Asymmetrical Information

The day is coming that the central planners will succeed in strangling the baby of pharmaceutical innovation in it's crib.

P.S.- I think the previous thread is habit-forming. Beware!

I've heard this allegation that some countries "break patents," but I have a question. Do pharma companies have patents in India and Brazil, but the countries allow other companies to infringe them with impunity? Or do the pharma companies not have patents in India and Brazil? If the latter, them manufacturing and selling the products covered by the patents in India and Brazil would not be an infringement. If the products are imported into a country in which the pharma companies have patents, that would generally be an infringement, and it seems to me that the pharma companies would be able to stop importation into those countries. On the other hand, if the products are imported into a country in which the pharma companies do not have patents, there would be no infringement.

I think the point is that nations like India and Brazil refuse to grant patents to US pharmaceutical companies for their products in order to give themselves the option of allowing Indian and Brazilian companies to copy the intellectual property of those US corporations. According to international law, this is wrong, for the same reason it would be wrong for you to take a book written by a guy in Austria, reprint it with your name on the cover, and sell it for half price here.

Strictly speaking, companies in India who sell knockoff drugs are not breaking Indian law, but India is violating international conventions by refusing to enforce protections for foreign corporations'/citizens' intellectual property.

Not to mention that no matter what Brazilian law or even international law has to say on the matter, it's still wrong to steal, and taking someone else's intellectual property and selling it without their permission is stealing, and it hurts the pharmaceutical companies here the same amount whether Indian law condones it or not.

The day is coming that the central planners will succeed in strangling the baby of pharmaceutical innovation in it's crib.

A wonderfully pithy sentiment, but also profoundly clueless.

The fact is that pharma patents are often granted to privated companies, for innovation done by publicly funded research. The drugs for AIDS are an excellent example of this. The research and innovation was publically funded, then handed over to pharma to do the production and marketing.

If you break their patents on these drugs, but keep up with the publically funded research then the innovation still happens. The only difference is that the profits are no longer given to the company with the best contacts. (That, and there will no longer be a marketing budget for the drug. a huge loss I'm sure :0 )

The notion that high drug prices result in continued innovation is pure econ101. But unfortunately when you look at the situation in the real world, econ101 is too simplistic to be useful.

In the real world, many if not all of the drugs most important to poor countries are researched by foundations like the march of dimes or Govt grants. This work would happen anyway regardless of patent protection.

Bones, if you only knew what that marketing budget was used for. Free samples that docs will give to those that can't afford the meds or the co-pay, info to the docs on what is in the pipeline and what research shows to be effective combinations of pills(or detrimental). Sales reps do much more than give out free meals and tickets to get people to buy.

Sorry, but Bones is the profoundly clueless one. "Research and innovation" are all very nice, but if you don't conduct the human trials of a drug, you won't be sure it really works and you won't be able to sell it. Those trials cost hundreds of millions of dollars. Sure, publicly-funded groups have come up with some drugs with great *potential* but it is big pharma that drops the cash to actually realize that potential.

If we depended only on public funding for new drugs, we'd have far, far fewer of them available, and that includes very useful ones.

Bones,
Your faith in publicly funded research is touching but have you forgotten William Proxmire? The notion that the Democrats won't breed more Luddites of his ilk seems dubious to me.

Bones would have us believe that the flow of private capital into pharmaceutical development would be unaffected by anticipated profit margins, or that the amount of private capital devoted to pharmaceutical development is unrelated to the rate of innovation. Okay...like I was saying about central planners....

Regarding public funding of drug research, active compounds are a dime a dozen. Finding a compound that is metabolized at a reasonable rate, produces safe metabolites, doesn't interfere with the metabolism of other drugs too badly, is metabolized similarly by all people, doesn't have dangerous side effects, isn't destroyed by stomach acid, isn't destroyed by digestive enzymes, is transported across the enteral barrier to the bloodstream, isn't sequestered by random body proteins, doesn't stimulate an immune response, doesn't kill people with liver or kidney impairments, and can be synthesized in 100 kilo quantities: that's the hard part that pharma companies do.

