> The poster child for strong patent protection is usually the pharmaceutical industry, as drugs are easily copied and can cost upwards of a billion dollars to develop. Here, Boldrin and Levine admit that the government would likely need to step in. But rather than giving companies a legal monopoly over their formulas, the authors suggest we should modify the drug approval process to let makers start recouping their costs faster. They would also set up a prize system to reward companies that invent the new medicines we need.
This strikes me as a really fantastic idea. Actually, I wonder if insurance companies shouldn't offer these prizes regardless of the patent situation. They know intimately well which disorders cost them the most money. They could form a consortium and offer a prize for x amount of money for reducing the cost of treating some disorder by y dollars per patient, where x is guaranteed to be less than the amount of money they will save.
I'm a big fan of Boldrin/Levine but suspect they're wrong about this. The reason medical investigation is so expensive is because there's so much red tape around it in the form of approvals, and the convoluted systems health coverage in the developed world. It's a classic insiders' club. People got institutionalised into the culture, and then can swap between government and industry. There's no strong incentive for anyone in the game to keep costs down. Much more important for the insiders that the barriers remain high.
But there is a reasonable expectation that a pill your doctor prescribes will not kill you (with few notable exceptions). This is a good thing. Who is better at safety, the "free market" or the government?
Why do you quote free market and not the government. Neither one has any interest in actually promoting safety- both are only interested in security theater or protecting their bottom line. See the profitable war on drugs or the TSA. I really don't know the answer to the question, but the clear victor certainly isn't the government.
I'm always astonished by the idea that, were it not for patents and the profits they promise, "no motivation to develop drugs would exist".
At one point I worked with a group that raised money to finance medical research for patients with lupus. These were folks who were seen as too few, and suffering from something too complex, to be profitable. For the most part they were relying on some pretty toxic treatments that hadn't progressed since the 1950's - the pharmaceutical equivalent of pre-anastasia surgery.
Believe me, the people suffering from this were HIGHLY motivated to find a cure, and given an organization capable of focusing that interest, they've raised millions upon millions of dollars* to do exactly that. This was an early form of crowd-funding and it just obliterates the argument that "without patents, there's no motivation to cure stuff."
I'm sorry, but that is absolutely, categorically, and demonstrably false. If people are sick and dying, they have bottomless motivation. Indeed, the extraordinarily high prices people people put on their own lives ("my kingdom for a horse!") represents a profound reservoir of motivation.
The patent and approval system diffuses this deep and natural drive, replacing it with the more limited motivation offered by monopolistic rent-seeking (which aims not to cure disease, but to make it 'manageable').
The thing about an awful disease is that it develops a sense of community. I cannot imagine, for instance, someone who has raised a lot of money to find a cure saying, "yeah, but fuck the next generation that comes along and gets hit with the same affliction - those guys are on their own. WE paid for this, and the cure is OURS. They can reinvent their own damn wheel if they want to live."
Just...no, that's not how people think. What they really think is that in devoting themselves to finding a cure, they are finding a valuable role for themselves in a society that tends to see them as victims. It's how they recover a sense of self-worth and dignity. They are PROUD to pay it forward. Indeed, one of the top sentiments I heard from people I interviewed was "I want to find a cure so that no one else anywhere in the world ever has to suffer what I've gone through because NOBODY deserves this."
THAT's what real decency sounds like. And it's what our patent system frustrates in a very profound way. I know the pharmaceutical industry is always brought up as the tough case against patent reform - the exception that "must" be made in any discussions tending towards to liberalization. I'd argue the opposite. I'd say that this is one of the easiest cases to make. Maybe not a decade ago, but as the organizing power of the internet comes into focus, I can see a world where direct and massively distributed research finance is the norm, with the results made openly available to the entire world.
People who are sick used to feel terribly isolated. Thanks to the internet, that's changing. They're finding they discover others going through the same thing, and that they can use the same channels to pool their resources. Were they given tax credits, their resources would increase substantially. And they don't want to "manage" their diseases. They want to cure them. Researchers working on behalf of people trying to solve their own problem pursue tacks different from those who are working from companies looking to exploit that problem most profitably. And when people finding their own cures succede, their natural impulse is to share their triumph with all mankind, the world over, not start trade wars over IP that use the pain and death of millions already in - or facing - poverty as leverage.
