Nationalize Tamiflu Now!

Dean Baker writes some very good sense about Tamiflu and compulsory licensing:

MaxSpeak, You Listen!: BIRD FLU, BIRD BRAINS, AND ECONOMISTS : Those of you who like to prepare for potential crises in advance, rather than waiting until after the fact (i.e. not FEMA), may have been following the debate over dealing with a potential outbreak of the Avian Flu.... One of the key issues is whether the government should be stockpiling large quantities of Tamiflu.... The major obstacle to large-scale stockpiling is that the drug is under patent by Roche, the Swiss pharmaceutical company. Roche has limited manufacturing capacity for Tamiflu, and would charge a high price in any case.... [T]he claim of manufacturing complexity is not accurate. The Indian drug manufacturer, Cipla, determined how to reverse engineer the drug in two weeks and is now prepared to begin making a generic version of the drug available in January....

The most extreme case is the one that Roche may find itself in. It may have monopoly rights to a drug that could literally mean the difference between life and death to tens of millions of people in the rich countries. This could be REALLY big money. If the government takes away the potential for this incredible windfall, by requiring that the drug be licensed so that it can be mass produced, then it does reduce the expected return on future investment. To put it simply, if there is a 1 in 10,000 chance that a drug company's new drug will be the next Tamiflu, but the company knows that it will then be required to license this drug rather than making $200 billion in profit, it will reduce its expected profits on its new drugs by $20 million ($200 billion/10,000).

While we cry over this loss of expected profits, let%u2019s ask why are we in this mess to begin with? In other words, why are we relying on patent monopolies to finance drug research? The Holy Grail in economics is that price should equal marginal cost. Yet, drug patents lead to situations where prices are hugely out of line with marginal cost, in some cases by a factor of 100 or more. Drugs are almost invariably cheap to produce; they are only expensive to consumers because of patent monopolies.

Of course patent monopolies in prescription drugs lead to all the bad things that economists warn about when prices diverge from marginal cost. The most immediate effect is the deadweight loss that results from people not getting drugs that they could afford at the competitive market price, but not at the patent protected price. And, this is not just poor people in Sub-Saharan Africa, there are tens of millions of people in the United States who do not take the optimal drug or the optimal dosage because patent protection makes it too costly. Monopoly profits give drug companies incentives to undertake expensive and often deceptive marketing campaigns.... Patent monopolies also provide incentives to research copycat drugs.... Patent monopolies also encourage drug companies to conceal negative research findings.... [P]atent monopolies encourage drug companies to spend large amounts of money on lawyers, lobbyists, and propaganda to protect and extend their monopolies.

The $220 billion question (current U.S. spending on prescription drugs) is where are the economists? Remember, economists are people that get high blood pressure from 10 percent tariffs on shoes or pants. When Bush put a temporary tariff on steel imports that maxed out at 30 percent, economists all over the country became apoplectic. So why is the economics profession overwhelmingly silent about drug patents, which are the equivalent of tariffs of 300 percent on average, and affect a product that is much more important to our economy and our health?

We recognize that patents are a way to provide incentives for research, but where is the economic research that shows that they are the most efficient way? You won't find it, because economists have mostly chosen to ignore the issue.

Just for the record, the U.S. government already spends $30 billion a year on biomedical research.... Why shouldn't we believe that if we doubled this appropriation, to replace the $25 billion that the drug industry claims to spend on drug research?...

Given the enormity of the stakes, you would think that there was a major debate within the economics profession about the best method of financing drug research. While there has been a limited amount of writing devoted to the topic, most economists are too busy dealing with tariffs on pants and other crucial items. Maybe mass deaths from a flu pandemic will help to reorient priorities in the profession.

The answer is that we don't trust the NIH to be able to set up procedures that cover all the bases in drug research. Low-probability but high-payoff projects are likely to be underfunded by the government--but properly funded by private companies willing to roll the dice.

However, these ex ante considerations vanish ex post when an epidemic threatens: nationalize Tamiflu now!

Comments

[theorajones]

"Low probability high-payoff scenarios tend to be underfunded by the government--but properly funded by private companies willing to pay the price."

This isn't how pharma companies actually operate, though it's what their PR departments would like economists to believe. The final steps of research that create new drugs aren't funded by "private interests"--it's funded by sick people.

