17 October 2018

Does the patent system need fixing?


Patents are a rather controversial topic among pro-market thinkers. Some are very much in favour of them, seeing intellectual property as just another kind of property and as entitled to legal protection as any other. Others see patents as government-sponsored market power, a latter-day version of the ancient Chinese salt monopoly.

The main argument in favour of the patent system is that it spurs innovation. And while that is probably true, it’s important to spell out precisely how. Absent a system of intellectual property protection, firms would seek to keep their innovations secret, like the Coke recipe. The key feature of the patent system is that firms disclose their innovations, in exchange receiving a period (usually 20 years) of exclusive exploitation of that invention.

A patent does not necessarily grant market power. Just because a product is unique does not mean it can face no competitors. For example, many pharmaceutical medicines are only minor chemical variants of one another. These are known as “me too innovations”. It is sometimes suggested that there is little social gain from me too pharmaceuticals, but that is rather confused. First of all, a me too medicine is only granted a patent if it is actually different in some non-trivial way. That difference may make it more suitable for certain kinds of patient, mean it has slightly less bad side effects, or another kind of incremental gain. Being just a little better is easy to scoff at but important to human welfare.

More straightforwardly, however, me too medicines compete with each other. If one is too expensive relative to the others, then in a well-functioning health system it won’t be prescribed — the extra cost won’t be worth the minor medical gain. Indeed, in some pharmaceutical reimbursement systems, pricing is based on what is called “therapeutic equivalence”, so a patient buying a medicine will only be reimbursed at the price of the cheapest drug in that class (including the original innovation and the me toos).

For a golden age in the 20th century, the patent system appeared to produce wonder drug after wonder drug, curing ailments that had killed for thousands of years and alleviating or eliminating systems that had persecuted sufferers throughout their lives. More recently it has come to seem as if the low-hanging fruit has been plucked and each new innovation is becoming more expensive and less life-changing. At the same time, across much of the developing world people continue to die from diseases that seem as if they should have cures but that it is not profitable for patent-based pharmaceuticals companies to research.

These problems have been noted and studied for decades, with a series of well-trailed alternatives to the current system being debated. Some of these alternatives have been repeated in a study out this week from the UCL Institute for Innovation and Public Purpose. Among its authors is well-known economist Mariana Mazzucato.

Many of their criticisms and solutions are familiar: a combination of the already-implemented (measures to steer innovation to address specific health areas, as is already the case with paediatric medicines, or the use of volume discounts for pre-committed large purchases); the long-debated (the use of prizes to incentivise research into medicines to treat ailments that exist in the developing world); the counter-productive (over-riding patents to produce generic variants, claiming spurious “rights to treatment”); and the plain silly (rules forbidding pharmaceutical companies from buying back their own shares or mandating the inclusion of patient representatives on the boards of pharma companies). Those final two examples each reflect a confused prejudice against profits and finance, and a wildly wide-of-the-mark allegation that pharmaceutical companies are too short-termist.

Lurking amidst this fog of the familiar, the flawed and the foolish, there are a couple of more interesting, more novel — though probably still wrong — ideas. One is the concept of establishing a set of “missions” in the area of pharmaceuticals development. This goes a little beyond the concept of steering research into that of creating an inspiring central vision of what research could deliver us as a collective enterprise. One could imagine, for example, such missions forming part of the corporate missions or even articles of association of pharmaceuticals companies.

Another proposal is that government research funding in health should come with much more extensive strings attached. Less blue sky thinking and more of a hard-nosed commercial stake for the government, acting like a venture capitalist. (One problem with this that the paper did not seem to recognise is the risk that firms would simply refuse to accept the government funding under these conditions.)

A further interesting idea Mazzucato et al mention (coming originally from Geoffrey Ling in the US) is the establishment of a Health Advanced Research Projects Agency modelled on the US Defense Advanced Research Projects Agency (DARPA). This would guide and coordinate research efforts from existing firms and government agencies, and might be an interesting complement to the idea of creating formal pharmaceutical missions.

In my view, the central goal of intellectual property rules should be to align legal property rights with moral property claims. You should have intellectual property rights over what is morally yours.

But there is surely scope for honing the current system to better coordinate philanthropic efforts to address diseases in poorer countries, and ideas for smarter use of government funding and government coordination efforts should be welcomed if not always embraced. Mazzucato and her co-authors appear to have offered a few of these — once they are filtered out from their anti-capitalist stew.

Andrew Lilico is an economist and the Managing Director of Europe Economics.