*People who say research costs billions, not millions have been suckered by the most pernicious line of bullshit imaginable. The "billions" figure does not represent actual R&D costs, which, in a shocking number of cases, represent single-digit percentages of pharmaceutical company budgets. Instead, they represent the fully loaded costs of maintain legal departments to protect patents and marketing departments to push drugs in cases where they have marginal or negative value. Inflating the reported development costs into the billions is simply propaganda designed to make any system that doesn't involve patents seem like a financial impossibility.
Tens of millions of dollars won't get a drug to market. Will it fund research that could find useful leads that could produce a drug? Of course.
So how do you incentive private organizations to fork over the $100 million(1) or so it takes to get a drug to market? You provide a mechanism to regain your capital plus something more. It's a system that works pretty well.
(1) That's if everything works the first time. Since only 1 out of 10 drugs that are tested on humans get to market, it's closer to $1 billion on average.
As mentioned, that's a hugely suspicious "fact". As noted by the National Center for Biotechnology Information.
"In the March 2003 edition of the Journal of Health Economics, a trio of economists from the United States wrote about a number. Soon after, that number began popping up all over the place — in newspapers and political speeches, on television and the Internet. But the figure, despite reaching near-canonical status, drew criticism. Some said it was inflated. Less diplomatic detractors said it was a 9-digit fairy tale.
That number was 802,000,000. It was, according to the 2003 study, the number of US dollars that pharmaceutical companies spent, on average, to bring a new drug to market (J Health Econ 2003;22[2]:151-85). Now there are new numbers. Some health economists peg the current cost of drug development at US$1.3 billion, others at US$1.7 billion."
Key point: the data used to come up with the original number came from an industry financed source and was not made public. And here's a bit more coverage that throws additional cold water on 10 figure costs.
I agree that the numbers thrown around are often a lot of hand waving. However, let me make a few points few points.
1. Check out the Tufts Center for the Study of Drug Development. They calculate the cost to create a new drug and their methodology is very transparent.
2. You can do a simple sniff test on these numbers. Simply call up a CRO that runs clinical trials and ask "What will it cost me to run a Phase III clinical trial?" I did this recently for a project I was working on. They will freely give the numbers about since they are all in competition with each other.
This is what a recent survey of CROs found[1]:
"As for the average per-patient trial costs across all therapeutic areas, in Phase I, costs rose from $15,023 in 2008 to $21,883 in 2011. In Phase II, the cost rose from $21,009 to $36,070. In Phase IIIa, the cost increased from $25,280 to $47,523 and in Phase IIIb, cost jumped from $25,707 to $47,095. Finally, Phase IV expenses rose from $13,011 to $17.042."
Let's do some simple calculations. 1000 patients, 1 year trial. You need to complete two Phase III trials to keep the FDA happy.
1000 patients * $47,000 * 2 = $94M
And that's only for phase III trials. Add in the cost of discovery, pre-clinical work, formulation, Phase I, Phase II, all the paperwork with the FDA.
OK, great, now you're approved, you still need to actually make the drug which includes scale-up, testing, FDA certification of the manufacturing process, packing and distribution.
When I was working at a big pharma company, I heard about a new manufacturing site they had built in anticipation of a really big drug being approved. The cost? Several hundred million dollars. What happen when the drug got rejected by the FDA? The manufacturing site was written off (couldn't really be used to make anything else).
1) How do they keep them high? They are buying these services from a third-party.
2) These cost of clinical trials is increasing because FDA evidence requirements are getting stricter and stricter. Back in the 1950s, you could get a drug approved in under 2 years. Now? It's more like 5-8 years. Of course, you end up with much safer drugs this way.
Considering drug companies are always fighting with the FDA to do the bare minimum in terms of clinical studies, I would fathom to guess that your theory can't be supported with the existing evidence.
