Understanding Patents on Pharmaceuticals

 

Patents are a policy tool used to encourage innovation and the diffusion of knowledge.  Patents provide an incentive for inventors both to invest in creating new useful knowledge, and to make that knowledge public.  A patent grants to the patentee[1] the right to control the use of an invention for a period of time, generally 20 years.  The patentee can license the use of the invention to others, or produce and sell the invention without competition.[2]  The patent is an incentive and reward because it ensures that the patentee will be able to benefit from any commercial opportunities that derive from the invention.  At the end of the patent period the invention is no longer protected and can be used by anyone.

 

The need for patent protection in order to encourage the creation of new pharmaceutical products is clear.[3]  Pharmaceuticals are expensive to invent but cheap to copy and manufacture.  Estimates of the cost of developing a new drug vary between $200 million and $900 million.[4]  Even at $200 million, drug development requires the expenditure of a massive amount of capital.  In contrast, producing copies of a drug that already exists is a relatively inexpensive exercise.  Without patents (or some other sort of protection) every drug, would be copied by rival companies, that did not have to spend millions on drug development, and price competition would make it impossible to recoup the research investment.  Without patent protection companies would be unwilling to invest the hundreds of millions of dollars necessary to invent new drugs.

 

While patents do encourage innovation they also have a cost.  Generally, the price of an item under monopoly is higher than it would be under conditions of competition.  This means that some people who could afford the item under conditions of competition are unable to afford the item when sold at a higher, monopoly price.  Economists refer to the lost sales as dead weight loss.  If it is a life saving drug that is under patent protection, and the patent monopoly causes a dead weight loss, patent protection poses a serious ethical dilemma, between encouraging innovation that will help people in the future, and the current health of individuals in need of medicines that have already been invented.[5]  In the case of some drugs, in particular drugs to treat HIV/AIDS, patent protection has had the effect of limiting access.[6]

 

In developed nations, governmental programs for the poor generally ensure that people will have access to the medicines they need.  This means that in developed nations there is generally no dead weight loss due to patented pharmaceuticals.  In poor nations, however, the prices charged by pharmaceutical companies may cause dead weight loss.  The government in many developing countries cannot afford to provide drugs for people who cannot pay.  Most households in developing countries pay for their own medicines.[7] 

 

It is important to note that patents are not the only or even primary cause of limited access to essential medicines in poor countries.  While there is a potential for dead weight loss, many people in poor countries cannot afford life saving drugs even if they were sold for the same price that they cost to produce.[8]  In addition, regulatory and institutional barriers play important roles in limiting access to medicines in developing countries.  For example, in India drug patents have been largely non-existent for the past 30 years, yet over 70% of the population still lack access to needed pharmaceuticals.[9] 

 

What high in-patent prices do for pharmaceuticals is place them even further out of reach for many of the world’s poor.  This makes the job of governments and organizations mobilizing resources to provide access to medicines more difficult than it would otherwise be.

 

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