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A Case For Scrapping Drug Patent Monopolies As Incentive For R&D

by on Monday, August 8, 2011 at 2:59 pm EDT in Healthcare, Politics

It is widely accepted across the gamut of economic ideologies that when a monopoly exists a free marketplace becomes inefficient and fails. It fails, because without competition, a monopolist is all but guaranteed to price-gauge consumers. So it’s no wonder that US anti-trust laws were written to safeguard the marketplace from monopolistic (anti-competitive) behavior.

Yet, for over half-a-century, the idea that the pharmaceutical industry should somehow remain exempt from this monopolistic prohibition, has largely gone unquestioned. By being permitted to patent its medicines, BigPharma enjoys a monopoly in the marketplace for a fixed period (20 years or more per drug), where they are free to price-gauge consumers. 

The rationale behind drug patent monopolies rests upon the idea that without huge profits assured by this 20+ year price-gauging period, these pharmaceuticals would lack the incentive to invest in costly research and development. In addition, the actual manufacturing of medication tends to be cheap, so without patent-protection would-be-competitors, unburdened by R&D investments, could easily sell many generics for as low as $10 per prescription. 

And thus, the drug patent has been widely accepted as a necessary evil.

But by choosing patenting as the preferred incentive for private R&D investment, the government is knowingly handing ‘for-profit’ corporations monopolistic licenses over vital consumer products. 

We are not talking about discretionary goods, here — music downloads, books, or software — which people can live without. We’re talking about medicines that often keep people alive, or help to lessen their pain and suffering. In other words, the consumer CANNOT DO WITHOUT many of these products. And the provider, being shielded from competition, is well-positioned to take full advantage of their desperation.

Which is why the Pharmaceutical industry consistently ranks as one of the most profitable industries in the United States.

In response to public outrage over the fact that drug prices consistently rise at a much faster pace than the rate of inflation, the Congressional Budget Office (CBO) conducted a study in 2006 to assess the industry’s R&D expenses.

The study revealed that Federally-funded research has played a HUGE role in the discovery of nearly all new drugs released by the pharmaceutical industry. In fact, the only industry that receives more Federal subsidies for R&D is defense.

Here were some of the CBO’s findings:

  • The federal government expended $25 billion on health-related R&D in the previous year alone (2005). 
  • “Most of the important new drugs introduced by the pharmaceutical industry over the past 40 years were developed with some contribution from public-sector research.”
  • “Out of 21 of the most influential drugs introduced between 1965 and 1992, only five were essentially developed entirely by the private sector.”
  • “In the past decade, federal outlays on health-related research and development have totaled hundreds of billions of dollars at the National Institutes of Health (NIH) alone.”
  • R&D costs for new drugs are usually low, because more often than not, they are merely incremental modifications of already existing drugs.

CBO reported that the amount BigPharma itself contributes towards R&D is a staggering $800 million (2006 dollars) on average per drug release. However, CBO pulled these numbers from a separate study conducted by Tufts Center for the Study of Drug Development, which happens to be financed by — you guessed it — BigPharma itself!

In fact, a recent study published in the journal BioSocieties, entitled “Demythologizing the High Costs of Drug Research,” by Donald W. Light of the University of Medicine and Dentistry of New Jersey and Rebecca Warburton of the University of Victoria, took a hard look at those Tuft numbers. And what they found were HUGE flaws (Note: some of the major flaws are summarized HERE at Slate) which dramatically inflated BigPharma’s R&D costs:

When Light and Warburton correct for all these flaws—well, all the ones that can be quantified—they end up with an average cost of bringing a drug to market that’s $59 million and a median cost that’s $43 million. In 2011 dollars, that’s a $75 million average and a $55 million median.

So the drug companies’ [last stated] $1.32 billion estimate was off, according to Light and Warburton, by only $1.265 billion.* Let’s call it a rounding error.

Therefore, it appears the only credible information that can be gleaned from the CBO study is the taxpayer-funded portion of pharmaceutical R&D, and it is HUGE (to the tune of hundreds of billions of dollars).

A 2008 study entitled “The Cost of Pushing Pills: A New Estimate of Pharmaceutical Promotion Expenditures in the United States,” published by the Public Library of Science, estimated that BigPharma spends nearly twice as much on advertising and promotion than it does on R&D expenditures, contrary to the industry’s claim. Their research reveals that the US pharmaceutical industry is in fact marketing-driven, despite its constant claims that it is research-driven.

In January, BusinessWire published “2011 Trends to Watch in Pharmaceutical Technology” which reported that BigPharma plans to cut R&D costs in 2011, by outsourcing their R&D operations to emerging markets, like China and India.  

The CEO of GlaxoSmithKline just announced he’s been aggressively closing R&D operations, and instead partnering with academic research centers (again, government funded) & biotech companies:

One of the more vocal voices in the changing R&D landscape has been GlaxoSmithKline (GSK) CEO Andrew Witty. His company has significantly pared down its fixed R&D costs by closing research facilities, doing less discovery work internally, and pushing more and more responsibility for research to external academic and biotech partners.

It’s the same familiar theme that has come to define much of corporate America: socializing much of the risks and costs, outsourcing the higher-paying technical jobs to low-cost-labor countries, privatizing all the profits, and then evading paying US income taxes (as this Bloomberg article highlights).

Except in this case, the government additionally grants BigPharma a 20+ year competition-free environment with which to fleece the American people, to the detriment of their wallets, their health and their lives.

The US obviously needs to find a new creative way to ensure that financial incentives for private R&D remains, but without granting corporations monopolist-licenses to harm the public. Drug patent monopolies make no economic sense, and have proven to be a resounding failure on every front.

A couple months ago, Vermont Senator Bernie Sanders proposed a major reform bill of the drug patent system that sounds like a winning strategy. The bill would essentially replace drug monopolies with prizes:

He has introduced a bill to create a prize fund that would buy up patents, so that drugs could then be sold at a free market price. Sanders’s bill would appropriate 0.55% of GDP (about $80bn a year, with the economy’s current size) for buying up patents, which would then be placed in the public domain so that any manufacturer could use them at no cost.

This money would come from a tax on public and private insurers. The savings from lower-cost drugs would immediately repay more than 100% of the tax.

The country is projected to spend almost $300bn a year on prescription drugs this year. Prices would fall to roughly one-tenth this amount in the absence of patent monopolies, leading to savings of more than $250bn. The savings on lower drug prices should easily exceed the size of the tax, leaving a substantial net reduction in costs to the government and private insurers.

This would help to bolster R&D investment, by ensuring these firms are handsomely rewarded with all-upfront payouts for their products, which they could then reinvest into their R&D operations. Their huge marketing budgets would evaporate, thus saving them the lion-share of their current expenses. And at the same time, it would inject competition into the drug manufacturer marketplace — essential for ensuring these products remain widely available and affordable to the consumer.

And equally important, it would substantially impact our nation’s runaway healthcare costs by reducing our $300 billion annual pharmaceutical expenditures down to $30 billion. This would help to shore up Medicare and Medicaid, save lives, and put more money back into the pockets of the American people.