Interesting point about reducing patent terms helping the consumer--as R&D money could, perhaps, be better spent elsewhere.

I have a question about IP more broadly, inspired by your discussion on Lessig's blog. The terms on patents seem at least defensible, whereas the lengthy terms on copyrights seems to me indefensible. Books, movies, and music are not written and produced by the consideration of garnering profit 30,40, or 50 years later. What movie studio, when deciding on whether to green light a project or not, asks what possible profit will they make in 40 years?

What economic arguments are there for having copyright terms of 100 years or more? Can they be defended or are they purely a result of special interest lobbying?

Purely the result of lobbying. Assuming an expected rate of return of 10% per year (which is much lower than record companies expect), it would not be worth investing $74 for a certain profit of $1,000,000 in 100 years. A certain profit of a million dollars 50 years from now is worth $8,519 (but if you do a more accurate expected return rate of 20%, that value drops to only $110).

Any finance student (even a freshman) could tell you that the value of extending the copyright of something produced now is virtually worthless compared to the value of extending the copyright of something already produced (even more so when you realize that there is no cost to extend copyrights to previously produced works, other than lobbying cost)!

So right yu are that companies may race to the finish line to claim the prize.

Unfortunately we consumers/patient lack the knowledge to be informed consumers. Everyone has some knowledge of what a car is.

In the field of medicine the consumer has to put their trust in the doctor, the drug companies, and the regulatory system.

However when ethics lapse there can be significant consequences.

See this breaking story on our site:

Subject: BREAKING - HOT UPDATE ON "VACCINE-A" TO THE BLOGOSPHERE

ANTHRAX VACCINE - Had additive agent that may be injurious to the health of
those service people inoculated.

Several days ago I posted and linked to a book review on our site,
"Vaccine-A." We've since transferred this piece from the HSPIG Forum Site,
"Book Reviews" to the new HSPIG blog site:

http://www.hspig.org/MT/weblogs-hspig/archives/2004/11/anthrax_vaccine_1.html

HSPIG has a keen interest in things related to bioterrorism and bio-chem
weapons both in their use and our response and counter-measures.

The book, Vaccine-A, has far reaching ramifications from the manufacture of
such weapons to mounting creditable defenses against their use.

This is something to watch. This story is continuing to evolve.

This is still under the radar of the MSM. The MSM is probably wary of
Uncle Sam I suppose. The MSM has been burned badly lately on not
objectively reporting the news. One can argue almost that they have markedly
been rooting for the enemy.

Mr. Matsumato doesn't appear to be an alarmist and has considerable
credentials with a strong research/investigative background. Mr. Matsumoto
is a well respected and experienced investigative journalist both in print
and the TV media. Mr. Matsumoto was the Chief Investigative Correspondent
for the FOX News Channel and a foreign and national correspondent for the
NBC Nightly News. For his other distinctions and awards see his bio at:

http://www.hspig.org/hspig-board-bios-gmatsumoto.htm

This story has the potential to dwarf the Rathergate scandal and could even
rival Watergate. This Country is at war and those who would allow this to
happen to our brave men and women need to be held accountable for their
actions.

Since the original post Tom Barnes, Co-Founder of HSPIG and Persian Gulf War
vet - military intel, has talked many times with the author, Mr. Matsumoto.

Mr. Matsumto has agreed to come on the Board of HSPIG. Mr. Matsumoto is
staking his professional reputation on his book. As he says,"I took a page
from my old employer's play book at Fox News Channel - 'We Report. You
Decide.' I reported; now you decide." Mr. Matsumoto backs up his book with
exhaustive research he has done over the last several years.

Mr. Matsumoto has answered several comments from concerned vets in posts
subsequent to the initial article.

In a response on the HSPIG blog, Mr. Matsumoto says:

Dear GulfVet2: I obviously didn't think it was purely coincidental either.
The trail of evidence is too complicated for TV, and almost too complicated
for newspapers; hence the book. The DOD/FDA stonewalling on this issue -
which has been documented by the GAO, Congressman Jack Metcalf, and the
House Government Reform Committee - has been so formidable that I felt it
necessary to write a book to lay it all out. Even pressure from Congress
couldn't pry loose the facts that you've read in VACCINE A.

I took a page from my old employer's play book at Fox News Channel - "We
Report. You Decide." I reported; now you decide.

What I reported in VACCINE A, you won't hear from the Department of Defense
or the FDA. I think officials from DOD/FDA/NIH - the three federal agencies
working in concert to "fast track" the second generation anthrax vaccine
with squalene - will continue to stonewall, obfuscate and lie about squalene
and its injurious effects until they are forced to testify about it under
oath. With the help of veterans like yourself - the people who arguably need
the most protection from unethical human experimentation - that could
happen.

Mr. Matsumoto

Ron Wright, Moderator
HSPIG Forums Site
www.hspig.org

It absolutely astonishes me to see something from Richard Posner that I can completely agree with.

What do you think about curtailing trademark protection as one part of the solution to this problem, especially to the effect of consumer loyalty after a drug goes out of patent? For example, it might be useful to have the trademark to a patented product go generic by statute at the same time the patent expires. ??

Patents serve an additional function besides providing an incentive for invention. They also provide an incentive for developing a product. For example, a patent holder might invest in additional trials to find additional uses for a medicine. If the drug were generic or not patented, then there would be no incentive for this investment. Also, a patent holder would invest in promotional activities.

As to promotion, two points:
1. Promotion is not so different from research. Both are information activities. Research finds information about the functioning of some chemical as a drug. Promotion then distributes this information to users – physicians and patients. Without the promotional expenditures, users would have more difficulty in learning about the results of research, and some would not learn at all.
2. Critics complain that some patented drugs are not much if any more effective then generics, but that promotion and advertising lead consumers to spend more on the patented drugs. But that assumes that consumers would learn of the existence of the generics. No one will spend resources promoting generics, so the choice is often one between use of the patented drug and no drug at all. If the drug is useful, then there may be no better alternative than promotion and use of the more expensive drug.

As a academic researcher in basic science (eg. basic biology of Alzheimer's disease), I really wasn't prevented from doing the research that I wanted to do because of pharmaceutical patents directly but I did find it difficult to know what other groups had already done so that I wasn't "reinventing the wheel".

This was largerly due to the current structure of the system for publishing scientific results but there also seemed to be the consideration that researchers in industry (and even in academia) were reluctant to share their results because it might somehow compromise their ability to get a patent at some future date.

In a broader sense, though, as a scientific researcher, what bothers me is that pharmaceutical company managers and executives earn so much more than the scientists actually doing the research.

Along those lines, it is interesting that the word "free" can mean either "free speech" (political freedom) or "free food" (economic freedom). When it comes to politics, "divine right of kings" has been replaced by "government for the people" and there is a broad recognition that there must be checks and balances on the extent to which political leaders can take a country's resources for themselves.

On the other hand, there is very little recognition that there must be checks and balances limiting the extent to which a company's leaders/owners can take the company's resources for themselves. Even though it is the company's employees that build up the company's value, the employees are not seen to have any rights to that value themselves.

As someone who works for a small biotech company in drug development, I am pretty confident that my company would not exist if the patent life of our technologies was reduced. My company was started by scientists who believe in their work and who are driven by the science rather than profit. But because of the costs of drug development a company like ours would not be able to get investors to back it if there the profit margin was reduced. Additionally, being a small company the time to market is longer than the average pharmaceutical company. We don't expect to be on the market within 8 years of filing our patent; our expectations are more like 10-12 or more. Perhaps there may still be some advances in medicine if you reduce the patent life, but I wouldn't doubt that some great technologies might never have a chance if this were to happen. I think very few technologies from academia are licensed out to Big Pharma at such an early stage of development and companies like mine are needed for their development.

Just a layman's comment or two:

I think there are two questions here: first, whether the current patent system is the optimal one for pharmeceuticals, and second, whether the government should regulate the prices of prescription drugs.

