A case against intellectual propety in pharmaceutical industry
I have just stumbled upon a book called “Against Intellectual Monopoly” by Michele Boldrin and David K. Levine, two economists from Washington University in St. Louis. As the title implies they argue in it against the patent system as a whole because it supposedly stifles innovation and brings very little in return. They support their case with numerous examples in a number of areas, some of which I find more, some less convincing. Interestingly, they dedicated a whole chapter to the pharmaceutical industry. They acknowledged the pharmaceutical industry as one of the most costly, and therefore likely to benefit from patent protection, so they reasoned that if they could refute the case for patents there, they could do it anywhere.
Nobody in their right mind will deny that there is a lot of things that are wrong with Big Pharma. Shameless lobbying, physician bribing, exorbitant drug prices all give pharmaceutical industry giants a bad rap. Are patents to blame? Boldrin and Levine argue that they play a big part.
A substantial portion of the chapter does not concern patents at all. The authors repeatedly go off on a rant on just about every aspect of the evil corporate culture of the pharmaceutical industry. All these issues are clearly off-topic, so I will concentrate on their rebuttal of the necessity for drug patents.
First, they present a rather tedious (they themselves admit it) history of patentability of drugs throughout the world. By analyzing the history they attempt to show that there is either no correlation or a negative correlation between patentability of drugs and innovation in the industry. By means of such demonstration they hope to call in question the intellectual property supporters’ argument that patents are necessary to promote new drug discoveries. However, I would hardly call their examples scientific. They provide hearsay “evidence” that despite lack of patent protection, companies in Switzerland, Germany, and Italy innovated no less than companies in the UK and USA, where patent protection was present. Also, they analyze the example of Italy before and after introduction of patent protection for drugs. Supposedly, in the 20-year period before patent protection was introduced, Italy contributed 9.28% of the world’s newly discovered active chemical compounds, and in 3 years following that period, that percentage fell to 7.5%. These examples, however, are rather meaningless for the following reasons: (1) they completely ignore other economic factors in the same period of time, (2) they are hardly statistically sound (comparing 20-year period to a 3-year period seems rather ridiculous), (3) from the point of view of pharmaceutical technology and medical law they can be considered ancient history, and (4) most importantly, they ignore the fact that despite the lack of protection in their countries of origin these drugs DID have patent protection everywhere else, including the USA, arguably the biggest single world market for pharmaceuticals. So in effect it didn’t matter whether where the drug was made, but rather where it was sold.
After their analysis of historical cases, Boldrin and Levine cite an economic study on the social benefits of patents which they claim basically says that drug patents are not in the society’s best interest. I figured I was kind of dumb, because hard as I tried I didn’t understand what the hell they were talking about. And so like a proper scientist I decided to go to the source – the paper itself. I had a bit of a hard time finding it because Boldrin and Levine misspelled a name of one of the authors, as well as the name of the pharmaceutical company which sponsored the study (!!!), but I ended up actually finding the abstract. I am going to quote this abstract in its entirety for reasons that will soon become apparent (I added the emphasis):
“Napsterizing” Pharmaceuticals: Access, Innovation, and Consumer Welfare
James W. Hughes, Michael J. Moore, Edward A. Snyder
We analyze the effects on consumers of an extreme policy experiment — Napsterizing’ pharmaceuticals — whereby all patent rights on branded prescription drugs are eliminated for both existing and future prescription drugs without compensation to the patent holders. The question of whether this policy maximizes consumer welfare cannot be resolved on an a priori basis due to an obvious tradeoff: While accelerating generic entry will yield substantial gains in consumer surplus associated with greater access to the current stock of pharmaceuticals, future consumers will be harmed by reducing the flow of new pharmaceuticals to the market. Our estimates of the consumer surpluses at stake are based on the stylized facts concerning how generic entry has affected prices, outputs, and market shares. We find that providing greater access to the current stock of prescription drugs yields large benefits to existing consumers. However, realizing those benefits has a substantially greater cost in terms of lost consumer benefits from reductions in the flow of new drugs. Specifically, the model yields the result that for every dollar in consumer benefit realized from providing greater access to the current stock, future consumers would be harmed at a rate of three dollars in present value terms from reduced future innovation. We obtain this result even accounting for the stylized fact that after generic entry branded drugs continue to earn significant price premia over generic products and hence recognizing that Napsterizing does not completely eliminate the incentives to innovate.
What the hell? Turns out Boldrin and Levine took the study and arbitrarily changed the assumptions made by the authors in constructing their model, and came up with different numbers, which completely contradicted the authors’ original conclusions. What’s more, they made it seem like the assumptions were in the paper all along. If that’s not outright fraud, I don’t know what is.
