Pay-For-Success Contracts: An Open Source Alternative to Psychedelic Patents
by Savva Kerdemelidis, Celeste Alvarez, Chris Byrnes & Graham Pechenik
The role of patents in the ongoing psychedelic renaissance incites robust debate. Are patents necessary to recoup the high cost of clinical studies and regulatory approval required to bring psychedelics to market? How can one patent psychedelic compounds or treatments that have been used for decades or centuries? In some cases, the patent system has facilitated biopiracy, expropriation of traditional knowledge, and market consolidation by powerful Western pharmaceutical companies. Can we find other market mechanisms that forgo patents—and these problems—altogether?
In this piece, we describe an alternative pay-for-success (PFS) contract system that can be used instead of patents to bring psychedelics into the clinic, including off-patent and naturally occurring compounds. We first detail the history of psychedelic therapy and analyze how this history creates unique market failures when patents enter the scene. We then describe how a PFS contract system works and how it can solve critical market failures that patents cannot.
History of Psychedelic Use
Prior to Western recognition of the therapeutic potential of psychedelics and the present psychedelic gold rush, mind-altering plants and fungi played a central role in cultural practices in various parts of the world. Preceding written history, prehistoric cave paintings from Algeria and Spain appear to depict hallucinogenic Psilocybe mushrooms. As recounted by 16th century Spanish missionary Bernardino de Sahagún in the Florentine Codex, mind-bending cacti and fungi, such as peyote and the Aztec’s teonanacatl, “flesh of the gods,” played a central role in Indigenous religious and healing ceremonies. Today, members of the Native American Church (NAC) continue to use peyote as a means to expand their consciousness and commune with God and the spirits, restoring balance and enhancing a sense of community, and benefiting their overall health without necessarily treating a single indication.
Although Western and Indigenous ideas of therapeutic value may not completely align, previous use of psychedelics in a therapeutic context is undeniable. Setting aside any differences in the subjective experiences they elicit, psychedelic cacti and mushrooms from Mexico and the American Southwest, ayahuasca from the Amazon basin, and iboga from equatorial Africa, to name a few, are connected by recognition of their healing and transformative properties.
Although Western culture has been slow to accept and adopt the medicinal potential of psychedelic therapy, there was a brief period of open scientific research on natural and synthetic psychedelics among Western psychiatrists. During this time, the potential for LSD and peyote to treat alcoholism, assessments of psilocybin in a psychotherapy context, and descriptions of the powerful healing properties of ayahuasca were published in scientific communications. However, this period came swiftly to a close when the Controlled Substances Act of 1970 inaugurated an era of prohibition.
Fast forward to the current psychedelic renaissance, we are now witnessing the slow retreat of Western institutions from their prohibitionist policies in an effort to discover promising treatments for the growing mental health crisis. In a particularly salient example, treatment centers that administer ibogaine to those suffering from opioid addiction have sprung up in Canada, Mexico, and across Europe. And for those seeking improvements in overall mental health and well-being, rejuvenating psilocybin and ayahuasca wellness centers are accessible with a visit to The Netherlands, Costa Rica, or Jamaica. For unticketed citizen scientists, only a Wi-Fi connection is necessary to share valuable insights into the use of psychedelics. Studies on the effects of microdosing, a trend that was popularized by Silicon Valley, have been conducted by Quantified Citizen’s Microdose.me and the National Institute of Health (NIH).
Why Patents on Psychedelic Therapies Often Create Market Failures
So what does all of this mean for patents?
Let us first set the stage with the archetypical use case for patents: A lone chemist, our inventor, works diligently to overcome scientific and technical challenges that prevent the synthesis of a new compound. Suddenly, a new idea takes hold, the “Eureka!” moment. In a final experiment, challenges are overcome, a new compound is created, and a problem is solved. The inventor has created something new, something that would not simply follow from consulting the body of work in the field. Provided the incentive to wield a limited monopoly over the discovery, our inventor shares the invention with the Patent Office, understanding that the granted monopoly would conclude in twenty years with entry into the public domain. Novelty, non-obviousness, monopoly, and eventual dedication to the public—this is what patents are made of.
Novelty, whether something is new in the eyes of the law, and non-obviousness, a quality of inventiveness that evades the grasp of another having ordinary skill in the art, are standards of patentability, not only in the United States, but worldwide. How do these standards apply to compounds and methods that have been known and used over generations, like psychedelics and traditional use thereof?
