With monopoly rights, profits are tied to units sold, not the innovation’s impact. Consequently, when those in need do not provide a profitable market, for example through poverty or low usage rates, monopoly patents fail to incentivise medical innovation.
See also the funding mechanisms document in answer to this question.
Monopoly patents combined with consumer choice do incentivise innovation - but not in relation to cost-effective health impact. With monopoly rights, profits are tied to units sold, not the innovation’s impact. Consequently, when those in need do not provide a profitable market, for example through poverty or low usage rates, monopoly patents fail to incentivise medical innovation.
Let us consider how monopoly patents incentivise innovation. Patents, like any financial incentive, drive innovation through profit. Under monopoly patents, profit is made through the markup on the medical products sold. So profit is determined by use in a monopoly patent system. We might think that this system works quite well: monopoly patents incentivise the kind of innovation that consumers want and so will pay for. We might well think that innovation that consumers will buy must be useful, and so represents the ‘right’ kind of innovation.
In the case of healthcare, however, the right innovation is the innovation with the greatest health impact. This means that for monopoly patents to stimulate the innovation required, there needs to be a link between consumer choice and health impact. Unfortunately, this is not the case. There are a number of theoretical reasons supporting this claim, as well as empirical evidence suggesting that current R&D does not in fact target the most impactful areas.
The theoretical reason that consumer choice is not linked to health impact is that wealth is distributed unequally, and health and poverty are associated. As Scotchmer puts it, ‘Whereas wealthy benefactors and governments can indulge in basic science and curiosity-driven research, a research agenda driven by patents is hostage to the market and to consumer sovereignty. The consumers who are sovereign are those with resources.’1 Patents stimulate the innovation that wealthy consumers are willing to pay for, and not the innovation that sick consumers need. This means that consumer choice is not directly linked to health impact. Firstly, the poorer you are the more likely you are to be in ill health. Secondly, diseases are distributed differently between rich and poor populations, meaning that the poor have different medical needs to the rich. Finally, where cost-effectiveness is concerned, the opportunities for health impact are often especially high in resource poor settings, where general levels of health are poorer and cheaper basic interventions can have a large impact. This compounds the problem.
The association between health and poverty is not the only reason for arguing that profit tied to consumer choice might not to relate well to health impact. There are medical reasons that some drugs should be used as little as possible. Antibiotics are a good example of a class of drugs which as a society we wish to conserve. But tying profit to end use gives the manufacturers of antibiotics an incentive to sell as many pills as possible, regardless of the risk of resistance.
Let us take an example. Imagine how profitable a cure for the common cold would be. Millions of people in rich countries every year would buy it from their local pharmacy. It would make their lives a little bit better; perhaps it would create marginal productivity gains too. Now imagine how profitable a cure for a rare disease affecting 1000 children a year. Without treatment the children will die; with treatment they will live full and happy lives. But there are only 1000 of them. Even if this treatment were sold at a very high price, it would not make as much money for the producer as a cure for the common cold. As a society, we would wish to save the lives of the 1000 children, rather than stop the runny noses of few million people. But as a rational, profit-maximising firm, the cure for the common cold wins hands down. This is a stylised example, but it illustrates the fact that consumer demand does not correlate perfectly with health impact. It is therefore an imperfect way of incentivising innovation.
There is also empirical evidence that the innovation currently undertaken under the monopoly patent system is not strongly related to health impacts. On the one hand, innovation is failing to tackle problems of high potential health impact. Over a billion people live with one or more neglected tropical disease.2 However, ‘only 1% of new chemical entities commercialized’ were ‘relevant for tropical diseases’ in 2006.3 In 2010, ‘Only about 1% of all health R&D investments were allocated to neglected diseases.’4 And ‘[i]n 2013, public and private investment for R&D in 34 neglected diseases was $3·2 billion, of which pharmaceutical corporations only contributed $401 million. The latter amount represents only 0·8% of total industrial R&D spending of $51·2 billion in 2014’.5 Monopoly patents do not offer a sufficient incentive to undertake innovation in these areas, because the people affected by neglected diseases are mostly poor. In a system where profit is tied to use, drugs to cure these patients will not be developed.
