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Fri Mar 16 21:24:37 UTC 2007

sourcing" their drugs - the actual therapeutic molecules - seems very
low.=20

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.=20

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.=20

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. .. 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."=20

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<BODY>
<H2><A=20
href=3D"http://blog.p2pfoundation.net/open-sourcing-pharmaceuticals-how-r=
ealistic-is-it/2007/03/17"><FONT=20
size=3D2>http://blog.p2pfoundation.net/open-sourcing-pharmaceuticals-how-=
realistic-is-it/2007/03/17</A></H2>
<H2><A=20
title=3D"Permanent Link: Open sourcing pharmaceuticals: how realistic is =
it?"=20
href=3D"http://blog.p2pfoundation.net/open-sourcing-pharmaceuticals-how-r=
ealistic-is-it/2007/03/17"=20
rel=3Dbookmark>Open sourcing pharmaceuticals: how =
realistic is=20
it?</A></H2>
17th March 2007
<DIV class=3Dentrytext>
Janet Hope has written a very interesting <A=20
href=3D"http://rsss.anu.edu.au/~janeth/OSBiotech.html">PhD thesis</A> on =
the=20
prospects for Open Source Biotechnology, which by the way, has an =
excellent=20
review of <A href=3D"http://rsss.anu.edu.au/~janeth/OSBusMod.html">Open =
Source=20
Business Models</A>.
Here is an excerpt from her conclusions, as to what the chances are =
that=20
pharmaceutical companies would eventually go open source in a more full =
way.
Excerpt:
&#8220;The obvious question for a for-profit company (eg a =
pharmaceutical company)=20
is why give away the crown jewels? Why would I donate free access to my=20
intellectual property, that I have generated through my private =
investment, to=20
everyone &#8212; including my competitors? And the answer is that there =
are other ways=20
for a firm to benefit from the adoption and use of its IP, eg:
1. free revealing of IP may establish an advantageous =
industry=20
standard which may be useful to a company that hopes to =
commercialise=20
complementary goods and services that sit on top of that technology =
platform. In=20
other words, free revealing can lead to growth in a secondary market =
that may=20
bring in more revenue than it loses. 
2. free revealing may allow or facilitate improvements to the =
core=20
technology. If the original innovator then gains access to =
those=20
improvements, this represents a cost saving in R&amp;D for that =
company.
3. by revealing its IP, a company may generate a favourable=20
reputation that is useful in selling associated offerings, by =
enhancing=20
brand value or enhancing the company&#8217;s ability to attract and keep =
high quality=20
employees.
As with any other strategy, there are costs as well as benefits =
associated=20
with an open source approach. Opportunity costs are the gains that an =
innovator=20
could have made by adopting an exclusive proprietary approach according =
to the=20
traditional model in biotech and elsewhere. Actual costs include the =
costs of=20
producing and then diffusing an innovation (if you choose to actively =
build a=20
user community around your open source product, obviously maintaining =
and=20
supporting that community will entail extra costs).
Whether the balance of costs and benefits of an open source approach =
make it=20
more attractive to an IP owner than the traditional proprietary approach =
will=20
depend on the circumstances. 
From what I&#8217;ve seen, the likelihood of pharmaceutical =
companies &#8220;open=20
sourcing&#8221; their drugs - the actual therapeutic molecules - seems =
very=20
low. 
There are two main reasons for this:
1. Opportunity costs associated with open source. =
The major=20
opportunity cost of adopting an open source exploitation strategy is the =
loss of=20
profits you might have made if you had taken an exclusive proprietary =
approach.=20
In most fields that opportunity cost is actually not all that high, =
because it=20
turns out there are serious caps on the return you can realistically get =
from a=20
limited number of licensees. The most important reason for this is that =
because=20
the patent grant technically covers the means of achieving an end, not =
the end=20
in itself, patents in most fields are quite easy to invent around, so in =
effect,=20
the upper limit of the licensing fee you can charge is the estimated =
cost to=20
potential licensee of coming up with an alternative way of achieving the =
same=20
goal. Interestingly for our purposes, pharmaceuticals are one of only =
two=20
exceptions to the rule that patent ownership is not all that profitable =
in=20
practice (the other, not co-incidentally, is chemicals). The main reason =
for=20
this is that over the years the pharmaceutical industry has successfully =
pushed=20
for patent grants that are broad enough to effectively cover not just a=20
particular molecule that happens to have value as a drug, but all the =
variations=20
of that molecule that might be effective, and this means that =
pharmaceutical=20
patents are actually almost impossible to invent around. So the =
opportunity=20
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=20
for pharma to be interested. 
2. Established business practice: Pharmaceutical companies =
rely=20
heavily on patent positions - whether or not they have a patent =
on a=20
particular pharmaceutical product makes a big difference both to the =
results of=20
their operations in terms of the economics of selling drugs, and to the=20
company&#8217;s valuation on the stock market; and this translates into =
a big emphasis=20
on IP, to a degree even in areas that aren&#8217;t really related to =
their proprietary=20
position on their drug products. In other words, not sharing IP is =
deeply=20
ingrained. To a large degree the biotech industry has inherited that =
culture of=20
not sharing. The costs of changing established business practice are =
very real=20
in terms of organisational structure and providing incentives for your =
employees=20
to shift the way they look at things - and so there is plenty of inertia =
for=20
large, established companies like the big pharma companies when it comes =
to=20
adopting fundamentally new business models like open source.
But that doesn&#8217;t mean open source has no application in =
relation to=20
the pharmaceutical industry. 
For example:
1. One established use of open source business strategies in =
the=20
software context is to pre-empt the establishment of proprietary =
technological=20
standards owned by your rivals. Even though pharmaceutical =
companies=20
hate sharing, one thing they hate even more is being beholden to a =
single=20
supplier for some critical value driver. This means they might be =
prepared to=20
put money into an open source biotech company that planned to come up =
with a=20
really critical tool &#8212; say a toxicology tool that would help =
predict R&amp;D=20
failures before a drug hit the expensive clinical phase of development. =
This is=20
a significant example because currently, exclusive patent positions are=20
important to biotech start-ups largely as a way to attract capital. So =
this kind=20
of support would provide a credible alternative story for biotech =
start-ups to=20
tell potential investors and thus could promote the development of open =
source=20
strategies in the biotechnology sector.
2. Using open source as a form of leverage to gain access to=20
improvements to its technology that other people have made for their own =