The first question seems to me to be a pure question of economics: what rate of return is necessary for pharmeceutical companies to have an incentive to invent, and how long must patents last to allow companies to realize that return? This question should be answered by a detailed empirical analysis of the industry. It could also include data about the transaction costs of patent searches and whether those costs might be reduced by reforming the patent system somewhat.

The second question is a political one: how much are we prepared to allow drug comapanies to earn on the products they make? Usually, market price is based on supply and demand, and even if demand is inelastic for a particular product, we don't much care about it as a political matter, because people will not suffer or die if they cannot buy the newest mousetrap. With drugs, demand is inelastic (medical conditions are not preferences that change based on cost), and most people have at least some inkling of a belief that patients should not suffer so that drug company executives can extract an extra buck. Thus, many countries have placed limits on what they think that drug companies should be allowed to charge for certain products. That, of course, has consequences - it may reduce the ability of companies to invent new drugs, or it may skew the market as a whole. Or maybe it just stops executives from lining their pockets. This is a discussion that needs more empirical data as well as a full political airing. It cannot be solved just by economics.

It's been mentioned before, but I'll do so again. Re pharmaceuticals, the ultimate consumer (i.e., the patient) is usually in the dark wrt alternatives to a doctor-prescribed drug and even to non-drug treatments. If the patient had better comparative information on drug effectiveness and prices (as well as potential side effects) of the whole range of drugs that a doctor could prescribe for a condition, then the patient could choose to try a lower cost drug in hopes that it would provide adequate effectiveness for HIS/HER specific needs and/or eliminate on-going side effects. This seems particularly useful since there is always a fairly wide spectrum of effectiveness and side effects for any drug in a patient population.

This latter phenomena is often over-looked in the drug cost debate. The prescribing doctor would necessarily need to be involved in this process, but that would not be a change from present practice.

I don't find Paul Rubin's theoretical arguments in favor of advertising to be all that persuasive when compared to seeing actual drug commercials on TV. Anyone who's seen these ads knows that they have little information content and appeal primarily to our emotions. If you want to defend them, you need to show how particular drug advertisements have proven to be valuable, not just defend the category in the abstract.

Between the media, the Internet, and of course the advice of doctors, not to mention other forms of advertising, I find it hard to believe that any consumer would be at all inconvenienced if television ads for drugs were banned. Banning the most expensive and least informative form of advertising doesn't seem like a serious barrier to finding out about these drugs.

Furthermore, if drug companies weren't able to make emotional appeals in favor of more expensive drugs, maybe consumers would be less likely to want them just because they have vague feelings that they're somehow better than generics.

Would it reduce social costs of the patents to require a prototype? The effective life of the patent would be lengthened if it was measured from the time of presentation of the prototype. On the other hand, the costs incurred by the inventor in developing the prototype (and hiding it, if it is big) must be added to cost exposure before protection begins. And there also are increased costs on the patent office of viewing the prototype. Suppose that Noah had wanted to patent his 300-cubit x 50-cubit x 30-cubit ark. He would have had to conceal it in a 301-cubit by 51-cubit x 31-cubit tent until the patent office inspector had come to view it.

What would be the change of social costs, in balance?

There's currently a very well told series running in the Seattle Times by reporter Alwyn Scott that illustrated the issues being discussed here. Inventor Harry Rassmussen made a fortune, lost it, and is now about to garner a second fortune. This link gets one to a discussion about the first two articles in the series, and there are links there to those pieces:

http://seattletimes.nwsource.com/html/shiftingfortunes/2002116859_qa_investor12.html

Brian Slesinsky says that "Between the media, the Internet, and of course the advice of doctors, not to mention other forms of advertising, I find it hard to believe that any consumer would be at all inconvenienced if television ads for drugs were banned. Banning the most expensive and least informative form of advertising doesn't seem like a serious barrier to finding out about these drugs." He is probably correct for anyone reading this blog. But many people do not have access to the internet (or do not search it for drug information.) A doctor is useful for information only if a patient knows to see one and ask; but for many of the drugs advertised on television, without the ad, the consumer would not have the information needed to ask or might be embarrassed to ask (think of the early Viagra ads). Information is expensive, and ads are one of the cheapest ways to effectively communicate with many consumers.

You all should read the recently published book, The Truth About Drug Companies by Marcia Angell M.D., a former editor of the New England Journal of Medicine (one of the best U.S. medical journals).

Amongst other things Dr. Angell notes that in 2002 "the combined profits for the ten drug companies in the Fortune 500 (35.9 billion) were more than the profits for all the other 490 businesses put together (33.7 billion). Profits for these companies in 2001 were 18.5 percent of sales as opposed to the median return for all other industries in the Fortune 500 which was 3.3%.

With drug companies nothing is as it seems. The claim is that the high charges for medications are to provide for research and development. However, drug company's expenditures in 2002 for R and D was 14 per cent of sales while that spent on advertising and marketing was 31% of sales or about 67 billion dollars. Dr. Angell also points out the unreliability of the costs provided by PHARMA for the development of new drugs.

The system is lopsided and badly needs reform. Your doctor, pharmacist, or other professional may actually be receiving incentives, financial and other to encourage your use of medication which may not be better than less expensive ones.

We need changes not only in the patents but also in the transparancy of the costs and expenses. Further, patients need to be informed of the incentives provided professionals to recommend or prescribe a medication--that includes the researchers. What good is a medication if we cannot afford it. Some new drugs are costing patients over $50,000/year!

Paul Goff M.D.

Many of Posner's assumptions relative to the drug industry seem contrary to my knowledge of the drug industry. The rant below (extracted from a discussion about how tort liability does/should fall on the drug industry) contains an example of drug companies having insane excess profits. It suits Posner's argument to say that researching drugs is soooo hard and oh the poor drug companies are struggling to get by! But we can all google their annual reports and see otherwise.

The comment above about the difficulties that biotech startups have bringing drugs to market is correct except I think that in reality, very few small biotechs ever actually get into bringing their drugs to market before the founders have the bright idea of cashing out and licensing to "big pharma." There is a similar trend in the computer/networking silicon industry where I come from.

---Begin quoting myself (from Oct.)---------

A lot of people don't realise the degree to
which drug research is already subsidized by
the government directly, through universities which spin off startups when new technologies/drugs begin to look marketable. Cambridge MA is littered with hundreds of subsidized biotech startups. Pfizer does not actually do much research. Their Research and Development costs as percentage of revenue
are about 12%. Their R&D budget involves buying a lot of finished technology, so predictably, their marketing costs are higher. (roughly 40% of sales)

But then you ask yourself, why does something like a cure for disease need to be marketed so hard that 40% of its cost goes to that. Shouldn't it sell itself? Do we need Superbowl ads for Viagra? How much of this is selling the disease and how much is providing a cure?

Once you start to realise how much research is subsidized, you begin to see Chomsky's point that the US looks like a command economy in areas where we are internationally competitive (medicine, computers, high-yield farming.) So then the question becomes, why keep up the free-market front? What does that cost? I can never forget an example given by Nader in a press conference I saw in Boston:

The US government, via subsidies to the National Cancer Institute, spent 31 million taxpayer dollars to develop the ovarian cancer drug Taxol. The NCI took the drug through Phase III clinical trials, at a cost of about $310,000 per trial phase. The government, perhaps wishing to avoid being involved in distribution, handed sole rights to sell the drug to Bristol Myers Squibb.

In 1999, Nader was contacted by a woman who reported having to pay $14,000 for six doses of Taxol! (Which costs pennies per dose to make.) BMS made $1.6 Billion dollars on Taxol in 2000. They now claim to have spent $1 Billion on Taxol research...

Do we believe them? If we don't, then where do the Billions go? That seems high even for liability costs. The obvious answer is just raw "profit". I'm all for rewarding hardworking researchers, but that Billion went to a CEO and some 10% Beneficial shareholders.