History first: most existing pharma companies (biotech excepted) aren't funded by adventurous private sector investing in low-probability high-payoff scenarios--they're legacies. Roche, for example, is 100 years old. Back at the turn of the century, Germans dominated chemistry and invented fabulous things like dynamite, fertilizer, and purple dye.

However, if you want to make money from organic chemistry, the smartest place to be isn't in fertilizers--it's in pharma. Turns out that most people who have money will pay lots and lots of it rather than see their loved ones suffer and die. And even marginally improving their odds of survival is amply rewarded.

So, we have a situation in which chemistry companies make products that save lives and in exchange, the government gives their products special protection so they can charge consumers (i.e., sick people) far more than the product's marginal value. The chemistry companies then spend the money as they please--one thing they invest in is R&D for more lifesaving products to sell to tomorrow's sick people.

While it's very nice that people have drugs as a result of this, we have a perverse situation in which as a matter of government policy, sick people from one generation are responsible for funding the treatments for the next generation. Personally, I think sick people got screwed over enough by misfortune and really don't need government to add to their burden as a matter of policy, but it appears I am in the minority.

There's got to be a better way to fund innovation than with a sick tax in the form of a government-enforced monopoly. A sick tax is really the stupidest sort of tax imaginable.

[Dale]

Are all the bases being covered now?

[Rob]

Brad, isnt this a case where you'd actually expect pharma to stay away from the riskier ventures. If you (and I mean *you*) can make a case for nationalizing stock market risk which has much less risk involved, how can you really expect the market to fully provide sufficient capital to even more risky ventures?

[Rob]

(for the lack of an edit button..)

Now if you want to make an argument, you could make an argument that the governemnt won't get see or pay attention to market signals and miss out on whats most desirable to the population. (Given the huge public good component in medicine this may be a difficult taskto fuly sell)

Another big area would be that certain drugs would find themselves out of reach for political reasons. RU-486, any birth control, and Viagra would have a hell of a time getting any sort of direct governemnt support.

[a]

"Another big area would be that certain drugs would find themselves out of reach for political reasons. RU-486, any birth control, and Viagra would have a hell of a time getting any sort of direct governemnt support."

Fortuantely, the medical world isn't just the good ol' boys in the U.S. They do medical research in other parts of the world, and there other polities with different values. RU-486 comes from France.

With the number of old men in Congress, I don't see why Viagra would have had any trouble getting direct goverment support.

[Steve]

It's the classic positive externality case.

Tamiflu doesn't internalize the benefits of increasing production of the vaccine so the quantity they produce is far lower than the socially desirable level.

[agm]

Naive physicist's question: why is setting price equal to marginal cost a good thing? From what google tells me, the discussions here and at Crooked Timber imply there are some really big assumptions that economists use but aren't readily visible to non-specialists, assumptions that non-economists ::cough Holsclaw cough:: may not agree with.

[agm]

And my memory sucks, the relevant discussion is over at Marginal Revolution, not CT.

[trevelyan]

"Low-probability but high-payoff projects are likely to be underfunded by the government--but properly funded by private companies willing to roll the dice."

Sure the use of the the word *likely* is tongue-in-cheek here, Brad? You frequently post on market failures, so using a theoretical argument about market efficiency comes across either as (1) an apologia or explanation for the failure for people to focus on the issue, or (2) an attempt to justify government inaction while distancing policy from moral culpability.

I would find it very difficult to believe it would be either. What grounds do we have to believe that markets are funding this sort of research? There aren't a lot of competing drugs for Tamiflu.

Fortune has a nice a relatively lengthy article about the effect that drug patents have had on the research process here. Difficult to generalize from, and there is no large-n statistical data from which to run regression analyses, but I don't think it makes a weak case.

http://www.fortune.com/fortune/fortune75/articles/0,15114,1101810-1,00.html

[A. Zarkov]

In view of a possible pandemic, I would certainly support a taking (with compensation) of the Tamiflu patent. It’s a settled matter in law that the government can use its powers of eminent domain to do this. However there is another side to this debate, one I don’t agree with, but deserves consideration. For example see Tyler Cowen at

http://www.marginalrevolution.com/marginalrevolution/2005/10/should_we_confi.html

But the “reality based community” just yells “seize it.” Of course a broken clock is right twice a day.

