Patents create an inefficient system which increases costs and denies medical access

The AIDS crisis has brought to public notice what has always been generally true—that the existing business model for drug development leads to high prices and unequal access. There is now widespread dissatisfaction with drug prices in both the developed (Families USA 2003) and developing world (Correa 2000). Governments and health insurers are finding ways to deny access to the newest and priciest products. In the United States and other countries without a universal public health system, the uninsured simply cannot afford the newest medicines. In developing countries, life-saving medicines are priced beyond the reach of most people, a morally offensive outcome (TrueVisionTV 2003). Huge publicity surrounds negotiated price reductions for specific drugs in specific developing countries, yet the effect on the overall access problem is tiny.

Today's high drug prices are a direct consequence of a business model that uses a single payment to cover both the cost of manufacture of a drug and the cost of the research and development (R&D) carried out by manufacturers to discover it. A 20-year patent-based marketing monopoly is then granted to the drug's developers to prevent their prices being undercut by ‘generic’ copies produced by manufacturers who do not have R&D costs to recover. Preventing such ‘free riding’ on R&D has become a global trade issue at the World Trade Organisation (WTO) (Drahos and Braithwaite 2002). The implementation of the TRIPS (Trade-Related Aspects of Intellectual Property Rights) agreement and a growing number of regional and bilateral agreements on intellectual property require most countries to implement tough patent systems that discourage or eliminate competition from manufacturers of generic medicines (Box 1).

Unfortunately, monopoly-based business models have unpleasant side effects. Since the primary responsibility of any company is to maximise return on investment, it is unsurprising that there is pressure on pharmaceutical companies to set drug prices to whatever level gives the highest return, excluding those individuals who cannot afford to pay, rather than maximising the number of patients treated. There is also pressure to misuse the power given by patents, using them as anticompetitive weapons to block innovation and extend marketing monopolies. And there are growing fears that the huge growth in the use of patents is in itself starting to inhibit research (CIPR 2002; Anonymous 2003; Royal Society 2003). Something that is less well recognised is that this system is an enormously inefficient way of purchasing R&D. There is a considerable lack of transparency in pharmaceutical R&D investment, but the available data indicate that only about 10% of drug sales go towards R&D on new products. Only about one-quarter of new drug approvals are rated by the United States Food and Drug Administration (FDA) to have therapeutic benefit over existing treatments (NIHCM 2002; see Figure 1). Measured by investment, only about one-fifth of the 10% is invested in innovative products (Love 2003a). There is also very little research for diseases that primarily afflict the poor (Trouiller et al. 2001; WHO 2003).

Propping up the present structure for financing R&D (Figure 2A) is the widely held belief that the private sector plays a key role in the development of new medicines and that it is necessary to grant patents to incentivise private-sector financing. If this were true, it would make sense to tolerate all sorts of bad outcomes, because the fruits of R&D eventually benefit everyone. But granting a 20-year marketing monopoly on a patented invention is only one way to finance R&D, and the shortcomings of the present system are increasingly hard to ignore. Suggestions for alternatives are beginning to come from many quarters (Baker and Chatani 2002; CGSD 2003; Hubbard and Love 2003; Weisbrod 2003). In this essay, we present practical proposals to modify trade rules based solely on intellectual property so that alternative policy instruments can be used to encourage innovation.