The patent system is theoretically supposed to prevent patents from issuing on therapies that have been historically known and disclosed to the public because such therapies are neither novel nor non-obvious. However, as always, the devil is in the details. We will spare our readers from the more exhausting ways in which patent practitioners have been able to flout or qualify the principles of public disclosure, but a few are especially worth highlighting in the context of patenting psychedelic therapies.
The first challenge comes from a requirement that public disclosure is in fact “public.” This can often be proved by pointing to printed publications or other documentary evidence that typically accompanies the public disclosure of patentable information. For example, a hypothetical patent on a method of using LSD to treat alcoholism would face a formidable body of prior art that was established through the brief period of Western psychiatric experimentation prior to the prohibitionist era.
However, what do we do with psychedelic therapies that have been developed and maintained by Indigenous communities who lack the interest or means to participate in Western systems of knowledge production? What do we do with knowledge of psychedelic use that is intentionally transmitted only orally, as a means to protect the sacred wisdom that often accompanies its use? How do we handle research and development of psychedelic therapies that operate in the shadow of criminalization and prohibition, which disincentivizes the type of public disclosure that the patent system typically seeks?
The patent system does not operate in a cultural vacuum. Instead, it prioritizes and biases itself towards a specific form of Western epistemology that gave birth to the patent system in the first place. As critical theorist Anjali Vats has scrupulously shown, the intellectual property system as a whole operates under the guise of racially and ethnocentrically scripted archetypes of “intellectual property citizenship.” A critical view of the archetype we present above of the lone inventor underscores this point. Who is to say that invention is ever a solo endeavor or that it doesn’t always intrinsically arise from communal scaffolding?
Such questions are brought into acute focus when it comes to psychedelic therapies. Given a historical body of knowledge that has long evaded the norms of Western knowledge production, we are left with a particularly elusive body of prior art that the Patent Office can call upon to challenge a patent application for lack of novelty or non-obviousness.
It is this elusive body of prior art that brings us to our second challenge: ensuring that the Patent Office has available all of the public disclosure of psychedelic therapies that actually exists. In the face of budget cuts, a lack of historical training in psychedelic research among patent examiners, and a history of criminalization and prohibition, even when public disclosure exists, it’s unlikely that a patent examiner will find it. After all, a patent examiner is not likely to find documentation of psychedelic research conducted in secret. In our Internet Age, publicly available information that undermines novelty may be found on discussion boards like Erowid, The Hive, Bluelight, DMT-Nexus, and Shroomery, to name a few, but an examiner may lack the savvy to illuminate such corners of the internet (despite taking little more than a Google search).
To these ends, we express our deep appreciation for the psychedelic prior art library, Porta Sophia, which aims to solve the accessible-information dilemma by archiving numerous resources, and allowing them to be easily searched. As such tools become more widely used, and as more information is compiled, it may become increasingly more difficult to patent psychedelics (and especially, to obtain overbroad and low quality patents that cover the prior art).
Against this backdrop, we consider the market failures that result from improperly issued patents. Erroneous patenting of compounds, methods, and uses that are currently in practice may halt further valuable exploration and complicate the delivery of treatments to patients, disrupting the healing trajectory of psychedelics that is the core raison d’etre for many proponents in the space.
It is also no secret that the patent system generates a cross-technology market failure exploited by so-called “patent trolls.” Patent trolls acquire low quality patents (i.e., those that should never have been issued in the first place) and assert them against large swathes of a given market. The patent troll business model works by exploiting the market failures that arise at the nexus of the justice system and the patent system. Because of the complexities of patent litigation, the legal costs attendant to patent disputes can rapidly exceed $1M for a defendant, regardless of the actual merits of the case. Accordingly, many defendants will pay for a license simply to avoid litigation costs. This dynamic creates a classic market failure and yields a wildly inefficient distribution of patent licensing revenue, with much of it going to entities wielding non-infringed or demonstrably invalid patents.
Each of these market failures has driven a deep suspicion in the psychedelic space over the utility of patents altogether. Meanwhile, enterprises engaging in the cost-intensive process of funding randomized control trials and regulatory approval necessary to bring psychedelics to market are left without market mechanisms—aside from patents—to incentivize investors and ultimately recoup their costs.
A lack of alternatives to patents thus begs the question: can we craft new market mechanisms that solve the market failures created by patents while still providing incentives to invest in clinical trials and regulatory approval?
A New Way Forward: Pay-for-Success Contracts
Pay-For-Success contracts use financial innovation to incentivize private investment in public-good projects, which are traditionally taken on only by governments and charities. The financial innovation of PFS contracts lies in the alignment of private gain with public good. For example, so-called “Social Impact Bonds” or SIBs, which are a type of PFS contract, have been used to help fund public-good projects such as homelessness and prisoner recidivism, with over US$700m in SIBs raised to date. Under the SIB model, impact investors are incentivized to fund public-good projects in return for an outcome payment if the project is successful. In essence, this model enables investors to place a bet on the potential success of a public-good project and to then reap returns on their investment should the project succeed.
The potential for PFS contracts to address the market failure for developing off-patent therapies, including psychedelics as discussed above, is enormous. Under the PFS model, an impact investor that successfully repurposes an off-patent molecule or treatment protocol to obtain regulatory approval will receive an outcome payment or subsidized price. This payment is drawn from a Pay-For-Success fund in accordance with a pre-determined formula that calculates the payment based on the level of clinical impact or Quality-Adjusted-Life-Years (QALYs) generated. The number of QALYs that could result from an approved off-patent therapy can be calculated in advance by a committee of pharmacoeconomic experts under a similar process to the NHS’s Subscription-Style-Payment (SSP) model for incentivizing development of new antibiotics, whereby a fixed amount is paid annually according to the total QALY value of the new antibiotic, as assessed by the antimicrobials evaluation committee. Through this payment mechanism, impact investors can recover their investments, even without a patent to enforce a monopoly price.
The PFS model not only incentivizes investment in off-patent or unpatentable therapies, it can also be used to generate a sustainable and scalable fund for additional investment. For example, a business model built around PFS contracting can raise funds to conduct large-scale clinical trials for off-patent psychedelic therapies, which has otherwise been nearly impossible to do without patents to secure investments in the fund. Funding large-scale clinical trials of off-patent therapies can result in billions of dollars in healthcare savings for health insurers and governments, while also reducing drug costs. This is because a large body of existing safety data from prior use in humans means it is significantly cheaper and faster to obtain regulatory approval. Those cost savings can then be reinvested in additional PFS contracts to incentivise further development of more off-patent treatment protocols.
Conclusion
As the burgeoning psychedelics market grapples with how patents can and should be used to bring psychedelic therapies to the public, PFS contracts provide a powerful alternative. Through financial innovation, PFS models align the economic incentives of impact investors with the public good. For psychedelic therapies, PFS contracts provide an incentive for investors to fund large-scale clinical trials, seek regulatory approval, and recoup their investments upon proof of therapeutic success—all while forgoing the monopoly rights that drive patent-based market failures.
About the authors:
Savva Kerdemelidis is a consultant legal counsel and patent attorney advising technology companies and web3 projects in relation to IP, commercial law and crypto. He conducted his Masters thesis on alternatives to the patent system to incentivise development of medicines and founded the New Zealand charity Crowd Funded Cures in 2013 to help implement and scale these ideas as a social enterprise. Crowd Funded Cures is partnered with PsyDAO and Molecule to explore how IP-NFTs and Pay-For-Success contracts can be used to develop open source psychedelics.
Graham Pechenik. Prior to founding Calyx Law in 2016, Graham gained over a decade of experience obtaining and defending some of the country’s most valuable patents. When he’s not working with clients, Graham contributes to Psychedelic Alpha as editor-at-large, where he writes about psychedelics IP, provides data for patent trackers, and helps maintain a psychedelics legalization and decriminalization tracker. Graham is also a member of Chacruna’s Council for the Protection of Sacred Plants.
Chris Byrnes is a patent lawyer at Calyx Law and adjunct professor of intellectual property at IE University, with particular interests in using innovative licensing practices to support knowledge production as a public good.
Celeste Alvarez is a registered patent agent, with degrees in Pharmaceutical Sciences and Microbiology, Celeste brings her professional experiences in medical writing and intellectual property to Calyx Law. Celeste’s patent practice has focused on application drafting, U.S. and foreign prosecution, and performing due diligence and freedom-to-operate analyses.
