Should the patent system for pharmaceuticals be replaced? A theoretical approach

Abstract

This paper acknowledges the difficulties of providing access to innovative drugs in some jurisdictions under the patent system and it contributes to the current debate on mechanisms aimed at facilitating such access. We employ a highly stylized static model of two markets (North and South) to analyse the conditions under which a new system based on royalty payments would be preferred to a patent system for pharmaceuticals. In the welfare calculations we have considered explicitly the influence of marketing activities by the patent owner as well as the shadow price of public funds needed to finance the royalties. The bargaining power of the firm in terms of obtaining higher compensation is also considered. The result: are not unambiguously conclusive being heavily dependent on the relevant values of the parameters. Nevertheless, it seems that for realistic parameter values, the new system could be preferred by all the parties involved.

Keywords::

• drug
• economic model
• patent
• royalty
• social welfare

Financial & competing interests disclosure

The authors have no relevant affiliations or financial involvement with any organization or entity with a financial interest in or financial conflict with the subject matter or materials discussed in the manuscript. This includes employment, consultancies, honoraria, stock ownership or options, expert testimony, grants or patents received or pending, or royalties.

No writing assistance was utilized in the production of this manuscript.

Key issues

• Patent system for pharmaceuticals has considerable drawbacks such as making difficult access to innovative drugs at affordable prices for many segments of the population and to reduce the level of R&D activities targeting prevalent diseases in less developed countries or rare diseases.

• During the last two decades, several initiatives have been presented to mitigate the consequences of the patent system or to substitute it; among them, prizes, bounty and royalty-based systems are believed to maintain innovation incentives as well as to facilitate a wider access to treatments.

• Changes in general welfare constitute the benchmark to check the adequacy of any alternative option to the current patent system, and the development of a theoretical model to conceptualize a new system based on royalty payments to the patent owner appears to be a simple instrument to measure those changes.

• When the disease is prevalent in the South, if the total treatment cost in the North under the patent system is higher than the extra benefits under the royalty-based system, the former system is preferred only for high enough values of the shadow price of public funds needed to finance the new system together with low values of marketing effort cost. Otherwise, the system based on royalty payments dominates in terms of welfare.

• When the disease is prevalent in the North, if the extra benefits per patient obtained under the royalty-based system are lower than the regulated price, then the patent system is preferred only for high enough values of the shadow price of public funds needed to finance the new system. Otherwise, the system based on royalty payments dominates in terms of welfare.

• The ambiguity of the results yielded by our model under certain values of the parameters reinforces the idea that there is no single system that may universally provide all the stakeholders with higher welfare.

• In situations yielding higher social welfare should the new system be implemented, institutional efforts should be made to facilitate the move toward the new system; for those drugs for which the patent system dominates from a global welfare perspective, some compensatory policies may be needed to facilitate access to the innovative drugs for patients in the South.