The problem with drug patents

Governments around the world are proposing to abolish drug patents and to subsidize the companies that lose out. But if it hadn’t been for patents restricting free markets in the first place, we would likely have more and cheaper vaccines than we do today.

A man in Indiana holds a sign calling for patents on drugs to be waived.
Public pressure has built on politicians to suspend or abolish patents on drugs. Though the people who have been making such calls are rarely free-marketeers, those who value innovation would do well to consider that patents are a government-enforced restriction on business. © Getty Images

In a nutshell

  • The pharmaceutical industry has innovated impressively
  • Unshackling it from patents would accelerate that trend
  • Politicians are likely to mix a moratorium with subsidies

The pharmaceutical industry has played a key role in defeating Covid-19. While most governments panicked, forcing people to stay at home and shutting down economic activity while waiting for treatments, it took only a few weeks for researchers to develop effective vaccines. Three months later, companies had already produced the much-needed medicines. Regrettably, regulations adopted by international authorities made approval a lengthy process. Precious time and lives were lost.

This spring, producers have struggled to meet demand. Pressure has built to suspend or even abolish patents in segments of the pharmaceutical industry, in hopes that new companies would enter the market, acquire the necessary know-how, set up production facilities and deliver more vaccines. Though producers likely would have been in a better position to increase output if they simply could have charged higher prices, a polarized debate has followed over the drug patents issue.

R&D debate

Some opinion leaders have argued that patents are necessary because they provide incentives to conduct risky, high-cost research and development (R&D). Patents ensure that the profits on the few success stories cover the costs of the total R&D companies conduct. Although such expenditures absorb less than 20 percent of the big drug producers’ revenues, drug patent advocates fear that abolishing them will cause research to slow down, and that any benefit generated by having more vaccine producers will be offset by impeded progress in research.

Another worry is that if fewer new medicines are produced, the desire for more will eventually justify some heavy government intervention. This would lead to the creation of state or state-controlled companies and discretionary subsidies to privileged producers. Disaster would follow.

The opposing camp says that when dealing with events like a pandemic, all efforts should be devoted to providing adequate treatment as soon as possible to the largest number of people. If these changes require compensating the incumbent pharmaceutical companies, then so be it.

Dangers of selective legislation

However, there is a third approach. It is based on the free market and harks back to basic principles. A patent is a privilege awarded by the government to a producer. Other producers are prevented from replicating a production process that has already been put into practice by the owner of the patent. 

Free-market supporters argue that by enforcing a patent, the government is violating people’s freedom to put their thoughts to good use, to imitate and to act accordingly. Moreover, they claim that when issuing a patent, the government is not protecting a legitimate property right. The imitator is not engaging in any kind of aggression and, therefore, there is no right of “first use” like the right of first appropriation typical of material goods. In other words, patents are an abuse and should be abolished.

Free-market supporters argue that by enforcing a patent, the government is violating people’s freedom to put their thoughts to good use.

The upshot is that those who are wary of social engineering should welcome the abolition of patents and be suspicious of proposals aiming at selective legislation, the one proposed for Covid vaccines being the most recent example.

Selective legislation is damaging since it inevitably ends up triggering negotiations about privileges and compensation behind a cloud of demagoguery. As mentioned earlier, patents are currently considered the legal bulwark of an allegedly legitimate barrier that excludes entry into an industry or segment of the market, and which guarantees a fair reward to the producer.

Compensating the companies that suffer from changes in patent legislation would set a dangerous precedent for future situations in which production is regarded lower than desirable. Taxpayers’ money will then be used to support all kinds of risky projects that the bureaucrats in charge considers promising and of social interest. The aim would no longer be the abolition of patents, but the transformation of the legislation on patents into a system of discretionary subsidies and privileges.

Accelerated innovation

Would a free-market solution kill research and scientific progress? The short answer is no. Scientific insights are not in scarce supply, and many researchers are driven by intellectual ardor and the search for prestige and recognition, not necessarily money. Moreover, today’s research is based on cross-fertilization and incremental improvements, while success is based on the speed with which ideas circulate, products are tested, modified and perfected. This does not mean that scientists and engineers should be forced to share their ideas and their projects, but rather that they should not be prevented from looking around, imitating and experimenting without starting from scratch.

The pace of innovation would probably accelerate, while the period during which the producers could charge the high prices required to cover the costs incurred would be shorter. Cutting-edge medicines would be expensive, but penultimate generation drugs would be much cheaper. If the industry were liberalized and governmental recommendations replaced overzealous regulation, which causes enormous costs of compliance and long delays, consumers would probably be able to access the same generation of drugs it is using today at a fraction of the price.

Cutting-edge drugs would be expensive, but penultimate generation drugs would be much cheaper.

The free-market solution is not on the table for two reasons. It would bring the big players under heavy competitive pressure and would destroy the thick, relatively friendly network of formal and informal links that connect the pharmaceutical industry and policymakers. Moreover, although liberalization would slash billions of dollars in administrative costs and give people access to partially tested drugs that could save thousands of lives, it would eliminate thousands of regulators and, more generally, question the role of government as the supreme watchdog of people’s health, especially in unexpected emergencies.

At the same time, abolishing drug patents would be hard. Yet, policymakers have raised people’s expectations and do not want to give the impression they have given in to big business. Some Western leaders might even be toying with the idea of resorting to cheap drugs as a card to play in the geopolitical game.

In the short run, a makeshift solution will likely emerge, for example, a face-saving, mild moratorium on pharmaceutical patents, supplemented by research subsidies. In the long run, more ambitious goals could be unveiled. For example, lavish subsidies for research and development could become the price governments would pay to buy patents on drugs even before they hit shelves, regardless of their market value.

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