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Home Publications Blogs Beat the Press The Efficiency of Drug Patents and Other Silly Things Economists Say

The Efficiency of Drug Patents and Other Silly Things Economists Say

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Sunday, 09 February 2014 08:56

If you want to see an economist get really angry, suggest imposing a 20 percent temporary tariff on imported steel, as President Bush did in 2002. He can quickly produce the charts showing how this will lead to an inefficient outcome.

If you want to see an economist get really confused, ask him how the story is different with a drug patent that allows a company to charge a price that is several thousand percent above the free market price. Of course you can use the exact same chart to show the inefficiencies, except with the drug patent the scale would be two orders of magnitude larger.

But economists don't get concerned for some reason about drugs selling for above market prices, even though the gap between the patent-protected prices and the free market prices is now running into the hundreds of billions annually. They will inevitably mumble about how we need patents to provide incentives to develop new drugs, as though they could not conceive of any other mechanism.

This is why this little piece on the potential use of vitamin C as a cancer treatment is so interesting. It refers to some promising results from scientists at the University of Kansas then tells readers:

"One potential hurdle is that pharmaceutical companies are unlikely to fund trials of intravenous vitamin C because there is no ability to patent natural products."

The conclusion is then that the government will have to finance large-scale clinical trials to determine the effectiveness of vitamin C as a cancer treatment.

The specifics of the vitamin C case are fascinating in themselves, but what is more striking is what this says about our division of research responsibilities between the public and private sector. The assumption of patent supporters is that somehow Pfizer, Merck, and the rest are hugely more efficient when they do patent supported research than when research is done through other funding mechanisms. (The issue here is patent support, not public versus private, since the government could pay Pfizer and Merck to do research.) 

So patent supporters believe that we can have efficient public funding through the National Institutes of Health (NIH) for basic research. (NIH gets $30 billion a year, which everyone seems to agree is money very well spent.) And they recognize that occasionally it will be necessary to do research on non-patentable products because these may provide effective treatments or cures. But somehow it is efficient for the government to grant patent monopolies that both lock up the product and also many important research findings for decades. 

It would be interesting to see a theory of how science develops that would support the efficient patent argument. On its face, it is hard to see anything there besides drug money.

 

Thanks to Jon Schwartz for calling this one to my attention.

Comments (11)Add Comment
...
written by oncodoc, February 09, 2014 10:03
Another problem with patent protection for medicines is that manufacturers will preferentially produce the highly profitable patented ones rather than merely beneficial ones. In my field in recent years we have seen shortages of Compazine, leucovorin, and methotrexate for intrathecal injection. Our two class, patent-protected and generic, system creates incentives other than medical need for things that are essential medical necessities.
You can patent natural products
written by MGK, February 09, 2014 11:51
The statement that you can't patent natural products is simply untrue. Not only can you patent their intended use, but you can also patent the technology to manufacture them at commercial scale. In many cases, the production side of the is the bigger barrier to entry if you can achieve and efficient means of manufacture that allows you to sell the product more cheaply than competitors. The patent issue for vitamin C is simply one of investment. Why would a pharmaceutical company spend $10's of millions of dollars to design and execute a clinical trial along with additional resources to submit all the necessary documentation to the FDA for official review only to have dozens of competitors after approval sell vitamin C cheaper than they could. Any large company taking on vitamin C is basically investing their resources into the public domain without any hope of ever recovering their investment and making a profit because they will be immediately competing against others who do have the sunk investment costs to recover.
Forced Bundling is the Answer: Vitamin C WITH Tylenol: Take It or Leave It
written by Last Mover, February 09, 2014 12:19

This is a no brainer for the free marketeer crowd who hate big government. The answer of course is forced bundling.

Just take anything that occurs naturally, oh, say things like sunshine, ground water and clean air, and bundle them with any patented product such that they must be purchased and consumed together or not at all.

Problem solved. Vitamin C and all the rest of it will now be allocated efficiently by the market price of the bundles within which they reside.

This will quickly correct the excess levels of consumption of underpriced sunshine, ground water, clean air and Vitamin C to date which have resulted in suboptimal levels of disease.

