[Today’s post is a guest commentary on the NewStandard article about drug companies getting taxpayer supported government grants and then extracting large profits on drug sales.]

If I may comment on the [previous post: Do Drug Companies ‘Gouge’ Consumers With Taxpayer Handouts? ], what is the fair price for any product? When people purchase high-priced drugs, every person who pays the price is indicating that they agree that the drug is worth the dollars paid. It is hard to say, for such individuals, that the drugs are “overpriced”. After all, they are willing to fork-over their hard earned money to complete the purchase. What better definition is there for a “proper price” for a product.

The described scenario overlooks two considerations. One is that millions of poorer people may be unable to pay the cost of purchasing a high-priced product. Or more precisely, they will choose not to purchase such a product. The other scenario is that the vendor may be making a substantial profit, a profit well in excess of the amount of profit needed to encourage them to stay in business. This might be called “surplus” profit.

Patents are designed to produce “surplus” profit. Such increased profits arise in the absence of competition. Free competition sets a market price were producers settle for the minimum profit that they can tolerate. This produces a “competitive price”. Typically, a competitive price allows many more persons to have access to a product. And it allows rich people to acquire a product at a much lower price than they would be willing to pay otherwise. Economists sometimes call the advantage enjoyed by rich persons in such a situation as “consumer surplus”.

Why do governments sponsor a system wherein patents produce surplus profit? Patent systems are maintained because of the belief that they bring into existence products that would not otherwise come into existence if it weren’t for the incentive of surplus profit. But how much profit is enough? Is 20 years too long for some inventions? And do some inventions command such market power that people will pay anything in order to obtain access to the product? These are concerns that arise when a government endeavors to operate under a one-size-fits-all patent law.

On the one hand, we have those who say “Keep it simple”. On the other hand, there are those who say “Make sure the law is just”. These are competing interests that cannot be easily reconciled.

So we have proponents of the patent system who advance a defense based on demonstrated examples wherein the patent system has worked. And we have opponents of the patent system who advance an attack on the basis of perceived injustice.

The pharmaceutical industry is subject to such attacks because:

1) their product commands such market power that they can charge especially high prices;

2) the high prices charged for pharmaceuticals limits access for many persons of limited means, and

3) there is a deep suspicion that the profits earned by the pharmaceutical industry are not needed in order to provide a reasonable incentive for the production of new pharmaceutical products.

Today’s commentary comes from David J. French, an attorney with Milton, Geller LLP in Ottawa, Canada.

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One Comment

  1. When the inventive ingenuities of alleged inventors create scenes of not making full disclosure, attempts of double patenting, claiming million or multimillion possible molecular combinations by giving illustrations of even less than 10%, granting such claims by PTO, reducing the price phenominally either after loosing paraIV or on expiry of OB patent, all these factors create impression that the claimed surplus of profit is unjustifiable. The motive appears to be misappropriating public wealth, intensions are exhibited by engaging in acts far from those required by patent law, and the fact of either committing or ommitting the act completes three essential elements required to prove crime. These companies are committing a daylight crime, authenticated by national law. Unfortunately there is no provision of punishing the habitual corporate offendors.