There is the chilling possibility that H5N1 will mutate to a form that is resistant to Tamiflu. We clearly need a layered defense, and that might include closing or at least carefully controlling our borders and other actions that those yelling “seize it” won’t like.

[gordon]

Don't forget Relenza, a drug which is similar to Tamiflu.

[DuckedApe]

According to The Independent Online,

"As moves to halt the growing threat of avian flu intensified, governments sought to stockpile the only drug currently available to offer any sort of defence for humans. The herb from which Tamiflu is made is grown in four provinces in China and "huge quantities" of its seeds are needed, according to the Swiss pharmaceutical manufacturer Roche.

It is harvested by local farmers between March and May, purified and the shikimic acid extracted at the start of a 10-stage manufacturing process which takes a year.

Only star anise grown in the four provinces of China is suitable for manufacture into Tamiflu and 90 per cent of the harvest is already used by Roche."

And yet the Indian lab can make it by January? Do they have an alternate, cost-effective source of "shikimic acid" or do they not need it? I read somewhere that their copycat product "may be less effective", so maybe it is true that only so much true Tamiflu can be produced.

And nationalize Relenza while we're at it:

Flu Strain Isolated in Vietnamese Girl Is Resistant to Drug, Scientists Report
By DONALD G. McNEIL Jr., Published: October 15, 2005

Strains of avian influenza virus that are resistant to the antiflu drug Tamiflu have been isolated from a patient in Vietnam, scientists reported yesterday.

They added that the strains could still be treated with a second flu drug, Relenza, suggesting that it might be prudent to stockpile both drugs in the event of a bird flu pandemic."

http://www.fda.gov/cder/consumerinfo/druginfo/relenza.HTM

[glenn hefner]

While I don't disagree with the allegations of aggressive and unethical marketing practices, without patents and some form of IP protection, the pharmaceutical and biotech industries would not exist. Much of the profits are reinvested for new drugs and research. The life-saving drugs of today (and yes, the life-style drugs, too) are largely due to the IP protection they had in the past.

[dsquared]

I must say that I don't understand the phrase "high payoff" in Brad's post and suspect that it is doing double duty here. The only meaning which makes sense in context is "high financial payoff", but that clearly can't be right; the financial value of a drug is dependent on the patent and licensing regime, which is the very matter at issue.

I think Brad also wants to use the implicit meaning of "high payoff in terms of being very useful clinically", but in this sense it isn't even necessarily true; notoriously, some of the worst killer diseases in the world are the subject of next to no pharmaceutical research (or at least they were before the Gates Foundation made a big grant) because they are diseases of poor people.

[Adam]

Okay, time for a crazy idea:

How about establishing a non-profit, national drug development institution that would not receive patents. I'm thinking that this would be established on a model similar to HMOs -- perhaps it would be owned/directed by the HMOs and insurance companies. These companies would be motivated to develop drugs in order to reduce treatment costs.

On another note, since the Feds fund most of the basic science research in this country, I don't think that we can take for granted that the government isn't interested in long-term projects with a low probability of having a payoff.

[Joerg Wenck]

Actually nationalization isn´t really necessary to achieve the effect Max Sawicky is after. There is an alternative to patent monopolies in the form of a DRM-type regime where research-oriented companies sell non-exclusive manufacturing rights to what are now termed generics companies. This would eliminate all the perverse incentives and waste inherent in the current arrangement.
The overall cost of the system would only be higher if it also produced more welfare benefit, whereas patent monopolies - as Sawicky noted - tend to invest in marketing and litigation to protect future profits, thus inflating the cost associated with creating a given amount of welfare benefit rather than maximizing their investment in research.
In the case of nationalization, government would have to pay a fair price - which is impossible to determine under conditions of asymmetric knowledge. It would also distort the incentive structure even more: presumably government would never nationalize drugs aimed at newly-defined, big-pharma-sponsored pseudo-illnesses. Expect those to sprout and proliferate madly if nationalization leads to at-cost-pricing of really vital drugs.
This is a recipe for failure not only in the long run, but the short run, too.

[MoobyCow]

"How about establishing a non-profit, national drug development institution that would not receive patents. "

We kind of have that. It's our university system. Unfortunatly companies that put in a small portion of research dollars can piggy back off of the research done at university (or in conjunction with a university) and then get the patent.