I'm not suggesting that the government should subsidise marketing costs, liability costs, and profit on Taxol, to the tune of $1.6 billion per year. I am suggesting all three of those costs have been inflated to obscene proportions, especially considering that Taxol is a potentially life-saving drug that people should morally have access to, and considering that the folks who actually invented it are living on public interest salaries!

Wes, you might want to check out Madey v. Duke. For a very long while, most universities didn't need to do patent checks because they believed academic research activities were exempt from patent infringement. Alas, says the Federal Circuit, but no.

Because of this ruling, pharmaceutical patents may very well prevent academic researchers today from accomplishing things they did in the past. If you're trying to synthesize intermediate materials, do you check to see if there's a patent? If you want to work on a gene fragment you can extract yourself from a bacterium, do you check to see if there's a patent? If you use a technique you read about in a journal, do you check to see if there's a patent?

It was bad enough when we heard stories about PhD students who couldn't publish their dissertations and graduate until their work had cleared the university patent office. But now, people are beginning to get letters telling them that their interim work is barred as well.

The interesting thing about Posner's last paragraph is it sounds a lot like Marx's argument about how competition can/will lead to an overproduction crisis. I would read that last paragraph as a strong argument for government regulation/assignment of new technology research (perhaps on the current Chinese model).

If long term patents (or long term equipment supply contracts at telecommunications service providers) lead to 25 companies getting into a race only one can win, then there is going to be a great deal of economic waste. However, at the other extreme if patent terms are negligible (or equipment supplied to a market becomes fungible/commodifiable) then incentive for innovation stops. The necessity of striking a balance somewhere in between is a great case for either direct government intervention or closely regulated industry consortiums. No one could expect the market to decide for itself what the ideal length of a patent term should be. (Well, I'm sure some L&E type will try to say it.)

"I agree that no adequate, feasible alternative to patents exists for encouraging R&D by manufacturers of pharmaceutical drugs."

Can we at least pretend that we know how to study history? I suppose not--I suppose that instead we should wonder how anyone ever found incentive for any entrepreneurial innovation before patent laws "blessed" us. Of course, people in all former socialist societies--when faced with changing to a market system--become perplexed about how the economy could possibly still function after abandoning "centralized control."

Let's please be honest to ourselves. Only one solution exists: eliminate all IP laws--because they are collectivist, and statist, and wrong.

There is a motivation by big drug companies to sell more, and thus doctors are taken golfing and rolfing, and who knows what. Perhaps this cost is small compared to R&D, but it is important to consider.

What if the marginal improvement on a drug is, frankly, not worth the social cost? That we'd all be better off with an older, cheaper, nearly as effective drug. Then the drug company doesn't have to fete the docs, or whatever.

That's the problem. The market is not always perfect. It allows for waste with good marketing.

I would also request that you put up a contact site. I'd like to suggest that you consider the idea of school choice and vouchers as an imperfect market because of poor information to consumers. Not because of all the reasons.

http://drcookie.blogspot.com/2004/12/voucher-schools-become-accountable.html

Heidi, I wasn't aware that pharmaceutical patents were being used directly against academic researchers doing basic science research but that could certainly be changing.

If someone were to obtain a patent on something like "Using gel electrophoresis to separate proteins" then that could have a profound effect on basic science research but, although I wouldn't put it past the patent office to grant such a patent, to my knowledge that hasn't happened yet.

My personal experience with IP law has been more that it prevented collaboration.

A couple years ago I was interested in a software algorithm for protein folding and I was told that to get the details of the algorithm I would have to pay hundreds of dollars to pay for the University's legal office to prepare non-disclosure forms for me.

More recently, I was traveling in a country without good academic libraries and I had to pay hundreds of dollars to buy a copy of a journal that had a scientific article that I needed. If the scientific article had been freely available online (not encumbered by the journal publisher's copyrights) then it would have saved me a lot of trouble (and money).

Paul Ruben writes: "But many people do not have access to the internet (or do not search it for drug information.) A doctor is useful for information only if a patient knows to see one and ask"

If someone isn't taking any steps to solve a medical problem, not even asking their doctor about it, it's unclear to me why the rest of us should have to pay to inform them. Few would be in favor of a special tax to advertise prescription drugs on television. Why should we feel any better about it when these costs come from our insurance premiums?

Wes, it depends what you call a "pharmaceutical patent" -- on the one hand, if you consider that to be the end drug, sure, it doesn't bother basic researchers. But people get patents on a broad range of things, like techniques and gene sequences. I was taking a broad view of "pharmaceutical", as in, not just the end product, but anything patented in the intermediate stages that helps create and/or test pharmaceutical drugs.

Of course, things like gel electrophoresis have been around long enough that a patent won't issue. But newer techniques -- let's say, someone's grand new NMR technique -- may be, and often are, patented. The next gel electrophoresis might be patented.

Those researchers who aren't collaborating with you because they want to patent their research are, um, patenting their research. So when they publish their article, and you say, "gee, that's a pretty cool thing they did here; I'd never have thought of it, but maybe I can try it for this other problem I'm thinking about" you now need to check to see if they patented the cool thing.

Basically, I think I'm agreeing with you, except to the extent that I point out that there may be more obstacles than you think.

Brian: If someone isn't taking any steps to solve a medical problem, not even asking their doctor about it, it's unclear to me why the rest of us should have to pay to inform them. Few would be in favor of a special tax to advertise prescription drugs on television. Why should we feel any better about it when these costs come from our insurance premiums?

Yes! Patent reform along the lines suggested by Posner combined with stricter regulation about pharmaceutical advertising would be a huge improvement. Given that many pharmaceuticals are barely better than placebo, it's ridiculous to allow the companies to brainwash people that life will be better with celebrex.

Wes:

"Even though it is the company's employees that build up the company's value, the employees are not seen to have any rights to that value themselves."

I believe it's called a 'wage', most people demand one in order to work. ;) Pharma researchers usually have pretty decent wages.

Still, it is of course possible that nefarious executive types extract rents using all of those juicy agent problems that crop up in large organizations. Still, keep in mind the executives are employees - not owners. Whatever they skim off the profits of the company hits the owners especially hard.

I wonder what effect on prices we would see if people actually paid for their own prescription drugs. Since the price of a drug is currently set at what insurance companies are willing to pay (and then pass on to the consumer), high prices are the norm. I wonder if prices would drop in a freer marketplace.

Yes, I recognize that patents are meant to prop up prices by limiting how efficient the market can run. However, I also recognize that having a third party buy the drugs makes the market even less efficient. Somebody has to decide what price to charge for a patented drug, and that decision is partly based on how much the consumer is willing to pay.

There are other forms of market protection for developers and marketers of drugs other than patents. As part of the Hatch-Waxman Act passed in the early 80's to spur generic drug development, Congress also created periods of exclusivity for approved drugs, independent of patent life. So, if a sponsor of a drug conducts a clinical trial that is essential for approval, the sponsor receives 3 years of exclusive right to market the product. If the drug is a new chemical entity in the US, the sponsor receives 5 years of exclusivity. (Note that the drug does not have to be a new drug, just one that was never approved in the US.) Also, the Orphan Drug Act grants 7 years of exclusivity for sponsors who receive approval for drugs that are used to treat diseases affecting fewer than 200,000 people in the US. In a similar vein, drug companies can get 6 months of exclusivity for conducting a clinical trial demonstrating a drug's efficacy in children.
However, because patent terms typically exceed (trump) exclusivity periods, the patents are valued much higher in the market than regulatory exclusivity. Typically a pharmaceutical company does not care about Hatch-Waxman, Pediatric or Orphan Drug exclusivity until late in a products life cycle when it becomes a way to extend a product's market protection.
Perhaps it would be useful to follow Europe's lead. There a new chemical entity receives 10 years of market exclusivity. Because exclusivity is a race to market rather than a race to patent, the game would change radically if patent life were reduced/eliminated and only approved marketed products attained a period of exclusivity. I'm not sure of the consequences but it would be interesting to air the possibilities.

