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Patents on drugs are much too expensive for the benefit we get

Despite the fact that this commentary was delivered the week of the giant spending dust-up in Congress over the proposed reconciliation bill to spend close to $3.5 trillion over the next ten years on what the Biden Administration referred to as human infrastructure, I have chosen to focus on a relatively obscure issue that should be of more concern to the general public than it is. I am talking about the incredibly expensive way our economic system encourages innovation: government monopolies through patents and copyright. (I plan on discussing the ultimate result of the Congressional discussions, once the dust settles and we actually see what Congress has come up with.)

On September 22 of 2021, the New York Times published a story that probably flew under the radar for non-economists. The headline was Pressure Grows on U.S. Companies to Share Covid Vaccine Technology.   The article details efforts by the Biden Administration to get both Pfizer and Moderna to share the proprietary technology that makes their COVID - 19 vaccines with producers world-wide so as to increase the rate at which vaccines will get into arms in other countries. The reason the Biden Administration is anxious to get the rest of the world vaccinated is because the longer there are large populations receptive to the spread of the virus, the more danger there is that the virus will mutate into a variant that is immune to the current set of vaccines. So far we’ve been lucky. Even though the Delta variant spreads much more quickly, the current set of vaccines still act to defeat it. Getting the rest of the world vaccinated is the surefire way to avoid the mutation to a new variant that will ravage even the populations that have been vaccinated.

[The full title of the article is “Pressure Grows on U.S. Companies to Share Covid Vaccine Technology. Moderna accepted $2.5 billion in taxpayer money to develop its Covid-19 vaccine. But officials in the U.S. and overseas are having trouble persuading the company to license its technology.” It’s written by Stephanie Nolen and Sheryl Stolberg and is available at https://www.nytimes.com/2021/09/22/us/politics/covid-vaccine-moderna-global.html]

The specific details on what is actually dividing the Biden Administration (and the countries of the global South who desperately need millions of doses of the vaccine yesterday [!!] -- only about TWO PERCENT of the population in those countries has been vaccinated --) from the pharmaceutical giants are not quite as important as a more basic problem. Why do governments of the world grant monopolies in the form of patents --- which create enormous profits for pharmaceutical companies?

[The issue of copyright illustrates the same principle --- Walt Disney and the individuals who created the character of Mickey Mouse many decades ago are long since dead. Why should the company that bought that copyright still continue to get monopoly profits from that character? However, forcing movie makers who might like to use the Mickey Mouse character to pay high prices for that right is hardly a life-or-death situation. When it comes to life-saving drugs, patent protection allows companies to make hundreds of millions – even billions – in profits putting people who live in countries where buying such drugs is too expensive in grave danger.]

According to traditional economics, competition is the key to making sure that companies produce goods that consumers want to buy. Competition is the key to making sure that consumers are not overcharged. Monopoly is considered a failure of the economic system because it denies consumers choice and it permits prices much higher than validated by cost. The traditional rationale for making an exception and granting a government created monopoly through the issuance of patents is that companies that invest time and effort and money doing scientific research to find something new --- whether it be a new drug or a new technological procedure --- should be able to exploit that “something new” without having some free loading competitor just copy it without engaging in any of the expensive research to develop it. Yes, prescription drugs in the US cost over twice as much as drugs elsewhere and that is powered by the government-imposed monopoly for patent holders, but the defenders of patents say look at all the wonderful innovations that American companies produce BECAUSE of the promise of that pot of gold (monopoly profits for years) at the end of the (research) rainbow. Currently for most prescription drugs, patents last 20 years.

Given the existence of patent protection, Moderna and Pfizer and Johnson and Johnson, the three companies whose Coronavirus vaccines have been approved by the FDA, can charge any price they want. Doing that will make them a lot of profits --- and the federal government pays these prices so that no individual patient pays out of pocket. However, if they set a price to give them substantial rates of return on their investments, that might price many not so rich countries out of the market. This brings us back to the New York Times article above. The Biden administration wants to get more vaccines to the rest of the world and get those populations vaccinated before a new variant arises which might not be susceptible to the current set of vaccines. The Administration is trying to cajole Big Pharma to allow overseas nations the use of their technology without having to pay an arm and a leg.

The Drug Companies respond saying they are willing to give countries with low incomes a break on the price but they want to remain in control. In other words, they want to preserve the PRINCIPLE that they and only they can set the price. Then they will MAGNANAMOUSLY offer discounts.

The economic issue this raises is basic. Is the only way to encourage innovation to give years of monopoly profits to the companies first past the post in discovering a new technology or a new product? The answer is a resounding “NO.” There are many ways to encourage innovation without saddling the public with high costs for a minimum of twenty years.

Economist Dean Baker has written about this extensively. In an OP ED in the NY Times he argued, “We don’t need patent monopolies to support research. We already spend more than $30 billion a year financing research through the National Institutes of Health. Everyone, including the drug companies, agrees that this money is very productive.” [See Dean Baker, “End Patent Monopolies on Drugs” available at https://www.nytimes.com/roomfordebate/2015/09/23/should-the-government-impose-drug-price-controls/end-patent-monopolies-on-drugs].

Economics Nobel Prize winner Joseph Stiglitz is on record as supporting a system of prizes for drug innovations to replace government monopoly profits as an incentive. See his piece, “Prizes not Patents” which he wrote for Project Syndicate in 2007 https://www.project-syndicate.org/commentary/prizes--not-patents. Bills have been introduced into the Congress to create these substitute prizes but as one might expect, they have never even gotten hearings due to the influence of Big Pharma.

Despite the existence of alternative policy approaches, at the present time, the only way that Pfizer, Moderna and Johnson and Johnson will permit their newly approved drugs to be used by other companies is for these companies to pay for a license to sell these patented drugs. The article from the Times makes clear that the Biden Administration is getting frustrated with Big Pharma, particularly with Moderna.

Recall that Moderna was heavily subsidized by the federal government in their research. Thus, their resistance is particularly galling. They ended up risking NOTHING to develop the drug. Johnson and Johnson’s trials were partially financed by the federal government as well. Pfizer chose not to accept money from the federal government to develop their vaccine but of course they benefited from the fact that the government was poised to buy hundreds of millions of doses. They had a guaranteed market and promise of getting approved in record-breaking time before they spent a penny on research.

In these three cases, companies stand to gain hundreds of billions of dollars in profits over the years that their patent monopolies are enforced. This is just dead wrong when we are dealing with life-saving drugs. Perhaps it is time for Congress to hold hearings on the various proposals to swap in prizes and abolish patents in pharmaceuticals.

Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author with Howard and Paul Sherman of the recently published second edition of Principles of Macroeconomics: Activist vs. Austerity Policies

The views expressed by commentators are solely those of the authors. They do not necessarily reflect the views of this station or its management.

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