Why Patents and Pandemics Don’t — or Shouldn’t — Mix
by brink lindsey
brink lindsey is a vice president at the Niskanen Center, a think tank in Washington. This article is adapted from his analysis on the Brookings Institution blog that can be found at the Brookings website.
Published June 14, 2021
Last month the Biden administration announced it would support waiving intellectual property protections for Covid-19 vaccines under the World Trade Organization’s Agreement on Trade-Related Intellectual Property Rights (TRIPS). Predictably, the move drew fiery condemnation from drug companies. In addition, many disinterested observers criticized the president’s support for a TRIPS waiver as empty symbolism, arguing that vaccine patents are not the major obstacle hindering the stumbling drive to make vaccines available around the world.
Waiving patent protections is certainly no panacea. What’s needed most urgently is massive technology transfer, capacity expansion and supply-chain coordination to bring vaccine access in line with global demand. Dispensing with patents in no way obviates the need for governments to fund and oversee the effort.
Yet, while focusing on these immediate constraints is vital, we cannot afford to confine our attention to the short term. First of all, the pandemic is far from over. Although Americans can now see the light at the end of the tunnel thanks to the rapid rollout of vaccines, most of the world isn’t so lucky. The virus is currently raging in India and throughout South America, overwhelming health care systems and inflicting loss on a horrific scale.
Consider, too, that Australia, which has been successful in suppressing Covid-19, recently announced it was sticking to plans to keep its borders closed until mid-2022. Criticisms of the TRIPS waiver that focus only on the next few months are therefore short-sighted: this pandemic could well drag on long enough for elimination of patent restrictions to enable new vaccine producers to make a positive difference.
Furthermore, and probably even more important, this is almost certainly not the last pandemic we will face. Urbanization, the spread of factory farming and globalization all combine to increase the odds that a new virus will make the jump from animals to humans and then spread rapidly. Prior to the current pandemic, the 21st century had already seen outbreaks of SARS, H1N1, MERS and Ebola. Everything we do and learn in the current crisis should be viewed from the perspective of getting ready for next time.
When we take the longer view, we can see a fundamental mismatch between the design of intellectual property protection and the policy requirements for effective pandemic response. Although patent law, properly restrained, constitutes one important element of a well-designed system for stimulating innovation, the way it incentivizes technological progress is singularly ill suited to managing emergencies. Securing a TRIPS waiver for Covid-19 vaccines and treatments would thus establish a salutary precedent for governments to employ more direct means to encourage the development of new drugs in crises of this kind.
The Uneasy Bargain
Here is the basic bargain offered by patent law: encourage the creation of useful new ideas for the long run by slowing the diffusion of useful new ideas in the short run. The second half of the bargain, the half that imposes costs on society, comes from the temporary exclusive rights, or monopoly privileges, that a patent holder enjoys. Under U.S. patent law, nobody else can manufacture or sell the patented product without the permission of the patent holder for a period of 20 years. This allows the patent holder to block competitors or to extract licensing fees before allowing them to enter the market — and consequently charge prices that are above the incremental cost of production. Patent rights thus slow the diffusion of new inventions by restricting output and raising prices.
The imposition of these short-run costs, however, can bring net long-term benefits by sharpening the incentives to invent new products. In the absence of patent protection, the prospect of easy imitation by later market entrants can deter would-be innovators from incurring the up-front fixed costs of research and development. But with a guaranteed period of market exclusivity, inventors can proceed with greater confidence that they will be able to recoup their investment.
Thus, for the societal tradeoff between costs and benefits to come out positive on net, patent law must strike the right balance. Exclusive rights should be valuable enough to encourage greater innovation, but not so easily granted or extensive in scope or term that the value is outweighed by restrictions on the output of patented products and discouragement of downstream innovations dependent on access to the patented technology.
Unfortunately, the U.S. patent system at present is out of balance. Over the past few decades, the expansion of patentability to include software and business methods, as well as a general relaxation of patenting requirements, have led to wildly excessive growth in these temporary monopolies: the number of patents granted annually has skyrocketed roughly five-fold since the early 1980s without commensurate acceleration in terms of innovation or productivity.
One unfortunate result has been the rise of “non-practicing entities,” better known as patent trolls — firms that make nothing themselves but buy up patents and monetize them through aggressive litigation against infringement. As a result, a law that is supposed to encourage innovation has turned into a legal minefield for many would-be innovators. In the pharmaceutical industry, firms have abused the law by piling up patents for therapeutically trivial changes in already patented drugs that allow them to extend their monopolies long beyond the statutorily contemplated 20 years.
Patent law is creating these unintended consequences in part because policymakers have been caught in an ideological fog that conflates “intellectual property” with actual property rights over physical objects. Enveloped in that fog, they regard attempts to put limits on patent monopolies as attacks on private property and view ongoing expansions of patent privileges as necessary to keep innovation from grinding to a halt.
In fact, as I’ve explained above, patent law is a pragmatic tool of regulatory policy with the usual tradeoffs between costs and benefits. Like all tools, it can be misused, and as with all tools there are some jobs for which other tools are better suited. A well-designed patent system, in which the difference between social benefits and costs is kept high, is just one of a variety of policy options that governments can employ to stimulate technological advance — among them tax credits for R&D, prizes for targeted inventions and direct government support.
What we want to avoid at all costs is putting drug makers in the position where they can profit from standing in the way of rapid global vaccination. That is why intellectual property rights need to be taken out of the equation.
