Pondering pharmaceutical patents

David Huang


May 2nd, 2014

David Huang delves into the patent system of the pharmaceutical industry.

There lies a vast degree of difference in the living standards and Human Development Index rankings between countries today. How can we explain this? Research has shown that statistically, it is not attributable to natural endowments but more so to the inherent quality of institutions [2]. This can be measured by looking at a number of variables but in particular property rights, contract enforcement and equality of opportunity.

In theory, property rights – including intellectual property rights – are accepted today by social planners as a fundamental ingredient for achieving economic success, though it is still a topic that is hotly debated in the economics world. Central to this argument are issues of ethics and whether alternative mechanisms may be a more beneficial substitute.

The pharmaceutical industry is one which controls human wellbeing, life and death. When you allow a company to dictate monopoly prices over the only cure to a life threatening disease, the words ‘ethics’ and ‘morality’ so often arise. It is an industry that distinctly presents markets at their worst, but also at their best. Today, of the 34 million people that suffer from HIV, around 23.5 million are from Sub-Saharan Africa and two decades ago, its contraction virtually spelt one’s death sentence. The arrival of antiretroviral drugs meant that HIV became a treatable disease. However, for many years this was only a treatable disease for those that could afford the hefty price tag of $10-15,000 USD per year [2], a market price which was roughly ten times the associated manufacturing costs and placed it out of reach of nearly all Sub-Saharan Africans.

The key reason such benevolent patents are granted for the pharmaceutical industry is because it is riddled with high risk and costs that mean a successful project’s profit must outweigh the associated opportunity cost. A recent analysis from Forbes estimates that the cost of a single drug to reach the United States market averages anywhere between $350 million and $5.5 billion, and less than one in ten drugs that are being tested in human clinical trials actually succeed. Nonetheless, patents allow the pharmaceutical industry to rank as the third most profitable industry in the United States, as illustrated by Pfizer’s drug Lipitor which peaked at $11 billion in annual sales before the drug became generic.

As a capitalist society dictates, producers will react to what the market wants and some pharmaceutical companies would much rather cater for the cosmetic demands of the wealthy than for the fundamental needs of the poor. So does a market structure in which companies invest billions per year into research and development for impotence and baldness treatments mean a failure of the system itself? If we consider the fact that the private sector has provided the means to deal with measles, syphilis and polio while extending the life expectancy of millions around the world, we might not be so quick to judge.

Some alternative economic frameworks have been successful, including ones that are kinder towards those with little purchasing power. One of these is the Indian pharmaceutical industry, which is the third largest in the world and had little involvement with patent protection until 2005 [3]. Whilst millions of Indians are able to access generic drugs at a fraction of Western prices (around 8-15 per cent [3]), the challenge India faces is that major breakthroughs in research and development are commanded by the patent-heavy Western firms. Indian firms only spend around two per cent of their sales on research and development [4] because funds are simply targeted towards competing. With heavy competition (over 600 medium to large firms and over 10,000 small and medium enterprises [4] in an industry dominated by generic producers, affordability comes at the cost of innovative capacity.

Each system serves its own purpose; as a country that has over 269.3 million people living below the poverty line, the encouragement of generic producers and heavy competition has allowed drugs in India to be accessed at some of the cheapest prices in the world. Yet for the developed Western world, it is pivotal that market mechanisms are designed to encourage technological advancement. The United States especially has been built upon a culture of entrepreneurship and innovation, and we see that in the nine US companies that rank in the top 20 in terms of revenue, within the pharmaceutical world. Volumes are written about finding the right level and method of patenting and the rise of technological development has led to huge debates over software patenting. For the pharmaceutical industry, it has worked. Perhaps the market design does not always maximise social welfare, but ultimately the results show a big improvement in human living standards and longevity.



[1] Acemoglu, D., Johnson, S., & Robinson, J. A. (2002). Reversal of fortune: Geography and institutions in the making of the modern world income distribution. The Quarterly Journal of Economics117(4), 1231-1294.

[2] McMillan, John. 2002. Reinventing the Bazaar: A Natural History of Markets. New York: Norton.

[3] M Janodia, S Pandey, J Venkara Rao, D Sreedhar, V Ligade, N Udupa. Patents Regime in India: Issues, challenges and opportunities in Pharmaceutical Sector. The Internet Journal of Third World Medicine. 2007 Volume 7 Number 1.

[4] Hewitt, J., Campbell, J.D., & Cacciotti, J. (2011). Beyond the Shadow of a Drought: The Need for a New Mindset in Pharma R&D. Oliver Wyman Health & Life Sciences. Accessed April 26th 2014.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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