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Home Publications Blogs Beat the Press The Drug Companies Mislead People About the Effectiveness of Their Drugs #54,732, Can We Ever Talk About Patents?

The Drug Companies Mislead People About the Effectiveness of Their Drugs #54,732, Can We Ever Talk About Patents?

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Friday, 29 April 2011 08:58

The NYT had an article about new research showing that a drug that sells for $50 a dose is just as effective in treating an eye disease as a drug that sells for $2,000 a dose. Why was Medicare and private insurers paying 4000 percent more than necessary to treat this eye disease? Because a drug company (Genetech) has a patent on the expensive drug which allows it charge prices that are far higher than its cost of production.

Economic theory predicts that when government interference in the market allows firms to charge prices above the cost of production, then they will engage in various rent-seeking behaviors to maximize their profits. These rent-seeking actions, like expensive lawsuits and paying off politicians, are a pure waste from an economic standpoint.

Economists usually get very upset when they see this sort of behavior, for example when an import tariff raises the price of a product by 20-30 percent. For some reason economists don't seem to notice the problem when government granted patent monopolies raise the price of products by several thousand percent above their free market price, even though they can use the exact same graph to show the costs.

The ignorance of economists should not be an excuse for bad reporting. The fact that patent protection is at the root of the problem noted in this article should have been mentioned.

Comments (8)Add Comment
depends what the meaning of isis
written by frankenduf, April 29, 2011 12:28
the corporate statement was that it continues to believe that theri drug is safer and better- lol- reminds me of when they lined up the tobacco industry ceos and they all swore under oath that they dont believe nicotine is addictive, again with documentation of just the contrary- what i really don't get is why anyone cares what these guys think- it's like asking a bank robber if he believes that money shouldn't be kept in safes, or if he believes in santy claus for that matter- adjudication here is based on empirical evidence and the prosecution against price gouging, not whether someone who is ironically much smarter than the person asking, whether they 'believe' something an 8 year old can figure out
Without Drug Patents Patients Would Go Blind
written by izzatzo, April 29, 2011 3:13
Because a drug company (Genetech) has a patent on the expensive drug which allows it charge prices that are far higher than its cost of production.


Any economist knows that when fixed costs of research and development are high and incremental production and distribution cost are low, charging prices that cover only the latter will drive all drugs out of the market since total cost would never be covered.

Without patents generic companies wouldn't be able to freeload off patented drugs with stolen property rights because there wouldn't be any.

But's that's fine for the socialists who want patients to go blind for a cheap lure of 50 bucks for a counterfeit drug instead of paying 2000 bucks for the real thing. As Boy Monarch Bush would say, the world is safer without generic drugs and Saddam Hussein.

Stupid liberals.
...
written by Stuart Levine, April 29, 2011 5:02
You missed the best part. According to the article, in 2008 "Medicare paid . . .$537 million for . . . Lucentis injections." Also according to the article, Genentech, the company that sells Lucentis, "had sales of roughly $1.5 billion a year." In other words, over a third of the gross sales of the company were due to the sale of a drug that may very well be grossly overpriced.
Hail to the Thief
written by diesel, April 29, 2011 7:07
"Economists usually get very upset when they see this sort of behavior, for example when an import tariff raises the price of a product by 20-30 percent. For some reason economists don't seem to notice the problem when government granted patent monopolies raise the price of products by several thousand percent above their free market price..."

It's Human Nature to despise the petty thief for embarrassing himself and us with his low-brow crimes that yield a paltry tens or hundreds of dollars. But let a Great Man impoverish millions of us while undermining our social trust with his bald face Lies and we gasp with astonished admiration.
not convincing
written by Zack, April 29, 2011 10:56
As a big fan of this blog, I find the arguments about drug patents strange and unconvincing.

Pharmaceutical companies charge more than the "cost of production" for marketed drugs because they must recoup the cost of developing new drugs -- which requires that they spend billions of dollars every year on research and development. The vast majority of those new drugs fail in clinical trials (~90%) and never reach the market. This is because the science of drug development is as complicated, expensive, risky as any human endeavor. The argument that the patent system is responsible for a large amount of "pure waste" is particularly unconvincing in an era when the pharmaceutical industry is undergoing massive layoffs and downsizing, as a direct result of the industry's failure to convert billions per year in research and development into viable new drug candidates. It is hard to imagine how reforming the patent system will change this fundamentally scientific/technical failure. If Baker has specific ideas for how drug discovery could be made more reliable and cost efficient, he should explain them -- numerous people in the pharmaceutical industry would be interested to hear.

