Why Drug Companies Don't Need Patents

In any debate over the utility of patent systems, IP-maximalists will almost always fall back to the example of the pharmaceutical industry. If this industry didn't have the incentive of monopoly on new drugs, they would never invest the millions of dollars that are necessary to perform new drug research and development, so the argument goes. Without new drug research, no new drugs would be produced. And if new drugs aren't produced, we all suffer from sickness and death. Therefore, they claim, patents are not only good, but directly vital to our well-being.

At first glance, this argument seems quite compelling. Those who put forth this argument choose it carefully -- no other industry, it seems, spends so much money on research and development, and is in such need of protection from cheap knockoffs. Or so it seems.

The truth is, these arguments are so poorly-founded and so misleading that we shouldn't feel bad about calling them, simply, "lies." Here are 6 reasons why:

1. History. Historically, western countries have had vastly different levels of monopoly protection for chemical production and chemicals themselves, ranging from almost no patent protection (in Switzerland prior to 1977 and Italy prior to 1978), to patents only for chemical production processes but not the products themselves (in France and Germany), to full monopoly grants on both processes and products (in the US and UK). Boldrin and Levine summarize these facts as follows:

   Now, you may be wondering, why are we boring you with all these details about specific countries, patenting of chemical processes, and pharmaceutical products, and so forth? For a very simple reason: if patents were the source of medical innovation as claimed by intellectual monopoly apologists, the large historical and cross country variations in the patent protection of medical products should have had a dramatic impact on the pharmaceutical industries of the different countries. In particular, at least between 1850 and 1980, most drugs and medical products should have been invented and produced in the United States and the United Kingdom, and very little if anything in continental Europe. Further, countries such as Italy, Switzerland and, to a lesser extent, Germany, should have been the poor sick laggards of the pharmaceutical industry until the other day. Instead, as everyone knows since high school, the big time opposite is and has been true. This is as macroscopic a contradiction of the intellectual monopoly apologists' argument for patents in general, and for medical patents in particular, as one can possibly imagine.

   Boldrin and Levine are correct: the most prolific innovators in the pharmaceutical industry during this period were precisely and consistently those countries with the weakest patent monopoly protection.


2. Patents Hinder Drug Research. Much as we've seen before with patents hindering science in general, patents are having a major effect on killing drug research. The chief scientific officer at Bristol Myers Squib, Peter Ringrose, told The New York Times that there were "more than 50 proteins possibly involved in cancer that the company was not working on because the patent holders either would not allow it or were demanding unreasonable royalties."


3. Public Funding of Drug Development. According to the NIH, taxpayer-funded scientists conducted 55 percent of the research projects that led to the discovery and development of the top five selling drugs in 1995. The assumption in the argument for patents is that no one but commercial interests will do drug research. This is nonsense. We spend billions of dollars in tax money on new drug development every year -- in many cases, these are drugs that save lives that the pharmaceuticals are uninterested in researching, because their profit margin is too low. So we already have government subsidized drug development. What this means is that we, as a society, agree that this is an important public good, and should be funded as such. Do other public goods need patent protection? And yet we give our government-funded and developed goods patent protection, and allow pharmaceuticals to pay public researchers and universities for those exclusive rights. Tell me again, how does this setup benefit anyone but monopolists?
   
   Here are a handful of additional stunning facts with regard to private vs. public spending on drug development (from the Public Citizen report on drug R&D myths):
   
   
   • A study by a Massachusetts Institute of Technology (MIT) scholar found that publicly funded research played a part in discovering 67% of the most important drugs introduced between 1965 and 1992.
   
   
   • 90% of the top-selling drugs from 1992-1997 received government funding for some phase of development.
   
   
   • The NIH report discovered that only 14 percent of the drug industry’s total R&D spending went to basic research, while 38 percent went to applied research and 48 percent was spent on product development. The report concluded, “To the extent that basic research into the underlying mechanisms of disease drive new medical advances, the R&D in industry is not performing the role played by public research funding.”


4. Pharmaceutical Spending. The fortune 500 drug companies dedicate 30% of their spending for advertising and administration. Only 12% gets reinvested in research and development. So much for the massive costs of drug development. Does this industry that requires so little on up-front investment in R&D really need the added benefit of government sponsored monopoly protection?


5. Excessive Profits. One of the most effective indicators that anti-trust regulators use to determine monopoly power is the presence of excessive profits; monopolies have the power to 'rent-seek' and set prices artificially, and so profits that are out-of-line with other industries are good evidence for monopoly power. In the case of pharmaceuticals, the evidence is not hard to find: exorbitant amounts of money spent on advertising (most in the form of drug rep visits to offices, purchased lunches and trinkets, fully-paid vacations to expensive resorts given under the guise of conference attendancee, etc), exorbitant amounts of money spent on lobbying (pharmaceuticals are perennially in the top 3 of campaign contribution industries), and exorbitant profits (how often do you hear about a "struggling pharmaceutical?"). Does this industry that makes so much money at such high prices to consumers really need the added benefit of government sponsored monopoly protection?


6. Patents Kill. Sadly, in much of the developing world, patents restrict countries from obtaining or manufacturing medicines that could save lives. It seems that our Intellectual Monopoly Regime says that patent claims by pharmaceuticals are more important than life itself in many cases.

So, when someone tells you that the pharmaceutical industry is a perfect example of why patent monopolies should be granted, go ahead and agree with them -- just make sure to help them understand that even that strongest of pro-patent examples is not very strong at all. As Boldrin and Levine summarize:

the case for patents in pharmaceuticals is weak – and so, apparently, even under the most favorable circumstances patents are not good for society, for consumers, or in this case, for sick people. Patents are good for monopolists, but that much we knew already.