Against Monopoly

defending the right to innovate

Monopoly corrupts. Absolute monopoly corrupts absolutely.

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And the power of Novartis

This is not "news", but the news here is the rising tide, not the drops of water that make it up.

Novartis is, according to its own spokesman, "testing" the 2005 Indian pharmaceutical patents legislation in court, to check if it is working properly, or not. How? The details are here. Briefly, in traditional big pharma's style Novartis is seeking an extension of its expired patent for a leukemia drug. Novartis has slightly modified the drug (it can be "absorbed more easily by the body") and it claims this is a new drug, hence a brand new patent is justified. Lower Indian courts have rejected the claim, but Novartis is appealing. The drug in question is not widely used, as the form of leukemia it cures is rare. Novartis claims it donates the medicine to about 90% of the 6,800 Indian patients affected by the disease. Novartis' drug costs about $ 2,600 while its generic Indian version costs less than a tenth of it.

So, what's the big deal? That Novartis is "testing" the new Indian patent system, that's the big deal. After it wins this one, it can go after more important generic drugs produced in India. Not just drugs for rare forms of cancer, but also AIDS drugs and drugs for more widespread diseases, as Doctors Without Borders is pointing out. Apparently, about 80% of the generic AIDS drugs used by this and other NGOs around the world come from India. Should the Indian producers of generic drugs be shut down by the new legal challenges mounted by Novartis and other pharmaceutical companies, the consequences would be obvious, and not pleasant.

So, thanks to copyright, Bill Gates is a powerful man: he can spare a Russian fellow five years in jail. But, thanks to patents, Novartis is even more powerful: it can sentence thousands of sick fellows to death, or spare their lifes instad. No idea yet if Intellectual Monopoly increases income inequality, but it does allocate the power of life and death rather unequally around the world.



It's not just because of patents that Novartis can "sentence thousands of sick fellows to death, or spare their lives instead." It is also because they invented the drugs that would cure them in the first place.

Further, it sounds like they are being pretty efficient price discriminating monopolists. (Giving the drug away to those who can't afford it and soaking those who can.)

Apparently not so good at price discriminating, if all over the world "illegal" generic firms are producing tons of cheap drugs against which the big pharmas rally the WTO ... asking developing country to forbid free trade ("parallel imports", in the monopolists' dictionary.) Good at doing itself some cheap propaganda in rare instances such as these that are under the scrutiny of the world media. They give away medicine to a few people and only as long as the case lasts in court, then resume the old practice.

It is beacuse of patents, Chris. If Novartis had not "invented" the drug, someone else would have, probably soon after or even earlier than Novartis did. "Earlier" in the former statement is not a typo, as in this case, and many other, Novartis is using previously patented products to come up with new ones. In fact, in the case being brought to court, the very same drug is being considered, with minor improvements only on its release time. By patenting this drug, and all its previous incarnations, Novartis is executing people. Its patents prevent other companies or scientists from using those chemical compounds to independently develop similar drugs, or even that same drug.

The theorem you proved the other day, someone else would have probably proved a month from now: competition is fierce in the theorems' proving business, where little money is at stake. Even without patents, or with extremely limited ones, lots of money would still be at stake in the pharmaceutical research business and very many companies would strive to produce new drugs.

Lots of people can prove theorems in the field of mechanism design. Lots of people can invent drugs that cure leukemia, not just Novartis.

You guys have convinced me that IP is a good idea or not on a product by product basis. I agree with you that it is certainly a bad idea to protect theorems and probably a bad idea to protect music. But these are for case specific reasons. In the case of theorems, I have an incentive to produce these because for some reasons, various institutions such as universities and federal reserve banks are willing to pay to have around people who have written economics papers. The more and better papers I write, the higher salary I get. As for music, the combination of a CD acting as an advertisement for a live concert and that pop musicians have an approximately zero opportunity cost for their time (ok, ok, not fair, but you know what I mean) means that without IP music will most likely still be produced.

I certainly agree that lots of companies can create drugs. But without IP, why should they? What, for the case of drugs, corresponds to the University in the theorem case or the advertising for live concerts in the music case?

We wrote quit a bit about the pharmaceutical industry http://www.dklevine.com/papers/anew09.pdf. I'd agree that complementary sales aren't going to be an important source of revenue in the pharmaceutical industry. The key points are these. There are two big costs in developing new drugs: the cost of R&D and the clinical trials. Murphy and Topel have some data on R&D - it turns out that not only is R&D heavily subsidized by the government, but the private sector pays for about 1/3rd of R&D. So awarding patents - with the subsequent exclusion of patients who can cover the marginal cost of producing the drug - is a pretty expensive way to get that extra R&D. The big issue is in the clinical trials which are horribly expensive. Here the experience in India - with a thriving pharmaceutical industry but until recently no patents - is instructive. If you introduce a new drug - either invent it, or copy a patented drug from somewhere else, you have to do clinical trials and you face a lot of competition. Despite the competition, they introduce lots of drugs and pay for clinical trials, so apparently competition doesn't dissipate the rents needed to pay for the clinical trials. One other thing that bears noticing is that competition isn't immediate - the entrants typically delay to see how well the product is doing, and then they have to reverse engineer, set up production and do their own clinical trials.

In the U.S. clinical trials are vastly more expensive than in India - so it is doubtful that with unfettered competition ex post there would be enough incentive to pay for clinical trials - especially if the first clinical trial results are made freely available to rivals. But patents - that is ex post monopoly - isn't an obvious solution. A more obvious solution - besides moderating the regulation that makes clinical trials ridiculously expensive - is to subsidize clinical trials. It isn't clear that we want the people with a stake in selling the drug to be the ones to do the trials anyway.

The three big reasons for prefering alternative solutions to patents for pharmaceuticals are 1. exclusion here has a high social cost - that's what Michele's posts are about, and 2. the patent monopolies lead to a great deal of very expensive drugs that are not better than existing patented drugs, but are simply inventing around existing patents, and 3. existing patents are an important obstacle to innovation of new products.

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