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Economics smackdown

Everybody is talking about the general lack of preparedness for a major outbreak of the avian flu among humans. The only drug that’s known to help people fight off the disease is Tamiflu. It’s developed by Swiss company Roche and we don’t have nearly enough of it on hand to deal with a major flu outbreak should one arise. What should we do to obtain enough of it? One obvious answer is violating Roche’s patent on the drug and licensing other companies to produce it as well. Liberal economist Dean Baker over at MaxSpeak recommends doing just that. In fact, he recommends doing away with patents on drugs entirely:

Just for the record, the U.S. government already spends $30 billion a year on biomedical research, primarily through the National Institutes of Health. Everyone (including the pharmaceutical industry) claims that this is money very well spent and the appropriation always enjoys deep bi-partisan support. Why shouldn’t we believe that if we doubled this appropriation, to replace the $25 billion that the drug industry claims to spend on drug research (two-thirds of which goes to research copycat drugs) that we would end up with at least as good progress in developing drugs as what we have at present?

And, if the research funding all took place upfront, then the patents could be placed in the public domain. This would allow all drugs to be sold as generics. It would reduce drug prices by approximately 70 percent, saving approximately $150 billion a year. Half of these savings would go to the government (mostly through paying less for the Medicare prescription drug benefit), which would more than recoup its additional spending on drug research.

I also happened to read a post by Tyler Cowen over at Marginal Revolution arguing exactly the opposite:

We should not focus on avian flu to the exclusion of other emergencies, including bioterrorism. Avian flu is just one possible pandemic of many. If we confiscate property rights this time around, there won’t be a Tamiflu, or its equivalent, next time. We also need to stop taxing our vaccine-producing infrastructure through liability law.

Respecting Tamiflu property rights would supply an international public good as well. Many other countries will confiscate Tamiflu property rights. If the U.S. holds the line, we are subsidizing global R&D and doing a greater service for the world than our critics are willing to admit.

Interesting debate. Unfortunately, it’s purely academic since ultimately such decisions will be made based on politics rather than on economics. The pharamaceutical industry donates enough money to politicians that we’ll never see drug patents go away (assuming taking them away is a good idea in the first place), and if a flu outbreak got bad enough, public pressure would put an end to Roche’s patent. Can you imagine the public outrage if people in other countries were getting cheap, generic Tamiflu and we couldn’t get it in the United States?

2 Comments

  1. the expected solution you sketch seems kluge-esque, and yet it produces a reasonable result: profit motivation for companies most of the time, with public need taking priority in major emergiencies. that seems ok to me…

  2. Having worked for the Pharma-industry, I can give you their argument for patents (and even, for extending patents):

    The amount of time required to bring a drug to market, due to the amount of regulation (testing/trials, documentation, etc.) is about 15-17 years. This only gives the corp 3-5 years to recoup the millions of dollars it invested before the drug goes generic and the profit stream dries up. (Bear in mind, if they weren’t making profits under the current system, their shareholders would short the heck out of their stock.)

    This is why the PharaCorps want patents to be extended beyond twenty years. Make no mistake: the cost will not be lowered, just the profits would increase.

    Eliminating the patents would eliminate the ParmaCorps’ incentive to do any research in their current manner. A smart company would figure out how to do research and still turn a profit in a patent-less environment, thereby crushing the competition. Free Market at work, yadda yadda.

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