Generic Tamiflu

Two blogs I respect, Marginal Revolution and MaxSpeak, have weighed in on opposite sides of the generic Tamiflu issue.

Tyler Cowen's argument (Marginal Revolution) is essentially the same as that of Big Pharma and their allies, like Joe Lieberman. Research and Development of new drugs is inherently risky, so we have to compensate companies for taking risks by promises of a market monopoly if they are successful. Without that promise, research and development on new drugs will vanish and we and the world will be the poorer for it. (However, the research and development for Tamiflu were done by a (then) small biotech company, Gilead Sciences, with a $50 million stake from Roche after the drug was discovered.)

Dean Baker's argument at MaxSpeak also buys the R&D argument (in a limited way) but doesn't believe it outweighs the matter of life and death that Tamiflu stockpiles might represent in a pandemic. Moreover, he gives a long list of reasons why patent protection severely distorts the economic fundamentals.

The most immediate effect is the deadweight loss that results from people not getting drugs that they could afford at the competitive market price, but not at the patent protected price. And, this is not just poor people in Sub-Saharan Africa, there are tens of millions of people in the United States who do not take the optimal drug or the optimal dosage because patent protection makes it too costly.

But this is just the beginning of the distortions. Monopoly profits give drug companies incentives to undertake expensive and often deceptive marketing campaigns. The industry spends more on marketing its drugs than it does on research. In some cases this marketing has effectively amounted to kickbacks to doctors who prescribe their drugs.

Patent monopolies also provide incentives to research copycat drugs rather than breakthrough drugs. The industry’s data suggest that approximately two-thirds of its research money is spent developing copycat drugs.

Patent monopolies also encourage drug companies to conceal negative research finding, or even to lie about their research. The New York Times has run many excellent articles over the years highlighting such incidents. (Merck’s effort to conceal potentially harmful side effects from Vioxx is the latest installment on this list.)

Patent monopolies encourage the production of counterfeit drugs, which can be sold at a fraction of the price of the patented drug.

And, patent monopolies encourage drug companies to spend large amounts of money on lawyers, lobbyists, and propaganda to protect and extend their monopolies.

These are strong arguments, arguments that cannot be countered by economists because they have been missing in action.

The $220 billion question (current U.S. spending on prescription drugs) is where are the economists? Remember, economists are people that get high blood pressure from 10 percent tariffs on shoes or pants. When Bush put a temporary tariff on steel imports that maxed out at 30 percent, economists all over the country became apoplectic. So why is the economics profession overwhelmingly silent about drug patents, which are the equivalent of tariffs of 300 percent on average, and affect a product that is much more important to our economy and our health?

We recognize that patents are a way to provide incentives for research, but where is the economic research that shows that they are the most efficient way? You won’t find it, because economists have mostly chosen to ignore the issue.

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

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

Our sentiments, exactly.