With a guaranteed forward contract, a drug company is incentivized to develop a product by the guarantee of a certain amount of revenues. It still can patent its discoveries, though the role of patents may be secondary to the forward contract itself. In a sense, you can think of patents and forward contracts as both being contracts except that forward contracts specify the price and volume of future sales whereas patents leave future pricing and volumes up to the market.
For a market like the treatment of cancer where you can see how many people get cancer each year and what the prevailing prices of various cancer drugs are, a company doesn’t need a forward contract. It can already feel pretty confident that if it develops a great drug, it should be able to make money selling it at prices close to what other great drugs command in the market. The amount it would be able to sell would likely correspond to a meaningful fraction of the number of people who need that drug. Market precedent is the reassurance the innovators and investors count on.
Sometimes pricing and volume are much less certain. Think about making a vaccine for a pandemic — we don’t know when or even if we’d ever need it. That’s a case where the U.S. Government uses forward contracts to incentivize companies to invent and produce vaccines that can be stockpiled in anticipation of a pandemic. It’s how the U.S. Pays for pandemic insurance.
But while we have an agreed-upon budget for this kind of pandemic insurance, we do not yet have any such thing for the possibility of bacteria emerging that are resistant to currently available antibiotics.
And that’s why Congress continues to deliberate passage of the Pasteur Act, which would appropriate $6B of federal funding to award at least $750M and up to $3B over a decade to any company that successfully wins FDA approval of an antibiotic that met particular specifications (i.e., worked to treat particular types of infections). After the contract period, since the antibiotics would likely still be patented, companies would only be able to profit from them if hospitals were willing to actually buy doses. Still, the whole point of the PASTEUR Act is to provide enough supplemental incentive to get companies to invent those antibiotics. If the Act passes, we’ll see whether it offers enough incentive. That’s going to be a function of how easy it is to develop novel antibiotics, which may depend on whether the FDA brings an Operation Warp Speed ethos to the challenge. In addition to the “pull” incentive of the forward contract, PASTEUR also provides “push” incentives such as funding for R&D, just as OWS did.