purposes: this is of course a form of pre-competitive =
collaboration,=20
well known in other industries despite high capital costs and time =
investments.=20
Ironically, the closest to a true open source arrangement that =
I&#8217;ve come across=20
in interviews was in the heart of exclusive IP territory - in the =
business model=20
of a successful biotech firm that provides data to pharmaceutical =
companies.=20
This biotech firm had a licensing arrangement where if any of their =
customers=20
discovers and characterises a full length gene using the information in =
their=20
database, the customer has to grant back to the biotech company AND to =
all of=20
its other customers non-exclusive freedom to operate in drug discovery.=20
Initially this clause was inserted in order to allow customers to use =
the data=20
without fear of infringement suits from other customers, but it came to =
be seen=20
as an additional source of value - customers aren&#8217;t just getting =
access to the=20
biotech firm&#8217;s data, they&#8217;re also getting access to =
information from all of=20
their rivals. The most interesting part of this story is that this has =
been=20
happening since the biotech firm set up shop in the early 1990s, some =
time=20
before Linux took off.
It&#8217;s also important to note that even if only one or =
two companies or=20
institutions in a given industry sector choose to go open source, the =
actions of=20
those companies have a big impact. By undermining =
customers&#8217;=20
willingness to pay for access to tools from one company that they can =
get at a=20
lower cost or even for free elsewhere, a couple of open source players =
can shift=20
the basis of competition in the sector away from proprietary =
technologies. So in=20
this sense, open source really has the power to transform industries. .. =
It also=20
means you&#8217;d expect resistance from established firms to anything =
that looked=20
like open source. We shouldn&#8217;t underestimate the power of big =
pharma to=20
influence how open source is perceived if they felt it would be to their =

disadvantage. Also note that it wouldn&#8217;t have to be a company that =
provided open=20
source technologies in order to have this industry-wide effect: it could =
be a=20
non-profit organisation.&#8221; </DIV></BODY></HTML>

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