And then they prove it with closely-monitored clinical trials. And then stand behind the product. (Find me a university researcher who pays compensation when his discovery turns out to have a nasty side effect.)

Forgive me for being blunt, but the idea that developing countries should be made to abide by patents for AIDS drugs is morally gruesome, and also ignorant of basic economics.

As Adam Smith said over 200 years ago:

"consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumers”

What this means is that there’s nothing intrinsically wrong with allowing developing countries to ‘steal’ the intellectual property of the drug companies. In fact, if ends up saving lives in the long run, then this ‘stealing’ should be *encouraged*. What matters is figuring out the policy that will result in the most lives saved.

Another economic truth which has been recognized since the time of Adam Smith is that intellectual property rights should not be absolute. IP rights give producers the incentive to innovate, which is a good thing. But they also give the producer a monopoly over his product, which is a bad thing, since this results in higher prices and lower consumption. IP protection should be set at the level which balances these two effects in the manner which is most advantageous to consumers.

This is all basic econ 101 stuff. And if you apply it to the case at hand, the conclusion is pretty clear: since poor countries *can’t afford* to buy these drugs at the patent protected price, enforcing the patents on them does not provide any extra incentive for innovation to the drug companies. It only means the drugs won’t get bought, and lots of people will die needlessly.

Of course it should be noted that this is a special case, only applicable to diseases which have a large effect on both poor and rich countries. And it’s entirely proper that a limited level of patent protection be enforced in the rich countries, even for essential life saving drugs.

I wonder how much of their own money the drug companies actually spend on their precious R&D? Doesn't the government (our tax dollars minus the laughable "rebate") subsidize an enormous amount of this research?

RC, if patent breaking were restricted to providing drugs to poor people, it obviously would have no real negative effects, since they can't buy the drugs at a proce that provides an acceptable profit margin to provide incentive anyhow. Unfortunately, central planners do not reside solely among poor people, they also have appeal with wealthier people who begin to think it "unfair" that they are paying higher prices, and eventually we may have drug development, Soviet-style. This isn't to say that I blame Brazilians or South Africans from taking whatever steps are available to provide the drugs that they need for their countrymen, but if you think the process stops there, you are mistaken.

PC's post is living proof to the endurability of beliefs, once they become firmly lodged: Why, those nasty drug companies don't use any private capital to innnovate! It's all a giant scam by which they freeload off the state! We don't need any profit incentive to maximize innovation! I actually had an advocate of central planning suggest to me not long ago, that a complete government take-over of health care would be wise, because it would be more fair, and technology could be developed in the same manner as it was at NASA. (!!!) When I pointed out that catastrophic failure every 70 or so launches was not exactly something to emulate, and that the total launches were far short of what had been projected, the person replied that it was all Congress' fault, since it had not funded wisely or adequately. When I asked him which body would ultimately be responsible for directing the nature and quantity of funding for pharma research in his proposed regime, he got mad at me and dropped the subject. Oh well, it is never warmly received when fantasies are challenged.

PC,
Are you suggesting that the hundreds of millions of dollars that are spent are gov't subsidies?

Pharmas spend enough money to develope the drugs if you think more should be spent lets see you raise that money.

Pharmas do allow for massive price differences between the US and developing countries, they effectively give away massive quantities of AIDS drugs (still not cheap enough for some, but that suggests to me that those people's income is too low not that the drugs are too expensive)

The only response i can give to those who would suggest that the Pharmas would continue to pour money into R&D int he absence of patent protection is to look at european pharmas, you will notice that their big firms rely heavily upon the US market.

Without "central planners" granting artificial monopolies to pharma companies, those companies would have no patent protection at all.

Will, I find your use of the word 'central planning' in defense of patent rights kind of funny. After all what is a patent? It's a process where a government bureaucracy decides by fiat to grant a monopoly over a particular product to a single individual or company. If that isn't central planning, I don't know what is!