I have heard that drug patents are trivially circumvented by adding some irrelevant part to the active molecule. Instead it is the FDA approval process that prevents ripoffs.
Doesn't that mean pharma is the one industry where patents could be abolished with literally no consequence?
It is true that you can get around a patent by creating a slightly different molecule. However, drug companies aren't stupid. When they patent a drug, they are patenting a pretty big space around their molecule of interest. Pretty much every modification you can think of, they will patent. The resulting patents aren't just one molecule but rather an IP "space".
That doesn't follow. If patents were abolished companies that spent nothing on development would be able to produce the exact drug that the FDA had approved.
You know what else will drive up the costs? Running bad trial after bad trial after bad trial, burying the results, and only publishing if and when you finally come up with something positive.
Not only does this provide a dangerously (murderously?) distorted view of the compound in question, it means patients (read: victims) will be paying exponentially more for their "treatments".
It's an increasingly sordid business, and not one that can be defended in good conscience. As the Economist notes in its current review of "Bad Pharma" "This is a book that deserves to be widely read, because anyone who does read it cannot help feeling both uncomfortable and angry."
Funding the expensive regulatory process (which includes clinical trials and all the rest) is very easy to legislate. For example, grant a company some limited exclusive rights for commerce/sale of a drug they have funded through clinical trials.
A commercial restriction on the sale of a drug would be far less onerous and legally problematic than the current patent system.
A patent is granted for the invention of a drug, not the testing. If the monopoly were tied to the approval process, it would be limited to the country where the approval was granted. So shepherding a drug through the FDA approval process would get you a monopoly in the US, but not other countries.
Also, you can patent drugs that haven't been approved, which makes it basically impossible for anyone else to do the clinical trials. Breaking the link between the research and the approval process would make it easier for effective drugs to get tested and approved.
Finally, sure, that scheme would be a lot like patents. But at the very least it would be specific to the drug industry, where they are (maybe) useful, and wouldn't distort other industries where patents are actively harmful.
If you get your drug approved by the FDA, you get 5 years of market exclusivity (12 years of it's a biologic). However, it has to be determined by the FDA to be a NCE (new chemical entity). Right now, a company called Amarin is trying to get a drug approved that has no patent and they are hope to get the FDA to recognize their drug as an NCE.
If it for a very rare disease (orphan drug), you get 7 years of exclusivity (still 12 if it's a biologic).
During that time, no other application for the same NCE and indication will be approved by the FDA, giving the first applicant de facto market exclusivity in lieu of a actual patent.
>I'm sorry, but that is absolutely, categorically, and demonstrably false. If people are sick and dying, they have bottomless motivation.
Yes, but they don't have bottomless wallets. I'm sure a great deal of research would still happen in the absence of large potential profits. The problem is very little of it would lead to drugs your doctor could prescribe. The drug targets are the easy part - the hard part is getting a compound through clinical trials, and ones you get approved has to pay for the other 90% that didn't make it because they were too toxic or didn't work as well as existing treatments.
As a real-world case consider antibiotics. There's a huge need for new antibiotics - if you get the right strain of MRSA your doctor is going to be about as useful as the local faith healer. Same goes for a nasty strain of the clap that's making the rounds in Japan. Totally resistant to existing antibiotics - once you get it, it's not going away.
But for various reasons there's no money in antibiotics (or vaccines, either, but let's just stick with antibiotics). You don't get repeat customers, and the bugs will start to develop resistance in a few years. With no profit motive drug companies aren't doing what they need to do to bring new antibiotics to market. So there's nothing in the pipeline.
The concern, of course, is that if you did away with patents entirely every type of drug would be like antibiotics. Drug companies wouldn't exist at all, or they'd exist as contractors to governments (oh, and wouldn't that be efficient).
In some respects they do: often government or insurers are left with costs. The insurers make their margin upstream of this, so there's low price pressure on the drug manufacturers.
Also, demand for drugs is often inelastic, so people are more likely to make sacrifices here to pay for drugs. Which is fine in itself, but not when the high costs are the product of a cartel arrangement between government and industry.