Dear Honorable Judge Posner,

This comment is coming from a law-student who is also an engineer, and, usually a fan of your work. I'm disappointed with the shallowness of your analysis.

This comment goes beyond the application of patent protection to the pharmaceutical industry.

You give very little weight to the psychological value of patents. I know it's fun to stick with numbers that you can crunch quickly and easily, but just because there are "soft factors" that are hard to quantify does not mean that they don't have an effect! Patents create the hope of a pot of gold at the end of the rainbow of your efforts (a temporary monopoly). It's very rare for anyone to actually get the pot of gold, indeed, but the hope of getting it drives the speculation which builds the technology base.

But for the ability to monopolize your invention, the hope that you can bring production costs down with sufficient speed to recoup your R&D costs before your competitors copy and mass produce your invention would be an unreasonable business risk. Who would hire the most creative minds in a field if you can't enjoy what he or she brings to the table? Furthermore, without patents to protect, there would be no basis to demand that employees not utilize their specific knowledge of your coming products when they get hired away.

As an engineer who has invented things in the past, I see your "clinical" analysis of the problem as giving too little account to the human motivations of those who are responsible for most of the technological advances in the world. Sure, the system can benefit from a re-vamp. Perhaps inventions should be thrown into the public domain within 2 years if the patent-holder cannot demonstrate that he/she/it is actively developing an application for it, or something of the sort. (In the pharmaceutical industry, that might be a demonstration that the patent holder is actively taking the product through the approval process or is using it in the development of something else which will probably be brought to market.)

Nevertheless, the HOPE of a pot of gold is why people focus capital (human and otherwise) towards R&D. If you decrease the perception that a pot of gold might ever be had, you reduce the probability that research will be performed on any large scale.

Your example at the end of your post is just weak. If the "prize" is reduced from $1B to $800M, then you reduce the capital-attraction aspect of the invention. If you do that then you reduce the probability that the invention will be realized AT ALL, and thereby not only reduced the potential up-side of an investment in that work, but simultaneously increased the probable down-side.

You speculate that the resources that doesn't go into the pharmaceutical industry will go somewhere else... Where? The amount of economic resources is not a static quantity. We create new wealth through creative effort. So, if you discourage creativity in one place, you might not get it anywhere else, unless you do something to encourage creativity in another place. Market forces (i.e. potential profits) generally pick the place where creativity should be focused. Decreasing the value of patents, generally, will discourage investment in research, and that will significantly reduce all creation of new technology and subsequent wealth.

If you want to stagnate the economy, shortening patents is probably the best way to go about it.

George,

The problem I see with getting rid of patents and using exclusivity terms that are awarded after the drug passes clinical trials is that one company can spend years on phase I and II (with trial and error) and have another company with more resources come in and follow their example and and finish phase III before the first company. The first company is out millions with no way to recoup.

Patents protect the company that develops the technology from the beginning. If you take away that protection, there will be a higher risk to that company and subsequently much less technology. Companies need protection if they are going to invest millions into something that is already inherently very risky. Otherwise they won't invest.

With exclusivity alone only the big companies with the resources would develop anything. Plus you may get a race with several companies trying to beat each other to the punch for one blockbuster drug with only one winner and several out of millions that could be spent on other drugs. This would also take away from the amount of new drugs on the market, and the amount of small biotech companies developing drugs. Which can't be good for the market or the patients.

I don't understand the reason why patent needs to be awarded to the first one to cross the "finish" line. If other individuals (or organizations) had put efforts/investments before patent application was filed they have right to make free use of that knowledge without restriction of patent filed by competitor.

Only when a successful patent application is filed and made public then can it be argued that any subsequent work by others is influenced by the knowledge of that public patent.

Why only concern ourselves with recovery of investment of first R&D investment to successful file patent? What about others who might have invested heavily and were almost near the "finish" line? Doesn't their investment count for something?

Dear Judge Posner,

I'm not a patent attorney, and I don't play one on TV, either, but I thought you and your audience might find this interesting:

http://www.spectrum.ieee.org/careers/careerstemplate.jsp?ArticleId=i120204

From the IEEE (electrical engineers) with some interesting proposals about patents. Refered to me via Slashdot.

Just a Fan Here in Oak Park

I agree with the last comment pertaining to rewarding R&D done by other companies. By only rewarding the first to cross the finish line you create incentive to skip a few steps to get the patent first, possibly sacrificing safety. Constantly drugs are put on the market before enough research is done on there side-effects. Recently, Vioxx and the AIDS drug to Africa. By rewarding all parties involved in R&D companies would be less inclined to patent or place a drug on the market without fully testing it.

It becomes a fine line dealing with such matters. Creativity and discovery are born out of competition and with a lack of incentives science can be slowed, but it also becomes an issue of safety.

I realize that being first still has it's advantages, but playing with numbers here and there may allow for some change towards the positive.

Ashish,

But when are talking about recovery for R&D investments we are talking about recovery for the costs after the patent was filed (in drug development this is millions of dollars). Most will not invest much before filing the patent therefore any company that lost in the "patent race" would have lost a negligible amount of both time and money compared to the whole process of drug development. Patents are filed at the very early stage in drug development, before animal toxicity tests and likely a couple years before Phase I starts.

Investors are not going to want to invest the money if there are other companies developing the product(not when your talking about 10 years and millions of dollars). The company/individual that "almost" filed the patent isn't going to want to spend the time on the drug either if they know someone else is developing it and is already farther along in development.

I've enjoyed your exchange about the role of patents, but I'm not sure if the pharmaceutical industry is as efficient as we assume. You write that: "The pharmaceutical-drug industry is the industry that can make the strongest case for needing patent protection. The investment required to bring a new drug to market is very great, in part because of the many “dry holes.”

You are right about the number of "dry holes" that the pharmaceutical digs. But there is an even more sobering prospect that the large pharmaceutical firms may not even be very innovative. An examination of the financial data from the pharmaceutical industry suggests a bleak picture about the efficiency of this sector. For example, the R&D expenditures of pharmaceutical industry while large are almost always dwarfed by the total profits in the industry. Moreover, the level of R&D spending among large pharmaceuticals has remained constant year-over-year, about 11% of revenues while productivity as measured by "new" drugs has declined. The biggest growth expense for pharmaceutical companies is what is labeled marketing and administration, which is roughly about 36% of revenue. Companies are spending such an extra-ordinary amount competing against other me-too drugs, thus suggesting that many of their innovations are easily commodified. It is not clear how the net social welfare is being advanced. In her research on drug industry patents, Marcia Angell examines the patents that were issued to drug companies and finds that most of the innovative drugs do not emerge from large pharmaceutical firms, but small, entrepreneurial led bio-tech firms. She finds that "Of the seventy-eight drugs approved by the FDA in 2002, only seventeen contained new active ingredients, and only seven of these were classified by the FDA as improvements over older drugs. The other seventy-one drugs approved that year were variations of old drugs or deemed no better than drugs already on the market. In other words, they were me-too drugs. Seven of seventy-eight is not much of a yield. Furthermore, of those seven, not one came from a major US drug company."

Rakesh-

Does she mention how many of those patents issued to small biotech companies were eventually licensed out to pharmaceutical companies for development (or even licensed out to bigger biotech companies)? Smaller biotech companies tend to be more science oriented (and therefore more innovative) and pharmaceutical companies tend to be more business oriented, but the small companies can't afford to develop all the way to the market. They need Pharmaceutical companies to "buy" the rights and finish the job. This is why patents are needed, otherwise they would just take the rights, eliminating reward for the smaller companies and thus eliminating the small innovative companies altogether.