I refer to central planners who pretend that that profit motive is irrelevant to private investment, or more hilariously, that private investment is mostly irrelevant to technology innovation. Go ahead, advocate the repeal of patent laws. I'm sure that Congress, it it's ultimate wisdom, will see that we reside in a land of milk and honey, through the wise implemenattion of successive five-year plans and various great leaps forward!

Talk about strawmen! I don't think that even Ralph Nader believes that private investment is ‘mostly irrelevant’ to innovation. What worries me more is the people who elevate private investment to such importance that they deem any policy that might conceivably depress investment at some point in the future as automatically bad.

Even if that policy could save the lives of millions of people.

Too much "central planning" (ie five-year plans) is bad.
Too little "central planning" (ie repealing patents) is bad.

Will, which way would you prefer the government to err?

Considering that this thread started with Canada threatening to break drug patents unless they got a patent, I have just one question. When the hell did Canada become a "poor" country?

"I actually had an advocate of central planning suggest to me not long ago, that a complete government take-over of health care would be wise, because it would be more fair, and technology could be developed in the same manner as it was at NASA."

Gee, I wonder if NASA officials--given a friendly genie--would rather have the rate of innovation and funding for their enterprise between 1975 and 2003 be equivalent to the rates for, say, the medical or computer industries, or the one they actually had?

"Without "central planners" granting artificial monopolies to pharma companies, those companies would have no patent protection at all."

Or drug companies would take extreme measures to keep the secrets of their drugs, meaning that no one but the very rich could afford them, and that innovation would be seriously limited because the active exchange of ideas would be stifled. Much better. Of course, the statists here are calling out the army at this point to beat the secrets out of the drug companies. . .

"drug companies would take extreme measures to keep the secrets of their drugs"
"innovation would be seriously limited because the active exchange of ideas would be stifled"

So a complete lack of "central planning" (such as patents) is bad, right?

The trick is to find the right balance. When the decision is made by the govt and lobbyists, are you going to end up with too much or too little patent protection?

It makes sense for poor countries to get discounts, just as computer hardware and software firms give impecunious students discounts. Paperback books are a way of giving poorer book buyers discounts and movie theaters that sell overpriced popcorn are effectively giving discounts to people too poor to afford the snacks. It doesn't make sense to charge the poor more because they can't pay the higher price.

Canada, on the other hand, has no excuse.

In any case, if pharmaceutical companies were parasites, we would see socialist nations inventing their own drugs.

Let's kill this foolish idea that granting a patent is "central planning" in any way, shape, or form. It is simple protection of property, for a limited amount of time.

I have a couple patents myself (OK, my employer does, but MY name's on them! ;) The mere fact that patent rights exist did not compel me to create the things I did. The decision to do that was mine, and my employer's, of course. What the hell is so "central" about planning that develops no plan whatsoever?

The government didn't tell us what to make, and couldn't force us to invent something, but that's obvious. Why is anyone here even discussing such a goofy concept?

The first post in this thread suggested that weakening patent protection was "central planning".

Is there any non-perjorative term for "government interference with the free market"?

I see now how utterly naive I was
to presume that the recent Congressional
vote to allow US citizens to buy drugs from
Canada was a darkhorse victory for the market.
My reasoning at the time was the the proposed
law would increase pressure on Canada to share
their fair share of the research burden by
removing the safe haven that drug manufacturers
now enjoy in the US.

Little did I realize that the price for
said victory would be a serious erosion of
property rights.

By the way, the pharmaceutical drug
companies have spent $200 Billion on drug
research since 1992.

Anyone who wants to put forth the notion
that the government is spending all the
money to develop new drugs is insane.

