Subject: Re: termless copyright and patents
From: Thomas Lord <lord@emf.net>
Date: Wed, 20 Sep 2006 13:20:44 -0700

Ben Tilly wrote:
>> > So basically what's left is that we grant you a monopoly, except that
>> > if it's really valuable, we're going to allow your would-be
>> > competitors to buy you out at a government-set price and put your
>> > technology into play.
>>
>>  Correct.
>
> This idea is politically DOA.  Everyone will just drag out the example
> of how much it costs to produce new drugs, and the set price will wind
> up ridiculously high.  (As in billions of dollars.)  Except that this
> will be so obviously stupid that it is easier to retain the status
> quo.
I'm not so sure it's DOA because the patent system is showing
some cracks even for big pharma [3], [4], [5], [6], [7], [8].

"Billions of dollars" for some discoveries sounds right, if vague.
Let's  limit attention to "new chemical entities (NCEs)" --
i.e., breakthrough drug discoveries rather than incremental
product improvements.  I'll assume[1] that the
average cost of bringing an NCE to market is $802M.
So,  $1-2B for a compulsory license sounds reasonable
enough -- it would certainly leave patent-based incentives
in tact.   The majority of products brought to market by
the pharmaceutical companies are *not* NCEs and the cost
to market is substantially less for these.

(Note that we are talking, though, about the reasonable price
of a compulsory license on the very first day of FDA approval.
As the remaining time on the patent passes, and the patent
holder collects revenues, the reasonable price of a compulsory
license falls as well.

So, the first area that I think you are mistaken is that you
are looking only at the reasonable price for a compulsory
license on the first day of approval.   You should also look
at how that price diminishes over time.

But, sure, let's continue to look at the first-day-of-approval
price:  )

Next, $1-$2B isn't so outrageous, at least for some drugs.
Let's pick $1B on an $800M dollar investment -- a 25%
percent *instant* ROI.   (The drug cost $400M total cash
to develop, over the lifetime of development, and so
it's as if we are plunking down $800M on the first day of
FDA approval[2]).   Let's suppose that this drug is a breakthrough
antiretroviral (ARV).    There are, currently, worldwide, somewhere
north of 1M patients currently receiving ARV treatments.
Let's suppose that insurance companies X and Y have, between
them, 50,000 patients who would benefit from this new regime
right away, that the patent holder would want to sell it for $3,000
per year, and that but for patents, generic forms would cost about
$70/year.   Furthermore, at $70/year, the treatment will be given
to many, many more people including many who aren't customers
of X and Y and, as a result, infection rates will drop.  We can
assume that, on the day of approval, let's say that 14 years remain
on the patent.   All of those numbers are pretty consistent with
past ARV breakthroughs. This would be a good investment by the
insurance companies and, whaddayaknow, it would have the side
effect of getting the drug into the hands of 10s of millions of
other HIV/AIDs patients around the world.

So, the net effect is: handsome profit for the pharma company;
handsome return for the insurance companies that buy the public
rights; vastly superior public health outcome.   Who loses there?

Ok, I know, I know -- insurers X and Y lose against their competitor
Z who doesn't split the $1B cost with them but who does benefit
from the $70/year price.    Except, that doesn't happen -- not enough
to worry about -- and here is why.   X and Y did not buy a public
license -- they bought a "pull the trigger" license.    Either of
them can sell Z the first public license and the pharma company can
sell Z a third pull-the-trigger.  X, Y, and the pharma company
have an interesting price competition going on.   X and Y are
holding out their cheap access against Z.   The patent holder is
offering a third way.   Overall, there's a kind of controlled, competitive
dilution of the exclusivity of turning the invention public until,
finally, the  benefits of increased generics competition force the
hand of just one pull-the-trigger holder -- who then fires.

-t

[1]
http://72.14.253.104/search?q=cache:00Ee4Z16W60J:www.cptech.org/ip/health/econ/dimasi2003.pdf+dimasi+hansen+grabowski+price+innovation+estimates&hl=en&gl=us&ct=clnk&cd=1&client=firefox-a

[2]
http://72.14.253.104/search?q=cache:QfqOUI_bj3sJ:www.cptech.org/ip/health/econ/frank2003.pdf+%22drug+development+costs%22&hl=en&gl=us&ct=clnk&cd=1&client=firefox-a

[3]
http://online.wsj.com/public/article/SB115696198593649659-YQyzBxAYSoi2XuHltOtPJgTktzQ_20070830.html?mod=tff_main_tff_top

[4]
http://www.pbs.org/wgbh/pages/frontline////shows/other/interviews/angell.html

[5] http://www.forbes.com/2002/05/02/0502patents.html

[6]
http://query.nytimes.com/gst/fullpage.html?sec=health&res=9800E1D8173BF935A25752C1A9679C8B63

[7]
http://healthythoughts.wordpress.com/2006/09/04/lawrence-lessig-aids-drug-costs-and-patents/

[8] http://www.cepr.net/publications/intellectual_property_2004_09.htm