The Becker-Posner Blog: Pharmaceutical Patents

The Becker-Posner Blog: Pharmaceutical Patents: "

Pharmaceutical Patents

Pharmaceutical Patents-Becker
The pharmaceutical industry is under attack once again for its high prices, because of a belief that it pays insufficient attention to safety, and allegedly that sometimes it hides damaging information about their drugs. The industry is no paragon of virtue, but during the past 50 years it has become a major contributor to the dramatic declines in mortality and increases in the quality of life. Reforms that undervalue these contributions are likely to do far more harm than good.

Some of the industry�s important products include aspirins, antibiotics, blood pressure lowering medications, cholesterol lowering drugs, Aids cocktails, drugs that slow the progress of breast and prostate cancer and Parkinson�s disease, effective sleeping pills, and anti-depressants that enable many mentally troubled persons to live reasonably normal lives. Although the cost of producing these and other drugs is typically quite low, enormous amounts are usually spent trying to discover and develop them.

In 2003, American drug companies spend over $30 billion on research and development, which includes the very expensive clinical trials required by the FDA and government regulatory bodies in other countries. This is not very far behind the Federal government�s spending on basic and other medical research. The average number of new molecular entities approved during the past five years averaged about 50. So American drug companies are spending some $600 million (=$30 billion/ 50) per new molecular entity. This heavy R&D burden explains why stock prices of drug companies have not performed especially well during the past 5-10 years, despite very high prices for a few blockbuster drugs. Bio-tech companies as a whole probably even lost money over this period.

The low cost of producing drugs once discovered creates the impression that drug companies are gouging seriously ill cancer, Aids, and other patients. But these companies cannot recoup their huge R&D spending without charging for a number of years much more than the cost of producing their drugs. The patent system provides protection against generic competition for about 20 years from the date of first filling for a patent. However, competition from chemically similar entities usually appears years before patents expire, and the extensive testing required by the FDA considerably shortens effective patent lengths. Still, without patents or similar protection, other companies can reverse engineer most drugs to discover how they are made, and then sell them at much lower prices since they do not have the burden of heavy R&D costs.

To be sure, a patent system creates a tension between the effect that prices well above costs of production have in reducing the use of drugs by sick persons, and the effect of high prices in helping companies recoup their large R&D spending. This tension is the cause of the increasing attacks on drug companies as more blockbuster drugs have been introduced during the past couple of decades. So an important public policy question is whether we can do better than the present patent system? I believe we can improve how the system operates in many ways, but some suggestions are likely to make matters worse rather than better.

One tempting idea is to have the government buy out patent rights, and place them in the public domain available to all producers. Competition would then insure they would be sold to consumers at the cost of production. Recently, the Harvard economist, Michael Kremer (http://papers.nber.org/papers/w6304) revived this old idea in sophisticated form. Kremer suggests that the government uses auctions to decide how much patents on new drugs are worth. The value of a winning price would be paid not to the winner, but to the discoverer and patent holder-who can refuse the government�s offer and hold on to the patent. The winner of an auction only provides a measure of the drugs� worth, and would not receive exclusive rights, even if the discoverer accepts the government�s offer, except in �a small proportion of patents�. But if this proportion is really small, the incentive to provide serious bids is greatly weakened. I also believe such a system might create a bureaucratic nightmare, but his proposal is worth more attention.

State governments and other groups are exerting great pressure to allow imports from Canada and online pharmacies, where drugs are much cheaper. But Canadian drug prices are cheap in good part because they impose price controls. In essence, Canada (and most other countries) free ride on the profits collected from the higher prices in the American market. The U.S. could also impose price controls if it wanted to do so, but these would be counterproductive because they would discourage discovery of new drugs. Moreover, if many drugs begin to be reshipped from Canada, drug companies would cut the amounts supplied to Canada, and prices there would rise. That is why Canada is beginning to crack down on online pharmacies that resell to the American market.

Perhaps patent lives should be shorter, but they were lengthened in the 1990�s because clinical trial procedures take so long due to the requirement of three clinical stages: the first to determine safety, the second to determine efficacy, and the third randomized trials to check safety and efficacy. It has been estimated that perhaps 40% of all R&D costs are spent on these trials. I have proposed elsewhere (http://home.uchicago.edu/~gbecker/Businessweek/BW/2002/09_16_2002.pdf )) that the FDA trust patients more, and allow them more freedom to use new drugs by granting approval without the efficacy and randomized stages - this was the situation prior to 1962. At the same time, the FDA can tighten up safety standards, especially by putting resources into following more closely possible side effects over long time periods. Were my suggestion implemented, R&D costs would go down considerably, patent length could be considerably reduced, and yet companies would have more incentive to invest in finding new drugs.

I do not like the hype and some other salesmanship of big pharma and bio-tech companies, but this industry has made enormous contributions to raising world health. It is likely to become even more important in the future as drugs are developed to match individual genetic differences. One does not want to kill this goose that is laying golden eggs by ill-thought out and counterproductive �reforms�. "