The Enemy is Government-Granted Patent Monopolies, not the Market

June 08, 2020

(This is the first entry in an exchange with Leigh Phillips. I am responding to a piece he wrote in Jacobin last week about the drug industry’s response to the pandemic.)

Leigh Phillips had a very useful piece in Jacobin on how patent protections are impeding progress in developing and distributing vaccines or treatments for the Coronavirus. The piece points out how the United States has engaged in a pointless competition with the rest of the world, which has involved trying to procure control over a potential vaccine. It also points out how pharmaceutical companies are planning to charge exorbitant prices that are likely to limit access, especially in developing countries.

All of this is very true and important for the public to know, but where the piece goes badly off the mark is in the punchline in its subhead: “But the real architect of these crimes is not CEOs or shareholders, but the market.”

The reason this is so far off the mark is that the clear villain in this piece is government-granted patent monopolies, which exist as a result of the government, not the market. If we envision a world where these government-granted monopolies did not exist, all of the problems (and more) that Phillips mentions would not exist. Without patent monopolies, and related government protections, drugs would be cheap.[1] They are almost invariably cheap to manufacture and distribute.

This means that the problems Phillips points to would disappear in the absence of patent monopolies. It would be absurd to fight over a race to develop a vaccine, since as soon as a vaccine was developed, any manufacturer in the world would be equally able to produce it, regardless of where it originated. And a vaccine, or any drugs that are useful treatments, would be available as cheap generics. That could still raise issues of affordability in the poorest countries, but that is a problem of poverty, not the high cost of drugs.

Patent monopolies actually are causing even worse problems than Phillips indicates. For example, he notes that Gilead is likely to charge very high prices for its drug remdesivir, the first drug that shows clear evidence of being an effective treatment for the coronavirus. It turns out that Gilead has developed another drug, GS-441524, that holds equal or better promise as a treatment for the coronavirus, and is easier to manufacture. The reason that Gilead is pursuing tests with remdesivir, and not GS-441524, is that the patent is much newer for remdesivir, and therefore it can expect many more years of a patent monopoly for this drug.

Another problem with patent monopoly supported research is the incentive to lie about results. We may have seen this with the limited test results reported by Moderna, which were the basis for its jumping ahead with the clinical testing of its vaccine. These reports were sufficient to send its stock price soaring, leading to big payouts for top executives, even if they may not provide much evidence of the vaccine’s effectiveness.

Patent monopolies often lead companies to lie about the safety and effectiveness of their drugs. Merck was forced to pay billions over allegations that it withheld evidence that its blockbuster arthritis drug, Vioxx, increased the risk of strokes and heart attacks. More recently, opioid manufacturers are paying out billions to settle suits claiming they lied about the addictiveness of the new generation of opioids they were pushing. The incentive for such harmful lies largely disappears when drugs are selling in a free market without patent protection.

The possibility for misinformation is also hugely reduced when all research is open-sourced, which is another very big part of the picture with responding to the pandemic. Since we are confronting a worldwide problem, ideally we would have all results posted to the web as quickly as possible so that researchers everywhere could benefit from successes and learn from failures. This is happening to some extent, but the continuing pursuit of patent monopolies, especially in the United States, is slowing progress.

The really perverse part of the story with the development of coronavirus treatments and vaccines is that the government is already picking up most of the tab for the research. Patent monopolies are supposed to be a mechanism for providing companies with incentives to do research, but if the government pays for the research upfront, they just obstruct progress and lead to high prices for whatever may be developed. As a condition of funding, the government should be requiring all results be posted as soon as practical (the Bermuda Principles for the Human Genome Project is a good model), with everything in the public domain, so that it can be produced as a generic from day one.

Companies can still make a profit from their research, and manufacturers can still profit from selling drugs, but their profits would be more like the profits made by manufacturers of plastic cups and paper plates. Drugs would be cheap.[2]  

Medical equipment is a similar story to prescription drugs. MRIs, kidney dialysis machines, and other types of medical equipment are expensive because we give companies patent monopolies. Without these government-granted monopolies, these items would be a small fraction of their current price. To take one example that has been in the news, a ventilator typically sells for $25,000 to $30,000. A group of researchers developed an open-sourced model that they calculated could be made for $400 to $500. In nearly all cases, if medical equipment was sold in a free market without patent monopolies, it would cost just a small fraction of the current price.

This is not just a question of making health care affordable. There is a huge amount of money at stake. We will spend over $500 billion this year on prescription drugs, more than $3,000 per household. In the absence of patent monopolies and related protections, we would almost certainly pay less than $100 billion. Patent protections also add more than $100 billion to annual spending on medical equipment. By my calculations, patent and copyright protections cost us more than $1 trillion annually, an amount that is more than half of all after-tax corporate profits.

And, this money is very unevenly distributed. If were not for the patent and copyright protections on Microsoft’s software, Bill Gates would probably still be working for a living. More than a quarter of the Forbes 400 richest people owe their wealth in large part to patent and copyright monopolies.

We would have a far more equal distribution of income and wealth without these government granted monopolies. And, we would still very much have a market-oriented capitalist economy if Bill Gates could not get a copyright on Windows.  The issue here is how we have chosen to structure the market, not the market itself.

This point arises in other contexts also. There are many huge fortunes in the financial sector which would not have been made if we had a modest financial transactions tax in place. And, a financial market with a financial transactions tax is still very much a capitalist market, just as a shoe market doesn’t cease to be a capitalist market if we have a sales tax on shoes.

To take another example, if we didn’t exempt Internet intermediaries from the same liability for libel that traditional media companies face, as provided for by Section 230 of the Communications Decency Act, Facebook would be a far smaller company. None of us would then have ever heard of Mark Zuckerberg or give a damn what he thinks about anything. And, we would still have a media market and be every bit as much a capitalist economy.

There are many other examples I could give, including rules on international trade and labor laws (see Rigged), but the point should be clear. The market is infinitely malleable. For the last four decades, the right has been actively working to restructure the market in ways that redistribute income upward. We can structure the market differently so that it leads to more equality and everyone shares in the benefits of growth.

We have to recognize the market as a tool that can be used towards different ends. Lashing out at the market because we don’t like current outcomes would be like lashing out at the wheel because we had a friend run over by a car. For better or worse, we are likely to have the market for a long time into the future. The left needs to figure out how to make it work to achieve ends we want. The right succeeded at this task long ago.  

[1] Drug companies benefit from other forms of government protection, such as data exclusivity, which prevent generic manufacturers from relying on a brand producer’s data to show that a chemically equivalent drug is safe and effective.  

[2] Military contracting in the United States provides a useful model here. The military does get good weapons, even if we may not like what it does with them. Contractors make profits off their payments from the government. They may get patents, but these are really secondary. There is fraud and abuse in the system, but part of this is due to the secrecy in the process. Unlike the development of weapons systems, there is no justification for secrecy in biomedical research. This is discussed in chapter 5 of Rigged (it’s free).

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