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How a market can make vaccine patents available to the world

How a market can make vaccine patents available to the world
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The Biden administration recently announced that it supported temporarily lifting patent protections on the COVID-19 vaccines in order to help combat the growing crisis in poor countries. Not surprisingly, the pharmaceutical companies complained that this action was akin to expropriation and that it would harm future incentives to innovate. This situation is a perfect distillation of the tension regarding patents and research and development: We get more benefits from an innovation now if we let everybody use it, but risk long-term progress if investors do not have the possibility of a large return for succeeding. Today, the tradeoff is how to get as many vaccines to as many people as possible as quickly as possible while ensuring that we continue to get the same effort and innovation for the next pandemic or even for boosters for this one.

The answer is not to waive patent protections, but instead to run what is called a “reverse auction” in which the four major Western vaccine producers — Pfizer, Moderna, AstraZeneca, and Johnson & Johnson — compete to sell the U.S. government their intellectual property (IP). This process, designed properly, would cause these companies to reveal what they truly believe their IP to be worth to them and allow the government to buy the IP without paying more than it is worth. Once it has bought the IP, the government can then make it available to everyone.

In a reverse auction, the government begins by offering a very large amount of money for the product it wants and asks participating companies whether they would supply the product at that price. In each subsequent round, the government lowers the price and asks again. Firms drop out of the auction when the amount offered drops below what they believe is a fair payment. At some point, the auction is left with only the number of firms necessary to provide what the government needs.

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We know that reverse auctions work. The FCC uses them to get the most bang-for-the-buck for broadband subsidies by getting providers to bid against each other for the subsidies. It has also used this approach to reallocate spectrum once used by television broadcasters to higher-value services like mobile voice and broadband.

It sounds complicated, but it’s just a version of how the government buys anything, from reams of printer paper to tanks. In those cases, the government asks for proposals to provide whatever it is the government needs. The bidder who offers the good or service for the least money while meeting the contract specifications wins the business. The difference is that in this case, instead of paper, the government would be buying the IP to a vaccine.

The vaccine IP auction could be open to, say, the manufacturer of any vaccine that has been approved by U.S. or EU regulators. The opening round of the auction would offer a large amount for the IP. Hypothetically, at $20 billion, for example, Pfizer, Moderna, AstraZeneca, and Johnson & Johnson might all participate. The government would reduce the amount in the next round. Perhaps at $15 billion, Pfizer decides it is more profitable to keep its IP and drops out. At $10 billion, Moderna might drop out. The process would continue until only one company remains, and the government would pay the amount revealed by the auction for the IP.

I don’t want to oversimplify the process. The rules of the auction would matter a lot, and can make the difference between success and failure. But reverse auctions have shown to be an effective way to reveal how much a firm actually believes a product is worth and for the government to avoid overpaying.

Given production capacity constraints and different countries’ reluctance to authorize certain drugs, many think it unlikely that making IP freely available will make much immediate difference. The best way to help quickly is probably to distribute to the rest of the world the millions of AstraZeneca vaccine doses the U.S. is inexplicably keeping locked up for reasons the administration has not articulated.

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Still, making the IP available probably would make vaccines available to more people eventually.

A reverse auction for the vaccine would eliminate the need for getting countries in the World Trade Organization to agree to a waiver of the rules covering IP, avoid destroying incentives to innovate and perhaps even strengthen them, and keep the government from paying way too much. And, importantly, it would relatively quickly make it possible for other countries to manufacture vaccines wherever production capacity exists.

Scott J. Wallsten is president and senior fellow of the Technology Policy Institute, and a senior fellow at the Georgetown Center for Business and Public Policy. Follow him on Twitter @scottwallsten.