Tuesday, October 06, 2015

Forbes on the Wall Street Journal on pharma patents

From a piece by Tim Worstall in Forbes about an article in the WSJ.

Here’s the WSJ:

Demand for a drug called Avonex has declined every year for the past 10.

Not a problem for its manufacturer. U.S. revenue from the drug has more than doubled in that time, to $2 billion last year.

The key: repeated price increases. The multiple sclerosis drug’s maker, Biogen Inc., raised its price an average of 16% a year throughout the decade—21 times in all.

It is an example of drug companies’ unusual ability to boost prices beyond the inflation rate to drive their revenue, even when demand for the drugs doesn’t cooperate.

Well, let’s leave aside the most obvious point here. That a rise in the price of something is highly likely to lead to a fall in unit demand for it. We do generally think that demand curves slope downwards, don’t we?

Actually, we can be more subtle than that and we will be in a moment after we’ve dealt with the public goods point.

A public good is not something that is good for the public, a good supplied to the public nor even something the public thinks it would be good to have. It’s something which meets two specific tests, that of non-rivalry and that of non-excludability. Say, Newton’s equations. Now they’ve been published there’s no way to exclude someone from using them to calculate the route to the Moon and there’s also no way that someone elses’ use reduces the amount of Newton that I can use to plot my own journey to the Moon. The problem with things like this is that it’s extremely hard to make money out of them. This is as true of a big budget movie as it is of a new drug. OK, the first might cost $100 million, the second $1 billion, but all of the money is being spent up front in the original development. The costs of showing it to an extra person, making an extra dose, are between trivial and nothing.


So, it is confusing that the WSJ is complaining about the patent system enabling drug companies to profit. Because the very point and purpose of the patent system is to enable the drug companies to profit.


Which tool of capitalism is getting the patent system right?

link: http://www.forbes.com/sites/timworstall/2015/10/06/wall-street-journal-surprised-that-pharma-cos-make-out-like-bandits-from-patent-system/


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