Using Social Impact Bonds in the Quest for Accessible and Affordable Open Source Medicines

Following on from the Global Financial Crisis (GFC), governments around the world have been looking for innovative ways to make a bigger impact with their available funds and to address the paradox that investing in R&D to improve delivery of public goods and services can save taxpayer money, but that it is currently difficult for public bodies to justify the risk and expense.

Social Impact Bonds (SIBs), also known as pay for success contracts, were first introduced in the UK in 2010, as a mechanism to improve innovation and cost-efficacy by incentivising impact investors to participate in the delivery of public goods and services.[1] The first examples of SIBs involved tackling prisoner rehabilitation and homelessness, [2] and have generated a large amount of interest in the US with Barack Obama’s proposed 2012 budget allocating up to $100m to run social impact bond pilot schemes.[3] SIBs have since expanded into other areas, with over US$475m in capital raised to date.[4]

The quest for more accessible and affordable medicines

Look in any GP’s toolbox of drugs, and you will find that only one in ten are the name brand blockbuster drugs that are advertised on TV. When the research labs at a pharmaceutical company make a new discovery, they are rewarded for this by being granted a patent, giving them the sole right to manufacture the medicine. They can set any price they want, and often they do, pricing the drug out of reach for many: these are called branded or patented drugs. The rest are what we call off-patent or generic drugs. The drug companies only make money from drugs that they have patents on. Once the patents run out, they can’t charge as much for the drug because other companies can make it and sell it for less.[5] It usually takes approximately 10 years before the patent expires for branded drugs and they become generic,[6] which is referred to as the “patent cliff” because the cost of the drug usually plummets.

So a lot of drugs are like open source software. You can’t download it off the internet for free, but you can buy them cheaply from other countries, usually from generic drug manufacturers in India and China. And if you’re a doctor, you can prescribe them off-label[7] and get paid for your time by doing so. Therefore, even with a patent over a new use of an off-patent/generic drug, you cannot raise money for clinical trials because you cannot enforce a monopoly price.

If doctors can prescribe the drug off-label, you might ask why don’t the drug companies just reformulate the drug and then charge a higher price? This is because if the new formulation isn’t any better than the old one, why would anybody pay more for it? For this reason, repurposed off-patent drugs could be thought of as “public goods” or “open source medicines” that suffer from “the tragedy of the commons”[8] because it is not possible to enforce a monopoly price to recover the costs of clinical trials.[9]

The cost/benefit from repurposing generic drugs could lead to massive reduction in healthcare costs. For example, (a) repurposing sirolimus to treat autoimmune lymphoproliferative syndrome (ALPS) could save the lives of up to 1,000 children in the United States each year while lowering annual direct medical costs by up to $40 million at a cost of US$500k for the clinical trial, and (b) the intraoperative use of the off-patent NSAID ketorolac (which costs $50 per patient) could prevent 6,500 lung cancer recurrences and deaths per year in the U.S., which could save $715 million since each recurrence costs $110,000 to treat.[10] More recently, a study in the journal Anesthesia & Analgesia found that aspirin use was associated with decreased mechanical ventilation, ICU admission, and in-hospital mortality in hospitalised patients with COVID-19.[11] The problem is that these two examples were based on evidence short of the gold standard of clinical research, large, randomised clinical trials (RCTs), but represent a minor share of the overall population of unmonopolisable therapies that hold promise to reduce health care costs and disease burden. Governments do not tend to provide funding for the large Phase 2 and 3 RCTs required to prove that generic drugs work for a new disease indication, because of the high cost ($1–50m) and risk (>50% chance of failure). Therefore, government relies on private industry funding the majority of large RCTs,[12] who are only interested in developing new patented drugs.

Eroom’s Law — the Pharma R&D Productivity Crisis

There is a productivity crisis facing Pharma R&D, known as “Eroom’s law”, whereby the costs of developing new medicines is rapidly increasing.[13] Today, it takes an average of 10–12 years and ~$2 Billion for pharmaceutical companies to develop a new drug.[14]

Costs of healthcare are also growing to an unsustainable extent, primarily driven by the costs of treatment due to monopoly profits charged for new drugs, estimated at over US$500b per year [15] (or US$335b per year in the US alone, which is deemed an underestimate according to a Harvard study[16]). There are also diminishing returns for health expenditure vs life expectancy, particularly in the US.[17] For these reasons, it is important to find other mechanisms whereby healthcare payers (and ultimately, the taxpayer) can fund the development of new medicines that maximise the amount of healthy life years (QALYs) per dollar spent.[18]

How do Social Impact Bonds work?