[Steady Eddie]

OT -- Don't look now, Brad, but Bruce Bartlett has become the latest victim of America's Stalinist party orthodoxy inquisition:

http://www.nytimes.com/2005/10/18/politics/18bartlett.html
?adxnnl=1&oref=login&adxnnlx=1129640886-ywExGhNaoY79uks8Oq9Mcw

[Joerg Wenck]

"These companies would be motivated to develop drugs in order to reduce treatment costs."
They would equally be motivated to contribute toward drug development by big pharma, perhaps under condition of receiving a rebate in case of success - another form for them to actively direct investment toward areas where the payoff would be largest.

[Eleanor Arnason]

My understanding is that drug companies put most of their research money into developing treatments for lifestyle diseases in rich countries and into copycat drugs, rather than into products such as influenza vacines, which need to be inexpensive (in order to effectively treat epidemics) and have to be remade every year, as new strains of virus appear. The ideal drug for a drug company is a psychopharmacological drug which will be taken for years by otherwise healthy people, who might not need the drug if they didn't live in a truly crazy society. There are many illnesses which take huge social and economic tolls, but are not likely to make money for drug companies. I like Dean Baker's plan, though (as a writer and the heir to a rather lucrative copyright) I am less crazy about his ideas re copyrights.

[Jim Lund]

"Low-probability but high-payoff projects are likely to be underfunded by the government--but properly funded by private companies willing to roll the dice."

The opposite is accually closer to the case. The NIH funded research is low-prob high payoff. Pharma companies skip off the promising results and funnel them into clinical trials. Drug development is individually risky (per drug), but a pharma company develops many drugs, and the overall system is low risk and extraordinarily profitable.

[DaveL]

While it is certainly the case that price should ultimately tend to mirror marginal cost, the cost of drugs is so front-loaded due to the high cost of research, the low success rate of potential new drugs, and the need for expensive clinical trials that this ideal is irrelevant in the real world.

There are many products with similar (though perhaps less extreme) cost structures. Books, computer software, movies and music come to mind: they cost almost nothing for each individual instance produced, but must recover front-loaded costs to return a profit.

[Macneil]

For what it's worth, it's plain stupid to moan about "copycat" or "me too" drugs. If the Vioxx recall has shown anything it's that we need more types of drugs that do "the same" thing.

In reality, the molecules are different, and different people react in their own unique ways to these drugs. Simply having only one molecule and no choice is a huge problem. For example, some people respond only to Prozac, while others respond best to Paxil.

Moaning about "copycats" also ingores the point that drug companies are racing each other to the finish line. Those who invested so much by being in the race in the first place can recoup their losses (when they've made significant progress, that is) by releasing their drug too. It's a win for the drug companies, and it's a win for the consumer.

I think we just need the government to purchase these drugs instead, if we really care about helping the needy.

[looj]

i remember a drug rep for roche on NPR saying it takes 12 months to make Tamiflu. How can they just lie about stuff like this?
I do believe, however, that there is a place for patent protections in the pharmaceutical industry. we just need to be much more judicious about how we apply those rights, namely not allowing incremental changes to qualify for new patent protection, among other things. And I have no sympathy for drug companies that refuse to release a drug that potentially could save millions of lives in a short period of time simply because they feel entitled to their windfall profits (in this case due to a stubbornly mutating strain of the flu, of all things).

[Len Zimmerman]

The source of the drug patent problem is spelled out by Richard Horton, the editor of The Lancet, in his review of Sheldon Krimsky's "Science in the Private Interest" that appeared in the 3/11/04 issue of The New York Review of Books. Krimsky says the Patent and Trademark Amendments (Bayh-Dole) Act of 1980 entitled anyone, including universities, who came up with inventions with the support of federal funds to claim full rights to any patent that resulted from that work. Thanks to that act science may have changed from a search for truth to a search for money.

[Maynard]

Instead of a large government agency (turbo-NIH) that takes over the R&D of private pharmaceutical companies, how about a relatively small government agency that buys the patent rights from Roche et al at a fair price and then allows anyone to manufacture the drugs? Boom, for a lumpsum payout you get a competitive market and all the social/efficiency gains that produces. If the agency is run competently (i.e. not by Bush political appointees), the drug company is fairly but not excessively compensated, and the size of the payout is smaller than the deadweight loss to society of Roche's monopoly. You maintain the advantages of privately directed R&D -- companies still have the incentive to develop the next drug, because they know that they'll either be able to sell it to the public at inflated prices, or sell the patent to the government.