Also, along the same lines, I am curious to know if there is any mention as to how much the pharmaceutical companies spend for in-licensing as opposed to R&D? They need to compesate for what the little company already put into development.

Sami,

I think you are right about smaller companies being more science oriented and pharmaceutical companies being more business oriented. I don't have the specific data on re-licensing, but imagine that getting that data from university technology licensing offices would not be difficult.

But I think your point also takes us into a different debate. Specifically, who bears the costs of drug development and who captures the benefits. If, as you suggest, small drug firms are more science oriented and "like" universities, it is likely that many of their ideas are derived from university/publicly funded research. After all, there is substantial evidence that bio-tech firms are often proximally located near prominent research universities, thus there is some type of spill-over effect in which public benefits are being captured by private actors.

Additionally, there may be another spillover from universities to bio-tech, that is more subtle and not often considered in the patenting debate. I think this spill-over is in some ways more important than the specific content of the ideas. It is the spillover from the ethos of public science, which for most of the 20th century characterized university based science. Specifically, most university based research is a type of "public good". That is, it is often produced along social conventions that the sociologist Robert K. Merton called "the Republic of Science." These conventions consist of communalism, universalism, dsinterstedness, originality, and skepticism. The communal ethos, in particular, is rooted in a view that stressed cooperation and sharing of information and ideas, that has proven to be the best way to advance knowledge. Merton's hypothesis is that it was only through peer review that reliable knowledge could be accumulated. This, in turn, required that people not take a private view of their discoveries, but rather a public view. As a result, people had to put all of their knowledge out in the world for skeptical examination, what Merton called organized skepticism. This approach required a full disclosure of information, both good results and bad results (see Vioxx as an example of hiding data). Through this exchange, those individuals who would discover or advance knowledge would receive benefits, but usually in the form of status and recognition, not monetary rewards. So, in an ironic way, the privatization of the benefits of science may in fact over time result in a slow-down in the pace of the development in new knowledge.

Rakesh -
As a scientist, I agree that in general science is enhanced greatly by making their discoveries public. But as someone who now works for one of the small biotech companies (we do license from universities), I see that there is a point in drug development where it is not possible to move forward without privatization.

The original inventor can still publish his data (after the patent is filed) and still continue his studies. After filing the patent the information is in the public domain and other researchers can still many times use the drug for non-commercial purposes (many times the researcher can buy it from a vendor who then pays a royalty to either the university or the company). The university and the inventors (and the PIs lab) get some money from out-licensing which can be spent on more research. But the inventor and university cannot enter clinical trials. Unless you want the government to fully subsidize clinical trials you need the companies, and the companies need to assurance profitability.

Actually, out-licensing from universities has been growing rapidly), and it is a great way for universities to bring in some money and for researchers to see their ideas get turned into products. I am not sure that this really slows down scientific knowledge.

I see one point missing from the post, and one error.
The missing point is a cure for the patent thicket. It reflects a suggestion made by Judge Learned Hand in some Congressional testimony in the late '50s or thereabouts. Just treat patent like copyright. Give a patent to anything novel, and allow either independent invention to be a defense to infringement, or ignorance to be a defense to damages. This would eliminate the impossible "nonboviousness" test of patent law (which wallows in woulda-shoulda-coulda.) It would also give inventors a very strong incentive to publicize their inventions. Trivial inventions have little power in such a system, because they are usually trivial to invent around. (This has exceptions: e.g., patents embedded in standards, but antitrust law often works there.) Its only problem, as far as I can see, is recognizing that a filing in the patent office is not good constructive notice.
Professor Posner's mistake? He assumed that a patent race gave all the rewards to the first past the post. Generally, no, especially in pharmaceutical patents. Often enough, the R&D done by the losers lets them come up with some viable substitute.

Another alternative to patents is for medical insurance companies to invest in drug R&D. Insurance companies collect premiums before they have to pay the claims. Medical insurance companies can use this funds to provide capital for drug R&D. Insured patients can then be provided drugs at a significant discount as they indirectly financed the drug development.

Medical insurance companies also have significant incentive to develop safe drugs as they will be legally responsible for paying the claims arising out of drug-related side effects.

See my post for more detailed take

There was an interesting discussion in the New Yorker a few weeks ago about Prilosec and Nexium, pardon my spelling. Basically, they do the same thing. Chemically, one has both isomers, the other has only one. I don't know what that means.

The patent race gives an incentive to drug companies to produce chemically different drugs that do the same things as generics.

In a world with perfect information, most patients would use the generics. But, the Pharm companies have been able to compensate for their drugs becoming generic through advertising and marketing. That's the truly inefficient part of the patent model.

In response to Ashish Hanwadikar's thought on insurance companies investing in new drugs -

That is a very good thought. This would essentially be vertical integration of the health care industry, reducing the number of steps to the consumer, and increasing insurance company’s awareness of drug effectiveness to cost. I think the reason this business model hasn’t developed goes to anti-trust reasons.

The cost of R&D only returns of profit if you sell it to make lots of money – simply developing it with cost saving goals would not work for insurance companies. If there is a disease with no cure or treatment, the cost to the insurance company is zero. If the insurance company develops a treatment, not matter how cheap, it will still cost money to provide it to customers.

The problem comes in selling the product to other users. If the pricing structure is different enough that other insurance companies or patients can’t afford it (essentially forcing patients who need the treatment to go with the insurance company who also happens to own the patent), this is binding, and is illegal. Selling the drug and selling insurance are separate business, and the company’s pricing power is limited by laws regarding selling a product that a customer doesn’t want (insurance) in order for the customer to buy the product they do want. Even when given away free (Internet Explorer with Windows), the courts have found that this is an illegal barrier to trade.

Andrew wrote:
------------
If there is a disease with no cure or treatment, the cost to the insurance company is zero. If the insurance company develops a treatment, not matter how cheap, it will still cost money to provide it to customers.
---------------

There will always be other pharmaceutical companies researching and developing drugs. Medical insurance companies will have to pay medical claims whether patients (or their doctors) prescribe medicines owned by insurance companies or medicines from other companies.

Thus, it will be in their own interest that medical insurance will develop drugs as fast as they could.

My brother has written a response that I posted here.

If we're taking options such as eliminating patents off the table, what about altering the way patents work from a "one-size-fits-all" model to a variable term? The length of the patent term could be in some way calibrated to the expense. This would no doubt require a tremendous amount of accounting, but we're not afraid of that in our tax system, which impacts everyone, so why should we be afraid of it in patents, which affect few?

Another alternative, in order to address the competitive overlap, is that patent winners could be required to document the specific innovative leaps that add up to the patent, and assign weights to each. If other companies got part way to the solution and could document their success, they could then be entitled to share in the patent proportionately to the part of the solution they had. This could be used to administer a revenue sharing scheme among the patent holder and other parties who have a provable claim of nearly reaching the same result, while still protecting them against other free riders.

...and while we're at it, let's make it easy for anyone to claim "also ran" status for anything new, so that progress comes to a complete halt once and for all.

That's what we're hoping for, aren't we, by not advocating an elimination of all IP laws?

Here's what I want to hear about: software patents. With drug patents, I can understand the argument that patents are necessary, because they help create incentives to do millions of dollars in R&D work that wouldn't happen if someone could just steal your idea.

But listen, I'm an engineer by training; I can tell you that the Amazon "one-click" buying system didn't take millions of dollars and thousands of person-hours to develop. It was some dude sitting around, probably in the bathroom, who then realized it would be neat if you could just have all your information saved and buy stuff faster. I would imagine the first prototype was whipped up in about fifteen minutes.

Yet Amazon, because they've patented it, enjoys exclusive license to use something that is so common-sense and obvious that it's hard to believe no one had thought of it already. Is this really good for the industry? Probably not.

