The best critiques of the patent system–both in theory and as it exists in practice–can be boiled down to a simple point: there is a world of difference between capturing all the returns from innovation and enough return to make innovation worthwhile.
Below a certain price producers won’t produce and above a certain price consumers won’t consume, but between these two prices both parties benefit from trade. Neither producer nor consumer needs to reduce the other’s surplus to zero for a mutually beneficial arrangement to exist. If this sounds like economics 101, that’s because it is. Yet the idea that consumers can get something for less than they’d be willing to pay is conspicuously absent from debates about the cost of IP-intensive products, specifically prescription drugs.
In the most egregious example of an IP-intensive industry justifying excessive pricing because of the gains to society, consider the recent statement by Daniel O’Day, president of Gilead on the pricing of remdesivir:
In normal circumstances, we would price a medicine according to the value it provides. The first results from the NIAID study in hospitalized patients with COVID-19 showed that remdesivir shortened time to recovery by an average of four days. Taking the example of the United States, earlier hospital discharge would result in hospital savings of approximately $12,000 per patient. Even just considering these immediate savings to the healthcare system alone, we can see the potential value that remdesivir provides. This is before we factor in the direct benefit to those patients who may have a shorter stay in the hospital.
We have decided to price remdesivir well below this value. To ensure broad and equitable access at a time of urgent global need, we have set a price for governments of developed countries of $390 per vial. Based on current treatment patterns, the vast majority of patients are expected to receive a 5-day treatment course using 6 vials of remdesivir, which equates to $2,340 per patient. [Emphases added].
How kind of Gilead to charge less than the total benefit to society for their drugs! It is undeniably true that there are tremendous benefits to society associated with the use of lifesaving medication (especially in a pandemic), but monopoly pricing based on what the market will bear would sound bizarre in any other context.
Fire extinguishers don’t cost hundreds of thousands of dollars because losing a house in a fire is expensive. Seatbelts alone don’t cost more than a luxury car despite the high premium someone would pay to not be catapulted through their windshield during an accident. Even slumlords wouldn’t be so brazen as to say their obscene rents are a steal compared to living on the streets. In these contexts competition ensures that producers won’t try to grab the entire social surplus; just because patents temporarily remove that check is no justification for drug makers to squeeze their customers dry.
For what it’s worth, research from the Journal of Virus Eradication estimated the cost of production for remdesivir to be less than a dollar a day. Multiply this by ten, and you’re not even in the ballpark of what Gildead is pitching as a sweetheart deal.
O’Day’s letter doesn’t even mention how it plans to pay down the upfront costs of remdesivir’s R&D (the only reasonable justification for such prices). Gilead’s pricing model is based on what the market will bear–as should be expected from any monopoly. This is not the free market at work. It’s a private-sector price control.