>In some respects they do: often government or insurers are left with costs. The insurers make their margin upstream of this, so there's low price pressure on the drug manufacturers.
But governments and insurers don't save money by saving your life. They save money by letting you die before you get old. That was the ironic thing about the tobacco settlements in the US - the states sued the federal government claiming damages for the extra care they had to provide to people who smoked, when those people would have cost the state more money if they'd lived a normal lifespan.
In some cases a new drug will save money by keeping some damaging disease from becoming a problem and pushing expensive treatments far into the future. That's not the normal case, though. I'm all for helping people live out their threescore and ten in good health, but on average it doesn't save anybody money.
>Also, demand for drugs is often inelastic, so people are more likely to make sacrifices here to pay for drugs. Which is fine in itself, but not when the high costs are the product of a cartel arrangement between government and industry.
Here again there has to be some way for the people doing development to recover their costs. The patent system allows the drug company to charge more to every patient who takes a drug for twenty years. Without it that would all have to be covered by tax money. I like the patent system better, since it's biased toward charging people with lifestyle-related problems more money than people who take care of themselves.
Also, with the patent system companies will spend money on development for treatments that are within the realm of scientific possibility and not because advocates for that particular disease have more political clout. How many billions were wasted in the "war on cancer"? Government just doesn't do this sort of thing very well.
I was struck by how little effort the author put into describing the proposed solution for "the poster child for patents." Is the Atlantic going downhill?
How do you let drug companies recoup costs quicker without reducing the oversight that goes into drug approval? I am also a little curious about the free market implications. Instead of the invisible hand guiding drug development we will be relying on government autocrats? It seems that the incentives for governments to lengthen patent protection would just shift their nefarious attention to the prize system and drug approval process.
I don't see (har har) an invisible hand guiding commercial pharmaceutical development. I see an oligopoly of pharmaceutical corporations acting out of unenlightened self interest. From my layman's perspective, it seems that curing diseases is largely done by government- and university-funded research, while treating symptoms for profit is the domain of corporate R&D.
Most drug discovery and development is done in the private sector. Think 60%+.
Of the stuff that is gov't funded, it's basic research, not the development that actually gets a drug to market and that's what costs so much money.
EDIT: Wanted to provide some numbers.
252 drug were approved by the FDA from 1998 to 2007[1]. Where did they come from?
58% from pharmaceutical companies
18% from biotech companies..
16% from universities, transferred to biotech.
8% from universities, transferred to pharma.
During this same period, 118 drugs were considered to have scientific novelty. Where did those come from?
44% were from pharmaceutical companies.
25% were from biotech companies, and
31% were from universities (transferred to either biotech or pharma).
You need to dig a little deeper than that. Of the 252 drugs, how many where minor modifications of existing drugs. And how many where targeted based on government funded research.
Click on the link I provided and read the details. I even quoted the relevant numbers.
Of the 252 drugs that were approved, 118 were regarded as "scientifically novel" (not me-too drugs or minor modifications of existing drugs). They also did another cut where they looked at FDA "priority approvals", which basically means the FDA was willing to fast track the approval because the disease the drug was treating had no effective treatment.
As to your second question, over 60% of the scientifically novel therapies were discovered by pharma/biotech. They would have received no government funding for their research. The remaining 40% or so were discovered in university labs, of which a certain percentage were discovered via gov't funding (don't forget that industry-academic partnerships also make up a certain percentage of university funding).
A minor nitpic Drug R&D has a defacto subsidy in the tax code. see: "For purposes of section 38, the research credit determined under this section for the taxable year shall be an amount equal to the sum of" () As well as several other direct and indirect subsidies.
An oversimplified summary is that the majority of the pipeline for new drugs is in small companies. When one of these small companies develops a new compound that has an enormous potential market, it is purchased by one of the large companies that has better expertise in distribution and marketing, and can scale up production much more efficiently.
