Transcript F.M. Scherer: How patents support innovation in pharmaceuticals

00:02 Technological innovation drives forward economic progress. It’s the most important element of economic progress.

00:15 I’m F.M. Scherer, officially retired but continue to teach at the John F. Kennedy School of Government at Harvard University. We’re going to focus on pharmaceuticals and there are several interesting aspects about them.

00:31 Number one: they are saving lives and improving the quality of life. Number two: there’s been, in the last century, enormous technological change fueled by extensive research and development investment. And number three: unlike many other industries, in pharmaceuticals patents are particularly important.

00:55 A patent is a monopoly privilege issued by the government for a limited period of time that allows the first true inventor of some new product or some new process to enjoy a period of monopoly. That is to say–freedom from competitive imitation.

01:16 That means you can raise your prices way above your production costs. For a period of time you enjoy substantial profits and those profits are the reward for your technological contribution. After that limited period expires then the patent rights end, the monopolies should end, competition breaks out, prices are reduced, the monopoly profits are reduced, and everybody benefits from the new and, now somewhat older, product at much lower prices.

01:56 There are a lot of policy questions. If I, in the United States, develop a new drug and spend half a billion dollars doing so, others in other countries, including less developed countries, could benefit from that drug. Should I have patent protection in those other economies?

02:16 There’s also a fundamental economic issue here. If we provide these drugs free in low-income nations entrepreneurs will get their hands on the drugs, buy up a lot of them, ship them back into the rich world, and undermine the high prices that the pharmaceutical companies need to charge in order to earn back their research and development expenditures in the rich world.

02:53 Patents are very important in pharmaceuticals. Without them, or some equivalent intervention, the R&D would not take place.

03:01 Has the intervention of economics helped to save lives in pharmaceuticals? Yes. One needs to understand the economics of price discrimination. One needs to understand why organizations like the World Trade Organization and the World Health Organization encouraged the supply of pharmaceuticals at low prices in low-income nations, all the while tolerating the supply at high prices in high-income nations. And preventing the exportation from the low-income nations to the high-income nation. So, economics matters there.

03:45 They need well-trained people to carry out the policies that get this trade-off made right.