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An alternative to pharmaceutical patents

Posted by Graeme in Economics at 7:14 am on Monday, 30 April 2012

I have thought about this before, but a question my nine year old daughter asked me crystallised the idea. The (already existing) regulatory process can be tweaked to provide an alternative to patents that would make the market more competitive, reduce over-head costs of research, and reduce litigation costs and uncertainties.

Patents have failed as a method for encouraging the development of new drugs. The rate of discovery of new chemical entities (i.e. new active ingredients, as opposed to formulations) is falling. Governments are considering measures such as bounties for new drug discovery, because patents are not providing the right incentives. Patents actively provide bad incentives and are a very inefficient way of funding R & D.

A conversation with my daughter about herbs, lead me to explain how new drugs can be developed by studying herbs used in traditional medicine. I also explained that I thought it unfair that companies doing this were able to patent the active ingredient (in the US at least) even though it might have been in use for centuries or millennia in its natural form.

This lead me to start thinking about what those companies deserved. My answer is exclusivity (for a time) on the formulation they develop and get approved. The obvious answer is to give them exclusivity on the formulation (something similar to orphan drug incentives). This would allow others to develop other formulations, making the market more competitive and keeping prices down.

Of course, drugs developed from herbs are only a small part of drug development, what about the development of entirely new chemical entities?

The answer is that doing things this way would still keep an incentive to develop them: it would give the discoverer a lead in developing formulations. It would also get rid of one of the bad incentives of patents, delaying developing new formulations until the patents on the original chemical entity and formulation are close to expire in order to maximise the time for which at least one formulation is in patent. We could expect to get improvements such as extended release formulations much sooner, and we can expect multiple competing formulations to appear for major drugs.

New drug discovery may require funding from governments, but that is required anyway, and abolishing patents would be consistent with rewarding new discoveries with bounties.

There is in any case, extensive government subsidy for the development of new drugs, and the regulatory burden would noticeably increased, so this would be, on balance, more of a free market solution than relying on patents (because we would be rid of the monopoly rights granted by patents).

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