A tremendous amount of funding is put into the development of new drugs, yet it should be no surprise that much of this research produces nothing useful. Innovation anywhere results in hits and misses, yet investors are willing to assume the risk when they believe a certain percentage of success will sufficiently balance out the failures.
In effect, strong property rights allows a modularization of the different roles of drug development.
If people truly believe that there is a problem with the pharmaceutical industry, they should identify what the problem is first, and then unemotionally analyze how they could address those problems.
I tend to believe that there is a general consensus that the growing portion of GDP being devoted to pharmaceuticals is not sustainable, and quite likely already more than it would be in a better optimized economy.
What constrains the demand for pharmaceuticals? If something will save save your life, you may be willing to spend a million dollars on it. However, if you only have a 1/1000 chance of needing something, you may not be willing to spend $1000 on it when you're not under the gun. In order to balance all the many eventualities for potentially needed medical treatment either your government or insurance provider collects and organizes resources for people who need treatment today with the promise that all of the contributors will also receive treatment when needed. How much treatment?
How much treatment is generally determined by whatever is medically necessary. There may be some wiggle room on the definition of medically necessary, but it doesn't matter because this isn't what determines how much medical treatment you receive or might receive. What really determines how much medical treatment you can receive is how much medical treatment is available.
It probably sounds extremely cynical, but the idea of destroying pharmaceutical patents would likely accomplish what it sets out to do. It would dramatically lower expenditures on medicine. However, it wouldn't be because pharmaceutical companies would lose their profits,\1 it is because it would break the advance and development of new compounds that is probably occurring at too fast a rate.
Fueling the excessive rate of development, if it is excessive, is the knowledge of investors that the healthcare market is in a perpetual failure state. There is no constraint on demand. Unlike just about any other product, as long as you make a better product there will always be demand. Imagine doubling the price of a house in order to make it invulnerable to tornadoes. Maybe some people would do it, but they don't get the chance to purchase the modification while a tornado is bearing down on them, and they can't purchase different tiers of tornado insurance then be understandably furious when they find out it doesn't cover emergency home modifications. With other products, even potentially life-saving home improvements, people don't buy them just because they are better, they buy them if they are better and the improvement outweighs the additional cost.
If I were to rationally rank my preferences, I would rank an education that affects the quality of my adult life higher than I would rank a life-saving procedure that extended my life ten years. Some people would be able to choose both, etc, but no one is making those kinds of decisions about how much coverage they get, they simply choose 'whatever is medically necessary', by which they really mean, 'every sort of treatment that has completed development by the time I can use it'.
\1 One can invest in pharmaceutical companies if they think they have magical returns on investment, because little of the revenue is ultimately directed toward expensive research or acquisitions justifying investments in research done elsewhere. Judging by the quality of comments in the thread about efficient markets this morning, they may very well happen!
The "award system" for drug development is full of problems.
Who makes the call as to how much to award? Who decides who the award goes to (very few drugs are develop by one group alone)? Who decides when a drug is actually better than existing treatments?
Insurance companies already reward innovation. When a new drug hits the market, insurance companies collect and review all the data available and decide on how much access they'll provide their customers with. This analysis includes looking at a drug's impact on total cost of care.
Right now, the insurance companies' decisions are skewed by the fact that the new drugs have to be compared against the price of generic drugs. That means that unless the new treatment is orders of magnitude better, it won't be much of a cost savings until long after the inventors should have been rewarded for their innovation.
Might work nicely for diseases that take a long time to kill you, but insurance companies have no incentive to find a cure to something that kills you quickly and cheaply.
While it's true that insurance companies use cost as a major driver for decisions, however it's not the only driver.
In the US, insurance companies compete with eachother to provide coverage for employers. Many (not all) companies want insurance that is beneficial for their employers. If you drop coverage for something an employer wants, you may lose a major customer.
This strikes me as a really fantastic idea. Actually, I wonder if insurance companies shouldn't offer these prizes regardless of the patent situation. They know intimately well which disorders cost them the most money. They could form a consortium and offer a prize for x amount of money for reducing the cost of treating some disorder by y dollars per patient, where x is guaranteed to be less than the amount of money they will save.