Pharmaceutical Patent Incentives
One of the best examples of how the patent system is supposed to work is provided implicitly by a story in today's New York Times. The article discusses the efforts of pharmaceutical companies to develop new treatments for cancer. According to the article, there is a huge market for cancer treatments that provide even a small increase in life expectancy. As a result (and also due to the declining market in other treatment areas), pharmaceutical companies are engaging in a massive research effort to discover new drugs. All are hoping to find a blockbuster treatment, which may command $50,000 a year or more from patients in need. The ability to maintain these prices will be provided by patents.
But the effort is very hard because cancer is such a tricky disease. There is a huge risk involved, and truthfully only a small chance of reward. One quoted oncologist describes this effort negatively as a bubble -- a massive dedication of cash that will likely produce few winners and result in great losses for the others. This may be true from the company's perspective. But from the public's perspective, it's a good thing. In the end, we will benefit from whatever drugs are discovered, and we don't have to entirely fund the effort. Conversely, if this effort were entirely funded by the public, we would suffer all of the research loses, and likely would be much more conservative in what paths are investigated.
Doesn't such a massive investment result in higher drug prices? Not if the market is working efficiently. Price should be dictated by the treatment's benefits. If it doesn't do much (and that information is understood by physicians, patients and insurers, which is another issue entirely), people will not pay for it. The amount of sunk research costs are irrelevant.
And that's the point of the patent system. You encourage private actors to invest and take risks when there is a market interest in the information. If they are successful, they win and get to take advantage of the right to exclude others from the invention for a limited time. After that, the public shares in the invention.
I should add that some would argue that a massive private investment toward the same inventive goal is inefficient from a public perspective as well as private (it's often termed a patent race in the economic literature). But I think it's easier to make that conclusion in hindsight. In the context of the effort to find new cancer drugs, it's hard to identify a more efficient research path that doesn't risk missing a hard-to-find treatment that ends up being very important.
But the effort is very hard because cancer is such a tricky disease. There is a huge risk involved, and truthfully only a small chance of reward. One quoted oncologist describes this effort negatively as a bubble -- a massive dedication of cash that will likely produce few winners and result in great losses for the others. This may be true from the company's perspective. But from the public's perspective, it's a good thing. In the end, we will benefit from whatever drugs are discovered, and we don't have to entirely fund the effort. Conversely, if this effort were entirely funded by the public, we would suffer all of the research loses, and likely would be much more conservative in what paths are investigated.
Doesn't such a massive investment result in higher drug prices? Not if the market is working efficiently. Price should be dictated by the treatment's benefits. If it doesn't do much (and that information is understood by physicians, patients and insurers, which is another issue entirely), people will not pay for it. The amount of sunk research costs are irrelevant.
And that's the point of the patent system. You encourage private actors to invest and take risks when there is a market interest in the information. If they are successful, they win and get to take advantage of the right to exclude others from the invention for a limited time. After that, the public shares in the invention.
I should add that some would argue that a massive private investment toward the same inventive goal is inefficient from a public perspective as well as private (it's often termed a patent race in the economic literature). But I think it's easier to make that conclusion in hindsight. In the context of the effort to find new cancer drugs, it's hard to identify a more efficient research path that doesn't risk missing a hard-to-find treatment that ends up being very important.
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About the Author
Dan Cahoy is Associate Professor of Business Law at Penn State's Smeal College of Business. He is also a registered patent attorney. For more information, take a look at Dan's CV, Web bio or Research Page.
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