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Our conversation about Martin Shkreli and Indian pharmaceuticals reminded me that I’ve been having a mental debate with myself for a while. Where better to air my confusion than Ricochet?
As I argued, the case for importing generic medications from India is open-and-shut. I strongly suspect our failure to permit this is more owed to pharma-company rent-seeking and protectionism than to concern for public safety. American consumers are discerning enough to make their own decisions about whether they trust drugs from overseas. If we allowed them to come into the country, rigorous and trustworthy private mechanisms for inspecting overseas drug manufacturing facilities would quickly emerge, just as they have for awarding Michelin stars to restaurants around the world.
But I’m confused about the ideal regulatory regime for medication under patent, and indeed, for intellectual property generally. It’s a challenging problem if you think markets allocate scarce resources more efficiently than central planners do. The legitimate fight between the US and Indian pharma — “legitimate,” in the sense of, “I’m not sure who’s right” — is a case in point.
The US and India argue about the length of time a drug should be under patent. I can’t imagine an answer to this question that’s not arbitrary; nor can I imagine an effective private arbiter. Unless I’m missing something obvious, it seems to me that yes, we need the government to make and enforce this decision in some arbitrary (but consistent and predictable) way — and not just domestically, but globally.
That’s a lot of government.
Geeta Anand of the Wall Street Journal explains the problem this way:
The latest skirmish in the Indian government’s long-running battle with the global pharmaceutical industry came last week, when officials withdrew patent protection for an emphysema drug marketed by Germany’s Boehringer Ingelheim GmbH.
India’s refusal to recognize patents on some of Western drug makers’ most profitable medicines has been the cause of considerable rancor between New Delhi and governments in the U.S. and Europe, who say India is failing to adhere to global intellectual-property rules.
There can be no denying being tough on patents could cost India substantially in foreign investment—and that means lost jobs and growth. The country’s pharmaceutical sector was expected to grow to at least $48.8 billion in sales by 2020 from $11 billion in 2012, according to PricewaterhouseCoopers. Novartis AG, the Swiss company, has said it would reconsider launching new drugs in India after losing a court battle in 2013 to get a patent approved. Pfizer Inc. said at the time it was, “concerned about the environment for innovation and investment in India.”
Rigorously and globally enforced patent, copyright, and IP laws are obviously essential to innovation. If there’s no promise of unusual remuneration for inventing something new, people will have vastly less motivation to invent new things. If other people or companies can immediately copy and sell the idea or the product you invent, there’s little incentive to invest in research and development, little incentive to be creative, and little incentive to hire or cultivate inventive people. So I can think of no alternative to patent and copyright laws. But owning a patent gives you a monopoly on supply. And monopolies are not in the best interests of consumers.
Nowhere does the tension between creating incentives to innovate and protecting the interests of consumers seem more obviously in conflict than in pharmaceutical research and development. Pharmaceutical companies, obviously, want to gain and extend patent protections, and of course we want to them to have those protections. It costs a lot of money to create and test a new drug, and no one would do it if it were impossible to make a profit from it. In fact, we want to create very strong incentives for these companies to profit by discovering new drugs, particularly ones that cure diseases from which we now routinely die, or ones from which we’d begin to die again if the drugs we have cease to work. Think about new antibiotics, for example: The possibility that the ones we have will cease to work is real. So certainly, we want pharma companies to have very strong financial incentives to make new ones.
The hard question, for me, is how long any given drug company should enjoy a patent, and here, I can think of no way for markets to function absent a large amount of basically arbitrary government intervention. As the Journal notes,
India’s refusal to recognize patents on some of Western drug makers’ most profitable medicines has been the cause of considerable rancor between New Delhi and governments in the U.S. and Europe, who say India is failing to adhere to global intellectual-property rules. …
Indian law is strict in limiting what can and cannot be patented – and, local activists argue, justifiably so. Foreign pharmaceutical companies and their political allies may not like that, but it is hard to argue – morally, at least — against India’s approach.
It’s not clear to me that it’s a hard moral argument to make. The moral argument for a US-style patent regimen is the one I’ve made above: If we make drug discovery too unprofitable, pharmaceutical companies will cease to do it. But clearly, we don’t want companies to have monopolies forever. That would prevent consumers from enjoying the benefits of competition among producers.
So what, exactly, is an optimal patent regimen? One that gives us the best balance between providing pharmaceutical companies with an incentive to innovate and ensuring they also have incentives to copy each other’s innovations and compete on price? Is there such a thing as a non-arbitrary answer?
India’s law sets a higher bar for protection than in some other countries, limiting the ability of companies to get patents for new versions of drugs whose active ingredients were previously known unless they can show significant therapeutic benefit. U.S. and European patent laws more readily grant patents to updated versions regardless of whether they offer major improvements in efficacy over the original compounds. …
In 2006, India’s patent office refused to give Novartis AG a patent for Glivec, an extremely effective drug for a rare cancer. The patent office argued that the drug’s active ingredient was already known before the development of Glivec, and that it wasn’t significantly more effective than the earlier version. …
In 2012, India’s Intellectual Property Appellate Board revoked a Roche Holding AG patent for a hepatitis C drug saying technology involved in the drug’s invention was “obvious” and could be replicated easily. …
As Anand reports, the complaint among pharma companies in the US is usually the reverse:
[the US] patent office granted monopoly protection too easily for innovations that didn’t represent major advances over existing medicines or known science, a practice known as “evergreening.”
Longer-acting versions of old medicines were given patents, allowing their manufacturers to market them as better than the older versions, whose patents had expired—and whose prices were cheap. The collective effect of a low bar for patents drives up healthcare costs and insurance premiums for patients.
Anand concludes that India’s right:
To be sure, India’s patent office and courts can be arbitrary at times—and their individual decisions may not always be above reproach.
But taken together, India’s efforts to set a high standard for patents on life-saving medicines whose costs are often beyond reach of the majority of the population should be applauded and defended against attacks from the West.
In both India and the US, I suspect that the regulatory environment will to some degree reflect regulatory capture: Both countries have huge incentives to protect their own industries from foreign competition. But assume an entirely corruption-free regulatory environment and decisions that are truly made in the best interests of the public.
To whom should pharmaceutical patents be awarded, how long should they last, and why?
Can these rules be generalized to other forms of intellectual property?