An op-ed at the Baltimore Sun best read from the bottom up. At the bottom the bio of the author

Peter J. Pitts, a former associate commissioner at the Food and Drug Administration, is director of the Center for Medicine in the Public Interest, which accepts donations from health care corporations.

Then the top

Imagine that you are an inventor and the government steals your highly lucrative idea. The next day, you are informed that the government plans to mass-produce your invention and give it away for free. If you're lucky, they'll give you a pittance for your efforts.

This is what happens, with increasing regularity, to the manufacturers of lifesaving medicines. The most recent example occurred in Thailand when the military-appointed government issued "compulsory licenses" to obtain two drugs.

The first, the HIV/AIDS drug Kaletra...

Since the author seems to have worked for the FDA and directs the "Center for Medicine in the Public Interest" I have to assume the article is deceptive rather than misinformed. Rather than fisk the entire article, let me just ask: Do you really suppose that the big pharmaceutical companies wouldn't have produced the blockbuster AIDs drugs if they had know that Thailand was going to put it under a compulsory license...

The conventional wisdom among economists is that introducing or strengthening patents (as required by TRIPS) is very bad for developing countries. Whatever benefit there might be from an increase in domestic innovation is sure to be swamped by the great increase in payments to U.S./European patent holders. A very rough rule of thumb would say that if demand is linear, and introduction of patents causes a switch from perfect competition to complete monopoly, the loss to the developing country would be about 1.5 times the gain to the developed country holding the patent. It turns out that the situation may be considerably worse than this.

The American Economic Review has published a careful study by Chaudhuri, Goldberg and Jia which is a case study of a particular pharmaceutical product in India, Quinolones (a key molecular ingredient of several antibiotics). They estimate that the primary loss will be to consumers and not to domestic pharmaceutical producers. The domestic producers may actually gain - the increased cost of quinolones based drugs will lead consumers to switch to domestic drugs based on different molecules, increasing demand for those products. The effect on consumers depends on the extent to which India regulates the prices of imported drugs: the estimates range from $144-$450 million. By way of contrast, the gain to foreign multinationals is estimated to range from $19.6-$53 million, again depending on how much price regulation there is. That is, the loss to India is estimated to be 7-9 times the gain to the (rich) Western exporters. The reason for this is quite striking: CGJ consider in addition to the effect of increased price, patents will cause the products to become less available and accessible. It turns out that lack of availability induced by patents has very significant costs.

Whatever ones overall view of the patent system, it is hard to defend the portion of the system that taxes transfers from a poor country $7-9 so that a rich country may earn an additional $1.

The American Economic Review version of the paper is not available online, but there is a working paper version available here.

This is not "news", but the news here is the rising tide, not the drops of water that make it up.

Novartis is, according to its own spokesman, "testing" the 2005 Indian pharmaceutical patents legislation in court, to check if it is working properly, or not. How? The details are here. Briefly, in traditional big pharma's style Novartis is seeking an extension of its expired patent for a leukemia drug. Novartis has slightly modified the drug (it can be "absorbed more easily by the body") and it claims this is a new drug, hence a brand new patent is justified. Lower Indian courts have rejected the claim, but Novartis is appealing. The drug in question is not widely used, as the form of leukemia it cures is rare. Novartis claims it donates the medicine to about 90% of the 6,800 Indian patients affected by the disease. Novartis' drug costs about $ 2,600 while its generic Indian version costs less than a tenth of it.

So, what's the big deal? That Novartis is "testing" the new Indian patent system, that's the big deal. After it wins this one, it can go after more important generic drugs produced in India. Not just drugs for rare forms of cancer, but also AIDS drugs and drugs for more widespread diseases, as Doctors Without Borders is pointing out. Apparently, about 80% of the generic AIDS drugs used by this and other NGOs around the world come from India. Should the Indian producers of generic drugs be shut down by the new legal challenges mounted by Novartis and other pharmaceutical companies, the consequences would be obvious, and not pleasant.

So, thanks to copyright, Bill Gates is a powerful man: he can spare a Russian fellow five years in jail. But, thanks to patents, Novartis is even more powerful: it can sentence thousands of sick fellows to death, or spare their lifes instad. No idea yet if Intellectual Monopoly increases income inequality, but it does allocate the power of life and death rather unequally around the world.