Patents are not necessary for software, or for drugs, or for music. Because as you say, software is written by college kids and bored engineers just to see if they can do it. The government and universities fund drug research and would do so even more if every venture capitalist was to suddenly catch plague from their caviar. Medicine incents itself. As for music and arts, when was the last time you heard or saw anything that was produced purely for money that wasn't horrid.
Art works just as well under a patronage system as under patents. We still listen to Bach and we already laugh at Britney Spears.

The biggest falsehood in American business culture is the idea that things get done because of Senior Management compensation plans. I say innovation happens despite the CEO and that is no small miracle. Fact is, you could run Microsoft or Pfizer as a non-profit and the actual people doing the work wouldn't be able to tell the difference. They might actually make more.

Property rights exist to perpetuate aristocracy.
Intellectual property rights are NOT designed to incent innovation. That is the mythology that prevents us from thinking about how patents function in the real world. They limit competition, perpetuate monopolies, hold down supply, stabilize prices at high levels, and channel those higher profits into individual pockets.

Don't forget that Bill Gates and company wrote MSDOS before they got rich, and only got the IBM deal because the other guys were playing golf. Newton invented calculus for fun. The internet was created by the government, popularized by university students, and the first real web browser came from CERN. Taxol was developed from tax dollars, Napster was written by a high school kid, and the most innovative new music of the last decade came from a band nobody has heard of from Iceland. (Sigur Ros)

While I find some level of agreement, surprisingly, with the misguided Corey--such as that art and music would still be produced, though I suspect it would definitely impact the market--I cannot sign on to the ridiculous notion that all that IP does is bad.

To dispel Corey's fallacious conception that medical research would go on unabated in the absence of IP law, all one has to do is look at what drug companies spend their money on--common diseases. They are clearly developing products for which they believe they can make a profit. Take away IP, and you have all but killed private medical R&D.

Just because government is capable of subsizdizing private and university research in the absence of IP does not mean that system would be equally efficient as our current one.

I have little doubt that private companies invest in medical research which shows the highest expected value. I am less certain unversity and government research is as efficient. And in a world of scarce resources (finite scientists), it is an imperative that we use those resources efficiently.

Moreoever, though it is sure that some resources (most notably the scientists and research staffs themselves) could be redirected to university R&D, losing most, if not all, of private research would be of course a detriment. To suggest otherwise is, I am afraid, pure insanity.

Corey's misguided beliefs are familiar. It took a long time to prove to the world to any degree of satisfaction that collectivist, socialist, and centralized economies were bad for the people who lived under them. Now Corey believes he can strip away incentives and abolish market solutions to all intellectual endeavors without consequence. He's living in that familiar illusion the 20th century has already proven false.

"Just because government is capable of subsizdizing private and university research in the absence of IP does not mean that system would be equally efficient as our current one."

Of course, just because intellectual property laws are the status quo doesn't mean that they would be more efficient than a change.

Scott,

Corey is advocating abolish all IP, and that such abolition will not negatively impact innovation. That is what I meant by less efficient. I didn't mean to imply it is perfect or that reform in some form is not justified.

Judge Posner makes some interesting points, but I think the analysis is incomplete until one begins to factor in the additional cost of enforcing the patent monopoly right. Obtaining a patent is fine, but enforcing a patent is another thing altogether. Small patent actions can easily cost $500K, large ones (and biotech or pharmacy patents are always large) can easily cost millions in attorney and expert fees alone. And then you risk a court finding the patent invalid or so limiting the claims that a design around is fairly easy. (I do not agree with Judge Posner's claim of the Federal Circuit being overly biased toward the patentee.) I've never collected data on the subject, but enforcement costs and the risk of enforcement must have some measurable impact on the profits a patentee can collect and the overall value of a patent.

Corey, please.

Independent of people's drive to create, it still costs huge amounts of money to get a drug to market. You needn't accept the Tufts figure of $800 million per new drug. Assume it's only $100 million, as Nader claims. No matter. That money has to come from somewhere, and it won't be from those altruistic folk who are driven to develop drugs no matter what. Cause they won't be able to afford it.

In our system, that money comes from investments made by people who expect to get back more money in the future. Those folks will not provide that money without an expectation of positive return. Patents are essential to that expectation, because they allow the patent holder to sell his drug at a price that covers both the cost of making the drug, and the cost of developing it.

Without a patent, someone else can come along and sell the same drug based only on what it costs to make. People won't pay the erstwhile patent-holder more for the same drug, so he won't ever make up for the money he spent in development ($100M, $800M, whatever). And that guy, because he is motivated by money, will stop supporting new drug development.

I gather you think that won't be a problem, because the government can just take over all drug development. Of course, just because the government's paying doesn't suddenly make it free. But let's ignore that.

You appear to believe that government already pays for much (most?) of the work involved in new drug development. So tell me, when was the last time a drug was approved by FDA based soley on gov't supported clinical trials, safety testing, manufacturing, etc.? Can you name even one such drug? (Hint: no.)

Why do you think that is? If the capabilities are there, and if the people in universities, NIH, etc. are as driven to create as you suggest, shouldn't there be at least some drugs like that? Why does every single potential drug that comes out of a gov't sponsored lab get turned over to pharma for development? Could it be that private industry is, in fact, better at that stuff than gov't, and that the mindset of the people who are good at that stuff is, in fact, quite different than the mindset of academic researchers? (Hint: yes.)

Oh yes, I forgot that the 20th century taught us all that any step towards collectivation is a step towards doom and economic collapse. How misguided of me. I guess I should be building a little shrine to Hayek instead of posting. Oh,
and someone should tell those crazy Chinese that the U of Chicago debunked their system eh?

Lets keep the revisionism to a minimum here, and lets remember why everyone loved the New Deal.
Save that "20th century has proven socialism is bad" ideology for people who aren't collecting any of the bad socialist benefits in this country like social security, welfare, medicaid, Stafford Loans, electricity from the Hoover dam, freeways... Oh, and don't forget the 400 billion dollar a year defense budget without which entire industries would not exist. That's a great example of the machinations of the free market eh?

If you read my post carefully you will see that I am not advocating the loss of incentives. I am pointing out that awarding the CEO of Pfizer enough stock options so that he can buy a 400 foot boat and a second house in Aspen does NOT incent innovation in the drug market. It incents profit taking. As someone who used to work as an engineer and who invented patentable stuff, you would think that the market would have incentivized me after the fact. But NO... I was laid off to make the quarterly revenue prediction so the CEO could keep his job. I guess you could say the market incentivized me to be a neo-marxist.

In your massively efficient market, three times as many real dollars are going to marketing as are going to R&D. How wonderfully efficient. More money goes to executive compensation at many of these companies than to R&D. Oooooh, what a great solution the market has arrived at.

I bow before the god Mahkut! Please oh Mahkut, bless us with a solution for the rising homelessness in our cities! The cost of real goods like gas and milk has risen for 5 years with no corresponding real wage increase! Why hast thou forsaken us oh Mahkut! Can I have a job for Christmas? Please?

"Why does every single potential drug that comes out of a gov't sponsored lab get turned over to pharma for development?"

I don't know, seems like with Taxol that was a pretty stupid idea. I suspect that it happens because people like you are willing to tolerate 30 cents of every dollar of taxes going to subsidise the design and deployment of weapons of war but your anti-communist radar turns on when someone proposes diverting 7 billion of that 400 billion budget to "bringing drugs to market" (thats 70 new drugs per year times 100M)

If the point that I and some others are making here that most new drugs are coming from government labs and university spinouts is true, (and I haven't seen anyone debunk it) then we are only talking about efficiency of marketing here.

I suspect that Big Pharma is adding little or no marginal value to the process. I don't think a cure for impotence needs superbowl ads and a Nascar sponsorship to sell itself. (Though I hear a lot of those Nascar fans have problems with that.) Did BMS add 1.6 billion a year to the marginal utility of Taxol, a drug that the government took through phase III trials for 31 million dollars before turning it over? You tell me. No one had an answer to that post.