[cb]

Dean Baker, when not writing about social security, ends up all over the map. There are many interesting issues here, but he has them all confused because he wants to use the avian flu scare to drum up support for changing the way we fund drug R&D. He is right in that the current system does not work well, but he makes a lot of messes along the way.

Cleaning up Baker's messes:

1. Avian flu does not [yet] warrant this level of hysteria in the media as an imminent risk to humans.

2. Baker is wrong when he complains that economists do not study problems with the current patent system to fund R&D. He is welcome to start by cracking Tirole or by doing a search on "patent races" or by calling up Uwe Reinhardt.

3. According to CMR, drug companies claim to spend $50 billion on drug R&D, twice what Baker says. Phrma companies alone claim to spend close to $40 billion. Not sure where Baker is getting his information. Obviously all of this isn't on the development of the molecule, but Baker is talking about what drug companies claim to spend and he could have looked at Phrma's website and see that he is way off.

4. "Holy grail of P=MC" is a straw man. In even electricity ratemaking, it is aggreed that someone has to pay for the upfront capital.

5. Baker condemns economists for using patents without questioning whether they are the best approach...and then wants to stockpile Tamiflu. Really? Is stockpiling Tamiflu the best appraoch? are there other drugs that might be better that should be compared head to head? Will therapies improve over time and might we be better off not locking into an inferior therapy? Would vaccine research be a better approach? Given the enormity of the stakes, you would think that there was a major debate within the pundit profession about the best method of addressing a future threat of a flu pandemic.

6. To expand on something Brad says...NIH and Phrma do not generally overlap. NIH does basic research. Phrma typically takes existing basic reseach and turns it into a consumer product. NIH lacks the resources to do, say, phase III testing and physician education (marketing), which are extremely expensive aspects of bringing a drug to market. Phrma does not find it profitable to do a lot of its own basic research.

It isn't a big secret that the system doesn't work well and that drugs shouldn't be sold like jellybeans.

[david]

I'm guessing that Baker isn't wholly convinced by the numbers on Pharma's websites. I wonder why?

[Alex Tolley]

The best way to cost effectively deal with avian flu would be to develop a vaccine, not use a patented small molecule. Vaccines are under development, although given the lead time we have had, we have been woefully slow at getting started on this program in the US.

As last years debacle over flu vaccine availablity showed, it is in the public interest to have the government ensure that there is sufficient production, rather than relying of market forces to determine optimal production.

Regarding drug R&D. As others in this thread have noted, most original reserach occurs outside of Big Pharma, mainly in universities with government funding and also by small reseach companies that sell promising compounds for development. Big Pharma's strength are the capital requirements to test drugs for efficacy and safety, and marketing.

The costs of drug testing are now so onerous that the successful drugs must recover the cost of development of both successes and failures, either by being blockbuster life style drugs or very high priced niche products. Despite the high profile *failure* of Vioxx, I doubt that the existing business model will change, simply because of these economics. Find methods to drastically cut the development costs and there will be a large impact on drug development.

[Stuart]

I cast my vote for a fee-for-license manufacturing model. Creators get a piece of the pie from all who sign on to manufacture/distribute, so there's still incentive to produce useful drugs. The licensed manufacturers/distributors get a piece of the action, with the added benefit of adding some employment into the mix that is currently missing. Costs overall go down, which is great for all of us.

Now if we can just convince the FDA to mandate this as the way business is done in the US...

[Joe O]

Pressuring India to modify its patent laws on drugs is looking like a really bad idea. We could have had a two-tiered system where india would be allowed to copy drugs for sale in third world countries; while patent protection in the first world would provide adequate incentives for drug innovation. In case of emergencies, the capacity in India could be used to ramp up for production in the first world.

[Slocum]

"My understanding is that drug companies put most of their research money into developing treatments for lifestyle diseases in rich countries"

I don't know to what extent that's true, but it's a very sensible strategy -- after all, nobody's going to write a blog entry entitled, "Nationalize Viagra Now!" and probably not even, "Nationalize Lipitor Now!" On the other hand, the better a new AIDs, Malaria, or influenza drug works, the more risk the drug company faces in having its product nationalized. Invent a cure for baldness or wrinkles and you reap all the profits of yor invention, but invent a cure for Malaria and you're screwed. Incentives work.