Well, let’s move along. Next, Boldrin and Levine set out to attack one of the strongest arguments supporting pharmaceutical patents – high costs of clinical trials necessary to bring the drug to the market. They say that the costs of these trials can go as low as $6.5M. It doesn’t prevent them from stating at the beginning of the chapter that the average cost of clinical trials is $71M. Yes, that’s seventy-one million vs. six-point-five million – a 10-fold difference over a 13-page span. In reality, these costs can easily go up to over $100M (The Scientist ran an excellent article about it a few months ago). And that’s only for a single drug that actually reached clinical trials. Most of the drugs tested do not even go past the preclinical stage, and so all the money spent on R&D of these drugs is lost. Believe it or not that’s the fairly postitive scenario. Some drugs will fail to show benefits after tens of millions of dollars spent on clinical trials. So effectively, the cost of bringing a drug to the market, with all the risk of failure factored in, is enormous.
Boldrin and Levine end their list of arguments by quoting amounts of money spent on biomedical research by private companies vs. the federal government. They claim that only about a third of all the costs of biomedical research are covered by the industry. However, they completely ignore the fact, that government-sponsored biomedical research is, to a very large degree, basic rather than applied. The hard, risky, expensive, and relatively more mundane work of taking basic research results and making them into actual drugs that patients will be able to benefit from, is almost entirely the domain of the industry. So from a purely pragmatic point of view, one might argue that it is the federal government that is wasting money on studies that don’t immediately produce solutions applicable to patient care.
So that’s it? Do the authors of this treatise, academic scientists themselves, hope to persuade us with imprecise “conventional wisdom” arguments that don’t even have the pretense of scientific rigor, and then by hijacking a research paper and twisting it around so that it sounds like it supports their case? I’d expect a bit more of an effort on their part, seeing that their ideas are nothing short of revolutionary. But wait, there it is! In the final chapter they propose a genius solution, which will make patents completely redundant in the pharmaceutical industry, regardless of their actual value right now. They finally acknowledge (despite demonstrations to the contrary in their previous chapter) that developing a drug is expensive. So in order to protect the company from huge losses in the absence of patents, they suggest that the Food and Drug Administration (the agency responsible for registration of new drugs in the USA) should set a price tag on that development process, and that any company willing to produce that drug must pay the inventor that price. In that, they basically reinvent licensing, except now it’s the government who decides what the value of the license is, not the owner of the patent. Just think of what a great opportunity for corruption that is! We are talking tens to hundreds of millions of dollars here, which could be gained or lost in a single transaction. And it would all depend on a signature of a single FDA official!
Let me now share a few personal thoughts that the lecture of Boldrin and Levine’s pamphlet (I am now reluctant to call it a book) provoked. I think their ideas stem from a basic misconception about patents. Ideas are a dime a dozen – here the authors and I will agree. However, the patent is not meant to only protect the idea itself, but, more importantly, the investment an inventor (or their licensee) makes once he or she starts developing an idea into a finished product. In the case of some ideas, the investment may be close to non-existent, in others, such as drugs, it can be gigantic. Getting rid of patents altogether is throwing the baby out with the bath water – it removes the crucial protection every investor will expect before betting their money on an idea. At the risk of disclosing my ignorance about patent law, I would like to propose a solution slightly less drastic than completely getting rid of patents. Instead, we could simply put a clause on every patent that if the inventor cannot prove that either they, or any of their licensees have made substantial investments to bring the product to the market within a set period of time, their patent would be revoked. That would take care of a lot of patent trolling and would allow only truly “expensive” ideas to be protected. Maybe somebody has already come up with that scheme, I don’t know – I am far from an expert in the field. In any case, it seems like a reasonable compromise between promoting innovation and protecting investments.
The whole case reminds me a bit of my discussion with supporters of Open Access publishing. Both them, and Mrs Boldrin and Levine, think they have simple solutions to complicated problems. The simplicity of their solution is so appealing, that their perception of reality becomes completely skewed to support it. They will stop at nothing to prove that their solution is best, because the pink spectacles they view the world through make them completely impervious to all the evidence to the contrary. How amazingly fragile a human mind is!
To wrap up, let me quote Thomas Jefferson, a one time ardent opponent of the patent system, who later changed his mind:
An act of Congress authorising the issuing patents for new discoveries has given a spring to invention beyond my conception. Being an instrument in granting the patents, I am acquainted with their discoveries. Many of them indeed are trifling, but there are some of great consequence which have been proved by practice, and others which if they stand the same proof will produce great effect.
Entry filed under: Biomedical research, Geeky stuff, open access. Tags: bad science, big pharma, David K. Levine, economics, intellectual monopoly, intellectual property, IP, Michele Boldrin, patents, pharmaceutical industry.