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The Genetics Revolution Challenge and How to Incentivize Biomedical Research

Monday, June 30, 2014

The genetics revolution poses challenges to the way that the FDA and patent system influence medical research. Prize-grants could be better suited to providing incentives for the sort of research becoming valuable.

One-size-fits-all blockbuster drugs are giving way to treatments tailored to individuals’ genetic makeups and aimed at narrow subsets of broader diseases.

“It’s a new world,” said Wendy Selig, president of the Melanoma Research Alliance, the largest private funder of research on the disease, which this year is expected to kill nearly 10,000 Americans. “We’re segmenting what we thought of as large diseases into smaller populations of patients that are defined by genetic distinctions. ... The goal is to match the right therapy to the right patient, and to do it with minimal collateral damage.”

— “Drugmakers Find Breakthroughs in Medicine Tailored to Individuals’ Genetic Makeups,” Washington Post, June 2, 2014.

Indeed, medical research has entered a new world, created by the genomics revolution. However, as Peter Huber has pointed out, the institutional structure for creating and protecting property rights has not kept up.1  Drug developers can now use genetic information to identify individuals who need or are likely to respond to a drug. This makes standard testing protocols, which call for broad-based, blind trials, inappropriate. It also blurs the distinction between basic and applied research.

As Huber and others have noted, we need to do a better job of aligning the institutions that surround biomedical research with the path that medical discovery is likely to take going forward, as we seek diagnostic tools and treatments based on genetic information and biochemistry. What I propose here is a hybrid of a research grant and a prize, which could be awarded to either for-profit or nonprofit entities.

Profit-seeking companies would be just as eligible as nonprofit research institutes to receive prize-grants.

The prize-grant would be a contract between a research organization and a funding institution, which typically would be a government agency, although private foundations also could use this approach. The research organization would propose a study to test for a particular result. This might be the identification of a biomarker for a disease, or a demonstration that a new diagnostic tool is more accurate than existing methods, or a population-specific treatment.

The contract would specify the amount that the research organization will receive if the study produces a positive result. If the study produces a negative result, then the research organization receives nothing. Either way, the results of the study are placed in the public domain.

The contract would also specify a method for third-party verification of the result. The cost of verification would be paid for out of an escrow account funded in advance by the research team, although the third party would be chosen by the funding institution.

A research organization would have to decide whether to proceed with a project, based on its view of the likelihood of success, the cost of the project, and the value that the funding institution is willing to assign to a successful result. The researchers and their backers, whether a drug company, university, or venture capitalist, would have to make the decision whether to accept the contract and undertake the costs of the research.

The prize-grant contract would differ from a plain research grant in the following ways:

—Profit-seeking companies would be just as eligible as nonprofit research institutes to receive prize-grants. The studies contribute to basic research.

—The burden of assessing the probability of success would fall on the research organization, not on the funding institution. Those doing the research would in effect be betting on its success.

—Those doing the research would have the incentive to use funds wisely and for their intended purpose. The cost of excess overhead would be borne by the research organization, not by the funding institution.

—The funding institution would have to screen applications to ensure that the research will be conducted safely and ethically. However, it would neither have to “qualify” the researchers based on their scientific credentials and beliefs nor assess the probability of success. A team headed by an oddball who is scorned by mainstream scientists could obtain a contract, risking the team's resources that the oddball's idea will pan out.

—The funding institution would have to assign a value to a successful result before the research is undertaken, so that this value can be specified in the contract. This would be the most administratively difficult part of the process, and each research organization would have to submit an application fee to cover the cost.

The prize-grant would differ from an ordinary prize in the following ways:

—The criteria for winning the prize would typically be first suggested by the researchers, with funding institutions then assigning a value for the prize, prior to the research.

—Prizes often would be for incremental achievements, not just for spectacular accomplishments.

—Large pharmaceutical companies and other private firms would be just as eligible as nonprofit researchers to receive prize-grants.

We can think of the current intellectual-property regime in medical research as a grant-prize approach in which the prize is a patent. However, prize-grants differ from patents in the following ways:

—The prize for a successful result is specified by the funding institution. With a patent, the value of the prize is determined in part by patient demand but also by the purchasing rules of insurance companies and governments, by legal jousting, and by gaming of the system.

—Useful research that does not result in a patentable product gets rewarded under prize-grants, whereas under the patent system such research does not get rewarded.

—Regardless of the outcome of the research undertaken in pursuit of a prize-grant, findings would be immediately placed in the public domain. In contrast, patents set a term of monopoly on the use of information, during which the prices of patented products can be set far above production cost.

Governments, foundations, and individuals ought to experiment with prize-grants as a tool to promote medical research, particularly that undertaken in the private sector.

Medical research may be valuable without producing a brand new molecule that cures a disease and thereby justifies a patent.

One way to understand the prize-grant approach is to recognize that pharmaceutical research conducted by private firms is a public good. Such research adds to the general stock of knowledge. If there were no public-goods aspect to pharmaceutical research, then we would not need patents. Patents are a form of government intervention that raises the prices of many pharmaceuticals, often by large amounts. If there were no patents, then the prices of drugs would be driven down to production cost, which is much lower than the prices charged for patented drugs. On the other hand, without patents, private firms would not have the incentive to discover and test new drugs. 

Patents have always been a problematic way to promote innovation. They raise prices of products far above marginal cost. They impose legal costs involved in obtaining, attacking, and defending patents. They provide an artificially high incentive to develop substitute products that devalue the patented invention. They create an artificial disincentive to develop complementary products, because the high price of the patented product limits its market penetration, adversely affecting would-be product complements.

The value of a patent need not correspond to its social value. Some patented products may have been preceded by years of effort and hundreds of millions of dollars spent by the patent-granted firm on painstaking trial-and-error research. Other patented products might be based on nearly obvious applications of research undertaken elsewhere.

In pharmaceuticals, the challenges with using the patent system are increasing. As Huber has pointed out, the nature of molecular medicine is changing. The system of rigid, blind clinical trials needs to be replaced by a regime of focused trials in which researchers learn and adapt as they go. Medical research may be valuable without producing a brand new molecule that cures a disease and thereby justifies a patent. It may instead focus on determining which combination of drugs will best treat a certain class of patients. A prize-grant would reward this sort of targeted research in a way that a patent cannot.

This modern approach to drug development combines biochemisty and genetics. It tends to blur the distinction between basic research and applied research. It used to be that basic research looked at the biochemical mechanism of disease and applied research then tested cures (or sometimes the other way around — cures were found, and basic research then tried to understand the mechanism of the cure). With personalized medicine, the process of testing cures can yield important information about the biochemical mechanism of disease. The human trials that used to be considered applied research are now vital in their contribution to basic research.

In conclusion, the genetics revolution poses challenges to the way that the FDA and the patent system influence medical research. Prize-grants could be better suited to providing incentives for the sort of research that is now becoming valuable.

Arnold Kling is an adjunct scholar with the Cato Institute. The views expressed here are his own. He blogs at

FURTHER READING: Arnold Kling also writes “GDP and Measuring the Intangible,” “The Recipe for Good Government,” and “Fantasy Despot Syndrome and


1. Peter Huber, The Cure in the Code: How 20th Century Law is Undermining 21st Century Medicine.

Image by Dianna Ingram / Bergman Group






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