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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

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December 13, 2004

Fixing the Drug Industry?

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Posted by Derek

I had a post ready to go tonight, but we'll roll that one over to tomorrow. I'd suggest that if you're interested in patents and their place in the drug industry (and hey, who isn't, right? Uh, right?) that you trot over to the new Becker/Posner blog for a discussion of the topic. (Permalinks are here and here.)

Both of them have an excellent understanding of the issues involved, commensurate with their reputations. Gary Becker leads off by examining several possible reforms, but has some reservations:

"To be sure, a patent system creates a tension between the effect that prices well above costs of production have in reducing the use of drugs by sick persons, and the effect of high prices in helping companies recoup their large R&D spending. This tension is the cause of the increasing attacks on drug companies as more blockbuster drugs have been introduced during the past couple of decades. So an important public policy question is whether we can do better than the present patent system? I believe we can improve how the system operates in many ways, but some suggestions are likely to make matters worse rather than better."

Richard Posner's suggestion is to actually shorten patent terms a bit. His reasoning:

"Against this it may be argued that the fact that the drug companies apparently do not have excess profits show they need every bit of patent protection they have. Not necessarily. Competition for a profit opportunity may transform expected profits into costs. Suppose the drug companies believe that the invention of some new drug will yield the successful inventor a $1 billion net profit. The prospect will induce heavy expenditures on being first (the aggregate expenditures may actually exceed $1 billion). The result is that none of the companies, or the industry as a whole, may have abnormal profits. Now suppose that as a result of a shortening of the patent term, the prospect for the successful inventor is for making only an $800 million profit. Less will be spent on the patent race. Yet consumers as a whole may be better off, because the investment saved may have greater value elsewhere in the economy. The entire patent “prize” goes to the firm that crosses the finish line first, and so a firm might spend a huge amount of money to beat its nearest rival by one day even though the value to the public of having the invention one day earlier might be negligible. This danger is greater, the bigger the prize. Shortening the patent term would reduce this potential waste by reducing the revenue from a patent; it would also reduce the transaction costs of licensing, because more inventions would be in the public domain."

My worry about this idea is that the prices of drugs discovered under this system would rise to make up the difference in the patent term, making the "prize" about the same size as before. Complaints about price-gouging would only increase, and I fear that we'd end up in worse shape than before.

I like a couple of Becker's suggestions better: he would like to consider the idea of offering prize money instead of patent protection for diseases with the greatest impact on public health (here's a detailed proposal, on which more later), and he's also in favor (PDF) of loosening the FDA's efficacy requirements and turning drugs out on to the market after proving safety.

Steve Postrel of SMU tried to persuade me of that last idea a couple of years ago, and I wasn't having any. But I'm slowly coming around to it, although my original objections are still somewhat in force - namely, that it could be an open invitation to snake-oil salesmen (which would only pollute the whole industry's reputation - I know, like it's so clean right now), and that any such regulatory change would have to be coupled with some kind of tort reform. Even with all the FDA-mandated testing we have now, the trial lawyers flense the flesh from our bones when anything goes wrong. See Exhibit A, over there in Rahway.

Comments (10) + TrackBacks (0) | Category: Patents and IP


1. mingram on December 14, 2004 9:45 AM writes...

If companies didn't have to prove efficacy, most trials would probably stop at phase II. It's called proof of "concept" for a reason. Every drug that fails in phase III (and it happens regularly) is a shining example of why proof of efficacy is critical. What insurer would include a new drug on their formulary without any proof of efficacy let alone a benefit vs. the current standard of care?

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2. Derek Lowe on December 14, 2004 10:04 AM writes...

I think that Becker (and others advocating this route) believe that insurance companies probably wouldn't pay for drugs that truly have no efficacy data. If the companies that develop them want to get them to pay, they can go on to conduct such trials, but the compound would already be on the market. Alternatively, if the insurance companies believe that the drug could save them money in the long run, they could put up some of the money as well.

It's a very libertarian solution, and though I run somewhat in that direction philosophically, I'm sensitive to how poorly straight libertarian solutions sometimes interact with the real world. As I mentioned, though, I initially dismissed this idea out of hand, but now I'm not as sure.

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3. qetzal on December 14, 2004 10:47 AM writes...

The logic in the Posner passage you excerpt seems flawed to me.

New drugs get patented very early in the process, many years before it's clear whether they'll ever really work in humans. Maybe I'm misinterpreting, but Posner seems to be describing a winner-take-all race right up to FDA approval. That doesn't really happen (except for Orphan Products).

