Dangerous Thoughts on Alternative to Government Granted Patent Monopolies on Drugs

November 10, 2015

I was impressed to see the strong reaction to my blog post comparing the productivity of the research done by the Drugs for Neglected Diseases Initiative (DNDI) and research by the pharmaceutical industry supported by patent monopolies. Commentators here and elsewhere insisted that such comparisons were “idiocy” and possibly even dangerous. Many insisted that my explicit assertion that this was not an apples to apples comparison was inadequate, even though I noted important differences in the $2.6 billion in costs attributed to the pharmaceutical industry to develop a new drug with the expenses incurred by DNDI in developing new treatments.

Apparently, in their view making any comparison between the efficiency of the research done by the pharmaceutical industry and other biomedical research is inappropriate. It is understandable that people who profit from the current system of patent monopoly supported drug research might hold that view, but the rest of us who pay for this research in the form of artificially high drug prices must ask these sorts of questions.

First, of course the research supported by government granted patent monopolies and the research done by DNDI is qualitatively different. The drug industry is looking for patentable products from which it can profit; DNDI is doing research that is directly intended to have the greatest possible impact on public health. The question is, on a per dollar basis, which route is a more effective way to promote public health.

Improving public health is the point of biomedical research, not developing new drugs as several commentators seem to believe. The question is whether it is better to spend $2.6 billion developing a drug based on a new chemical entity through patent supported research or to spend this money in areas like developing new treatments with existing drugs, promoting better diets and exercise, or developing new drugs through alternative financing mechanisms.

The comparison between the $2.6 billion estimate of the industry’s cost for developing a new drug and the output from DNDI is informative on this topic, although far from conclusive. (If anyone has any research demonstrating the superior efficiency of patent monopoly financed drug research, I would appreciate the references.)

In fact, the comparison is overly generous to the industry since we pay four or five dollars in higher drug prices for every dollar we get of patent financed research. We are on a path to spend more than $400 billion this year on prescription drugs. If these drugs were sold in a free market without patents or other protections the cost would almost certainly be less than one-fifth this amount. In some cases, the gap in costs between the patent-protected price and the free market price is more than one hundred to one. Sovaldi sells in the United States for $84,000 per treatment. A generic version is available in Bangladesh for less than $1,000. Drugs are almost always cheap to manufacture and distribute, it is patent monopolies that make them expensive.

This means we are paying more than $320 billion in higher drug prices every year to support $60 to $80 billion in research by the industry. The rest goes to sales and marketing, profits, legal expenses and other costs associated with the patent-supported research model. Even this $320 billion is an understatement since it doesn’t include the excess costs paid by people in Europe, Canada, and elsewhere due to patent monopolies.

It frankly is bizarre that anyone would insist that patent monopolies are the best and only way to support the development of new drugs. Virtually all of the incentives created by this system are wrong. It gives drug companies an incentive to keep as much of their research secret as possible. Merck and Pfizer want to make sure they benefit from their research, not their competitors. Science advances most quickly when it is open for review and sharing. (We already do spend more than $30 billion a year on research through the National Institutes of Health, which everyone seems to agree is enormously productive.)

If we had an alternative funding mechanism where the research was paid for upfront then a requirement of support could be that all results are made public as soon as practical. This would be a huge benefit to the progress of research, in addition to the benefit of having new drugs sold at generic prices.

In addition to the problems it creates in paying for drugs, the enormous gap between the patent protected price and the free market price provides an incentive for drug companies to misrepresent the safety and effectiveness of their drugs. And they do this all the time, promoting their drugs for off-label uses. Economists all know the market distortions that result from a 20–30 percent tariff on apparel or steel. In this case, a patent monopoly is equivalent to a tariff of 1,000 percent or even 10,000 percent, and the problem is made worse by the enormous asymmetry of information. The pharmaceutical company knows much more about its drug than the patients taking it or the doctors prescribing it.

Even the idea of getting information on the value of the drug from the market is silly in a context where the vast majority of payments are made by third parties, either governments or private insurers. In this context the price is telling us how effective the company is in lobbying the government or private insurers to pay large amounts of money for their drug.

Insofar as payments are made directly by patients it is not clear what information we are getting. No one thinks that the right way to determine firefighters’ pay is to have them show up at the fire and ask the homeowner how much they would be willing to pay to have their family rescued from their burning house.

So it is important that we think about alternatives to patent-financed drug research, even if such thoughts may be “dangerous.”


Note: An earlier version of this post wrongly identified Pakistan as the country where generic Sovaldi was available for less than $1,000.


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