
As we look to fight coronavirus and any future pandemics, we should perhaps consider which patents — for antivirals, vaccines, ventilators, and other hygienic equipment — might be bought out in order to remove similar innovation bottlenecks. Whether we decide to use prizes, Advance Market Commitments, or patent buyouts, now is the time to experiment with any new ways to encourage innovation. As the coronavirus has shown us, increasing innovation is a matter of life and death.