Stiglitz: patents and drug monopolies

We have been picking on copyright a lot recently, but we should not neglect patents, that other arm of “intellectual property”. Like copyright, patents confer monopoly power. They have little to do with a “free market” but everything to do with real-world capitalism. In his monthly column, Joseph Stiglitz makes the case against patents with a focus on pharmaceutical drugs. Like Big Media’s political influence on copyright law, Big Pharma (the most profitable industry in the world) has massive clout in Washington, Ottawa and other capitols.

One reform that Stiglitz does not talk about is compulsary licensing, whereby the government can license generic producers to manufacture patented drugs. The patent owner gets a royalty instead of monopoly pricing. While the practice goes back to 1923, concern over high drug prices led to amendments in 1969 to the Patent Act, which allowed the importation of active ingredients that make up pharmaceuticals. This led to the development of a Canadian generic drug industry. And under this regime, Canada went from having one of the highest costs for pharmaceuticals in the 1960s to one of the lowest by the mid-1980s. Generics would come on the market at about a 25% discount, with prices falling to about half the brand name price when there were 3 or 4 competing generics.

Not amused, the brand name pharmaceutical industry intensely lobbied the Mulroney government, which put limitations on compulsory licensing in 1987. This was a large concession by Canada to get the much-desired Canada-US Free Trade Agreement, even though intellectual property was not part of the original FTA. Subsequent changes to the Patent Act in 1993 eliminated compulsory licensing altogether. This time trade agreements were overtly cited as the reason, even though this measure went beyond what the WTO’s Trade-related Intellectual Property Rights (TRIPs) Agreement and the NAFTA required.

Canada could amend its laws to take advantage of existing loopholes in NAFTA and TRIPs, but it has been reluctant to do so. Minimally, Canada should reinstate compulsary licensing up to the limits allowed by international trade agreements. This would also aid the adoption of a national pharamcare plan.

Stiglitz calls for something more radical: the creation of big competitions for prizes in developing cures that would then be licensed for production. The point is that the patent system is but one way of organizing the creation and distribution of drugs, and is one that benefits certain interests a great deal – but it is not necessarily the best means of doing so.

Dying in the name of monopoly
Joseph Stiglitz

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PART of modern medicine’s success is built on new drugs, in which pharmaceutical companies invest billions of dollars on research. The companies can recover their expenses thanks to patents, which give them a temporary monopoly and thus allow them to charge prices well above the cost of producing the drugs. We cannot expect innovation without paying for it.

But are the incentives provided by the patent system appropriate, so that all this money is well spent and contributes to treatments for diseases of the greatest concern? Sadly, the answer is a resounding “no”.

The fundamental problem with the patent system is simple: it is based on restricting the use of knowledge. Because there is no extra cost associated with an additional individual enjoying the benefits of any piece of knowledge, restricting knowledge is inefficient. But the patent system not only restricts the use of knowledge; by granting (temporary) monopoly power, it often makes medications unaffordable for people who don’t have insurance.

In the Third World, this can be a matter of life and death for people who cannot afford new brand-name drugs but might be able to afford generics. For example, generic drugs for first-line AIDS defences have brought down the cost of treatment by almost 99% since 2000 alone, from $10000 to $130.

But, despite the high price they pay, developing countries get little in return. Drug companies spend far more money on advertising and marketing than they do on research, far more on research for lifestyle drugs (for conditions like impotence and hair loss) than for lifesaving drugs, and almost no money on diseases that afflict hundreds of millions of poor people, such as malaria.

It is a matter of simple economics: companies direct their research where the money is, regardless of the relative value to society. The poor can’t pay for drugs, so there is little research on their diseases, no matter what the overall costs. A “me-too” drug, for example, which nets its manufacturer some portion of the income that otherwise accrues only to the company that dominates a niche, may be highly profitable, even if its value to society is quite limited.

Similarly, companies raced to beat the human genome project in order to patent genes such as that associated with breast cancer. The value of these efforts was minimal: the knowledge was produced just a little sooner than it would have been otherwise.

But the cost to society was enormous: the high price that Myriad, the patent holder, places on genetic tests (between $3000 and $4000) may well mean that thousands of women who would otherwise have been tested, discovered that they were at risk, and taken appropriate remediation, will die instead.

There is an alternative way of financing and incentivising research that, at least in some instances, could do a far better job than patents, both in directing innovation and ensuring that the benefits of that knowledge are enjoyed as widely as possible: a medical prize fund that would reward those who discover cures and vaccines. Since governments already pay the cost of much drug research directly or indirectly, through prescription benefits, they could finance the prize fund, which would award the biggest prizes for developers of treatments or preventions for costly diseases affecting hundreds of millions of people.

Especially when it comes to diseases in developing countries, it would make sense for some of the prize money to come from foreign assistance budgets, as few contributions could do more to improve the quality of life, and even productivity, than attacking the debilitating diseases that are so prevalent in many developing countries.

A scientific panel could establish a set of priorities by assessing the number of people affected and the impact on mortality, morbidity, and productivity. Once the discovery is made, it would be licensed.

Of course, the patent system is itself a prize system, albeit a peculiar one: the prize is temporary monopoly power, implying high prices and restricted access to the benefits that can be derived from the new knowledge. By contrast, the type of prize system I have in mind would rely on competitive markets to lower prices and make the fruits of the knowledge available as widely as possible.

With better-directed incentives (more research dollars spent on more important diseases, and less money spent on wasteful and distorted marketing), we could have better health at lower cost.

That said, the prize fund would not replace patents. It would be part of the portfolio of methods for encouraging and supporting research.

A prize fund would work well in areas in which needs are well known — the case for many diseases afflicting the poor — allowing clear goals to be set in advance. For innovations that solve problems or meet needs that have not previously been widely recognised, the patent system would still play a role.

The market economy and the profit motive have led to extremely high living standards in many places. But the health-care market is not an ordinary market.

Most people do not pay for what they consume; they rely on others to judge what they should consume, and prices do not influence these judgments as they do with conventional commodities.

The market is thus rife with distortions. It is accordingly not surprising that in the area of health, the patent system, with all of its distortions, has failed in so many ways.

A medical prize fund would not provide a panacea, but it would be a step in the right direction, redirecting our scarce research resources toward more efficient uses and ensuring that the benefits of that research reach the many people who are currently denied them.