On the other hand, recent innovation stimulated by monopoly patents is targeting some areas of lower potential health impact. R&D is expensive, and making a small change to existing drug may well be cheaper. Provided that a drug can be sold legally and to a sufficient extent, it is profitable to make it, even if it does not represent any incremental improvement on existing drugs. In 2005, Love and Hubbard claimed that ‘probably one-half to two-thirds of the R&D investments were directed towards projects of almost no medical significance’.6 And ‘[a]n analysis of 1345 new medicine approvals in Europe revealed that no real breakthroughs occurred between 2000 and 2014; only 9% of new medicines offered an advance, and 20% were possibly helpful’.7 Statistics on R&D into neglected diseases shows that monopoly patents do not sufficiently incentivise research into the diseases of poor patients. These figures are evidence of the opposite trend: monopoly patents may over-incentivise innovation where markets are wealthy, regardless of the limited health impact incurred.
Like any financial incentive mechanism, IP incentivises innovation based on profit. However, as a mechanism it generates profit in relation to use. The more people buy a drug, the more profit the producers make. In healthcare generally, it is thought that making the sick pay for their treatment is inequitable, so we might object to this incentive mechanism a priori on ethical grounds. Where health impact itself is concerned is the fact that IP only stimulates innovation where there is a profitable market for the medicine in question. This means that it offers a poor incentive to innovation in areas where the market is predominately poor. That is an economic way of stating the case: another way of putting would be that where sick people are poor, monopoly rights offer no incentive to discover the drugs they need. Profit is necessary to stimulate innovation, but there is a choice about what we tie profit to. IP ties profit to use, which does not relate well to health impact. If there were an alternative way to generate profit for innovation, which related profits to lives saved rather than pills sold, many lives could be saved.
Bigdeli, Maryam, Bart Jacobs, Goran Tomson, Richard Laing, Abdul Ghaffar, Bruno Dujardin, and Wim Van Damme. “Access to Medicines from a Health System Perspective.” Health Policy and Planning 28, no. 7 (2012): 692–704.
Love, James, and Tim Hubbard. “The Big Idea: Prizes to Stimulate R&(and)D for New Medicines.” Chicago-Kent Law Review 82 (2007): 1519.
“Promoting Innovation and Access to Health Technologies.” Report of the United Nations Secretary-General’s High-Level Panel on Access to Medicines, 2016. https://static1.squarespace.com/static/562094dee4b0d00c1a3ef761/t/57d9c6ebf5e231b2f02cd3d4/1473890031320/UNSG+HLP+Report+FINAL+12+Sept+2016.pdf.
Scotchmer, Suzanne. Innovation and Incentives. Cambridge, Mass. ; London: MIT Press, 2004.
Røttingen, John-Arne, Sadie Regmi, Mari Eide, Alison J. Young, Roderik F. Viergever, Christine Årdal, Javier Guzman, Danny Edwards, Stephen A. Matlin, and Robert F. Terry. “Mapping of Available Health Research and Development Data: What’s There, What’s Missing, and What Role Is There for a Global Observatory?” The Lancet 382, no. 9900 (2013): 1286–1307. doi:10.1016/S0140-6736(13)61046-6.
Gallini, Nancy, and Suzanne Scotchmer. “Intellectual Property: When Is It the Best Incentive System?” Innovation Policy and the Economy 2 (2002): 51–77.
Wirtz, Veronika J., Hans V. Hogerzeil, Andrew L. Gray, Maryam Bigdeli, Cornelis P. de Joncheere, Margaret A. Ewen, Martha Gyansa-Lutterodt, et al. “Essential Medicines for Universal Health Coverage.” The Lancet 389, no. 10067 (2017): 403–76. doi:10.1016/S0140-6736(16)31599-9.
