It shouldn't come as a shock to any reader of this blog that I prefer few restrictions on rights and less intervention into markets. I've been quite interested lately in the failure of the patent system. By this, I'm not just talking about how the USPTO is too small, too lenient, etc. I'm talking about the concept of issuing patents themselves. First, lets examine what a patent actually is.
Most people will say that patents are a form of property. While this is technically true, since they are freely tradable assets, this definition conceals the big picture of what they are really: government regulated monopolies. The government wants your innovations to benefit society, however they know that you must justify your investment. Their solution is to protect you for a few years so you could recoup costs and turn a profit. The period of enforcement started off at 3 years but has grown to 20+ today. It has basically become a way to legally to print money.
The fact is that patents allow a large amount of money to be sucked out of the economy for no promise of future innovations. Aside from this though, patents also favor large established companies where innovation returns (whether in dollars or other metrics) per investment dollar are far lower than startup companies. All things equal, this means innovations from small companies cost less and do more on the average than large companies. Not to say that a group of 3 people could cure to proverbial cancer better than a BigPharma, but on the aggregate they perform better and bring game-changing innovation to the table more often. This is the whole aim of the patent system.
There are a few ways that big companies have the upper hand in the patent playground, so let's delve deeper. Firstly, is the ability of enforcement. We all know that a small company doesn't have the resources to defend themselves against large companies even if they do have a patent. Let's look at software. If XYZ Software has valuable patented software that takes on the Big Blue, we know that IBM can come to them and say “you're infringing on these 100 patents - please settle or prepare for war”. XYZ is as helpless as a victim of an IRS audit. Patents aren't just one idea. They're a package of “claim” that number in the double and even triple digits. Try to get a quote to investigate infringement of one claim in 100 patents, and you'll find you'd go bankrupt before winning. Big Blue 1 – XYZ 0.
Also, problems can occur between two big guys. Often BigPharma get entangled in “patent tickets” which are areas of research that have been so patented that no one can legally pursue product development or even research in these areas because of the amount of IP and owners. Yes, you read that right – even university researchers can't conduct experiments without paying up. It's a gray area, but it stifles innovation.
Both of these problems, and others, have lead to the development of “patent trolls” - holding companies who hold IP just to reap profits parasitically from other companies. The most famous of these is former Microsoft CTO Nathan Myhrvold's Intellectual Ventures which holds over 20,000 patents. They claim to be an insurance company for those small firms who can't take on Big Blue. Their way is to fight fire with fire so that if HP says, “Look at our 1000's of patents!” you can say, “Look at our 1000's of patents. What of it?”. I believe IV provides the legal services as well. However, the net effect of this is an IP stalemate and thus a loss of applied innovation.
Patents are supposed to raise the amount of innovation, and in some industries like pharmaceuticals they are absolutely required. The response to us anti-patent-people is usually from this industry because they need patents to secure profit from the hundreds of millions of research dollars the companies spend on development. This is a tough issue. Would you keep patents if in ten years most forms of cancer were cured? It's an ethical dilemma, but I'd like to look at what would happen if it were done a different way.
A patent rewards technology for its own sake. A quick look through patents will show you thinks like a blanket with sleeves that will never be commercialized. What if, instead of the dichotomy we put forth of patents versus no patents, we had a middle ground: let's reward solutions. Technology for market's sake will always beat tech for tech's sake. At a basic level you could look toward a prize system like the X Prize Foundation. The Ansari X Prize caused an investment of over $100M from 26 teams – all for a $10M purse – still better, one team actually accomplished the mission. Companies could still justify their expenditures in the model, but instead of restricting the sale of the technology for profit, they just gave them the money.
This is a better, but still problematic system. The pharmaceuticals industry may be able to function if prizes were in the $500 million range, but I'm not sure they'd take the risks an all or nothing system. I hope I'm wrong, and that they would, it would make the solution a lot easier. Realistically though, I don't think they'd be as incentivized. A slight improvement might be a metric based payment system so perhaps more than one firm could get funds based on results. For instance, we'll pay $5,000 for every AIDS patient cured (the definition of which would admittedly require some thought). Any company to complete the result would get their payment. If you wanted to get really utilitarian, you could find those who incur the costs of an AIDS patient (like health care systems, the economy in general, etc.) to contribute that amount or less to the cause. That would really put economics to good use.
However, all these things need not be done by the government. X Prize exists already, and so do a lot of others with similar goals. Let's look at what could happen to the pharmaceutical companies if the patent system was just done away over a few years – perhaps with old patents being grandfathered for five years.