I'm not sure how common it really is that two or more companies are in a race to patent a new drug. Maybe Derek has insights here? (I'm more familiar with races to find & patent some disease-related gene, but as we've learned, finding the disease gene is often a far cry from finding a way to treat the disease.)

Even if races to patent new drugs are relatively common, I wonder how much money really goes into them. Seems like it would be a pretty small fraction of the total cost for getting a new drug approved.

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4. Sami on December 14, 2004 1:01 PM writes...

I have to agree with qetzal that there isn't much money spent before filing the patents. From my perspective, as someone who works for a start-up doing drug development, most of the larger pharmaceutical companies do very little early stage R&D and therefore are less likely to be the ones filing the patent. Our patents are mostly licensed from academia and the push to patent things there comes from wanting to publish the data soon without making their technologies undevelopable. Biotech companies would also be likely to file patents, but most don't have the resources that the large pharmaceutical companies do and wouldn't be likely to run out and spend a huge amount of money to beat another company by a day. Most of the money spent is for R&D further down the line after patent prosecution. The small companies do their best to effectively bring the drug into phase I and sometimes phase II before licensing off to the pharmaceutical company or larger biotech company(although lately I think there are more earlier stage licensing deal going on.)

I think something needs to changed to lower the cost of new drugs for the patient, but I think if you shorten the patent life, as Derek said, you will not reduce the initial price to the patient (although it will available to the average patient sooner), and I also think that you will have fewer technologies developed. With smaller profits pharmaceutical companies will likely spend less to license the technologies, or wait to license them at a later stage when they have a better chance at success. This will hurt the small biotechs and will likely reduce the overall amount of new drugs to the consumer and perhap miss some with real potential.

There was talk about reducing the amount of marketing the pharmaceutical companies do and although I am not a fan of too many regulations, but I would rather see this happen than the reduce the patent life.

Also, the idea of marketing drugs before they are shown to be effective strikes me as a bad idea (and I also consider myself somewhat of a libertarian). Either no one will buy them until after the drug companies do phase III anyway, thus having no effect. Or people will buy them, and then sue after they spent so much money on a drug that doesn't work. Or if there is some kind of tort reform you still run the risk of patients wasting money and time (and some patients don't have much time) trying drugs that don't work while the drug company is making profits on the same drug. With the rate of failure being so high in phase III this would likely happen. Wouldn't it better that the patient spend more on a drug that works than less trying several drugs that don't work?

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5. Derek Lowe on December 14, 2004 5:00 PM writes...

My subject matter for later in the week is clear! Once we've hashed this out some more, I'm going to try to get Becker and Posner to take a look at the arguments being raised over here - the comments section on their own blog seems preoccupied with pharma advertising costs.

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6. SRC on December 14, 2004 6:51 PM writes...


If you're serious about getting their response, would you mind deleting my post and letting me repost a more polite version, in the interest of not giving gratuitous offense and of promoting more productive discourse?

My tone was intemperate in places because this topic seems to engender so much silly commentary replete with manifestly unworkable proposals, that my patience has worn thin. These proposals were not that far above those of neem tree activists who haven't figured out that a US patent has no effect in India. Dealing with this sort of thing gets me on my hobby horse (as you may have noticed!).


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7. Kevin on December 14, 2004 7:35 PM writes...

The race analogy is bad. Just look at the Statins for example. Lipitor, the best selling drug ever, was fourth to market. Astrazenca just spent hundreds of millions to bring a new Statin to market, after the first statin is already off patent. That would be starting the race after some runners have already finished.

Permalink to Comment

8. Derek Lowe on December 14, 2004 10:42 PM writes...

Comment deleted, SRC, no problem. Please come back around for another run at making your points, though, because they're definitely worth making. I've e-mailed Becker and Posner to see if they're interested in coming over here for a look at some real-world feedback.

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9. SRC on December 14, 2004 11:42 PM writes...

I like a couple of Becker's suggestions better: he would like to consider the idea of offering prize money instead of patent protection for diseases with the greatest impact on public health...

Prize money? Your invention, which I need, is worth, oh, five bucks. Here you go. My invention, on the other hand, is self-evidently worth billions. This is not a biased assessment; it's a fair and honest one because I'm a fair-minded person, as my mom can tell you. You can send the check to my home address. This is a great system, as long as I get to decide who gets what prize.

Incidentally, the "prize" suggestion has already been the late unlamented Soviet Union, the dynamo of invention that issued inventor's certificates (now good for one Big Mac and a drink at the Moscow McDonald's). How did that work out for the Soviets?

