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Patents and Economics

September 25, 2009
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I’m guessing this is the kind of discussion the leaders of the “Say Yes to Drugs!” campaign want people on campus to be having, so I hope they’re enjoying the back and forth between Jordan and Chris right here on the HRC blog. Before this exciting week of giant pill containers ends, I feel compelled to offer some clarification.

While I agree with Chris that Jordan doesn’t have it entirely right (more on this later), his response goes too far in its dismissal of the importance of patent law. The gist of the argument here seems to be that patent laws, by acting as a form of regulation, inhibit the function of free markets, which would lead to lower prices for consumers and greater innovation as companies compete to offer the same product more cheaply. As such, we should do away with patents and the monopolies they create.

Unfortunately, this is not a straightforward regulation-versus-free-markets issue. The cost of researching and developing a new drug is in the billions (not even mentioning the costs of the FDA approval process), yet the materials needed to create most of the most-used drugs on the market today can be found in a high school chemistry lab (at least if you had a high school chemistry teacher as cool as Mr. Davies like I did). As such, when a company discovers a new life-saving drug, its only innovation is the fact that it exclusively owns it. As soon as its formula is made public and other companies are allowed to market it as well, the drug becomes essentially a commodity: a good that will be priced very close to its materials cost. This comes very close to explicit market failure (when the government SHOULD step in to the marketplace), and at the very least argues for strict enforcement of property rights (which is basically what a patent is), a basic pillar of any free-market system.

No patents would be great for consumers (in the short run), but terrible for innovation. Why would a company invest vast sums of money in creating a drug if it didn’t have the chance to recoup its costs later through selling at a price above production cost? This is, incidentally, one of the great unmentioned flaws in the Obama health plan. The U.S., by being by far the most profitable market for prescription drugs (by virtue of our non-single-payer system), provides an indirect subsidy to the rest of the world by bearing the costs (in the form of higher prices) of new drug development while the Britains and Canadas of the world use government power to force drug companies to sell that same drug at bargain-basement prices. Liberals see this and say “hey, I want those lower drug costs!” without realizing that, in most cases, the drug wouldn’t exist in the first place if the U.S. market didn’t provide the profit incentive for research to begin with.

So, if we adopt Chris’s advice to drop patents entirely, we’re likely to be able to provide existing drugs at very cheap prices, but innovation will ground to a halt. We could supply the world with medical technology as it exists today, which would certainly help in a lot of ways. But it also means that life-saving discoveries in the field of cancer, diabetes, AIDS, and other diseases that might otherwise have been developed won’t be (or will be delayed) because of the lack of profit motive.

There are other reasons to oppose the patent system as it exists today. It is certainly true that perverse incentives exist in the current system that bias drug companies towards creating a plethora of E.D. treatments and blood thinners rather than focusing on solving those bigger diseases like AIDS and cancer. [However, companies like Pfizer also create drugs that treat conditions like breast cancer so the system is not totally defunct.] The fact that the U.S. is the country with the most stringent patent protection also creates inequalities in distribution of drugs around the world, as other nations must wait for a drug company to recoup its costs before it will be offered in their nation. While this might argue for changing rules in rich nations like Britain, it is true that this doesn’t help much in places like Africa, where anything but almost-free prices would be prohibitive.

Which brings me to where Chris is right and Jordan is wrong: the actual objectives of the “Say Yes to Drugs!” campaign do NOT involve getting rid of patents altogether. Instead, they are advocating only for the elimination of the process by which drugs discovered and developed in Harvard’s university labs are licensed to drug companies, who then patent and market them. Given that much of this research is publicly funded and that these drugs are often in the lines of work that are underrepresented in drug company stables because of the perverse incentives of the patent system, this idea makes sense. Developing nations probably should be allowed to benefit from the work done in Harvard’s labs, and the current system makes that extremely difficult. Harvard does not face the same need for profit incentive that Merck does (though a cash-strapped Harvard would undoubtedly miss the payments from the companies), so they don’t need to recoup all those research costs by selling the drug; instead, they could rely (as they do for most other costs) on alumni funding, etc.

“Say Yes to Drugs!” is a campaign that deserves our support (though I agree with Jordan that I feel just a little weird flying in the face of a phrase coined by our own Mrs. Reagan). But let’s not confuse the need for a sound change in public policy with a radical, wholesale abandonment of property rights in the form of the patent system.

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2 Comments leave one →
  1. Jordan Monge permalink
    September 26, 2009 11:23 pm

    You’re right. I didn’t mean to imply that the Say YES to Drugs campaign would get rid of patents altogether. However, its implications for Harvard’s licensing agreements is important. Demanding that companies allow generic production of drugs is most likely going to lessen the amount that they are willing to pay for drugs produced in Harvard’s labs.

    Considering the current financial state of the university, I do not think it wise to attempt such an endeavor. I believe that Harvard currently earns $21 million a year from the drugs it licenses (according to this article: http://www.ipadvocate.org/assistance/pdfs/Harvard%20Cranks%20Up%20the%20Volume.pdf). That equates to the full-time employment of about 467 employees, or hot breakfast in all the houses for the next 23 years. Better yet, that money can be used to avoid taking on loans to balance the deficit. Maybe when Harvard has enough money to live off the endowment, we can reconsider this question. Until then, I think we should protect an important source of income for the university.

  2. November 16, 2009 7:08 pm

    The drug companies claim they are raising prices because some of their patents will expire soon. However, it is convenient that they are doing so before the planned health insurance reforms go into effect. I recommend the following post: http://euandus3.wordpress.com/2009/11/16/drug-companies-as-feeding-machines/

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