“…in a similar way, the slow growth of the coloring industry in the U.S. before the First World War was largely due to patent protection: most patents were held by the large German companies, such as Bayer, BASF, Hoechst and IG Farben. The chemical industry in the US was so underdeveloped, that during the First World War the U.S. was forced to import dies from Germany via submarines to bypass the British blockade.”
There is a very interesting book titled Against Intellectual Monopoly by Michele Boldrin and David K. Levine which was brought to my attention by the author of the Behavioral Trader blog. In the book, the authors build their argument that patent protection is either wholly unnecessary or at the least too broad. Chapter 9 of the book review the pharmaceutical industry and today I will review of few of the authors main points.
The beginning portion of the chapter shows that there has been large cross-country variation in patent protection over time, and that the evidence shows that countries with patent protection are not more innovative than those without patent protection. For instance, Italy had limited or no patent protection for pharmaceuticals until 1978, and before that time was considered the leading manufacturer of generics. Between 1961-1980, Italy discovered 9.3% of the world’s new active chemical compounds, but between 1980-1983, Italy had only discovered 7.5% of the world’s new chemical compounds, despite the fact that Italian scientist now operated in a patent protection system. In recent years, India has claimed the title of the leading manufacturer of generics. In the “Prizes or patents” post, I mention the Chaudhuri, Goldberger and Jai article which finds that instituting mechanisms to enforce foreign patents in the Indian market would reduce welfare in the anti-bacterials segment by $305 million.
Innovation chains is a concept that patents prevent innovation by disallowing other firms from building on the work of others. For instance, a patent can be good for one pharmaceutical company, but not for others. While patents confer monopoly rights to the inventor, they preclude other companies from developing new drugs. For instance, the chief scientific officer at Bristol Myers Squib 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.’”
Because patents create rent-seeking behavior, corruption , lobbying and bribery are common in the pharmaceutical industry. Many pharmaceutical firms have pleaded guilty to criminal charges of fraud for inducing physicians to bill the government for some drugs that the company gave the doctors for free. For those who do not believe that rent-seeking is rampant in the pharmaceutical industry, just listen to Sharon Levine:
“[Pharmaceutical] Companies today have found that the return on investment for legal tactics is a lot higher than the return on investment for R&D,” says Sharon Levine, the associate executive director of the HMO Kaiser Permanente. “Consumers today are paying an inordinate premium under the guise of the creating the stream of innovation in the future. But it’s actually funding lawyers.”
Where do useful drugs come from?
When the British Medical Journal revealed its list of the top 15 medical innovations, only 2 were obtained during a research project motivated by the desire for a patent. None of the CDC’s list of top 10 medical achievements of the past century had been patented when it was introduced. The authors note that private industry only pays for about 1/3 of biomedical R&D, while government institutions such as the NIH fund much of the rest. Boldrin and Levine propose the following solution so that pharmaceutical companies can recoup their large expense to preform clinical trials:
“Clinical trials are the step in the process of developing a new drug during which information is produced about the effect of a given chemical compound on a large sample of humans. The cost of distributing and absorbing this information being low, and the cost of acquiring it being high, it has a strong public good component. There is also no reason, either of by way of economic efficiency or equity, why this should be paid for by the pharmaceutical firms developing the new drug – indeed, as they will be first to market they have a strong conflict of interest. The cost of clinical trials cost would better paid from the public purse, for example, by competitive and peer-reviewed NIH grants. At which point patents on drugs would no longer have any reason to exist.”