The Jan. 27th issue of The Economist has an interesting article, "Billion Dollar Pills," about the problems affecting the pharmaceutical industry. Industry profits are declining amid generic competition and pressure from large purchasers (including the government). New therapies are becoming more costly, and capital spending has been funnelled from R&D to sales and marketing. The bill for bringing a new drug to market is inexorably rising. Estimates run from $500 million to $2 billion, with one expert pegging it at $1 billion.

So what to do? Disaggregating the model is one suggestion, whereby pharma companies focus on a few areas they specialize in--discovery, developing, and marketing are mentioned. They could then contract out to specialist firms other parts of the business they need to add to their core strengths to have a viable product, or perhaps develop joint ventures.

The article mentions that Big Pharma has had profit margins of around 20%, double that of Big Oil. The oil and drug businesses are supposedly "self-liquidating," uniquely among big industries. An oil firm has to find new oil, and a drug company has to produce a new drug. The article says that Coca-Cola can just continue peddling sugar water (thank you, Steve Jobs). (Well, no, Coca-Cola has two problems, one called Pepsi, and another consisting of a bunch of newer and sprite-lier beverage firms that are rolling out new varieties of bottled waters and power drinks. Hansen Natural's stock went from $0.55 in 2003 to over $50 in 2006 while Coke's stock went from, well never mind. Let's face it: the company is being out-innovated by its smaller rivals.)

Big Pharma's lawyers continue to defend their patents, as if that will somehow make the industry more innovative.

A Wharton researcher, Patricia Danzon, thinks the industry is resting on its laurels from past successes. Joseph Fuller, head of consultancy Monitor, points out that drug labs are still the big and bureaucratic behemoths they were in the 1970s. Big Pharma has become Enormous Pharma. A better innovation killer can't be scripted.

Meanwhile, smaller pharmaceutical firms are discovering new methods of finding new drugs, such as the use of molecular imaging techiques being pioneered by the British drug company GSK. This will allow personalized drug therapies available for smaller and more segmented markets, which can still be profitable. The blockbuster approach is unable to fill an emptying pipeline. R&D spending is up, but "the number of new drugs has still to grow." Actually, today's Investor's Business Daily (no link available, but there is an online edition) carries an article, "Pharma Industry Lags on Research Efficiencies," citing a recent GAO report that points out that from 1993 to 2004, U.S. drug R&D investment increased 147% while drug approvals rose by 38%. Only one-third of FDA-approved drugs were new; the others were "me-too" drugs. The former president and chief operating officer of Abbott Laboratories says that the "top 100 drugs developed since 1950 targeted only 50 conditions."

Jeffrey Kindler, the new CEO of Pfizer, has slashed costs (including giving pink slips to 10,000 sales people) and wants the firm to become less secretive and to reach out to partners. Bravo, Mr. Kindler, and how about kicking the patent habit to jump start this initiative?

Pharma should reinvent itself by kicking its blockbuster habit and by looking for innovative methods and drugs that target new markets and smaller groups of patients. It should also zero in on treatments tied to the unfolding of the human genome.

The old blockbuster model based on the trial-and-error method is being replaced. Drug firms can either seize the opportunities or be swept into the dustbin of economic history.

Time magazine enters the drug patent debate with an article on a Government Accountability Office study which reports that the bulk of the growing amount of research money is going into “me-to” drugs rather than real innovation (link here). The study notes that the amount spent more than doubled over a ten-year span but the number of ground breaking drugs submitted for FDA approval grew a modest 7 percent, even as the basic science was turning up a large number of promising new leads.

Suggestions for reform were small beer, including more collaboration among government, industry and academia; more scholarships to train "translational" researchers to bridge the gap between basic science and medicine; more incentives for innovative drug research; and patents for breakthrough drugs extended from the current 20 years to 25-30 years, and those for "me too" drugs shortened to 10 years.

Too bad that Time failed to address just abolishing the drug patent system or Stiglitz' idea to have government fund drug development costs.

Writing in the British Medical Journal, Nobel economist Joe Stiglitz editorializes against pharmaceutical patents, at least on some drugs where their market is limited (link here). He cites the large number of people who cannot afford existing patented drugs or who constitute an unattractive market for the development of new drugs. He proposes that governments create big prizes to cover development costs while making the successful discoveries available at the cost of manufacture.