Well, gee, RC, at least two people in this thread have questioned whether Pharma companies actually expend much capital in attempts to innovate, so what you desribe as a strawman evidently is flesh and blood to them. Also, when calculating lives savea via depressing private investment, have you calculated the lives lost by forgoing the innovation the investment would have produced? Have you determined the process by which central planning will only be restricted to places like Brazil, but won't be employed in places like Canada?

Is there any non-perjorative term for "government interference with the free market"?

Yes, I believe that term is "regulatory state." We reach the point of "central planning" when the government does not merely grant special protections to act as incentives to innovate, but instead begins scheduling innovation on five-year installments and dictating the according allocation of resources etc.

The interesting thing is that the pharma companies would be happy to sell to poor countries at rock bottom prices. They used to, in fact. The reason they don't any more is that congress started to use those low prices as examples of "price gouging" in the US, at which point they discontinued them.

So Jane

You note in passing the cessation of the practice by Pharma of voluntarily lowering the price of drugs for poor nations. Are you proposing that the price for a commodity be based on the buyer's ability to pay?

"Talk about strawmen! I don't think that even Ralph Nader believes that private investment is ‘mostly irrelevant’ to innovation. What worries me more is the people who elevate private investment to such importance that they deem any policy that might conceivably depress investment at some point in the future as automatically bad.
Even if that policy could save the lives of millions of people."

Allowing medical innovation to proceed unchecked will end up saving every last one of us. Right now, we're all under sentence of death thanks to a disease known as old age... a cure for that would be one of the most valuable innovations of all time, and is certainly worth doing whatever it takes to keep innovation going as fast as humanly possible. Anything that interferes with that, whether it be the FDA, or breaking patents to give out free drugs to poor people, or price fixing schemes here or elsewhere, has the potential to prevent you and me from getting a stay of execution.

" You note in passing the cessation of the practice by Pharma of voluntarily lowering the price of drugs for poor nations. Are you proposing that the price for a commodity be based on the buyer's ability to pay?"

This is known as discriminatory pricing, and is explained in any elementary economics textbook. It's an efficient way to distribute scarce resources.

'The interesting thing is that the pharma companies would be happy to sell to poor countries at rock bottom prices. They used to, in fact. The reason they don't any more is that congress started to use those low prices as examples of "price gouging" in the US, at which point they discontinued them.' Posted by Jane Galt at August 29, 2003 07:50 AM

And "price gouging" is the argument being used to get the "Let's re-import from Canada" crap: our congresscritters don't want to explain realities (assuming they know them) such as the US citizen paying all the R&D [when we import drugs from, say France, we pay our share of their R&D, not just manufactiring and distribution] so they are going for the "easy solution". The predictable result has already started, with some pharmas already closing down Canadian sales; and, yes, they are being excoriated for price-gouging, denying needed medicines to non-US people, and all the rest.

I'm not really a big fan of pharmas who regain a patent by changing the type of flour used as a base to hold the medicine together and then hyper-sell it over what otherwise has become a generic. But there are ways in place of dealing with that sort of thing - distributing the info to doctors and drugstore pharmacists, the proposed "Your new drug is safe and effective, now let's see if it is better than others" government studies, etc.

Is there any actual evidence that Canada is using the threat of patent-breaking to get lower prices?

Jane,

I disagree with your characterization of compulsory licensing as 'breaking patents'. I'm guessing that you probably know why these provisions are in the WIPO treaties and that the WTO TRIPS agreement actually constrained their use (Phizer had a lot to do with these provisions).

Canada WOULD pay a price in WTO for abusing the compulsory license provisions (if it did so) that it would never have paid under e.g. the Paris Convention.

There's more on my site at http://www.inquit.com/cgi-bin/blosxom/blosxom.cgi/2003/08/29#compulsoryLicenseTRIPS

Best wishes,

Peter

I'll skip the "where Q is" graphs on rates of return, and the details of actual government funding of R&D of products then manufactured by pharmas. Let's stipulate the government pays for 20% of drug development costs. What would that mean?