"If you read my post carefully you will see that I am not advocating the loss of incentives."

That is EXACTLY what you advocated, because you operate under the mistaken assumption that people's desire to help their fellow man is all the "incentive" anybody needs.

I never took any issue with specific socialistic policies, I took issue that the premise that incentives and markets don't matter. That is your position, Corey. Remember the whole "IP isn't necessary" line?

It's clear I'm dealing with someone with very little regard for reasoned debate. I'm sorry you were imbittered by your experience in private enterprise, and I hope you find comfort in your neo-Marxist delusions.

Corey -

You said "If the point that I and some others are making here that most new drugs are coming from government labs and university spinouts is true, (and I haven't seen anyone debunk it) then we are only talking about efficiency of marketing here."

University spin-outs only exist because there are venture capitalists that support them. The university does not pay for the development for the start-up company. Only the minimal research during the early discovery phase of development before the start-up is created. This start-up needs patents to exist. (Not to mention that frequently university labs also get money from companies to develop).

Furthermore, even if the government did spend more on developing drugs, unless you want laws to ban companies from also developing the government needs patent protection too. If you remove patents from the equation companies, the government and the universities will all lose out and technology development will slow down.

As for Taxol, I suspect that the government got all that they put into the development back and more from BMS. Granted the government won't take the same amount of profit as companies, but they do get royalty from their inventions. If your suggesting that the government develop all the drugs and then have companies market it, you are still going to get the high paid exectutives from the "marketing companies". If you suggesting that we scrap the companies all together and have the government control all aspects of drug development and marking altogether, well then I am sure we will all lose out.

You're assuming with the 7 Billion that all the drugs will make it to market. But most development will fail. In reality it will cost much more than 7 Billion of the governments money to keep the pace of development that currently exists. That 100 Million doesn't take into consideration all the hundreds of biotech companies (in addition to Big Pharma) that bring drugs at least part of the way into development and have to stop because of safty concerns, lack of efficacy or they run out money and can't find someone to license it. If the government wants to find the winners, it will have to pay for all of these losers too. Big Pharma on the other hand only pays for some of the losers and some of the winners. And frequently, Big Pharma finds the winners by allowing the smaller companies to begin development first. If your suggesting the government do the same, it will only happen if the small companies have patents.

Drug development needs Big Pharma, because the little companies and government can't take the same risks that Big Pharma does and these risks further development. Little companies know if they develop well in the beginning they can sell to the Pharmaceutical companies. It's this knowledge that keeps them going. Most biotech companies never plan to make it to phase III on their own. So yes, Big Pharma plays a big role in development aside from marketing.

I guess it is a losing debate to argue against an industry that is already "privatized" being privatized. I should stick to places like education where there is still some hope of stemming the tide.

Everything that Joe Venture Cap. can do, the department of Health and Human services can do. I've met Joe, he likes to drink $50 shots of Cognac. MIT gets money from companies yes, but they also get something like 40% of their budget from the government.

If you people think that people should have to pay $14,000 dollars when they get ovarian cancer just to take Taxol then I say, enjoy your country, because you deserve it. I sincerely do hope that some of the "incentives" trickle down to you, maybe you can get a job cleaning houses in Aspen. Soon you too can buy your girlfriend a Lexus for Christmas.

But don't forget one thing, big pharma doesn't just patent the end result, they patent the methods as well. And anyone can see that dampens innovation. We've got scientists complaining about that in this very thread.

Re: "LessBureaucracyNotMore"'s comment:

I am not a fan of our patent system, but if it is likely to be preserved, it seems to me that we should consider how best to reform it. Just because an alternative form might require more bookkeeping doesn't mean it won't have offsetting beneficial economic effects. The problem here is not entirely one of bureaucracy -- it's a problem stemming from monopoly rights and the costs they impose.

Your suggestion that this would cause progress to grind to a halt since anyone could file for "also ran" status is a strawman argument: if that were so, the same problem would apply to prior art with our current system.

As part of the project on pharmaceutical policy being undertaken by a Canadian think tank, the Atlantic Institute for Market Studies, I have been following the American debate on pharmaceutical patents and pricing fairly closely. There are a number of issues which it seems to me tend to be overlooked in much of that debate.
One of those issues is the role of health insurance in determining pharmaceutical prices. The co-payment/co-insurance form which for historical reasons has evolved for health insurance, tends to make patients insensitive to prices, and to reduce the elasticity of demand for drugs, permitting the price of insured drugs to rise. One of the reasons it can be difficult to persuade patients to switch to generics or to over the counter (OTC) substitutes for insured drugs is that, under a generous insurance plan, the co-payment on an expensive insured drug can be less than the price the patient would have to pay out of pocket for a cheaper OTC substitute. My favourite example of this is the case of Claritin which has for a long time been OTC in Canada but which, until recently, was a prescription drug in the US. Since presciption drugs are typically covered by insurance but OTCs are not, Claritin was much more expensivve in the US than in Canada (its Canadian price, by the way, was not determined by any Canadian price controls, rather it was determined by the price of the competing drugs which were all around it on the drug store shelves). When, recently, Claitin was shifted from prescription to OTC in the US, its price dropped dramatically (although some people who had been getting it through their insurance plans found that, even though the full price of a package of the drug had fallen, once it was no longer covered by insurance the amount they had to pay out of pocket had risen).
The European experience with reference pricing, notably the recent case where the Netherlands cut the price it would pay for various drugs, increasing the price patients had to pay out of pocket, has shown that the demand for pharmaceuticals is quite elastic with respect to out of pocket price, and that drug companies take account of that elasticity when they set drug prices.
The move by a number of states to try and permit re-importation of drugs from Canada seems to have a number of misconceptions attached to it. One point which some proponents seem to have overlooked is that Canadian retail price controls only apply in Canada, not in the US. There is really no issue of the US importing Canadian price controls, since Canadian exporters will charge the profit maximizing price, and given their small size relative to even the California market, that price will not be much below the US price.

The re-importation debate also assumes that, in the absence of price controls (which in Canada are really price negotiations, and therefore are subject to regulatory capture problems) there would be no difference in price between Canada and the US. But price discrimination is common even when the markets are less rigidly separated than they are in the case of drugs. North American made cars have always tended to be cheaper in Canada than in the US, and there is no Canadian auto price control board. Despite the talk about price controls, and about Canadian free-riding, there is no good evidence that drug companies are not charging the profit maximizing price in the Canadian market. And the recent appreciation of the Canadian dollar has, consistent with Patricia Donzon'e research, made re-importation a much less attractive prospect. It's worth noting, too, that the prices of re-imported drugs would have to include an allowance for exposure to the US legal system. Richard Manning's work has suggested that a lot of the difference in price between the two countries can be explained by the inclusion of an allowance for the costs of the US tort law system.

There are a lot of numbers thrown around in the debate which are supposed to show that pharmaceutical companies are abusing their positions - numbers, for example, referring to the percentage of revenue spent on administration and marketing and also on research, which are taken as showing that drug companies spend too much on advertising and too little on research. A couple of things are perhaps worth mentioning here. One is that the administration and marketing figure includes all A&M expenses, not just advertising. Ernst Berndt reported some numbers in an article in Health Affairs a couple of years ago which focused just on advertising and painted a somewhat different picture. With regard to the percentage of revenue spent on research, most people who cite it don't say what the socially optimal percentage devoted to research would be, and never mention that the pharmaceutical industry is one of the most research intensive of all US industries, by the percent of revenue measure. As I recall, only software and the nonmanufacturing scientific research sector top it on a regular basis.
It seems unlikely that the debate on pharmaceutical patents and pricing will yield any useful policy conclusions until it can be put on a less emotional basis. Certainly books like Marcia Angell's recent one do nothing but confuse the issue. Drug companies may not be paragons of virtue, but in pursuit of their own self interest they have done a lot of good. And while there might be disagreement about the patent system, as Peter Temin has shown in his economic history of the drug sector, it was only after the courts ruled that drugs based on natural ingredients could be patented that drug companies started doing research in a serious way.

