Drug Companies & Patent Law: Economics 101

Wow.  Just wow.  While I’ve spent a good portion of my thinking life railing against intellectual property law, it has never hit as close to home for me as it has recently.

The back story:

Without getting to into the personal details, my mom recently retired and as such she and my dad have been paying very close attention to their finances (he’s already retired), taking into account where cuts need to be made, changes that will and have to happen in their lifestyle, etc.  Part of that process, given that they are in their 60’s and 70’s, is looking at health insurance.  While they’ve been juggling different policies in an effort to make a decision about what would be a good balance between the amount they are spending and the amount they are covering, they’ve run into one snag:

Prescription drugs are the hardest thing for them to factor into their costs, period.

Between the two of them, they have three or four medications they both must take on a regular basis.  Most of these, even without insurance, aren’t prohibitively expensive.  Most have been on the market for a long time, and as such have generics available.

One of them, however, has no generic.  This particular drug, made by Glaxo Smith Kline, is under patent protection for the next two years (and has been for I believe about 10).  No generics available (though they are waiting in the wings for the patent to expire).  As such, GSK can pretty much set whatever price they’d like for it… the price they’ve chosen?

$800.00 for the standard dose.  Eight-hundred-fucking-dollars. Every month.

Do we need any clearer indication of the problem of intellectual property?  This is basic junior high economics: If I am the only one that can provide something, then the only limit I have on what I can charge for it is what people are willing to pay.  Now typically, anytime the market is presented with a sole solution to something, competition rises quickly, which pushes prices down.  Simple market forces.  I invent something, charge whatever I want, someone comes along and makes their own version of my widget and charges less, so I have to start being price competitive.  So in the case of GSK and this particular medication, someone else, say Pfizer or someone, would recognize the need for it and create their own generic version of it — good healthy competition, unregulated, would then work it’s market force magic to bring prices down to reasonable levels.

Patent law comes in and fucks that up.  Because a) GSK has an exclusive patent on this medication, and b) any generic has to wind it’s way through the FDA’s bureaucratic approval process anyway, there is no ability for a competitor to put any pressure on GSK to lower their prices. What’s worse is that this is not something my mom can simply NOT take.  This isn’t, for example, a situation where there are even market alternatives (i.e. if gas gets too high for my finances to bear, I have the option of taking the bus — this is indirect competition, trading one thing for another).  Drug companies profit immensely from the government protection they are given because once someone finds a drug that works for them, often any ‘alternative’ out there isn’t really an alternative at all.  While it may treat the same medical condition, how a persons body reacts dictates what they can and cannot take.  To put it more clearly: this isn’t a coke vs pepsi argument - this drug works for my mom, and the ones that are created to treat the same conditions don’t (while the reverse might be true for someone else).  She can’t just say “I can’t afford Coke, so I’ll buy a Pepsi” and be done with it.

Seriously, this is basic economics here, this is 101 stuff.  GSK’s incentive to lower their price is non-existent because they are protected (in more ways than one) by the federal government.

So instead, my mom pays more for her medication then she does for her mortgage.

Still think intellectual property law is a good idea?

I’ll leave you with this: ever wonder why innovation in the drug market is such an up and down process?  Instead of constant innovation, within any particular drug company we see drastic ups and downs.  If you start to track those ups and downs you start to see a trend emerge: they follow the patent initiation and expiration cycle.  Let’s say Pfizer invents a drug to cure male pattern baldness, and it works great.  They apply and receive their patent on it, and that patent is good for 20 years.  That means that they have a relatively uninterrupted profit stream from that drug for the next 20 years.  So maybe for the first 10 years, they are simply riding the wave of that drug — after all, whats their incentive towards R&D if there is no competition biting at their heels?  Then the last 10 years, they get into gear, trying to come up with the next big thing, so that by the time the patent runs out on their baldness drug, they’ve got something else to patent and repeat the process.

Take away the patents, let market forces do what they will with competition, and now Pfizer has to constantly innovate.  This means that their researchers need to have new ideas, new drugs, new product to present all the time.  The profit cycle becomes much shorter — the main profit cycle will only be from the time they release to the time a competitor can get something comparable on the market.  Thus, they introduce their new drugs, milk the profit for a few months, and then they have to be innovating already as their competitors start nipping at their heels.

Again, this is all just basic economics, but apparently patent and copyright law supporters missed that class.

-olly