Prizes, Not Patents

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 defenses have brought down the cost of treatment by almost 99% since 2000 alone, from $10,000 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 $3,000 and $4,000) 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.