Thailand's government has taken the unusual step of challenging one of the world's most powerful industries in order to better the health of its population. Thailand's government issued compulsory licenses on several important AIDS and heart drugs, reducing the price of these medicines by close to 70 percent. This step will allow the Thai government to provide health care to a much larger share of its population. The Thai government's policy also creates hope for a future with free trade in pharmaceuticals and a 21st century approach to financing prescription drug research. For this reason, it is an extremely important example that deserves the support of people concerned with both public health and economic growth. If Thailand's model is followed elsewhere, the antiquated system of patent-financed pharmaceutical research may finally be replaced by a modern system of open-source research.
While there has been a worldwide movement to reduce barriers to trade for a wide variety of manufactured and agricultural goods, trade in pharmaceuticals has gone the opposite route. Responding to pressure from the pharmaceutical industry, the US government has imposed rules that extend and tighten patent monopolies in a long set of trade agreements, most importantly in the TRIPS provisions of the 1994 WTO agreement.
In the absence of patent protection, virtually all drugs would sell for low prices. With few exceptions, drugs can be manufactured and marketed at very low cost. Drugs are only expensive when pharmaceutical companies are granted patent monopolies on drugs that are essential for people's health or life. Because they have patent monopolies, companies can demand, and people will pay, very high prices for drugs.
The compulsory licenses granted by the Thai government circumvent patent monopolies. They require the patent holders to license the patent to generic drug producers for a nominal fee, usually around five percent of the sale price. By allowing generic competitors to produce the drug, the market price will fall much closer to the actual cost of production.
US and European pharmaceutical industries are furious at the Thai government. They worry that other countries may follow Thailand's lead, which could sharply reduce their profits. Ultimately, they claim, it could take away their ability to finance research into new drugs.
Of course, if all countries followed Thailand's model, including the United States, it probably would destroy the industry's current research model, which would be a very good thing. Patent support is an incredibly inefficient way of financing pharmaceutical research. According to studies from Tufts University, the real cost of researching new drugs has been rising by more than seven percent a year, even as research costs in other areas are plummeting due to the explosion of computer power and the expanding research capabilities of developing countries.
Patent-supported research also encourages corruption in the research process. The promise of large patent rents gives drug companies enormous incentives to conceal unfavorable research findings or even to lie about their results. Patent rents also encourage marketing efforts to doctors and patients to promote the use of drugs in cases where they may not be beneficial to patients' health.
More inefficiency results from the fact that the pursuit of patent rents leads to excessive secrecy in the research process. Drug companies want to make sure that they will be the ones to profit from their research, so they only disclose information necessary to get patents and/or drug approvals.
Patent monopolies also cause a large portion of research spending to be diverted to developing copycat drugs that largely replicate the function of existing drugs. According to the pharmaceutical industries' own data, close to seventy percent of its research spending is used to finance the development of copycat drugs, rather than breakthrough drugs that offer qualitative improvements over existing drugs.
There are alternative methods for financing drug research. The United States government already spends close to $30 billion a year supporting biomedical research through its National Institutes of Health. This is almost as much as the $40 billion that the industry claims to spend each year on research. There is no obvious reason that the United States, and other governments, could not increase research funding by enough to offset the loss of funding by the pharmaceutical industry.
If research were publicly funded, then all the patents could be placed in the public domain so the new drugs could be sold as generics. This would save consumers world-wide more than $300 billion a year compared to what they pay under the current patent system. It would also mean that far fewer people would ever be denied life-saving drugs because of their price.
The developing world may have to take the lead in any effort to bring the pharmaceutical industry into the 21st century. While it is easy to show that patents are an archaic and inefficient method of financing drug research, the pharmaceutical industry is incredibly powerful in the United States and West Europe. Few politicians would dare challenge its fundamental interests.
However, if other countries follow the lead of Thailand, the patent system for prescription drugs may go the way of central planning in the Soviet Union. The market is a powerful force, and even the pharmaceutical industry will not be able to hold it back forever.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer ( www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.