A search of a news-story database for “Cipro & patent” over the past 60 days produces 281 hits. Several are from this very morning, as the WTO starts its meeting in Qatar. The issue of drug patents “could well be the deal breaker,” according to WTO’s Director General.
The problem is simple to state, and it affects not only pharmaceuticals but also software, books, entertainment, and other products for which the value comes from intellectual property. It is vital to all tech industries.
In the old nursery story, a goose lays golden eggs, but not fast enough for the impatient citizenry. They cut the goose open to get all the eggs hiding therein, with predictable results. Then they whine about the unfairness of a world in which no golden eggs are laid.
Pharmaceuticals are produced through a complicated system in which it costs centi- millions to raise a goose to maturity – to develop, test, and shepherd a useful drug through the FDA. After this initial work, it costs little to produce the golden eggs of the pills themselves.
If the pills were sold for the short-term cost of production, then . So drug companies get time-limited monopolies enabling them to recoup up-front investments. On the whole, this beneficent cycle creates a cornucopia of life saving pharmaceuticals.
However, the system is not perfect. Drugs for uncommon diseases get short shrift. Convoluted sometimes and often suppress competition. The third party payments that permeate the health care industry destroy market forces. Drug prices reasonable in the United States are beyond reach in the underdeveloped world. Every nation wants to free ride on research paid for by the citizens of other nations.
Many serious people are working on these issues. At CEI, we favor market solutions. Scholars with more faith in governments than one finds around here seek improved regulatory-dependent answers. Pharmaceutical companies are responding by establishing systems of variable prices or selectively waiving patent protection. A lot of ideas are floating around.
Unfortunately, the term “serious people” does not apply to many politicians, “public interest” representatives, and journalists. These focus on the low costs of manufacturing, ignore R&D investment and the long-term dynamics of the industry, and talk of “price gouging,” “greed,” and “valuing profits over lives.” They would happily gut the goose, then blame others, of course. As Canadian writer put it, after the Health Minister summarily ignored Cipro’s patent: “It’s Halloween again . . . and if you really want to scare your neighbours, why not dress up as a federal cabinet minister?”
In the Cipro instance, the crisis evaporated. The company quickly cut the price, albeit under the threat of having its patent ignored. The supposed monopoly disappeared because several drugs treat anthrax; Cipro’s apparent uniqueness was a product of initial fear that the strain of anthrax might be resistant to others and of incentives created by FDA’s rules. Further, in any real crisis the government could use its powers of to take over a patent, leaving it to the courts to sort out the issue of just compensation at leisure, so there is no reason at all to sabotage the system.
But the brouhaha over the drug patent issue is a notice to all industries that are characterized by this phenomenon of big up-front costs coupled with low variable costs. There is a lot of economic ignorance out there, and much of it is deliberate, generated by people who are no friends to either business or the free market.