"It's clear I'm dealing with someone with very little regard for reasoned debate."

Reasoned debate... is that the kind where one side defines the terms in advance in order to make sure the discussion does not escape the bounds of permissible thought?

I don't know, people here seem to like economics, and my posts have even more numbers in them than Posner's! Of course my numbers aren't hypothetical, maybe that is the problem. Maybe I should have said: "Assume excess profits in the drug industry of 25%." That sounds pretty
econominical eh? Posner forgot to put the "assume" in when he said the drug industry does NOT have excess profits, but he is understandably busy so we will remember to fill it in for him.

"if that were so, the same problem would apply to prior art with our current system."

This is exactly where our ridiculous system of patents and "prior art" have already led--and things are getting worse day by day.

The only feasible reform is abolition of all IP laws.

Anyone who truly believes that we will be in a pharmaceutical utopia once the government takes over should spend a few hours at the Department of Motor Vehicles. That is not a comment on Federal regulation of pharma, which needs some reform for sure, but rather on the notion that once drug patents are abolished and all research and development is turned over to the Feds, we will have cures for everything, no side effects, and the tort bar will have little or nothing to do with their spare time. I think that is a pipe dream.

There is no question that European pharma produces new drugs, although, virtually every big European pharma company has major research and development facilities here. Roche is an excellent example, with thousands of scientists in facilities around the country. However, the lion's share of new drugs are produced here in the environment that some, including Mr. Corey, view so negatively.

I don't think anyone claims the system to be perfect, particularly the patent system. There have been some excellent suggestions for reform in this discussion. However, there is simply no evidence from anywhere that abolition of patent protection will improve the quantity or quality of medicines or will reduce the costs to the patient. By the same token, claims that the pharma companies are making rapacious profits don't hold water either. Their financials are public information. Unless one is going to claim that these companies, which are public and audited, are salting away vast sums in inscrutable accounts somewhere, the numbers just don't support the excess profits notion. Of course, one could also assert that they are wasteful with their expenses and resources. I don't think that the shareholders, the majority of whom are institutional, would stand for either situation for very long.

The subject of compensation abuse at the executive level is much discussed these days and it seems that there exist no objective standards and probably won't ever. There is certainly competition among companies to hire persons capable of managing these huge enterprises and, in my experience, the number that have that ability is very small indeed. Companies compete for these individuals and compensation levels are driven upward thereby. You can love or hate the market, but that is what is operative here.

"the numbers just don't support the excess profits notion."

Which numbers? I asked way up in this thread if anyone could explain where the $1.6 billion Bristol Myers Squibb makes on Taxol went. I'm sure some of it is getting reinvested, apparently 11%, which seems to be the consensus big-pharma R&D percentage. (This is a matter of public record) What of the 30-40% re-investment in marketing?

We can probably save the argument about executive compensation for the day when Posner posts the L&E justification for it, but I do think its rather defeatist to say we can't fix compensation because it is hard to set an objective standard. 400 times the average pay of the entry level worker is too much on any standard. I say lets lower it until it starts becoming hard to find people who are willing to run every aspect of a company. (I'd want at least $70K for the job) Isn't that the free market way?

The DMV is not a good analogy of what a government administered drug R&D operation would look like. The National Cancer Institute is a good analogy. MIT is a good analogy. But in another way the DMV IS a good analogy, because if something is wrong at the DMV, you can write your congress-person about it. If you want to know about DMV procedure, you can ask and they will tell you. What is this irrational preference for private tyrants selected by the mysterious machinations of the marketplace over accountable, elected officials?

Lets say I have a hypothetical question about the design of certain electronic voting machines, so I go ask Diebold to see their specs... oops, brick wall! Now lets say I have a question about the DoD policy towards the Balkans in the 1980s... Freedom of Information Act, to the rescue!

I never said that government control would be 100% efficient, but it doesn't have to be. The "free market" isn't 100% efficient either. Pure profit taking (waste spending outside the industry which generated the profits) is an administrative cost for capitalism. "Marketing" is as well. I submit that 50% of the dollars paid for American drugs get spent on 1) profit taking, 2) marketing, or 3) tort liability. Is there dispute over this? Those three things are the evils that I am opposing. Under a Federal system, 1) is right out, 2) is drastically reduced because competition is no longer the motivator, and 3) is roughly the same.

Only thing you lose under a Fed system is your chance to get stupid rich in the drug business, which, I'm sorry, wasn't a real chance anyway. Some CEOs are likely out of a job, but apparently there is a critical CEO shortage so no big deal eh?

Corey,

Since you asked several times. Here is where Bristol Meyers Squibb's money went for the 2003 according to their annual report readily available on their website.

1. Cost of Product Sold - 7.592 B (46%)
2. Marketing, Selling Admin - 4.660 B (29%)
3. Advertising and Product promotion - 1.416 B (8.7%)
4. R&D 2.279 B (14%)
5. Litigation 0.199 B (1.2%)

Total expenses are 16.2 B (I left out some minor expenses)

Cost of the product and R&D together are about 60% of the expenses, while advertising and promotion was only 8.7%. Litigation was very little. The total revenue for BMS for 2003 was about 20.8 B.

You can check it out yourself here: http://www.bms.com/static/annual/2003ar/annual_report/data/2003bmsar.pdf

Sorry for the complete link after the "2003bms" type "ar.pdf"

The 12% R&D figure I used was off a Pfizer annual report.

What do you think the difference is between "marketing and selling admininistration" and "advertising and product promotion"...
together they add up to 38%, which is pretty much exactly what I said. Except not really, because those are percentages of expenses, not percentages of earnings.

But anyway, with 4.6B in profits, why fight over one or two percent. Lets give them some more corporate welfare, 25% profits is pathetic, those seniors can pay more, they are going to die soon anyway!

Merry Christmas to all.

As for the Federal Circuit being "extraordinarily pro-patent:"

It behooves the Prince indeed to keep the laws by which he himself if empowered.

Perhaps if the Fed. Cir.'s jurisdiction were broadened to less-beholden IP areas (trademarks?), we would see fewer self-interested policies enunciated by that Court. Or, perhaps sister circuits, on the off chance that they receive a patent appeal a la Vornado Air v. Holmes Group, should should fashion anti-patent opinions, if anything for the sake of showing the effect of contrasting policy. The Federal Ciruit isn't the last word on patents because it is infallible; it is infallible because it has been the last word on patents for the last 25 years (notwithstanding tepid attempts by SCOTUS to try to reassert their ability to understand and decide patent policy).

*is*

Two clarifications:

The "first to the finish line analogy" is incorrect. Pharma drugs called "me-too" drugs directly contradict that belief- i.e. multiple drugs exist within a given therapeutic area with the same mechanism. Multiple examples exist (so called statin drugs, i.e. Zocor/Lipitor/Crestor/Mevacor and several others, the infamous Cox-2 drugs, ACE inhibitors, ARBs, the list goes on and on). The patent refers specifically to a given chemical entity, but each company is working on developing a drug of several chemical structure, and they all have the same mechanism of action. One pharma company may get approval first and have traditional first mover advantages, but the others will be launched as well without infringing patents.

Second issue on the revenues garnered by a pharma company post-patent expiration. Analysis of the decline of these drugs over the past twenty years shows that pharma is increasingly less able to retain these revenues post-expiration. Managed care companies have used excellent cost-containment methods to prevent the so-called "goodwill" from overcoming generic substitution. Tiered co-pays, where patients have to pay significantly more for the branded drug, (e.g. $50 versus $5-10 per month) pushes almost all patients away from branded. These cost-containment methods will only become more sophisticated with time, hence we can reasonably assume that 95%+ of all revenues from a drug will be garnered during the term of the protected patent.