By Eric Crampton 08/08/2015


I don’t think that the extensions to drug patents hinted at under TPP – defunct though it may now be – are for the good. But it isn’t obvious that they aren’t.

Let’s run the story.

Most new drug development happens in the US and EU, with more coming in now from China as well. It is ridiculously expensive to develop new drugs. Some of that is because the FDA makes things harder than they need to be, but a lot of it is real cost.

The US has pretty strong drug patent protection to encourage investment in new drug development: nobody will spend hundreds of millions, or more, on drug research that might lead to one or two commercially viable breakthroughs if they can’t reap the rewards on the ones that pan out.

On that story, New Zealand and others have been free-riding pretty hard. Don’t get me wrong – this is great for New Zealand. We get a pile of generics out of India when they come off-patent here and the drug system saves tons of money. But we’re contributing rather less to the general “let’s develop more new drugs” effort. Price controls on pharmaceuticals do discourage new development (and here’s similar EU evidence), and new pharmaceutical innovation saves lives.

Ending the free-ride

You could imagine an international convention, agreed to by everybody, that would reduce global free-riding on research done in the EU and US in order to get more new drugs developed. We in New Zealand would pay more than we’re paying now, but we’d also be paying a fairer share of the development costs of new drugs.

Optimal pricing should still involve poorer countries paying less than richer ones, but you’d also have expected things like iPads to sell for less in New Zealand than in the US on the same kind of grounds – so that part might disappoint.

But think about the rhetoric on “doing our part” on global warming, and wonder why the same “doing our part” arguments haven’t been made about pharmaceutical innovation to save lives.

Why am I still sceptical? The overall system still seems broken. First order gains in getting new drugs would come not by pulling a few more dollars out of places like New Zealand but rather by fixing the FDA so developing new drugs weren’t so expensive in the first place. If there were an overall deal that improved processes at the FDA* while also making sure that everybody paid their fair share, that would be a winner for me.

At least that’s my point estimate – I put a pretty wide confidence interval around it though.

* On that, I generally agree with Alex Tabarrok. See here here and here, for example. And Doug Bandow.