Against Intellectual Monopoly

produce the additional medicine.
    Also, and again, since the Hatch-Waxman Act of 1984, producers of
generic drugs have found it easier to enter the market, so much so that,
according to the Congressional Budget Office, in the United States, generic
drugs reached 43 percent of the prescription segment in 1996, compared to
19 percent twenty-two years earlier. The Pharmaceutical Research and Manufacturers of America (PhRMA) reported their share to be in the interval of 42 percent to 58 percent in 2006.3 In areas such as Latin America, Europe,
India, and other Asian countries, the portion of the drug market occupied
by generics is even higher. Consequently, as soon as the patent expires, the
incumbent monopolist may expect to face competition from a growing
number of generic producers that sell at prices a lot closer to marginal cost
than the patented medicine did. In the United States, generic drugs are
available at prices that are between 30 percent and 80 percent lower than
that of the originally patented product.4

    Finally, the global drug market is geographically concentrated, with sales
in the United States accounting for about 48 percent of the total, followed
by Europe's 29 percent and Japan's 11 percent. Why is this? The fixed cost
of creating a new medicine is very high, it is argued; as a consequence, new
drugs are expensive and only consumers in rich countries can afford them.
Nevertheless, other markets are growing, and the economic development
of China and India will soon lead to a substantial change in the world
distribution of market shares.
    Large fixed cost, small and constant marginal cost, innovation as the
main competitive tool, and the market concentrated in rich countries where
pirating is practically absent - this sounds like the textbook description of
a traditional Schumpeterian industry. The model we have been criticizing
as unrealistic and misguided until now seems to fit almost perfectly the
situation of the pharmaceutical industry. Under these circumstances, the
traditional model predicts that there should be many potential producers of
a medicine, that the industry should be dynamically competitive and therefore highly innovative, with newcomers frequently challenging incumbents
by means of innovative superior drugs. In some sense, this describes the
global pharmaceutical industry. But in some other, equally if not more
important sense, it does not.
    Some people love the pharmaceutical industry and some people despise
it: there is little middle ground. The pharmaceutical industry is the poster
child of every intellectual monopoly supporter. It is the vivid example that,
without the sheltering patents provided to inventors, the outpouring of
new wonder drugs we have grown accustomed to would not have materialized, our life expectancies would be a lot shorter, and millions of people
would have died of the diseases Big Pharma has instead managed to cure.
In the opposite camp, Big Pharma is the scourge of humanity: a club of
oligopolistic white men who, by controlling medicine around the globe and
refusing to sell drugs at their marginal cost, are letting millions of poor
people die. Withdrawal of supply by the big pharmaceutical companies is
as close to economic crime as anything can be, we are told. The wonders of contemporary medicine and biotechnology are the fruits of intellectual
property, it is countered.

    This sounds utterly complicated, so let us handle it with care and, for
once, play the role of the wise fellows: in media stat virtus, et sanitas [Virtue
is in the middle, and so is health]. In fact, we will move (instead of jump)
into this issue so carefully that, by the end of the chapter, the reader may feel
we managed just to check the water's temperature and, maybe, salinity. The
pharmaceutical industry is a complicated beast to vivisect, one that can be
approached from many contradictory angles and viewpoints. We will stick
to ours, narrow that it may be, and ask, How strong is the case for patents
in pharmaceuticals? Is there substantial evidence that without patents we
would not have the medicines we have, or at least that we would have many
fewer and worse medicines? Would the industry shut down and talent move
to some other, more rewarding enterprise if patents on drugs were more or
less abolished; that is, if the world became like Switzerland until 1978 or
Italy until a year later?
    In fact, we shall see that although Big