Well, the most obvious inference to draw is that the 20% of drugs thus funded wouldn't be developed without the governments input. If the government's spending vaguely wisely. I.e. the pharmas won't develop them by themselves. Why? Because they're insufficiently profitable.

What would make drugs that it's uneconomic to develop more attractive? Um, extending their patents....

I.e. - unless the government's going to do the whole thing, or will pay pharmas on a contract basis to finalise government products, the objection that pharmas are getting big government grants is to INCREASE patent protection...

"Well, the most obvious inference to draw is that the 20% of drugs thus funded wouldn't be developed without the governments input."

No. There is no basis at all for this inference. The question is whether a drug that is now developed at a cost to the company of 8X, because it is expected to be profitable, would still be profitable at a development cost of 10X. There is no reason to think that 80% of drugs would pass this test. It could well be either more or less.

[ " ... Are you proposing that the price for a commodity be based on the buyer's ability to pay?"

This is known as discriminatory pricing, and is explained in any elementary economics textbook. It's an efficient way to distribute scarce resources. ]

Does "any elementary economics textbook" prescribe that richer people be prevented by law from purchasing goods sold at discriminatory prices?

Also, I take it that if discriminatory prices are OK, then progressive income taxes are right and proper. Income is a scarce resource for many people, so we ought to have progressive income taxes in order to distribute the often-scarce resource, income, more widely. Doncha think so?

By definition a monopoly is an inefficient allocation of resources since it rewards the producer over and above the amount required to induce him to produce in the first place.

What if we created a market in intellectual property? Suppose we could somehow bring down the price of drugs thru a market where patents (or portions of patents) could be brought from the pharma companies. For example, taxpayers could buy a patent for a valuable AIDS or cancer drug thereby creating situation where important drugs can be produced at cost.

Getting back to this "discriminatory pricing" concept: If government-enforced discriminatory pricing of pharmaceuticals is good, then are rent control laws in crowded cities also okay-doke?

This discriminatory pricing pricing stuff sounds very Socialistic to me. I suppose I suffer from never having read any elementary economics textbook.

Handicapped as I am, I can yet discern a difference between a seller having the freedom to choose to sell goods in Outlet B for a different price than the seller is asking over in Outlet A -- and government-mandated price differentials between Markets A and B.

[ [ " ... Are you proposing that the price for a commodity be based on the buyer's ability to pay?"

This is known as discriminatory pricing, and is explained in any elementary economics textbook. It's an efficient way to distribute scarce resources. ]

Can't smuggling and gray or black marketeering, including Internet vending of pharmaceuticals from Canada, also be efficient ways to distribute resources into markets where said resources are scarce?

Boonton--

Anybody who wants to buy a patent can do so. Just pony up the ENORMOUS cost of development + anticipated profits and I'm sure pharmas will be happy to sell. Or buy a "portion" of a patent with a licensing agreement.

The notion of having the government buy patents to sell drugs at costs just creates all sorts of corruption problems--senators funneling money to pharmas in their district, etc. Nice idea in theory, seriously bad news in practice.

David--

I'm having a hard time understanding your argument. The "discriminatory pricing" concept refers to the practice of selling drugs to impoverished African countries at near cost. Presumably an American who wanted to fly all the way to Africa would not be prohibited from buying drugs there. On the other hand, it would be illegal for that person to buy drugs in Africa and ship them back to the US for sale--since the pharma has the exclusive distribution rights here.

Canada does not constitute an example of "discriminatory pricing" since the Canadian government forces lower prices on drug companies that would not, left to their own devices, choose to sell drugs so cheaply. Americans wishing to travel to Canada to buy drugs are not prohibited form doing so; but no one is permitted to "re-import" those drugs for sale for the same intellectual-property reasons that prevent you from buying Harry Potter books up there and selling them down here.

The relationship of these intellectual-property rules to rent control and income taxation is not the least bit clear.

Rob,

You misunderstood my proposal. The gov't wouldn't produce drugs, if a drug was very valuable it would buy the patent from the owner and then make it available for free to whoever wanted to produce it.

