Pharmaceuticals are a natural area for patent buyouts where the market is uniquely ineffective.

Pharmaceuticals are a natural area to try patent buyouts because markets would be relatively competitive in the absence of patents, patent protection is effective, monopoly markups are large, drugs are nondurable, “me too” inventions are widespread, and considerable information is generated during FDA trials so potential bidders could make informed bids. Moreover, because many pharmaceutical patents are valuable, the administrative costs of the system are likely to be small relative to the benefits of patent buyouts. Once FDA approval has been granted, little new development is typically required. Finally, buying out pharmaceutical patents is likely to have benign distributional consequences, whereas buying out, say patents for improved yachts will not. Financing pharmaceutical research through patents places the financing burden on disease victims. If disease incidence is random, and not fully insurable, people will prefer ex ante to insure themselves by funding the research out of general tax revenue. The system could initially be applied to treatments for a few specific diseases considered to be particularly important or particularly subject to problems resulting from the patent system. Orphan drug legislation provides a precedent for establishing special rules for drugs designed to treat particular diseases.