Forced bundling will increase levels of disease back to higher optimal market clearing levels where it belongs, the same way it did with cable tv, internet service and phone service.
More research than less
written by Lord, February 09, 2014 1:50
NIH funds the most basic or promising research, industry funds the rest, the argument being they bear the risk failure. We could fund that, but everyone would be up in arms over the failures, "see, government can't do anything". At least with industry bearing the failure, they have some incentive when to cut back and when to expand. Unfortunately their failures just get added to their successes making them really expensive.
...
written by ezra abrams, February 09, 2014 7:58
Dear Dr Baker
Respectfully, I find the logic confusing..you start with tariffs (cost of production) which have nothing to do with patents (cost of RnD, same for steel, pencils and drugs..)

The fact of the matter is that drug development is a very long, $ process, with huge end loaded risks (the most money comes at the end , in clinical trials)

I think your argument would be more convinincing if you could outline some mechanism that would induce a company to spend 100 million dollars or more, over several years, to demonstrate safety and efficacy of a new compound without some patent protection.

If I have money to invest, and you want to work on a new cancer drug, I know, based on history, that you will need well over 100 million dollars, and will be very luck to have a sellable product in less the 5 years.

tell, me Dr Baker, why am I going to invest in your company without a patent ????? Do you have any plausible mechanism ????
...
written by ezra abrams, February 09, 2014 8:45
From the same journal (the prestigous Science Translational) that had the Vitamin C study you quote

http://www.sciencemag.org/content/343/6170/477.summary
Antioxidants Could Spur Tumors by Acting on Cancer Gene

Jocelyn Kaiser

Many people take vitamins such as A, E, and C thinking that their antioxidant properties will ward off cancer. But some clinical trials have suggested that such antioxidants, which sop up DNA-damaging molecules called free radicals, have the opposite effect and raise cancer risk in certain people. Now, in a provocative study that raises unsettling questions about the widespread use of vitamin supplements, Swedish researchers have showed that relatively low doses of antioxidants spur the growth of early lung tumors in cancer-prone mice, perhaps by hindering a well-known tumor suppressor gene.


I don't know what it is about cancer research that turns off normal skepticism and brings out he buck rodgers flying cars are here kid in everyone, but the effect is sure pronounced

or,to be more precise, we would need like 100,000,000.00$ dollars to learn if Vitamin C actually helped, and who those people are
Expecting a drug company with no expected economic profit to do drug trials is unreasonable.
written by John Wright, February 09, 2014 9:05

Expecting a drug company to spend 100 million for trials for a drug with little or no profit potential is unreasonable.

Large well funded CONSUMERS of the existing, and potentially more expensive and less effective patented drug seem to be the vested interests to conduct the expensive trials, as potentially they could SAVE the far more than $100 million in the future.

These consumers would be the primary beneficiaries of the potential new drug.

These could be large health plans, the Veterans Administration and various global national health organizations.

Perhaps even charities could step in, remember the "March of Dimes"?

However, I would expect the drug companies to actively lobby against other entities, particularly government ones, from conducting these studies as a competitive threat.

For an example of an effective and low cost treatment that didn't arise from drug industry research, a recent example is Helicobacter pylori and Peptic Ulcer Disease. Here is some background data.

1996
The Food and Drug Administration approves the first antibiotic for treatment of ulcer disease.

1997
The Centers for Disease Control and Prevention (CDC), with other government agencies, academic institutions, and industry, launches a national education campaign to inform health care providers and consumers about the link between H. pylori and ulcers. This campaign reinforces the news that ulcers are a curable infection, and the fact that health can be greatly improved and money saved by disseminating information about H. pylori.
Ezra, ever hear of government contracts?
written by Dean, February 09, 2014 9:45
This is really very simple. The point is you pay the money up front and everything is then fully open and all the results are in the public domain. There is no need for patent monopolies whatsoever. Plenty of companies make plenty of money off of government contracts. If you don't want to invest in them, that's fine -- many other investors will be happy to make money.
Patents and Tariffs
written by Dean, February 10, 2014 7:52
Ezra,

Just to be clear, at a point in time, if a government restriction inflates the price of a product above its cost of production it doesn't matter whether the restriction is a patent or tariff, the impact on the market is the same. Both lead to economic distortions and incentives for corruption. That's true even if there is a positive purpose served by the restriction.
Vitamin C
written by David Harding, February 10, 2014 1:49
While I agree with Dean Baker about our patent system, I do not agree with him about using Vitamin C as a potential treatment for cancer:

http://www.sciencebasedmedicin...or-cancer/
David is right
written by Dean, February 10, 2014 1:56
at least as best I can tell. Just to be on the safe side, I intend to avoid getting cancer so that I don't have to worry about this one.

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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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