A big issue we talked about after my presentation was whether or not supplementing (and ultimately replacing) the pharmaceutical patent system with a reward system is politically feasible. I thought I would use this post to explain why I think now, more than any time previously, the pharmaceutical industry would be in favor of adding a reward supplement to encourage innovation. The biggest issue pharmaceutical firms are facing right now is a “patent cliff” in which most of the patents of their most profitable drugs, which help cover the high costs of research and development for new drugs, are expiring all at once. These “blockbuster drugs” are responsible for maintaining the majority of profit streams for large firms. Without the patent protection of these drugs, generics are entering the market, driving down prices and thus decreasing the profitability of many firms.
This issue is compounded by the fact that there is little evidence that a new set of profitable drugs will be developed in the near future. In fact, pharmaceutical research and development has seen a steady decline in productivity over the past 30 years, with the number of therapeutically important new molecules produced dropping dramatically each year. A study by Antonanzas et al. found that in 2002, only 17 out of 78 new drugs approved by the FDA “contained new active principles and barely seven were considered to improve existing drugs.” The cost of drug development, however, has been increasing by an estimated 7.4 percent each year, further contributing to the productivity slowdown (Grootendorst 313). Therefore, because pharmaceutical firms are currently facing the perfect storm of increasing development costs, decreased profitability, and decreased productivity, I believe they would be more likely to agree to a reward supplement to the patent system to allow them to recover R&D costs quickly and easily for innovative new drugs.
Additionally, with an optional reward system supplementing the patent system, there would be less worry of government misallocation of funds, because pharmaceutical firms would be able to choose whichever system benefits them most. This would actually provide incentives to the government to provide a socially optimal reward amount because they would basically be competing with the patent system. The only remaining issue is that taxpayers would probably be more likely to disagree with the government paying a lump sum to pharmaceutical firms instead of the money being paid over time through government programs buying the drug at monopoly price.
What do you think?
Antoñanzas, Fernando, Carmelo Juárez-castelló, and Roberto Rodríguez-ibeas. “Pharmaceutical Patents, R&D Incentives and Access to New Drugs: New Ways of Progress at the Crossroad.” The European Journal of Health Economics : HEPAC;Dordrecht 12, no. 5 (October 2011): 393–95.
Grootendorst, Paul. “How Should We Support Pharmaceutical Innovation?” Expert Review of Pharmacoeconomics & Outcomes Research; London 9, no. 4 (August 2009): 313–20.