In effct, the drug would be moved from an exclusive monopoly (like MS Windows) to on that is in the public domain (like Linux).

Consider the following modification to patent law:

1. When a company applies for a patent it must also provide a price that it is willing to sell the patent for (this will be legally binding).

2. The patent fee will be a portion of this price. So if a company provided unreasonable prices it would pay a cost for it.

Basing the patent fee on the value the company places on the patent seems logical to me. After all, the more valuable the patent the more valuable the gov'ts service in providing protection of that property.

Gov't and/or private charities could then target drugs that have great theraputic value. They could buy the patents & allow the drug to be part of the public domain. Then the drug's costs would drop as multiple companies enter the market to produce that drug. The company that discovered the drug would still be rewarded for its capital investment.

Boonton--

The problem of rent-seeking and congressional pork still applies whether the government literally produces drugs or simply buys patents and offers free licenses. You still have a huge incentive for lobbyists and senators to funnel taxpayer dollars to large, profitable corporations, and even more incentive than currently exists for those corporations to corrupt the political process and seek unreasonably large payments just because jthey can.

You also have the threat of price controls--of government forcing the sale of "essential" patents at unreasonably low prices, thus reducing still further the incentive to produce life-saving drugs. The outcome could be either massive corporate welfare or a stifling of innovation--but it's exceedingly likely to be both at once, as those companies with clout rake in the tax money for drugs of questionable value and those without go begging, even with their life-saving preparations.

On the other hand, your "patent fee based on price of patent" idea is interesting. The biggest problem I see is that it will disadvantage expensive drugs with a small market. Consider: a company expends $500m to develop a drug and expects at most $20m in sales annually. The "price" of this patent will be much more than a drug that cost only $200m to develop, even given equal sales, since the company simply must cover costs. But if the patent fee is tied to the patent's sale price, the impact will be to increase prices and reduce incentives for small-market drugs.

Still, worth a thought. Anyone else got an idea?

Any forced sale would not be at unreasonable prices because the pharma company would set the price when they apply for the patent.

The problem with your example is that such a drug would take 25 years to break even (assuming cost of production is $0). Considering that patents generally run around 7 years it is unlikely this drug would have been developed if the pharma company was aware of the sales ahead of time.

The value of the patent, though, would not be based on the $500 sunk cost of developing it but on the cash flow it would provide. Namely $20M per year for the life of the patent. To the buyer it doesn't matter how much was sunk to make the patent, what matters is the income stream it can generate. To the seller, likewise, the sunk costs are gone. They will want to minimize their loss so they would probably agree to part with the patent for less than $500M.

By requiring companies to name their selling price ahead of time & basing their patent fee on that price, you will get a market price for the patent. If a company tries to be deceptive and price too low to save on the patent cost it runs the danger of having the patent brought. If it prices it too high it will overpay in patent fees (which could be partially turned around towards general R&D).

It seems to me in either case the taxpayer wins. If lobbyists cause the gov't to go on a patent buying spree the cost of drugs will fall since so many valuable drugs will be in the public domain. What could be done to remove the danger of too much pork-barrelling may be to remove the decision making process from Congress. Let them fund an agency which will base its patent purchasing based on projected cost savings to Medicare & general healthcare expenses. Private organizations could still 'liberate' the patents with their own funds as well.

" This discriminatory pricing pricing stuff sounds very Socialistic to me. I suppose I suffer from never having read any elementary economics textbook."

That would be my guess.

Also it should be noted that the danger of lobbyists exists even without direct gov't money being used. Lobbyists already advocate expanding and extending patents. While that doesn't show up in the Federal Budget as any direct cost it really amounts to billions of dollars in economic rents for the companies that are successful.

Boonton--

I find the economic argument regarding the patent purchases unconvincing. What is to stop a powerful, well connected company from dramatically overpricing its patent, with the full knowledge that its lobbying power will cause Congress to pay the full amount? The disincentive which the patent fee is supposed to provide won't apply if the pharma is based in a powerful congressman's district.