But why "Nationalize Tamiflu Now!" rather than "Buy the Tamiflu Patent Now!"? Why not have developed nations pool the resourced needed to buy the patent and put it in the public domain?

[Hank]

Why is that people who moan about Copy Cat Drugs are more than happy to see 10 different brands of potato chip on the shelf in the grocery store? Surely those companies could devote their resources to making some other more healthy foodstuff in an underserved area of foodspace.

[Martin Bento]

Brad said:

"The answer is that we don't trust the NIH to be able to set up procedures that cover all the bases in drug research. Low-probability but high-payoff projects are likely to be underfunded by the government--but properly funded by private companies willing to roll the dice."

I think the reverse is the case. The private company has no penalty for *not* developing a flu vaccine or other vital product. Their calculation is the opportunity cost of what they invest vs. the expected return times the probabality that said return will materialize times a time discount (roughly). All those factors are essentially the same for the government save:

1) There are potentially serious consequences to the government for failing to prevent or deal with catastrophe. New Orleans is a case in point and avian flu could be much worse than that. Plague can cause governments to collapse. No mob with torches will be going after Merck for not having come up with a flu vaccine. The mob with torch potential provides a helpful additional incentive for the government.

2) Governments have a much longer time horizon than private companies. That's why they are doing most of the basic research. Historically, governments and churches have been willing to fund projects that take centuries to reach fruition (think pyramids, cathedrals). No private for-profit company will do this.

3) To the extent that research is publically-funded, private patents should be illegal, at least in the country funding the research. If a drug relies on publically-funded research, any patent should apply only to the private value-added. It may be that we need to have the government hold patents and enforce them the same way private entities. As a taxpayer, I regard private patent on the fruits of tax-funded research as theft.

[bobsnodgrass]

Slow down, and take a few deep breaths. I’d say that it is hysterical to talk about nationalizing one drug and that prolonged use of Oseltamivir (Tamiflu) will cause resistant mutants to appear and probably to spread. There’s already a report of two volunteers in a group experimentally infected with H1N1 influenza virus (not avian flu) who developed resistant strains within a few days of treatment with high dose oseltamivir (Tamiflu). There may be some resistant cases in Vietnam although there is no peer reviewed data to support that yet.This particular mutation in this particular virus (influenza A/Texas/36/91 (H1N1) virus) wasn’t even as virulent as the wild type strain, but what effect it would have on a malignant H5N1 virus is unpredictable.

Various libertarian blogs have suggested that a. The US health care system is sure to screw up b. Free marketeers should buy kegs, barrels or other megaquantitties of oseltamivir and start using it in high dose at the first sign of flu- well of course, the flu that we get this winter won’t likely be H5N1. If resistant flu viruses of other types are fostered, there is some possibility of spread to the avian forms. Early and prolonged use of Tami flu will make it useless. Many European physicians have written about this saying things like “Early and prolonged use of any neuraminidase inhibitor is dangerous, expensive and likely to increase rather than decrease ultimate mortality”. It’s one of countless examples that working for your own health without considering the big picture can be harmful over all- we need to cooperate and hang together.
By the way, I am in favor a single payer health service- I would rather model it on German than British or Canadian healthcare systems, but all of them provide generally superior healthcare to our corrupt system. Our system suffers from the fact that physicians have mostly lost the feeling that they aren’t businessmen and women, that they have a special responsibility to patients, and that drug companies have come to play such a large role in US medical education. US healthcare is neither best nor worst in the world- it’s grossly unjust and we American MDs prescribe too many drugs, but there’s still a good side to it.

Single payer yes, nationalize Roche or Tami flu- that's ridiculous. We need to work on other ways to help the immune system fight influenza viruses, since any class of drugs will inevitably become obsolete due to mutation, as already happened with amantadine and rimantidine (not quite obsolete, but low value). This pandemic may be ten or infinite years away, nobody knows.

[liberal]

Joerg Wenck wrote, "There is an alternative to patent monopolies in the form of a DRM-type regime where research-oriented companies sell non-exclusive manufacturing rights to what are now termed generics companies. This would eliminate all the perverse incentives and waste inherent in the current arrangement."