First, their stock would go down a lot in the beginning as future earnings per product were updated and priced by the market. Research would be cut and outsourced, and many facilities would be sold or subletted. An influx of scientists, facilities, equipment and intellectual property would pour into the market. Out of that, the price of all those things would go down. Also, some of these guys start development of their own ideas. Many would also end up at universities and other research institutes.
These new companies and surplus of researchers would allow many new innovations to crop up, and many would thrive in this environment. Research that was done for profit incentive would go to these new organizations. The public, vis-a-vie charities, would pile on the dough as they realize we all must come together to solve these problems. Many prize foundations would emerge, and many more university centers would also pop up due to increased funding and decreased short term costs.
All this together would turn some pharma companies into nothing more than pill makers with very low profit margins due to perfect competition. Some would succeed within the new structure and pursue the prize route. Others would probably operate in groups with trade secret protection to take on problems that no one was giving a prize for or research money. However, I would think this latter market would be slim pickings because all the trendy diseases would get prizes and institutes. Perhaps a charity would arise where donation money was divided amongst many prizes to add democracy into the function of disease prevention and cures.
The net result in this thought experiment would be the reduction of oligopoly in pharmaceuticals. This leading to a huge decrease in the price of health care (especially when combined with medical accreditation reform, but that's for another day) and a temporary reduction in research. This temporary decrease in profits would lead to a sell off of assets, personnel, etc. This would lead to lower research costs and combined with renewed public interest would bring forth new institutes, prizes and start ups. Innovation then will, if all goes as thought, reach higher levels in the long term than before. Also, it would lead to the better allocation of money to the diseases that really affect us – instead of the ones that are merely profitable.
I'm sure I've missed a lot with this. I'd really appreciate a lot of feedback & discussion.
I'm sure we're going to talk about this tomorrow, but I figured we should have a discussion through this blog, as it will only help readers.
Firstly, I agree 100% that patents tie-up research and development in medical research. It's clear that BigPharma and Universities are often more interested in simply having a patent than they are for benefits that would come out of having something "patentable."
I like your idea of rewards for successes. As someone who does medical research, I know that it is frustrating for investigators when they are being funded by a grant that came from a pharmaceutical company, end up discovering something sweet and beneficial, and have no financial benefits from that because it is the "company's research." The Universities will also take much more credit. Here's what I don't get: Why this industry does not understand that if researchers were awarded PERSONALLY (i.e., with money), more brilliant minds would be attracted to the field. Obviously, people would be attracted to a field where personal successes were awarded accordingly. Seems pretty simple to me. But you've hit the nail on the head -- institutions, companies, etc. should be reward for novel and beneficial findings. But to extend from your ideas, I believe the individuals should be awarded more as well.
But there are some flaws as you point out above -- and I'm going to expand on them. You mention that it would be tough to define the term "cure." Very good point and it's very true. So basically, if a drug can reduce symptoms in 70% of patients, what does this constitute? But, in terms of medical research at least, there are far more complex problems. So, say for example, Dr. Jim's group finds that protein X is increased in cancer. Very important, hugeeeeeee discovery. But then, Dr. Doug's group, after reading the article and doing their own investigation (based on Dr. Jim's group) finds that protein Y turns off protein X, helping to reduce the cancer in patients. So who's responsible for this? Dr. Jim? Dr. Doug? If you create a system as you propose, who would get the money (per cancer victim cured?). Even though Dr. Doug's group found the cure (Protein Y), there was undoubtedly years of brilliant and novel work that lead to that discovery (even BEFORE Dr. Jim's discovery in my little example). My point is: while I agree that institutions, universities, and individuals should receive compensation for results, it can get VERY VERY dicey of who actually could be responsible for the result. I don't know that a rewards system "per person cured" is the right answer.
I think the current grant-writing system that is installed now is sufficient. The reason you proposed this "per victim cured" compensation idea, was because you fear that organizations will not want to shell out a bunch of cash, for fear or not getting the results desired. When applying for grants, research needs to be done. Money is not just handed out for saying, "hey ... we want to look at how these cells react and stuff. k. give us 5,000,000." Rather, thorough PRELIMINARY experiments and results are presented in application for these grants. Thus, I think a company or institution that would support and fund medical research under your system, would choose wisely based on sound science.
Posted by: Anthony Russo | October 23, 2008 at 10:31 PM