Pharmaceutical patents and price controls

Since 1995, every member-country of the World Trade Organization (WTO) has agreed to honor a 20-year patent-life, from the date of a pharmaceutical company's application for the patent, in the country of application. Patent protection retards competitive imitation of an invented product. This kind of protection is particularly important for pharmaceuticals, because pharmaceuticals that are not derived from biotechnology can be imitated easily and inexpensively. The economic function of a patent is to allow a period of above-normal profits for a technically and commercially successful product; these profits stimulate further investment and invention. However, direct price controls, or permutations of direct price controls on pharmaceutical compounds, can fully or partially circumvent the economic intent of patent agreements.

This paper formulates an economic model that takes into account demand and cost/supply dimensions of the output and pricing of a hypothetical pharmaceutical, extrapolating about the respective effects of direct price controls and lack of price controls, and describing permutations of direct price controls in different countries.

The pharmaceutical industry depends on patents to fund the development and introduction of new products. A country can indirectly circumvent the economic logic of a patent by using price controls, but it cannot shift the economic costs of such a policy to another country that does not use price controls. Instead, less money is available for research and development (R&D).

Pharmaceutical price controls allow some countries to avoid the constraints of patent agreements without breaking those agreements outright. This, in turn, reduces the amount of profit available for further R&D, which is a detriment to consumers worldwide.