Sunday, April 28, 2013

Removing patent protection is not a free lunch

A recent opinion piece on encourages the U.S. supreme court to disallow "pay for delay", a practice that involves a big pharmaceutical company paying generic manufacturers not to challenge their patents and start making generic version of their drugs. The authors argue that the increased competition from the generic drugs will keep prescription drug prices lower.

While I agree that allowing generics and increasing competition will keep prices lower for the consumer, it is important to remember that encouraging generics will not be costless. Innovative pharmaceutical companies rely on patents to allow them to recoup the high fixed costs associated with developing new drugs. Government regulations and mandated FDA trials make getting a new drug to market extremely expensive. If companies can't keep their prices at some amount above the marginal cost of making a drug they will not be able to recoup all of those research and development costs.

Why should a company pay all of the up front costs for creating a drug and getting it approved when some other company can just reverse engineer and copy their formula the day the drug hits the shelves? The copying company will not have any money invested in R&D so they will be able to charge a lower price. This is great for consumers as long as drug companies keep coming up with new products despite being unable to make any money off of them. But how long will that situation last? I personally would rather pay high prices for drugs than stifle the creation of new drugs.

I am not sure why drugs are cheaper in other countries like the author's claim, but my guess is that most new drugs are created by American companies and Americans pay higher prices to subsidize the low prices that other governments force companies to sell at in order to comply with their stringent price controls. Price controls are good for those other countries as long as American companies and consumers bear the real costs and drug companies keep innovating. But if America follows suit and the pipeline of new drugs dries up we will all be worse off. Getting those other countries to pay the actual market price would probably be a good start to lowering prices here.

I am not sure what the solution is to getting prescription drugs to cost less. But I do know that removing patent protections and eliminating the ability of drug companies to recoup their fixed costs will lead to less innovation and less new drugs. I do not think that this is the solution people want.

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