Open Source Pharma

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How likely is it that pharmaceutical companies would go open source?

By Janet Hope [1]:

The obvious question for a for-profit company (eg a pharmaceutical company) is why give away the crown jewels? Why would I donate free access to my intellectual property, that I have generated through my private investment, to everyone -- including my competitors?

And the answer is that there are other ways for a firm to benefit from the adoption and use of its IP, eg:

1. free revealing of IP may establish an advantageous industry standard which may be useful to a company that hopes to commercialise complementary goods and services that sit on top of that technology platform. In other words, free revealing can lead to growth in a secondary market that may bring in more revenue than it loses.

2. free revealing may allow or facilitate improvements to the core technology. If the original innovator then gains access to those improvements, this represents a cost saving in R&D for that company.

3. by revealing its IP, a company may generate a favourable reputation that is useful in selling associated offerings, by enhancing brand value or enhancing the company's ability to attract and keep high quality employees.

As with any other strategy, there are costs as well as benefits associated with an open source approach. Opportunity costs are the gains that an innovator could have made by adopting an exclusive proprietary approach according to the traditional model in biotech and elsewhere. Actual costs include the costs of producing and then diffusing an innovation (if you choose to actively build a user community around your open source product, obviously maintaining and supporting that community will entail extra costs).

Whether the balance of costs and benefits of an open source approach make it more attractive to an IP owner than the traditional proprietary approach will depend on the circumstances. From what I've seen, the likelihood of pharmaceutical companies "open sourcing" their drugs - the actual therapeutic molecules - seems very low.

There are two main reasons for this:

1. Opportunity costs associated with open source. The major opportunity cost of adopting an open source exploitation strategy is the loss of profits you might have made if you had taken an exclusive proprietary approach. In most fields that opportunity cost is actually not all that high, because it turns out there are serious caps on the return you can realistically get from a limited number of licensees. The most important reason for this is that because the patent grant technically covers the means of achieving an end, not the end in itself, patents in most fields are quite easy to invent around, so in effect, the upper limit of the licensing fee you can charge is the estimated cost to potential licensee of coming up with an alternative way of achieving the same goal. Interestingly for our purposes, pharmaceuticals are one of only two exceptions to the rule that patent ownership is not all that profitable in practice (the other, not co-incidentally, is chemicals). The main reason for this is that over the years the pharmaceutical industry has successfully pushed for patent grants that are broad enough to effectively cover not just a particular molecule that happens to have value as a drug, but all the variations of that molecule that might be effective, and this means that pharmaceutical patents are actually almost impossible to invent around. So the opportunity costs for a pharmaceutical company in giving up an exclusive proprietary approach to drugs in favour of an open source approach are likely to be too high for pharma to be interested.

2. Established business practice: Pharmaceutical companies rely heavily on patent positions - whether or not they have a patent on a particular pharmaceutical product makes a big difference both to the results of their operations in terms of the economics of selling drugs, and to the company's valuation on the stock market; and this translates into a big emphasis on IP, to a degree even in areas that aren't really related to their proprietary position on their drug products. In other words, not sharing IP is deeply ingrained. To a large degree the biotech industry has inherited that culture of not sharing. The costs of changing established business practice are very real in terms of organisational structure and providing incentives for your employees to shift the way they look at things - and so there is plenty of inertia for large, established companies like the big pharma companies when it comes to adopting fundamentally new business models like open source.

But that doesn't mean open source has no application in relation to the pharmaceutical industry.

For example:

1. One established use of open source business strategies in the software context is to pre-empt the establishment of proprietary technological standards owned by your rivals. Even though pharmaceutical companies hate sharing, one thing they hate even more is being beholden to a single supplier for some critical value driver. This means they might be prepared to put money into an open source biotech company that planned to come up with a really critical tool -- say a toxicology tool that would help predict R&D failures before a drug hit the expensive clinical phase of development. This is a significant example because currently, exclusive patent positions are important to biotech start-ups largely as a way to attract capital. So this kind of support would provide a credible alternative story for biotech start-ups to tell potential investors and thus could promote the development of open source strategies in the biotechnology sector.

2. Using open source as a form of leverage to gain access to improvements to its technology that other people have made for their own purposes: this is of course a form of pre-competitive collaboration, well known in other industries despite high capital costs and time investments. Ironically, the closest to a true open source arrangement that I've come across in interviews was in the heart of exclusive IP territory - in the business model of a successful biotech firm that provides data to pharmaceutical companies. This biotech firm had a licensing arrangement where if any of their customers discovers and characterises a full length gene using the information in their database, the customer has to grant back to the biotech company AND to all of its other customers non-exclusive freedom to operate in drug discovery. Initially this clause was inserted in order to allow customers to use the data without fear of infringement suits from other customers, but it came to be seen as an additional source of value - customers aren't just getting access to the biotech firm's data, they're also getting access to information from all of their rivals. The most interesting part of this story is that this has been happening since the biotech firm set up shop in the early 1990s, some time before Linux took off.

It's also important to note that even if only one or two companies or institutions in a given industry sector choose to go open source, the actions of those companies have a big impact. By undermining customers' willingness to pay for access to tools from one company that they can get at a lower cost or even for free elsewhere, a couple of open source players can shift the basis of competition in the sector away from proprietary technologies. So in this sense, open source really has the power to transform industries. This is one reason why Maurer's proposal is quite exciting - but it also means you'd expect resistance from established firms to anything that looked like open source. We shouldn't underestimate the power of big pharma to influence how open source is perceived if they felt it would be to their disadvantage. Also note that it wouldn't have to be a company that provided open source technologies in order to have this industry-wide effect: it could be a non-profit organisation." (