Against Intellectual Monopoly

institutional
environment pharmaceutical companies are currently operating in, me-too
drugs are the obvious profit-maximizing tools, and there is nothing wrong
with firms maximizing profits. Me-too drugs also increase the welfare of
consumers, if ever so slightly, by offering more variety of choice and slightly
lower prices. Again, they are an anemic and pathetic version of the market
competition that would take place without patents, but competition they
are. The sad and ironic aspect of me-too drugs, obviously, is that they are very expensive because of patent protection, and this cost we have brought
upon ourselves for no good reason.

    This expensive creation of redundancy also has two implications relevant
to our final argument. As in the case of the computer software industry, it
suggests that the indivisibility is not such a significant factor in the innovation process; in other words, the true fixed cost to be recouped via monopoly profits is probably small. Before you think we are crazy because of the
$800 million figure we quoted earlier, make a note that says clinical trials,
and give us a few more pages of your patience. Second, it suggests the presence of a substantial amount of socially inefficient rent-seeking, artificially
created by the patent system itself. One often finds, in the public debate
over the rising cost of health care, a misplaced insistence on the huge profits
of Big Pharma. Yes, those profits are abnormally large and persistently so.
A signal, we agree, of a highly monopolistic industry. But they are not the
main cause of the rising cost of health care, because at the very end they are
just 10 percent of the whole pie. The much larger amount of resources the
patent system forces us to waste in the me-too drugs business, its advertising and its legal support, that is a sizable share of the pie. When you add
them up together, the research cost, the legal cost, and the advertising and
promotion cost get you to more than 50 percent of the whole pie!
    Now consider this: assume we can cut Big Pharma's profits to the average
level in the manufacturing sector. As a percentage of sales that would be
about 5 percent, meaning 5 percent off the cost of drugs. Make the pharmaceutical industry a competitive one, and get rid of the resources insanely
wasted in the monopolistic competition monkey business. Well, that is a
beefy 50 percent off the cost of your drugs. Also, like the proverbial cherry
on top of the sundae, making the pharmaceutical industry a competitive
one will probably reduce its profit margins too more common level, giving
you an extra 5 percent cost reduction for free. Next time, tell that to your
congressperson, please.
    Insofar as new drugs are replacements for drugs that already exist, they
have little or no economic value in a world without patents - yet cost
on the order of $800 million to bring to market because the existence of
patents forces the producers to "invent something" that the U.S. Patent and
Trademark Office can pretend to be sufficiently different from the original,
patented drug. Where does that money go? What are the social gains from
this kind of investment? None: the only social gain from introducing a
me-too drug is that the supply of the beneficial active ingredient increases,
and average prices possibly decrease somewhat. But this could be achieved,
much more rapidly and at a cost orders of magnitude smaller, by simply copying the old drug and improving upon it. Money spent in obtaining a
me-too drug that can be patented is money wasted for society that will be
charged to consumers: rent seeking and monopoly profits can be very costly
for all of us, indeed.

Redundancy and Bribing
    A different way of looking at the same problem emphasizes the marketing
of drugs over the R&D to search for new ones:
    A better explanation for the pharmaceutical slump is a shift in priorities toward
marketing, particularly since the FDA first allowed companies to directly target
consumers five years ago. According to data collected byAlan Sager, a professor at the
Boston University School of Public Health, the number of research and development
(R&D) employees at companies making patented drugs declined slightly between
1995 and 2000, while the number of people working in marketing shot up 59
percent. "Drug companies trumpet the value of breakthrough research, but they
seem to be devoting far fewer resources than their press