Yesterday I introduced the gold-mine model. Today, I want to look at some solutions but also ask whether the model fits the pharmaceutical market.
Recall, the problem is that I discover a gold-mine, you undermine my profits by digging on nearby land. Society loses because instead of searching for another gold-mine you spend resources trying to exploit what has already been discovered. Applied to me-too drugs the idea is that firm A innovates and earns big profits, firms B,C,D try to imitate and grab some of the profits rather than search for innovations of their own.
In the gold-mine model one solution is to give the miner who first makes the discovery the mining rights on all nearby land. The miner won’t exploit these rights but will prevent others from wasting resources through undermining. How does this apply to me-too drugs? Critics of the pharmaceutical
industry will probably be upset to find that the analogous solution is to grant stronger patent rights. In particular, the problem with me-too drugs is companies investing resources in R&D that will end up producing a drug with similar effects through somewhat different means. If patent rights were broader then the costs of undermining would be higher and the me-too problem reduced.
Thus, me-too policy is patent policy and now we begin to see why the problem is complex. Broader patents, for example, have costs as well as benefits. Selden’s auto patent, for example, was originally held to be so broad that it almost finished Henry Ford. (For more examples see my paper Patent Theory versus Patent Law (email me if you can’t get access) or the new book Innovation and Its Discontents.)
Moreover, we have been assuming that the innovating firm strikes gold and then other firms rush onto nearby land. But that’s not the way most pharmaceutical innovation works. More often, there is some basic research, often done in a university lab, which suggests a possible drug target or mechanism. The research is public knowledge so a number of pharmaceutical firms begin the long slog of trying to turn an idea into a drug. Think of the original research as a prospector shouting "there’s gold in them thar hills," – the firms then rush into the hills to start researching/digging. One of them may strike gold first but the others are close behind.
The key point is that the R&D used to develop the me-too drugs was not spent to undermine the innovator it was spent in an effort to become the innovator. Think about it this way. Ten people are in a race to deliver a letter. Critics of me-too drugs complain that the runner coming in second is wasting society’s
Now it is possible to have too many firms racing to be the innovator – perhaps we should only have 8 firms in the race not 10. But critics of me-too drugs don’t argue that there is too much R&D, which at least would be consistent, they argue that there is too little.
Although it is possible to have too much R&D, I find the argument especially difficult to believe in the pharmaceutical industry. First, even in the best scenario the returns to the innovating firm are less than the social returns so "too much" R&D may simply make up for this defect. Second, there are many positive externalities to drug research. A substantial fraction of the increase in life expectancy over the past thirty years has been due to pharmaceuticals and the value of this reduction in mortality is in the trillions. Third, research indicates that the R&D efforts of different firms is in fact complementary – when you drain your mine of water my costs of mining fall.
Tomorrow I will wrap up with some final comments, Why me-too for you may not be me-too for me.