Arnold Kling

Becker-Posner on Drug Patents

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A good intro to the economic issues surrounding pharmaceutical patents, from Richard Posner and Gary Becker. Posner writes,


Invention is a cumulative process; a new invention is usually an incremental improvement on an existing one. So the more patents that are “out there,” the greater are the costs involved in negotiating for a license from every patentee whom the new inventor may arguably be infringing. Because a patent can be obtained without even a prototype, because patent examiners are overworked and it takes less work to approve than to reject a patent application, and because the U.S. Court of Appeals for the Federal Circuit, which reviews patent validity, is extraordinarily pro-patent, the number of issued patents has grown steadily in recent decades. There is concern that some fields are so blanketed with patents (which may be owned by firms that do no production at all—whose business plan centers on demanding license fees under threat to sue for patent infringement) that innovation is actually being impeded.

Becker writes,

I do not like the hype and some other salesmanship of big pharma and bio-tech companies, but this industry has made enormous contributions to raising world health. It is likely to become even more important in the future as drugs are developed to match individual genetic differences. One does not want to kill this goose that is laying golden eggs by ill-thought out and counterproductive “reforms”.

Becker also favors, as does Alex Tabarrok, allowing drugs to reach the market only after safety trials. He suggests eliminating efficacy trials in exchange for shorter patent lives.

For Discussion. How could we reduce the burden of the patent system that Posner describes while not taking away the incentive to innovate?


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Lancelot Finn writes:

Well, it seems to me that the court should be somewhat less pro-patent. The trouble with all kinds of regulation is that people assigned to enforce it will spin their wheels and interfere more than necessary. How to get judges to behave themselves better is another trick. They're not democratically accountable in an ordinary way.

There's no easy way out of this one.

glory writes:

how about gov't patent buyouts :D

New institutions and new kinds of institutions--perhaps even some that have been tried before, like the French government's purchase and placing in the public domain of the first photographic patents in the early nineteenth century (see Kremer (1998))--may well be necessary to achieve the fourfold objectives of (a) price equal to marginal cost, (b) entrepreneurial energy, (c) accelerating the cumulative process of research, and (d) providing appropriate financial incentives for research and development. The work of Harvard economist Michael Kremer (1998, 2000), both with respect to the possibility of public purchase of patents at auction and of shifting some public research and development funding from effort-oriented to result-oriented processes (that is, holding contests for private companies to develop vaccines instead of funding research directly), is especially intriguing in its attempts to develop institutions that have all the advantages of market competition, natural monopoly, and public provision.
it doesn't have to be gov't either, like it could be along the lines of the ansari x-prize as well...

cheers!

Another alternative to patents is for medical insurance companies to invest in drug R&D. See my post for more detailed
take. Insurance companies collect premiums before they have to pay the claims. Medical insurance companies can use this funds to provide capital for drug R&D. Insured patients can then be provided drugs at a significant discount as they indirectly financed the drug development.

Medical insurance companies also have significant incentive to develop safe drugs as they will be legally responsible for paying the claims arising out of drug-related side effects.

Lawrance George Lux writes:

The true solution lay in issuing Patents with defined royalty per unit. Governments should not tell Business or Research they have a monopoly, and can gouge whatever Price desired. We can define the monopoly by defining the exact Royalty right--Dollar value. lgl

Ronnie Horesh writes:

"How could we reduce the burden of the patent system that Posner describes while not taking away the incentive to innovate?"

Define and quantify exactly what we want to achieve, such as a continuous increase in a welfare-adjusted quality of life indicator. Then reward people for helping to achieve it however they do so. My suggestion: issue tradable [non-interest bearing] bonds by auction that become redeemable for a fixed price once quality of life has exceeded a certain level for a sustained period. All activities of drug companies would then be inextricably tied to this targeted outcome. Market incentives would channel resources into wherever they will do most to increase quality of life.

Boonton writes:
Another alternative to patents is for medical insurance companies to invest in drug R&D. See my post for more detailed take. Insurance companies collect premiums before they have to pay the claims. Medical insurance companies can use this funds to provide capital for drug R&D. Insured patients can then be provided drugs at a significant discount as they indirectly financed the drug development.

Couldn't insurance companies achieve this by simply buying corporate bonds and stock from pharma companies? The monopoly profits that drug companies earn thru patents would then be partially returned to insurance companies through interest & dividend payments as well as stock appreciated.

An alternative plan is to incorporate some type of market system in the patent game. A suggestion:

1. With each patent application the applicant will state a market price for his proposed patent.

2. The patent holder *must* sell that patent into the public domain for any offer that meets that price.

3. The patent fee will incorporate a yearly tax based on the market price of the patent application. These funds can go into a pool to purchase 'essential' patents and fund general R&D.

The patent applicant is forced to disclose an honest value of the patent. If he states a value that is too low to avoid the tax he runs the risk of having the patent purchased into the public domain either by the gov't, competitors, or interest groups. If he states a value that is too high he will pay excessive taxes.

In the meantime, the revenue generated can cut the costs of what society deems to be essential innovations.

Leland Burrill writes:

because it's difficult to assess the true value of a patent until after the claimed pharmaceutical enters the market.

Consider Gleevec. Gleevec debuted as a kick-ass drug for one kind of rare cancer. Great news for the people who have one kind of rare cancer, but not really helpful for people who don't. Novartis wasn't even planning to move forward w/ Gleevec because it was too niche market. Patient groups put pressure on the company to move the drug along and now it turns out Gleevec is good for more than just one kind of cancer and may be helpful against many cancers.

And Gleevec's novel mode of action has inspired a plethora of new research. Gleevec's a billion dollar drug now whereas original projections topped out near a couple hundred million.

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