I also doubt that this program would never mutate into a plan to force pharmas to sell patents at lower than fair market prices. As soon as Congress gets into the business of buying patents, it will get into the business of holding hearings about the "unfairly high" prices put on those patents. This is doubly true given that some pharmas will undoubtedly engage in the rent-seeking behavior described above.

"If lobbyists cause the gov't to go on a patent buying spree the cost of drugs will fall since so many valuable drugs will be in the public domain."

Fine. And my taxes will skyrocket to buy the patents to hundreds of drugs I'll never need, so the net cost savings to me will be what, exactly? I'm not keen on buying drugs for other people, unless those people can demonstrate a pretty dire need coupled with a genuine inability to pay.

Like I said, though, worth thinking about.

I grant that there is a danger that a well connected pharm company could overprice their patent and then convince congress to buy it in special legislation.

But just recently a pharma company came very close to getting special legislation extending the patent for Claritan. If this happens it is probably better that the cost be explicit and born by the taxpayers. After all, what incentive do the taxpayers have to say no to various forms of indirect subsidy such as patent extensions, loose patent rules (what, changed the type of flour you used! well take another 7 years!) and other dubious policies that raise the cost to regular consumers but have no direct impact on the gov't budget?

Remember 'patents', 'trademarks' and other forms of 'intellectual property' are unlike traditional forms of property. They are by definition a form of government regulation, like it or not.

Here is the essential argument:

In a free enterprise economy, anyone can take a shot at producing anything. The dynamics of such a system move production towards the lowest cost possible, this means the most efficient allocation of resources.

Monopolies are a problem because they block competition causing production to cost more than it should. This results in economic rents being paid to monopoly holders.

The argument is that monopolies are necessary in order to encourage companies to undertake the R&D necessary to produce new products. On the other hand such monopolies are not natural but the result of gov't regulation (aka patents). Imagine a world of infinite patents. You couldn't serve pancakes at your restrauant unless you paid the patent holder for the right. Someone would have a patent on how to make ice cream and so on.

So you have a tug of war, patent holders have every incentive to expand the world of patents. That can become a real drag as companies turn away from real innovation and turn towards figuring out how they can patent things to shut down their competition (imagine McDonalds to Burger King: 'we patented hamburgers, stop selling them now unless you agree to pay us a $1 royalty fee on each berter!').

Here's a way to put a circuit breaker into the patent system while still keeping its essential benefit; proving a real financial reward to those who create real innovations.

Re: Claritin

Clarinex, the new patent/prescription allergy drug is--get this--a metabolyte of Claritin.

Cute, huh?

So, point taken.

Boonton,

With all due respect, your idea of setting an price for a drug patent at the time of issuance makes little sense.

The real value of patented compounds usually takes years to realize as they must undergo testing to see if actually work as drugs (safely, too!) See comments toward the top on the drug development process.

By this logic, a public company could not change in value from its IPO price. Microsoft would still be worth its split adjusted 27 cents a share. (On the other hand, Webvan investors would still have their money.)

The value of pharmaceutical patents is dynamic and is negotiated every day in the marketplace through licensing agreements, consumer sales, competitive postioning, marketing, formulary committees, FDA regulatory boards, etc.

[ " This discriminatory pricing pricing stuff sounds very Socialistic to me. I suppose I suffer from never having read any elementary economics textbook."

That would be my guess. ]

Without ever having had an economics course, I am confident that the textbook meaning of "discriminatory pricing" is the seller's freedom to vary prices in localized markets to maximize total profitability, NOT gu'ment enforced price controls.

Trying to ban the import of pharmaceuticals from Canada, drugs that are also legally available in the US for higher prices, is simply a tariff.

[ ... proving a real financial reward to those who create real innovations.]

