Redressing Old Drugs for Profit

Drug patents are making headlines in the online version of CNN Money this week. Apparently major pharmaceutical companies are facing big losses this year due to the expiration of some of their leading drug patents, decreasing their monopolistic holds on the drugs and making room in the market for increased competition. As the cheaper generic versions of these drugs hit the shelves prices will undoubtedly fall, which means better deals for consumers, but large blows for major pharmaceuticals. In fact, the industry is projected to lose a total of $16 billion in revenue due to the increased competition caused by the loss of these patents. (Smith, 2007)

In an attempt to curb their losses, many companies are tweaking their drugs slightly, such as making time-released formulas, in the hopes of retaining some exclusive patent rights. (Smith, 2007) Now although this type of patent manipulation makes sense in terms of company revenue, what of the larger pharmaceutical goal of helping people live healthier lives? Privatizing pharmaceutical companies and making them for-profit inherently creates a tension between the societal benefits of medicine and the individual company desire to maximize gains. In this case the introduction of generic versions is something that everyone should ideally support. After all, lower prices means more of the drugs will get to more of the people who need them. On the other hand, no one can expect an industry to give up $16 billion without a fight.

So why doesn’t the government step in to right this potentially life-threatening market failure? Because if companies had no monetary (monopolistic patent) incentive to create new drugs, theoretically none would be created, and society would generally be worse off. Patents are designed to expire so that the full benefits to society of new drugs eventually prevail via generic versions and market competition. This allows for companies to profit substantially at the expense of society for a limited amount of time. In essence the patent system is a compromise between creative incentive and social welfare. However, as is evidenced by recent drug tweaking and patent law circumvention, this system may not work as well as intended.

Source:

Smith, Aaron. “Big Pharma teaches old drugs new tricks: Drugmakers hunt for new patents on old blockbusters to try and postpone the inevitable: generic competition.” CNN Money Online. March 21, 2007. Reference URL:
http://money.cnn.com/2007/03/21/news/companies/drug_patents/index.htm?postversion=
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