Health Emergencies and Direct Support
For pandemics and other public health emergencies, patents’ mix of costs and benefits is strikingly misaligned with what is needed for an effective policy response. The basic patent bargain, even when well struck, is to pay for more innovation down the road with slower diffusion of innovation today. In the context of a pandemic, that bargain is a bad one and should be rejected entirely. Here the imperative is to accelerate the diffusion of vaccines and other treatments, not slow it down. Giving drug companies the power to hold things up by blocking competitors and raising prices pushes in the completely wrong direction.
How, then, do we incentivize drug makers to underwrite the hefty investments in R&D needed to develop vaccines without giving them exclusive rights over their production and sale? The most effective approach during a health crisis is direct government support: some mix of public funding of R&D, advance purchase commitments by the government to buy large numbers of doses of successful drugs at set prices and other sweeteners. And when we pay drug makers in a health crisis, we should not hesitate to pay generously, even extravagantly: we want to offer drug companies big profits so that they prioritize this work above everything else and so that they are ready and eager to come to the rescue the next time there’s a crisis.
It was just this sort of direct support via Operation Warp Speed that facilitated the astonishingly rapid development of Covid-19 vaccines and then their relatively rapid rollout (relative, that is, to most of the rest of the world). And it’s worth noting that a major reason for the faster rollout here and in the UK compared to the European Union was the latter’s misguided penny-pinching.
The EU bargained hard with the drug companies to keep vaccine prices low, and as a result their citizens ended up many months back in the queue for successfully tested vaccines as various supply line kinks hobbled mass production. This is particularly ironic since the Pfizer-BioNTech vaccine was developed in Germany. As this fact underscores, the advantage of direct support isn’t the leverage to “get tough” with drug firms and keep a lid on their profits. It is to accelerate the end of the public health emergency by allowing drug makers to do well by doing good.
Patent law and direct support should be seen not as either-or alternatives, but as complements that apply different incentives to different circumstances and time horizons. Patent law provides a decentralized system for encouraging innovation. The government doesn’t presume to tell the industry which new drugs are needed; it simply incentivizes the development of whatever new drugs that pharmaceutical firms can come up with by offering them temporary monopolies.
It is important to note that patent law offers no commercial guarantees. Yes, you can block competitors for a number of years, but that still doesn’t ensure sufficient demand for the new product to make it profitable.
Direct Support Makes Patents Redundant
Back to the pandemic scenario. Here, governments know exactly what they want to incentivize: the creation of vaccines to prevent the spread of a specific virus and other drugs to treat that virus. Under these circumstances, the decentralized approach isn’t good enough. There is no time to sit back and let drug makers take the initiative on their own timeline or to see how closely their interests align with the public interest. As recompense for letting regulators call the shots (pardon the pun), the government sweetens the deal by insulating drug producers from commercial risk. If firms develop effective vaccines and therapies, the government agrees in advance to buy large quantities at prices set high enough to guarantee a healthy return.
For the pharmaceutical industry, it is useful to conceive of patent law as the default regime for innovation promotion. It improves the companies’ incentives to develop new drugs while leaving them free to decide which new drugs to pursue — and also leaving them to bear all the risk of failing to produce a useful therapy or failing to find a market for it. In a health emergency, however, it is appropriate to shift to the direct support regime, in which the government focuses efforts on one disease. In this regime, it is important to note, the government provides qualitatively superior incentives to those offered under patent law. Not only does it offer public funding to cover the upfront costs of drug development, it also provides advance-purchase commitments that guarantee a healthy return.
It should therefore be clear that pharma has no legitimate basis for objecting to a TRIPS waiver in the wake of Operation Warp Speed. Since, thanks to the public health crisis, drug makers now qualify for the superior benefits of direct government support, they no longer need the default benefits of patent support. Arguments that a TRIPS waiver would deprive drug makers of the incentives to keep developing new drugs, when they are presently receiving the most favorable incentives available, can be dismissed as the worst sort of special pleading.
That said, it would be a serious mistake to try to cast the current crisis as a morality play in which drug makers wear the black hats and the choice at hand is between private profits and public health. We would have no chance of beating this virus without the formidable technological and organizational capabilities of the pharmaceutical industry, and providing the appropriate direct incentives is essential to ensure that the industry plays its necessary role. It is misguided to lament that private companies are profiting in the current crisis: those profits are a drop in the bucket compared to the staggeringly high social benefits of the timely production of effective vaccines.
What matters isn’t the existence or size of the profits but how they are earned. We have good reason to want drug makers to profit from vaccinating the world and then be eager to accelerate solutions to the next crisis. What we want to avoid at all costs is putting drug makers in the position where they can profit from standing in the way of rapid global vaccination. That is why intellectual property rights need to be taken out of the equation.
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Vaccinating the world in any kind of reasonable time frame will require large-scale technology transfer to drug firms in other countries and rapid expansion of their production capacity. And looking beyond the current pandemic to the longer term, we need ample vaccine production capacity that is widely distributed around the planet. Achieving these goals rapidly will require the active cooperation of the U.S. pharmaceutical industry, which is why the direct support model should be extended. What is needed now is an Operation Warp Speed for the world, in which we make it worth current vaccine producers’ while to share their knowhow broadly and ramp up global capacity.
The key to good pandemic response policy is ensuring that incentives are structured so that drug company profit seeking and global public health are well aligned. That means opting out of the default, decentralized patent bargain in favor of generous but well-focused direct government support.