While he would limit the drugs for which prizes would be created, he makes several of the standard criticisms of patents, a healthy stimulus to public questioning of the system. Moreover, for now he proposes a realistic way to deal with a part of the problem when it is unlikely that we will get a major reform of the patent system for a long time to come.

The recent decision by Pfizer to abandon development of the drug Torcetrapib has lead to a drop of about 11% in Pfizer's stock price, corresponding to a loss of roughly $21 billion in market value. Details can be found here and here. Less noted by the press was a second very similar story, in which Bayer's American partner, Onyx, reported that late-stage tests found the cancer drug Nexavar ineffective against advanced melanoma. Onyx stock dropped of almost 30%.

These two stories contain interesting lessons about the damaging effects that the current patent system has on economic welfare and innovation in the pharmaceutical sector. A few of these, related to legal battles, monopolistic marketing and pricing, strategic retardation in the development of substitutes are summarized here, and here. Let me briefly mention two additional aspects pundits seem to have missed.

The first, and most obvious, has to do with the timing of all this. If we have to believe Pfizer's top executives, the information about the ongoing clinical trials changed dramatically in the space of a few (at most: three) days. The trials had been going on for years, Pfizer had kept releasing a continuous stream of positive news, signaling it was monitoring progresses pretty closely. It had even be criticized by the American Heart Association for releasing some results too early, on October 31 instead of two weeks later at the AHA annual meetings in Chicago. Pfizer's stock had rised recently, gaining about 3% during the last week on the basis of information released by Pfizer iteself, according to which the company was ready to file an application with the FDA to commercialize Torcetrapib in 2007. Apparently, the critical statistics that lead to the decision to completely abandon the development of the drug was that the death rate in the group of patients taking Torcetrapib was about 80/N, whereas it was of about 50/N in the control group of not treated or treated with different drugs (Liptor). Did all those 40+ patients needed to turn the sample mean and the t-statistics around die suddenly and all together between Tuesday, November 28, and Friday, December 1?

Even leaving aside the possibility of insider trading, it is quite clear that, because of the very large profits that a single "blockbuster patent" may entail, stock prices sensitivity to patents has become extreme. The patent system tends to turn stock-trading of large pharmaceuticals into a blind lottery, in which the companies executives can time the release of information as they see fit, and shareholders have absolutely no way of monitoring what is going on until the jeux sont faits.

The second point is less obvious and more important. Pfizer reports having invested, and lost, about $1 billion in the development of the drug, including $90 million to build a plant, in Ireland, that had already started producing it. Also according to Pfizer, the cost of the clinical trial program for Torcetrapib, the largest ever, was about $800 million and involved 25,000 patients. In other words, at least 80% of the total cost is due to the clinical trial. This is the rule not the exception in the development of new drugs; in the Onyx case the number are smaller, but the percentages are very similar, see here and here.

Clinical trials are paid by pharma companies only because of the patent system, and strenghtening patent protection for pharma is continuously advocated because of the high and rising cost of trials. As the examples prove, clinical trial costs generate unwelcome and unnecessary volatility in the the market valuation of pharmaceutical companies. Drastically reduce the length of patent protection on drugs (three to five years) and transfer the clinical trial costs to the federal government. If there is one thing even I would approve the government to pay for, it is this. Let me argue why.

The clinical trials produce scientific evidence and information about the effects of a drug. To the extent that there exists something that is a public good, this is it: it is less rivalrous than national defence. Also, the purpose for which such public good is produced is purely regulatory - it may be good regulation, in fact it probably is: drugs that kill are not good to have around - but regulation for the sake of public safety it is. After Phase I trials are taken care of by the innovating company, let Phase II and III be managed by a Federal Clinical Trial Agency, affiliated to the Surgeon General (not to the US-PTO: the risk of capture is too high) under appropriate secrecy rules. Once the drug is released, mandatory licensing after a few years should be required, with a fee equal to the (properly capitalized and partitioned among licencees) cost of Phase I Clinical Trials.

The Foundation for Taxpayer and Consumer Rights is suing to overturn the the Wisconsin Alumni Research Foundation patents on stem cells. The organization site gives the URLs for the Wall Street Journal and Los Angeles Times articles.

The former is especially good

http://www.consumerwatchdog.org/nw/?postId=6583 http://www.consumerwatchdog.org/nw/?postId=6573