Do we need patents?

Whenever I suggest that patents are harmful, people point to the pharmaceutical industry. The pharmaceutical industry is heavily regulated. Marketing a new drug is a lengthy and expensive process. Moreover, drugs are subject to strict patent laws.

The rationalization for patents usually goes like so: developing new drugs is extremely expensive, only large well-funded corporations can do it, and they won’t innovate unless we grant them a generous monopoly on their discovery.

Granting monopolies, even temporary ones, is expensive. We need to be sure that the gains out-weight the costs. In this case, the rationalization offered by the industry does not stand up to scrutiny:

• The U.S. and the U.K. have always had strong patent laws protecting chemicals and drugs. Meanwhile, continental Europe had much weaker patent protection. Until recently, you could not patent a drug or a chemical in Germany (1967), Switzerland (1977) and Italy (1978). Where did the pharmaceutical industry thrive before the 1960s? In Germany, Switzerland and Italy. Though Italy was the fifth producer of drugs in the 1970s, its pharmaceutical industry has now practically disappeared as a result of the introduction of stronger patent protection.
• Without drug patents, India became the fourth largest pharmaceutical producer. It was forced to introduce drug patents in 2005. Haley and Haley (2011) analyzed the effect of the introduction of patents in India:
  

  (…) the rate of growth in innovation, as measured by investments in R&D, has fallen in India’s product-patent regime. (…) This study indicates that product-patent regimes do not necessarily generate greater rates of innovation than process-patent regimes, and may reduce innovation.

• Because companies cannot compete over the efficient production of drugs, they have a strong incentive to produce new drugs. People assume that this means more innovation. However, there is a much cheaper and safer path for drug companies: produce a variation on an existing drug. In this manner, you can go after the competition (by producing variations on their drugs) or artificially extend the life of your own patents (by producing endless variations on your own drugs). And indeed, we can verify that most drug patents are about me-too drugs. In effect, it is more profitable for drug companies to consider themselves as patent portfolios rather than R&D firms.

You might argue: aren’t you happy that the pharmaceutical industry has almost cured a disease like AIDS? I would, except that the pharmaceutical companies did no such thing. It took an academic researcher to figure out that a cocktail of drugs was the best option to treat AIDS. In fact, the majority of the funding in biomedical research comes from the government and private non-pharmaceutical funds. I have to ask: if the private sector with generous patent protections is so good at innovating, why do governments and private foundations bother to fund pharmaceutical research?

We don’t have worldwide pharmaceutical patents because they benefit most of us. We have them because they benefit the richest 0.1% at the expense of all others.

Further reading:

• Michele Boldrin, David K. Levine, The Case against Patents,
  Journal of economic perspectives, Vol. 27, No. 1, 2013 (pp. 3-22)
• Michele Boldrin and David K. Levine, Against Intellectual Monopoly, Cambridge University Press, 2010.
• George T. Haley, Usha C.V. Haley, The effects of patent-law changes on innovation: The case of India’s pharmaceutical industry, Technological Forecasting and Social Change, 2011.
• Charles Duhigg and Steve Lohr, The Patent, Used as a Sword, NYT, October 7, 2012.