Social Impact Bonds have been described by the The Non-Profit Finance Fund as: ‘Pay-for-success (PFS) financing agreements, in which private investors provide upfront capital for the delivery of services and are repaid by a back-end, or outcomes payor (usually a government), if contractually agreed-upon outcomes are achieved.[19] In essence, Social Impact Bonds (SIBs) are a mechanism by which to shift financial risk from service providers and payers to investors, with investors underwriting service providers’ based on their ability to deliver on positive social results and cost savings for the taxpayer.[20]. As noted above, Social Impact Bonds are part of a broader class of ‘pay for success’ contracts, and can be used solve the public goods problem for development of non-excludable goods such as repurposing off-patent drugs to treat Covid-19. We provide an illustration of how the pay for success mechanism works below. The diagram refers to a healthcare stakeholder offering an outcome payment (e.g. US$10m) for off-patent drugs that prevent hospitalisation due to Covid-19 if provided within 72 hours of symptom presentation and impact investors evaluating fluvoxamine, ivermectin and HCQ to treat Covid-19. These drugs are provided by way of example only and there are hundreds of off-patent drugs that could work: notably, the pay for success mechanism does not require the healthcare stakeholders/payers such as governments, health insurers, philanthropy to choose which off-patent drugs to fund — they only pay for the scientific result e.g. prevented hospitalisations shown in RCT. This mechanism can be implemented via contracts between the relevant stakeholders or via smart contracts on a blockchain.

The role of Social Impact Bonds in Pharma

Our goal is to validate the effectiveness of an off-patent/generic drug repurposing SIB in a pilot. Because the function of a SIB is to increase private investment into public goods and services, the SIB mechanism is uniquely suited to address the market failure for otherwise medically viable therapies which are not financially viable because a suitable return on investment cannot be obtained using patents. Bruce Bloom of the rare disease charity Cures within Reach, was one of the people that first championed the SIB model for generic drug repurposing.[21] Unfortunately, a proposed 2016 pilot by Findacure UK failed to obtain backing from the NHS for a rare disease generic drug repurposing SIB,[22] perhaps because the NHS did not see enough cost savings (or due to Brexit derailing the project). Our charity crowfundedcures.org wants to help carry on this quest, which could potentially unlock billions of dollars in healthcare savings through incentivising the validation of new uses for more affordable medicines in large clinical trials. Case in point: Biogen’s patented new drug, Aduhelm, recently approved by the FDA without evidence that it actually slows the progression of Alzheimer’s Disease, is estimated to cost the taxpayer-funded Medicare program $6 — $29 Billion per year.

A SIB for generic drug repurposing has 4 main stakeholders: the Healthcare Payers that agree to pay for successful clinical trials that ultimately result in cost savings (e.g. due to reduced hospitalisations and/or reliance on patented drugs), the Impact Investors that fund the clinical trials in return for outcome payments under the SIB from the Payers, the Researchers that propose the research, and the Service Providers (i.e. Contract Research Organisations (CROs)) that act as independent validators to run the clinical trials and determine if the criteria for an outcome payment has been achieved (see illustration below which provides more details regarding the 4 stakeholders in a SIB — as noted above, a SIB is a version of a “pay for success” contract that can also be implemented on a blockchain as a smart contracts to reduce transaction costs and counterparty risk).

Why Pay for Social Impact Bonds for Repurposing Generic Drugs are Better than Traditional Direct Public Funding

One of the main objections to using the SIB/pay for success model is why is this better than simply increasing direct public funding for repurposing off-patent drugs? This article discusses three reasons why SIBs for generic drug repurposing are better than direct funding (which also apply to SIBs more generally):

1. Promoting innovation: using SIBs to incentivise private investment in traditionally “public goods” will increase innovation around delivery of the interventions (e.g. selecting which off-patent drugs are the most promising). It should be a relatively uncontroversial statement that governments/non-profits are less innovative and more risk averse than private industry. By contrast, industry has the people and latest technology, but will only get involved if there is a profit motive. This has also been recognised with the increase in “public-private partnerships” between governments, non-profits and pharma (although there has been criticism over the monopoly prices charged to the taxpayer.[23])

2. Risk transfer: As noted above, government payers are less willing to fund large clinical trials due to the high cost and expense, therefore, the majority of large clinical trials are privately funded. Although there may be some political benefits to publicly funding such trials, the backlash if the clinical trial fails would discourage government payers from taking any risks.[24] By contrast, if a privately funded clinical trial fails this will barely get a mention in the media, because it is expected that the markets are willing to take on financial risk.