That sentence begs two questions: (1) how to measure a "real" financial reward, as opposed to a reward that is too meager and/or too late; (2) defining "real innovations." For example, does computer software to peroform online auctions such as eBay's a "real" innovation which merits a patent?

Ok David,

I propose we strike a double blow for free trade: eliminate the "tariff" AND he Candian government price controls.

"The real value of patented compounds usually takes years to realize as they must undergo testing to see if actually work as drugs (safely, too!) See comments toward the top on the drug development process."

A good point but let's keep in mind that the patent is for a fixed amount of time regardless of whether or not the drug is valuable or trivial.

"By this logic, a public company could not change in value from its IPO price. Microsoft would still be worth its split adjusted 27 cents a share. (On the other hand, Webvan investors would still have their money.)"

Actually the true price of the patent would vary, if it became clear the drug was very valuable then it would make sense for the gov't (or private groups) to pay the fee to liberate the patent so the drug would become part of the public domain. If the drug turned out to be not so valuable no one would exercise the option to purchase the patent at the declared price but the pharma companies would still have the right to sell the patent for less than face value if they wish.

What is accomplished is a method of liberating intellectual property by decreasing the amount of gov't regulation (grants of monopoly in this case) while still preserving the ability of the innovator to recoup profits for their investments.

Boonton

Jane, if you want to complain at Congress, complain about how their reaction to a market hiccup during a budget crisis is to further increase spending. Don't complain about how they structure the market -- that's a check and balance on Big Pharma, so that they concentrate on producing better drugs and not on reaping meaningless windfalls such as "Nexium" and "Clarinex" (both metabolites of previous drugs, and thus nearly sure bets to pass Stage III clnical trials).

After all, the purpose of capitalism is to ensure the best result for consumers, not producers. So said Adam Smith. Big Pharma only has problems if it becomes unable to raise additional capital or to turn a profit. There are no signs that Big Pharma's lifeblood is threatened by IP "theft" the way Hollywood and Big Music are. And if that becomes the case, Big Pharma can shout to the rooftops (and rightly so) that they are being squeezed by unfair Congressional regulation. Rising drug costs and company failures would then pressure Congress to act --

--thus, the Medicare prescription drug benefit, a guaranteed contract and thus a windfall for Big Pharma.

More of this argument on my blog; follow the link.

[Going to jump back up to the top of the thread. Many apologies for the discontinuity.]

RC:
"Forgive me for being blunt, but the idea that developing countries should be made to abide by patents for AIDS drugs is morally gruesome, and also ignorant of basic economics.
...
there’s nothing intrinsically wrong with allowing developing countries to ‘steal’ the intellectual property of the drug companies. In fact, if ends up saving lives in the long run, then this ‘stealing’ should be *encouraged*. What matters is figuring out the policy that will result in the most lives saved."

I hear this a lot, and, frankly, it's bollocks, for one very simple reason: AIDS is an incurable fatal disease. AIDS drugs do not save any lives; they postpone death.

When someone invents a cure for AIDS, I'd guess that the governments of the world will pool their resources to buy the patent and distribute the drug for free, wiping out the virus. In the meantime, though, the reason governments aren't buying the patents to anti-HIV drugs is that they recognise a waste of money when they see it: these drugs will save no lives, so why pay a fortune for them -- particularly if this leaves you with no money to buy the cure if it pops up in the next few years? But people still want the drugs, so certain governments (Hello, Mr Mbeki) have done a fine job of turning pharmaceutical firms into scapegoats rather than delivering to their people the unpopular message "If you've got AIDS, you're going to die. Get used to it."

(And I realise that we should be discussing Canada, not AIDS in Africa, but I just wanted to get that off my chest. It's been bugging me for months.)

Squander: Everybody dies eventually. In that sense, all that any drug can do is to postpone death. However the new generation of AIDS drugs can greatly extend life, effectively turning AIDS from an incurable fatal disease into one that is incurable, but not necessarily fatal.

Comments are Closed.