Thursday, November 15, 2001
by Frank R. Lichtenberg

When the threat of anthrax became a widespread concern, the Canadian government said it had serious doubts that Bayer, the owner of the patent for the anti-anthrax drug Cipro, could meet Canadian needs. Canada ignored the patent and ordered generic copies. In the United States, Sen. Charles Schumer expressed the same concerns and proposed that the U.S. government do the same. After Bayer said it could meet the needs of both nations, and after other drugs that are effective against anthrax were identified, Canada reversed its decision, and the issue was dropped in the United States for the time being.

But the proposal to override patents is certain to come up again as other drugs are needed, and as the population ages and demands drug treatment for an increasing range of illnesses and ailments. While overriding a patent might lead to a temporary increase in the supply of a drug, a great deal of evidence suggests that this policy would lead, in the long run, to a lower supply of innovative drugs, and poorer public health.

Research and development investment in general, and pharmaceutical R&D in particular, has made enormous contributions to the economic well-being and health of Americans. To have the incentive to undertake research and development, a firm must be able to get sufficient returns to make the investment worthwhile. The patent system is one of the most important ways in which the government can provide this incentive. Weakening patent protection (e.g., by government violation of patents) may have a chilling effect on private R&D investment, and therefore reduce the health and wealth of future generations.

Value of Medical Research.

A host of academic studies speak to both the value of medical research and the important role of economic incentives. For example, a major project sponsored by the Mary Woodard Lasker Charitable Trust addressed the question, “What is the true economic value of our national investment in medical research?” and found, “It provide[d] a surprisingly dramatic answer: the returns are exceptional.” The pharmaceutical industry performs about one-third of U.S. biomedical research. Some of my own academic research has estimated the benefits to consumers from the introduction of new drugs at the patient level, disease level and national level. These benefits include longer life, better quality of life, and reductions in total medical expenditure.

R&D Investment Is Responsive to Incentives in General.

Economic research on a number of industries (including pharmaceuticals) has demonstrated that the rate of private R&D investment is very sensitive to expected returns.

* In his influential study of almost a thousand inventions in four different industries, the late economist Jacob Schmookler found that the expected profitability of inventive activity determined the pace and direction of industrial innovation.

* In response to the enormous increases in energy prices during the 1970s, firms significantly stepped up spending on energy-R&D projects, in a targeted attempt to reduce energy consumption.

* Whenever the government offers to award a significant defense contract, potential military contractors make large investments of their own funds in R&D for the types of products the government is seeking to buy.

* According to the Food and Drug Administration, passage of the Orphan Drug Act in 1983 led to a twelvefold increase in the number of drugs for rare diseases brought to market.

* Both firm-level and industry-level evidence are consistent with the hypothesis that the threat of pharmaceutical price controls in the Clinton administration’s 1992-93 health care reform proposals had a significant negative effect on pharmaceutical R&D investment.

Economic theory and evidence indicate that, in general, a firm’s incentive to invest is positively related to its market value (relative to the replacement costs of its assets).

* My research has indicated that a 10 percent decrease in market value is associated with a 2.25 percent decrease in R&D expenditure, holding constant tangible assets, past R&D investment and cash flow.

* In a National Bureau of Economic Research paper, economists Sara Ellison and Wallace Mullin estimated that the threat of Clinton health care reform reduced the market value of pharmaceutical firms by 44 percent during the period from September 1992 to October 1993.

We would therefore expect to observe an industry-wide decline in the rate of growth of pharmaceutical R&D investment at the time of (or soon after) the threat of pharmaceutical price controls. The facts bear this out: the growth rate of pharmaceutical industry R&D investment was much lower during the period 1993-95 than it was during any other period since 1987.

Read the rest of this article on pharmaceutical patent protection.