3. Low hanging fruit: If most large clinical trials are privately funded, and industry will only fund monopolisable therapies such as new patented drugs, then private industry can turn their attention to highly unmonopolisable therapies such as generic drugs which can be quickly tested in humans due having passed Phase 1 safety clinical trials. This is also unlocking a massive (relatively untapped) blue ocean of potential treatments and cures involving off-patent drugs, diets/supplements and unprofitable therapies more generally such as antibiotics and neglected diseases (see illustration below).

Problems with Using Social Impact Bonds for Repurposing Generic Drugs

There is definitely a free riding problem with SIBs as the public can benefit from published clinical trial data regarding “open source medicines”, however, this is no different from publicly funded research anyway. It is also possible to build a syndicate of Payers globally to help address this problem.

The other issue is how to determine how much to pay for successful clinical trial data to ensure the backers are getting value for money. For example, government payers such as the NHS typically pay around US$50k per QALY or year of 100% healthy life.[25] The requirement for an ex-ante mechanism for price discovery is a common criticism regarding the use of prizes vs patent rewards.[26] However, I would counter that a fair pricing mechanism can be negotiated in the contract and we can design a formula to ensure that the payer is paying less than the value they receive. It is similar to any RFP mechanism by government — they agree to the “target product profile” of the repurposed off-patent drug and to a formula for the clinical outcome (e.g. $10k per percentage improvement in remission or additional people kept from being admitted to hospital vs usual care), without specifying which specific drug(s) and dosing, leaving the optimal treatment protocol to discovered by the industry. From the payers perspective, as long as they are paying less than their cost savings, they should be happy to back the SIB, and the mechanism is scalable.

The main bottleneck is convincing a payer to put a dollar value on a successful clinical trial data in advance and sign the pay for success contract, as government payers do not have a model that allows payment for cost-savings. This is ironic, because the payer does not take on any risk of clinical trial failure under a SIB and can ensure that their cost savings will always exceed the outcome payments into the SIB, as noted above. Once the SIB is backed, finding investors is relatively simple, as they will assess their risk profile vs the outcome payments available (e.g. will invest as long as ROI of at least 5% p/a is possible with a standard risk profile).

How you can get involved

We want to fix the current broken and inefficient private incentive mechanisms under the current system that irrationally relies only on patents to generate new medical treatments. It should be noted that we are not “anti-pharma”: they are simply playing the rules of the game which are available to them to the best of their ability, but are forced to fight diseases with their hands tied by the “charge monopoly price for single patented drug” model. A pay for success mechanism would provide another route for payers (and ultimately, taxpayers and patients) to fund clinical trials, and help align the profit motive to more socially beneficial medical R&D (off-patent / open source / preventative medicines). It would also help industry leverage the biotech advances made in the last 40 years which do not fit well in the current patent monopoly model (e.g. personalised medicine informed by blood and DNA tests, AI, combination therapies, lifestyle and diet interventions etc).

This is why we are conducting a US$40k feasibility study with Guidehouse, a large public healthcare consulting practice (www.guidehouse.com) to convince a payer to back a SIB. Crowd Funded Cures are also relatively agnostic as to disease class, but would focus on diseases with the most social cost / unmet medical needs. However, we are open to work with alternative disease classes where a backer for a pilot can be found. Crowd Funded Cures is looking for a forward-looking payer to implement pay-for-success contracts like SIBs for Phase II/III clinical trials that analyse the efficacy of off-patent drugs for new indications. In the long-term, CFC anticipates working directly with Guidehouse and a small to mid-size healthcare payer (including government, private employer, philanthropic organisation, etc.) to raise a $10–100 million SIB fund for a specific disease class (e.g., COVID-19, pancreatic cancer, Crohn’s disease, Alzheimers, etc.). The goal is to open up the Pharma R&D space to incentivise impact investors to fund large clinical trials for unmonopolisable therapies and unprofitable therapies in return for outcome payments from the fund if successful. Help us change the current paradigm and usher in a new era of open source medicine.

