FDA and Patent Reform: A Modest Proposal

by Stephan Kinsella on May 5, 2023

Some dashed off comments to some friends. I may clean this up later but for now, the informal comments—

In some of my talks I have made this proposal. Not sure if it’s cockamamie. But here it is:

People say we need patents (for pharmaceuticals) b/c the FDA process is too expensive and you have to recoup your costs. (See Kinsella, “Are Patents Needed to Make Up for FDA Kneecapping?” (July 2, 2011). also KOL341 | ESEADE Lecture: Should We Release Patents on Vaccines? An Overview of Libertarian Property Rights and the Case Against IP; Patents, Pharma, Government: The Unholy Alliance )

Here is my proposal.

Abolish patents.

Now some company (#1) spends $300M doing trials and getting FDA regulatory approval. This temporary monopoly (even without a patent) lets them charge high prices. It lasts a couple-few years at least, normally.

Now suppose a competitor #2 comes along. They could not afford the $300M investment, or maybe they were just unable to create the new drug. So now they get the FDA approval for a lot cheaper since no clinical trials, no huge R&D cost, etc. Once the FDA ensures drug 2 is chemically adequate and the same as the original, they grant the second FDA approval to #2, but on the condition that they pay a pro-rata share of the total expenses originally incurred, by reimbursing #1 for half the expense #1 incurred but that #2 got to avoid. So basically, #2 pays half of $300M = $150M to #1. So now each one has paid about $150M roughly.

Now if #3 wants to compete, to get FDA approval, now the pro-rata cost is 1/3 each of the original $300M, i.e. $100M each. So #3 would have to pay $50M to #1 and $50M to #2. Now each of the 3 has paid $100M.

This is not IDEAL but given the FDA, woudn’t this improve how it works, and wouldn’t it also undermine the pro-patent argument made that you need patents to recoup costs? No you don’t. Because if you invite competition, they have to share the costs with you to compete. Right?

BTW let’s assume no patents. #1 takes more risk since it doesn’t know if the drug will be popular. Plus they had to develop the drug in the first place (R&D, scientists, and so on). So you could say if it had 2 more competitors even if they later give #1 back 2/3 of its original costs, it is still unfair b/c it had to take the risk.

But by the same token, what this means is that #2 and #3 will NOT apply for a FDA license until they see whether the drug is popular and successful or not–since #1 didn’t have to reveal its composition before FDA approval by filing a patent! BTW this is what happens now: you get a patent; it’s public; the FDA process takes a long time so during that time competitors already know your formula by the time your patent expires so they can be ready to file with the FDA on that day. With no patents, competitors would not know the formula until the drug is already approved and ready for sale. So #1 could keep its formula secret and the FDA approval process could be confidential, until it’s approved.

So #1 spends $300M getting their drug approved. Then they start selling it and #2 and #3 now know its formula. They still have to wait and see if it’s popular, because you can’t start making copies of every product out there, since some are not successful. You have to wait a while. Let’s say a year later, it looks like a blockbuster hit. NOW #2 and maybe #3 start investing money to fabricate the drug, which takes time, and then they have to apply to the FDA, which also takes time. So #1 still has a first-move advantage of, what, 2-3 years, or more? during that ~2+ year window they can charge Shkrelli type monopoly prices so they have no competitors yet. Then when the other 2 finally get in, then competition sets in and #1 has to lower its prices, BUT (a) #1 had a few years of very high prices, and (b) it now gets paid $200M from the other two! and (c) the prices that #1, 2 and 3 charge are STILL monopoly prices since competition is still limited — they are more like a cartel or oligopoly than really facing pure free market competition.

What is wrong with this idea. I might do a little article about it.

Update: