Can Tokens Save Lives?

Applying the Discount Token Model to the Pharmaceutical Industry

Martin Shkreli was recently sentenced to seven years in a federal prison for defrauding investors to the tune of about $10 million. Yet, there is no criminal charges that can be brought against him for increasing the price of life-saving drug Daraprim by a factor of 56, from $13.50 to $750, during his time as CEO of Turing Pharmaceuticals. About 2,000 people in the US use Daraprim, with one year of treatment for one individual costing $300,000, and often more. At the current price, Daraprim costs patients and insurance companies in the US about $600 million annually, by a conservative estimate. However, Shkreli’s indictment and conviction are on unrelated charges. No one can prosecute a person — including Shkreli — for making profits for their investors.

The conclusion is this: scam investors for $10 million — get seven years in prison. Hold the entire society hostage for billions of dollars, and you’re a hero to your investors.

In another egregious instance of drug price hijacking, Valeant Pharmaceutical International, Inc. made a fortune by purchasing existing pharmaceutical companies, shutting down their research and development departments, and dramatically increasing the price of the drugs those companies own. These practices are costing billions of dollars in increased insurance premiums and additional healthcare costs, with patients frequently unable to get access to the needed medications. The conclusion is this: scam investors for $10 million — get seven years in prison. Hold the entire society hostage for billions of dollars, and you’re a hero to your investors.

After a 2015–16 congressional investigation led by Hillary Clinton into Valeant’s practices, pharmaceutical company CEOs have made numerous promises to reevaluate their pricing strategies, but nothing has changed. Yet we live in a free market economy for a good reason: stringent price controls create bad incentives, as we know from the demise of the Soviet Union. In the pharmaceutical industry, for example, destroying the profit incentive may halt the drug R&D altogether (but notice that Valeant shut down their R&D anyway).

Discount tokens can literally save lives due to the shift in incentives

But if not price controls, then what?

Enter Blockchain

Over the past few years, the blockchain space has produced a number of significant innovations. One of these innovations is the concept of discount tokens first suggested by Scott Nelson, CEO of Sweetbridge, Inc. Discount tokens are assets that give their owners access to a fixed percentage of the total supply of a product or service. In this blog post, we examine the surprising potential application of discount tokens to the pharmaceutical industry, demonstrating that if treated as consumer assets, they can literally save lives due to the shift in incentives, as well as fix the entire structure of the broken pharmaceutical industry.

Drug Ownership with Discount Tokens

First, let’s consider the case of a single drug. In order to create a fair market on that drug, we create tokens that represent a limited license to extract profit margins on producing the drug. One token gives its holder the right to either extract profit on a given percentage of the total consumed drug supply, or to buy this amount of the drug supply at production cost, eliminating the margin profits altogether. When a manufacturer holds this asset, they can produce, sell and make a profit on the drug in the amount equal to their token ownership. Consumer entities — insurance companies, hospitals, and patients can use the tokens as discounts; that is, buy drugs cheaply at production cost.

As an example, take a patient that needs a lifetime supply of a drug (e.g. drugs for diabetes, epilepsy, chronic disorders). Purchasing a required amount of the discount tokens buys this patient the right to buy a lifetime supply of the needed drug at low fixed cost. In case the patient no longer needs the drug, the discount tokens remain an asset in their possession that can be resold on the market.

Tokens become a tool for risk-management of healthcare exposures.

Insurance companies would buy large numbers of such tokens and use them as a cost-limiting tool in the event when their covered patients need the drug. This would guarantee fixed costs to the insurance company for covering serious health conditions in the insured population. Given that discount tokens are resellable, insurance companies can use them in a variety of ways, e.g. as collateral assets for loans, or they can sell them later to recover the initial purchase costs. Tokens thus become an additional tool for risk-management of healthcare exposures.

Groups of token-holders can form coalitions and engage a manufacturing company to produce the supply of the drug they own. They then become a distribution network for the drug, much like Apple is the distribution network for the iPhone (Apple owns the IP and the distribution network, but contracts FoxConn to manufacture the actual device). As a distribution network, token holders either consume the drug themselves or sell it for profit to others. Such groups are incentivized to find the cheapest manufacturer, creating competition in manufacturing costs. To the extent that the group members choose to re-sell the drug, they are forced to compete on prices with all of other token-holders/owners of the drug.

As a result of the model shifting from equity ownership by investors to supply ownership via discount tokens, the shareholders of the drugs are now patients, hospitals and insurance companies, whose primary goal is to have access to the needed drug in lieu of making the highest profit on its production.

Research Financing

Having examined ownership of a single drug, we turn to the entire pipeline. Drugs start with research and development efforts, of which only about 9.6% end in FDA approval. Pharmaceutical companies (good ones) operate baskets of such R&D efforts, counting on the value produced by these 9.6%.

In the token model described above, we imagined a world in which ownership of an FDA-approved drug is expressed as an allocation of discount tokens. Clearly, in such a world, the output of the R&D basket is an occasional success in the form of a drug-specific discount token being “born” along with the drug. Early investors in R&D baskets can re-sell their tokenized rights to the successful drug to interested organizations and individuals. But most importantly, there is a distinct class of investors — insurance companies and large healthcare providers — who would be interested in retaining ownership of their purchased supply. Whatever the output of the R&D portfolio, these entities are likely to want the supply of the drug at a low cost instead of making a profit on it.

Tokens Saving Lives

This type of a financing structure would fund the R&D efforts, and, as they come to fruition, give rise to a healthy market for drug and token prices. Multiple manufacturers and distributors would compete on prices, and consumer entities would have a mechanism whereby they are able to limit their financial exposure to drug prices by holding tokens on their books.

Because of the change in incentives … anyone who needs access could potentially get it with a guaranteed bounded lifetime cost.

The industry that develops and sells drugs would still be feasible — but not vulnerable to unethical price gouging by monopolies such as Turing and Valeant. Because of the change in incentives, the business would operate in a way that anyone who needs access could potentially get it with a guaranteed bounded lifetime cost, and the egregious misalignment between investors and consumers would be eliminated.

Bonus Section: Why Blockchain?

A savvy reader would undoubtedly ask me: why does one need blockchain here at all? Can’t you distribute and trade partial ownership licenses the same way you distribute and trade stock? The short answer is that, yes, you probably can. However, keeping track of tokens that give you rights to a percentage of supply of a good or service requires keeping track of one component in addition to what you need with stock: the total global supply of that good. This creates an issue unless you use decentralization technology: any entity tasked with keeping track of the supply of something becomes a monopoly on information about it, and thus partly invites the danger we are trying to avoid. Additionally, decentralization technology is simply much cheaper when it comes to using it for global accounting.

Thanks to Katia Rossi for help writing and editing; and to Scott Nelson for reviewing and commenting.