You can support our project via our NZ registered charity (No. CC49977) https://crowdfundedcures.org or contacting us at info@crowdfundedcures.org.

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[1] https://en.wikipedia.org/wiki/Social_impact_bond.

[2] The first social impact bond was announced in the UK on 18 March 2010 by then Justice Secretary Jack Straw, to finance a prisoner rehabilitation program — see https://www.bbc.co.uk/news/uk-11254308

[3] https://www.economist.com/united-states/2011/02/17/who-succeeds-gets-paid

[4] https://golab.bsg.ox.ac.uk/knowledge-bank/indigo/impact-bond-dataset-v2/

[5] https://accessiblemeds.org/resources/blog/generic-drug-supply-chain

[6] https://www.scientificamerican.com/article/whats-the-difference-betw-2004-12-13/

[7] Off-label prescription means that the doctor is prescribing the drug to treat something other than what it was originally designed for.

[8] https://en.wikipedia.org/wiki/Tragedy_of_the_commons

[9] These are referred to as “unmonopolisable therapies” in my 2014 LLM thesis on the topic “Deadly gaps in the patent system” — available at https://ir.canterbury.ac.nz/handle/10092/9826

[10] See https://ssir.org/articles/entry/repurposing_social_impact_bonds_for_medicine# regarding repurposing sirolimus to treat ALPS. See also https://rebootrx.org regarding repurposing ketorolac for lung cancer — from discussions with founder, Laura Kleiman.

[11]https://journals.lww.com/anesthesia-analgesia/fulltext/2021/04000/aspirin_use_is_associated_with_decreased.2.aspx

[12]https://www.jhsph.edu/news/news-releases/2015/industry-financed-clinical-trials-on-the-rise-as-number-of-nih-funded-trials-falls.html

[13] https://en.wikipedia.org/wiki/Eroom%27s_law

[14] https://www.sciencedirect.com/science/article/abs/pii/S0167629616000291?via%3Dihub

[15] This estimate is calculated on the basis that patented or ‘branded’ drugs are generally 12 times more expensive than off-patent or ‘generic’ drugs, and that global sales of branded drugs were USD 596 billion in 2011. See J Love and T Hubbard “The Big Idea: Prizes to Stimulate R&D for New Medicines” (2007) 82 Chi-Kent L Rev 1519 at 1522; The Global Use of Medicines: outlook through 2016 (IMS Institute for Healthcare Informatics, July 2012) at 8.

[16] https://blog.petrieflom.law.harvard.edu/2018/09/11/26404/

[17] https://ourworldindata.org/grapher/life-expectancy-vs-health-expenditure

[18]https://www.wsj.com/articles/obscure-model-puts-a-price-on-good-healthand-drives-down-drug-costs-11572885123

[19] https://nff.org/file/138/download?token=-QBK7PQd

[20] https://socialfinance.org/what-is-pfs/#what-is-pay-for-success

[21] https://ssir.org/articles/entry/repurposing_social_impact_bonds_for_medicine. See also https://trialsjournal.biomedcentral.com/articles/10.1186/s13063-021-05273-x.

[22] https://www.findacure.org.uk/the-rare-disease-drug-repurposing-social-impact-bond/

[23]https://www.bloomberg.com/news/features/2015-07-07/this-medical-charity-made-3-3-billion-from-a-single-pill

[24]https://apnews.com/article/virus-outbreak-health-us-news-ap-top-news-92e6cabd8834e6865eee67f116b006c1. This point has also been made in my discussions with relevant stakeholders. For example, a health economist working for the single payer in NZ (PHARMAC) said the agency is unwilling to fund clinical trials unless they can almost guarantee that the outcome will be what they want (e.g. whether a shorter course of the breast cancer drug Herceptin is just as effective as a longer course).

[25] https://en.wikipedia.org/wiki/Quality-adjusted_life_year

[26] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2337825

Our non-profit’s mission is to use pay for success contracts to repurpose off-patent medicines https://crowdfundedcures.org