You have a link to some discussion about that? Or care to elaborate further?

[Julian Apostate]

Merrill Goozner's "The $800 Million Pill" is a great resource around this discussion, particularly on the public-private "partnership" (public expense, private profit) in developing AIDS and cancer drugs. He notes several cases where NIH/NCI/other public entities did indeed conduct clinical trials through stage 3, so the fact that it doesn't currently happen much doesn't mean it couldn't happen were pharmaceuticals to be treated as a public utility (as they should be, in my opinion). He also computes that all the companies involved in the search for HIV/AIDS drugs spent around $5 billion combined in R&D by 1996 (with Merck's investments dwarfing those of all other pharma), whereas NIH spent twice that amount. By 2000, after protease inhibitors were brought to market (again, with the bulk of the research done with government grants or by NIH) that drug class alone provided a $2.2 billion a year market worldwide. In other words, most pharmas recouped their "front-loading" WITHIN THE FIRST SIX MONTHS.

[liberal]

cb wrote, "1. Avian flu does not [yet] warrant this level of hysteria in the media as an imminent risk to humans."

It's not clear why you think what Dean said was "hysterical".

Second, you're not doing the right computation. The correction computation is to first look at the expected loss, then look at higher order terms in light of risk aversion. While the likelihood of a deadly pandemic isn't that high right now, the stakes are very high, so the expected loss is somewhat high.

"Baker is wrong when he complains that economists do not study problems with the current patent system to fund R&D."

Dean didn't say that. He said, "When Bush put a temporary tariff on steel imports that maxed out at 30 percent, economists all over the country became apoplectic. So why is the economics profession overwhelmingly silent about drug patents, which are the equivalent of tariffs of 300 percent on average..."

[Slocum]

"Yet, drug patents lead to situations where prices are hugely out of line with marginal cost, in some cases by a factor of 100 or more. Drugs are almost invariably cheap to produce; they are only expensive to consumers because of patent monopolies."

This is ridiculous, by the way. The modern marketplace is absolutely full of products where the marginal cost is near zero and the prices reflect only intellectual property rights. Such products include movies, music, video games, office software, newspapers, books, magazines--even when you're not talking pure bits & bytes, the cost of production may be dramatically lower than the price (e.g. ICs of various kinds).

[Mike Sheffler]

I don't really think that nationalized drug research is the answer. A (tiny?) step in that direction would probably be a Good Thing (tm), but the statement that, "Low-probability but high-payoff projects are likely to be underfunded by the government--but properly funded by private companies willing to roll the dice." is most likely false.

Take defense. It wouldn't be hard to argue that national defense spending is a less immediate hedge for our personal safety than national drug research spending would be, but we have DARPA whose express mission is to ladle out huge pots of gravy to researchers studying topics with high risk but high potential value/payout. I don't really think that's a bad thing. It helps to overcome some of the miopic, overly-safe spending that leads to crappy research and slow development in military research.

From the DARPA website: The Defense Advanced Research Projects Agency (DARPA)
is the central research and development organization for the Department of Defense (DoD). It manages and directs selected basic and applied research and development projects for DoD, and pursues research and technology where risk and payoff are both very high and where success may provide dramatic advances for traditional military roles and missions.

I believe just as much as the next person that military spending is grossly out of proportion to the threats we actually face, but I think that most research spending -- and in particular, DARPA spending -- is a pretty good idea. I can envision a drug directorate that plays a funding role similar to that of DARPA, yet still does not amount to the whole-scale socialization of drug research.

[joe o]

>Why is that people who moan about Copy Cat Drugs are more than happy to see 10 different brands of potato chip on the shelf in the grocery store? Surely those companies could devote their resources to making some other more healthy foodstuff in an underserved area of foodspace.

Drug companies don't want to come out with copycat drugs. They want to come out with the cure to cancer. They can't find it.

The search of the drugspace for new drugs is hard to do. The marginal value of new drugs is declining. That isn't the drug companies fault. Much of the low hanging fruit have been found and the new tools that were going to revolutionize drug discovery haven't been working as well as people had hoped.

Even though this isn't the drug companies fault, it does make fears that patent reform will kill the goose that makes the golden eggs less than totally persuasive.