(In a sense, we already have a prize system – it’s just that the prize is determined by the market, i.e., those with the most knowledge and interest in the inventions – people who will actually use the invention, and therefore are in the best position to judge its worth - rather than by government bureaucrats.)

Furthermore, his point about shortening patent term to “reduce the transaction costs of licensing, because more inventions would be in the public domain" overlooks the obvious costs of deciding what prize each invention merits, which would entail a government bureaucracy, and no doubt extensive litigation. It’s not every day that one hears someone propose establishment of a bureaucracy as an efficiency measure.

Posner's suggestion of tinkering with the patent term is equally flawed.

First, as a practical matter, patent terms are agreed by treaty with about 100 countries. Getting them all to agree on anything would take (and has taken) decades. So let’s not start monkeying with patent terms until and unless there’s a compelling reason to do so.

Second, as anyone who knows anything at all about drug discovery is well aware, patent applications are filed early in the discovery process, long before the major expenditures (clinical trials) are incurred. A patent is essentially like gaining title to the land on which you’re going to build a house; no one would spend the money to build a house on land to which he didn’t have clear title. He could be wasting his time and money to build something he wouldn’t own.

Furthermore, the Posner quote

The entire patent “prize” goes to the firm that crosses the finish line first, and so a firm might spend a huge amount of money to beat its nearest rival by one day even though the value to the public of having the invention one day earlier might be negligible.

suggests that he doesn’t have a stranglehold on how R&D works in the pharmaceutical industry, nor on the role patents play.

First, it’s not clear what Posner means by “cross the finish line” (does he mean file a patent application, identify the class of compounds, identify the ultimate drug candidate, or God help us, achieve regulatory approval?). He seems to think that researchers beaver away in the lab, checking their competitor’s progress on precisely the same class of compounds, until they find just the right one and race to the Patent Office to pip their competitors at the post. Surely he knows U.S. patent law awards priority to the first to invent, not first to file. (Two applicants filing on the same matter would commonly find themselves in an interference proceeding to determine which invented first.)

In any case, the final drug is without exception a species within a genus defined in a patent application filed many years earlier. In essence, by filing a patent application the applicant is saying, “If we find a worthwhile compound in the following novel class, we want it to be ours exclusively to develop and sell, if and when we receive regulatory approval.” A patent is a hunting license, quite similar to an oil drilling right, and at least equally likely to be worthless.

(The true finish line – FDA approval – is typically crossed a decade after the patent applications are filed, and has little or nothing to do with the patent “prize” – the right to exclude others – awarded by the Patent and Trademark Office, as I trust Posner knows.)

Second, researchers don’t know exactly what their competitors are doing. The critical information here is not the target, but rather the class of compounds directed toward hitting that target. Competing companies at the stage of filing patent applications don’t generally know what compound classes other companies are filing on at the same time, so the notion that they would spend huge sums to beat their competitors to do so is nonsense. They would have to do so every time, against the possibility that someone else was working on the same compounds, which hardly provides the level of motivation that Posner imputes to them. In fact, the likelihood of someone else working on exactly the same compounds would constitute an excellent reason to move on to another class. Why continue building your house on a lot whose ownership will be decided later on a coin flip?

Posner’s footrace metaphor implies perfect information about competitors, each straining to cross the finish line before the other, watching the other’s progress out of the corner of his eye. A better metaphor would be a five card draw poker game: each player has to make his decisions with no more than an educated guess what cards the others might be holding, and only finds out who wins at the very end, after all decisions have already been made.

Third, patent applications are filed long before the major expenses are incurred. I would guess that when applications are filed less than 5% of the total R&D expenditure has taken place. The big bucks fly out the door years after the patent applications are filed. “Huge amounts” are spent then, not to gain a day’s advantage in patenting, but to try to establish a marketing advantage (e.g., greater safety or efficacy, broader indications).

The poker metaphor works here too. The big outlays in a poker hand occur at the end of the hand, not at the beginning, in the raises and re-raises that correspond to clinical trials. To extend the analogy, patent applications correspond to the ante.

So I would dispute the contention that these two are knowledgeable about either drug discovery or patents. Dismal science, indeed.

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10. SRC on December 14, 2004 11:51 PM writes...

Thanks, Derek. I've moderated the more egregious bits, while trying to make minimal changes (although I did augment the original version slightly in a few places).

I hope they do respond; it would be interesting to see their response.

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