Lucentis/Avastin is an easy target for criticism, because it is a (relatively) unusual example in which a drug company was able to get two different molecules against the same target approved for two different indications. It would be deceptive to suggest that this sort of thing represents the norm, or even is a major source of waste in spending on drugs. Moreover, even in this case the real story is more complex. Baker's post fails to mention that there was a safety signal in clinical trials indicating that the $2000 drug (lucentis) had fewer side-effects than the $50 drug (avastin). Should health insurance companies be willing to pay the additional cost for this safety benefit? Probably not. But the difference between the two drugs isn't just that Genentech "had a patent on the expensive drug." It's that Genentech spent hundreds of millions of dollars on clinical trials, required for FDA approval, to prove that the more expensive drug was safe and effective for this specific indication. That is why Lucentis is approved for macular degeneration, not because of any patent (which, in any case, Genentech holds for both drugs).

It is probably true that US consumers pay more than they should for drugs, and that part of this gap is due to rent-seeking by the pharmaceutical industry. But the argument that in the absence of patents drugs could be obtained for the "cost of production" -- i.e. at the same price as generics -- is absurd. Abolishing the monopoly pricing guaranteed by patents would simply bring an end to the discovery of new drugs, because no private enterprise could afford the extraordinary costs associated with drug development.

Greed cannot be unbiased
written by MartyBrentwood, April 29, 2011 11:59
Zack, what you say amounts the self-congratulating myth of the pharmaceutical industry. But there is simply too much money involved for drug companies to be unbiased scientific judges of their own work. Dr Marcia Angell demolished the myth a few years ago (http://tinyurl.com/DrugIndustryCorruption) citing the corruption of doctors receiving gifts from pharma, and pharma withholding negative studies in their quest to prove new drugs' value. One of her conclusions was stunning: "It is simply no longer possible to believe much of the clinical research that is published, or to rely on the judgment of trusted physicians or authoritative medical guidelines. I take no pleasure in this conclusion, which I reached slowly and reluctantly over my two decades as an editor of TheNew England Journal of Medicine."

Also, Dean has in fact written at least one paper outlining several alternative methods of financing drug research outside of patent monopolies: http://tinyurl.com/FinancingDrugResearch
Here's why
written by RueTheDay, April 30, 2011 8:54
"For some reason economists don't seem to notice the problem when government granted patent monopolies raise the price of products by several thousand percent above their free market price, even though they can use the exact same graph to show the costs."

You pretty much answered your own question.

We must start referring to what patents and copyrights really are:
"temporary, government-granted, monopoly privileges"
and stop referring to them as what they are NOT:
"intellectual property".

That is the source of the confusion. Economists will defend property rights and contracts to the bitter end. Patents and copyrights have nothing to do with "property" however. They are merely an artificial, government-granted, monopoly privilege on the distribution of something. Nothing more, nothing less.

That's not to say that they don't serve a purpose - they do (incentivizing additional investment in the production of something with positive externalities), however, that purpose is limited and if taken too far becomes negative. The proper way to frame the issue is a cost benefit analysis that maximizes the public benefit relative to the deadweight costs imposed. Talking about protecting property just muddies the discussion and gives it an unnecessary emotional component.
patents drain resources from research into lawyers
written by travis, April 30, 2011 1:47
The patent problem isn't just in the pharma industry. In many industries there exists a wide bastion of patents that in many cases overlap and conflict. Many companies now find themselves in a patent war with competitors and instead of building a better or cheaper product they spend their resources filing for new inane patents and suing opponents or defending themselves from lawsuit. If patents didn't exist much of that money would go straight into research and innovation rather than into trying to force a competitor to not release a superior product.

Example: In the smart phone industry the Android manufacturers all have thousands of patents that cover their products. Global Equities has suggested that some manufacturers with more patents could make more money by suing their competitors than competing through their products. That's now how the economics of capitalism is supposed to work.
http://tech.fortune.cnn.com/2011/04/25/analyst-15000-to-120000-xooms-sold-motorolas-survival-at-risk/

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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