South-Western College Publishing - Economics  
Will Eliminating Patents on Drugs Help Poor Countries?
Topic Oligopoly
Key Words Big Pharma, drugs, patents, developing countries, patent laws
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Reference ID: A164603376

News Story Middle-income countries have become more vociferous in their objections to the cost of prescription drugs. Some, like Thailand, have taken steps to no longer recognize the international patents protecting those drugs, and have begun to import cheaper generics. The government’s argument is that the poor of the nation will benefit from cheaper drugs. Is that the case?

The economic argument of the awarding of patents is based on a return to investment. Since research and development of novel drugs is expensive, firms will be loathe to attempt such research, if a fair return is not guaranteed. Patents protect the ability of firms to extract monopoly-like profits for a period of years; when the patent expires, competition with generic drugs ensues.

The complaint has always been that high prices for drugs eliminate developing nations – and the poorest of the world’s poor – from the market for these drugs. Pharmaceutical companies have responded by reducing price in developing countries, usually by increasing prices slightly in the developed world. Now, firms are seeing patent laws openly ignored internationally, in favor of cheap generics.

This will have several effects. First, it may cause firms to lose interest in researching drugs important to those developing nations. That seems an intuitive response to the elimination of profit potential in those nations. Second, it may cause drugs to be diverted away from a country that needs the medicine more, because the firm no longer has an interest in that part of the world. Third, it will stir a market in generics. While Thailand does not have a generic drug industry of its own, it will import generic drugs from other countries, such as Brazil or Canada.

And this may be the underlying trend here. Middle-income nations, including Brazil and India, are developing their own generic drugs industry, and have the ability to undercut the major drug companies with their copies of the name-brand pill. Thailand has hopes of becoming a major player in generic drugs. What better way to get a foot in the door to that industry than by overruling the patents of developed-world drug companies?

Discussion Questions:
1. The common argument against outlawing patents is that innovation will be stifled when it is needed most. It is, at best, an untestable hypothesis, under current conditions. Do you think this is correct? Why or why not?
2. What will be the impact on the drug industry in the US if international patents are not observed?
3. What sort of backlash may be expected from the US prescription drug consumer if developing countries continue to violate patent laws and import generics?
Multiple Choice/True False Questions:
1. True/False. A patent may be viewed as a return to innovation and research.
2. According to the article summary, which of the following is NOT a potential result of overruling patents?
  1. Innovation will be stifled.
  2. The world’s poor will not receive as much attention from drug companies.
  3. Generic drug industries will thrive.
  4. The duration of patents will be extended to compensate for the lost income.
3. Which of the following are given as reasons to offer patents to drug companies?
  1. Research is expensive.
  2. Research for novel drugs is uncertain and risky.
  3. Firms seek to recoup profits to undertake research.
  4. All of the above.
Source : “A Gathering Storm.” The Economist, June 7, 2007.
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