[robert waldmann]

The Federal government has very deep pockets.
It should have huge risk tolerance compared to well anything else. Consider the invasion of Iraq. Huge cost, low probability of setting off democratic dominoes, they did it.

The fact is that long shot research is already mostly publicly funded (mostly via investigator initiated peer reviewed grants where 85% of the NIH budget goes compared to 15% spent in house).

Or what about DARPA ? It's just not true that public research is more cautious and short term. Quite the opposite.

The private firms often come in when the basic concept is proven and details need to be fixed, roughly the development stage not the research stage. A pharmaceutical company issue is making a drug so that we don't digest it in our stomach, piss it away immediately or metabolise it (pharmacokinetics).

While outstanding original path breaking research has been done by drug companies, they generally come in at the relatively low risk close to market phase.

In fact, the advantage of the big drug companies is the advantage of a large firm whih can coordinate a huge team. Thus agents developed by say biotech startups are brought to market by big pharma.

Oddly NIH employees interact with big pharma roughly the same was biotech start ups do. The NIH is huge, but to avoid bureauschlerosis it is organised in an immense number of tiny fiefdoms with senior investigators who can't be fired and do what they want (think full professors but there are many more of them proportionally).

The NIH budget is spent on an absolutely immense number of tiny organisations (think of an NSF grant and that's like an NIH grant except there are many fewer NSF grants).

Often the orincipal investigators have no reason to fear risk, can shoot for the moon and do.

So why is it that the federal bureaucracy is better than the private sector at daring original high risk research and worse at anything requiring organisation ?

Well I think one big factor is ideology. The NIH is in the USA and for it to develop drugs and bring them to market would be socialism. Can't have that even if it works (see general debate about health care).

Another is that too much freedom is licence.

Public researchers do what we want. This means that NIH funded researchers study things which are interesting scientifically. Congress tries to push them towards more applied work (failing to calculate the return so far on pure and applied work which shows that more bang has consistently been obtained for the pure research buck).

The boring work of improving a molecule and testing and testing and testing it (after applying and applying and applying to the FDA for permission to do so) is something few people will do without pressure indirectly from shareholders via ruthless managers.

You could ask how many principal investigators at the NIH have ever received FDA approval for an IND (Investigative New Drug) a necessary step in the drug development process.

Now if you suggest that they and they alone get to divy up the 20 billion a year, then I'm all for it.

Conflict of interest disclaimer. I only know of one such person and he is my father.

[still working it out]

"Low-probability but high-payoff projects are likely to be underfunded by the government--but properly funded by private companies willing to roll the dice."

No offence, but are you kidding me?

Ever heard of DARPA? Noticed that it funds research that doesn't take place in the private sector at all?

[BillCross]

Also, I'm pretty sure that the pharma industry numbers for spending on R&D include PR like the free samples given to doctors and perhaps advertising costs.

I don't know much about movies and DVDs but CD prices are at most 25% IP related and usually closer to 10%. The cost model was set at the advent of CD on the basis of the vinyl LP model and when CD production costs decreased, the extra money went to the manufacturer as profit. people were used to paying a certain price and until recently recording companies did not need to reduce the price to attract sales.

[Glenn]

Capitalism, anyone? Many of the same people who bitch and moan about Drug companies and Oil companies making too much money, are the same people who want some form of nationalized health care and plentiful oil. It don't work that way. Profits are necessary to develop drugs and explore for oil. So, lifestyle drugs can be derided, but those profits allow lifesaving drugs to be created. I guess all of us should be in favor of allowing China in India, or any country, to ignore IP and sell and export these drugs to other parts of the world?

And when it comes to the laudable and ludicrous idea of government agencies buying IP "at reasonable prices," how does this work in practice? Who sets the reasonable price? Who decideds the cost of capital and the return of investment? Are for profit-companies allowed to bid as well? Because guess what - companies/inventors/entrpreneurs sell their ideas all the time. IP is bought and sold, but more often to the highest bidder.

Its fine to wax poetic and dream of a perfect world, but less profits mean less future research and fewer drugs.

[Otis Cambell]

I think that you have missed the other half of the equation. Any drug (medical or otherwise) will also have a marginal value to the user. A person with, or at risk of contracting avian flu will be place a very high marginal value, and therefore, be willing to pay a phenomenal price for any treatment.

The price will be equal to the marginal value.

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