A patent success story

Simvastatin StructureToday I am truly proud of the patent system.  The block-buster drug Zocor (simvastatin) has transitioned off-patent and into the world of generics.  Unlike other areas of IP law, patents really are valid only for “limited Times” and when those years have passed the property right evaporates — leaving the inventions “free as the air to common use.” (In the words of Justice Brandeis).

There is no question that patent rights played a major role in providing incentive to Merck to develop and test Zocor and to push it through the difficult FDA approval process.  The incentive worked, Merck recouped its investment, and now generic versions will be sold at an unbelievably low price that is very near its production costs.

14 thoughts on “A patent success story

  1. Dennis – it isn’t fully true that Merck let Zocor pass through its hands without a fight. While it’s true that Merck didn’t directly fight the generics on Zocor, Merck has done a couple of other things to cushion the blow of losing its patent protection on Zocor.

    First, Merck entered into an authorized generics deal with Dr. Reddy’s, which I presume would give it some continued profit on generic simvastatin.

    link to money.cnn.com

    Second, in a controversial move (outed by Senator Schumer among others), Merck is now undercutting Teva, who has exclusivity for generic simvastatin for the first six months, by selling its branded Zocor to insurance carriers for a lower price than Teva’s generic version. The insurance carriers are going to charge the same rate for branded Zocor as they do for the generic.

    link to cbsnews.com

  2. Dennis,

    Okay, fair point. I suppose you could reasonably assume that in this case the incentives provided the expectation of profit (and actual profit) that permitted the drug to be made.

    I suppose I would just point out that the system pretends to be *justified* because it adds to societal wealth–that is, net wealth; so to show that it really works, you have to subtract the costs from the benefits. Here you have pointed only to a benefit. Without knowing the cost, it’s hard to know if it was a net benefit.

    In particular, it means that maybe it was not *worth it* to have developed Zocor. Who knows? I don’t.

    This is similar to tax-funded projects, like, say, using tax dollars to build a road, or fund a museum, or send astronauts into earth, or going to war in Iraq. Yes, you can point to “benefits” of all these expenditures–the recipients of the funds benefit, for example; maybe there is an innovation or interesting info that results from space missions; maybe Iraq is liberated and improved (maybe). But all these things come with a cost: all the things that the taxpayers could have done with the money that was taken from them–consumer goods, savings, investing, etc. In fact this is one of the fatal flaws of myopic reasoning, as pointed out by the great French economist Frederic Bastiat, in his essay What is Seen and Not Seen (link to econlib.org). In this case, the positive results of a given government program (NASA, a public library, a war, an IP system) are often visible and seen; while the costs are hidden or unseen or diffuse. So people tend to discount the costs because they don’t see them as readily. But that does not mean they are not there.

  3. S. I think that you don’t take issue with any of my statements in this post except for my conclusory introduction where I said that I’m proud.

    I don’t know of any study done on the Zocor case, although this dialogue may help prompt one.

    That said, a number of studies have shown that the pharmaceutical industry in particular relies heavily on patent rights to support its research-intensive business model. For those companies and researchers, patent rights provide a strong incentive to research and get products to market quickly. I have not seen any evidence that Zocor is any different from a typical pharma patent case in this respect. This leads me to the conclusion that the incentive worked in this occasion to give a strong enough incentive so that the Zocor product would be developed and brought to market.

    The system also worked because the incentive is limited (in time) so that the drug invented at Merck is now free to be produced and sold by any company (pending FDA approval).

    Thus, in these two limited respects, the system worked as hoped.

  4. Dennis,

    You point to one possible other benefit–”support of the ethos of the american inventor”–but this is no data; no study; no evidence; just a hunch. And in any event, it’s just one possible benefit. It does not show the costs are not even greater than all these benefits put together.

    I take it, then, that you are not personally sure of what the costs, or benefits, are, of the patent system. So, you are not sure whether the entire system is “worth it” or not. So I think we must be in agreement then on this point.

    So if you are not sure if the patent system’s benefits justify the costs, why do you say “Today I am truly proud of the patent system. … The incentive worked, Merck recouped its investment, and now generic versions will be sold at an unbelievably low price that is very near its production costs.”

    AGain, not challenging you, just trying to understand the normative assumptions patent attorneys seem to have in these cases. Why would you be “proud” of the patent system if you are not even sure it’s worth it; why would you say the “incentive” “worked” if you are not sure that the costs of that incentive were greater than the benefits it incented?

    I don’t mean to ask you to justify your view; I just want to understand what you mean–how these views are compatible. Or am I misunderstanding you–?

    BTW I linked to your post and repeated my initial comment on the Mises blog here: link to blog.mises.org .

  5. “And, the question of over incentives is not trivial or one that should be quickly brushed aside.”

    And yet you do exactly that.

    ” We are still in a country where an ingenious individual can build a fortune through creative thinking and hard work.”

    Yes, but by preventing another individual from using his thinking and hard work to do the same. The USPTO creates a property right where one does not exist.

  6. Stephan — Great comment. Certainly, my little anecdote here does not prove anything and there are dozens of questions that must be analyzed before we would could determine whether the patent grant on simvastatin was an overall public good. And, the question of over incentives is not trivial or one that should be quickly brushed aside.

    On cost/benefit analysis. One often overlooked value of the patent system is its support of the ethos of the american inventor — We are still in a country where an ingenious individual can build a fortune through creative thinking and hard work.

  7. It’s in general true that the case for patents in the pharmaceutical industry, as opposed to the software industry, is pretty clear cut. But I wouldn’t make the serious conceptual mistake of confusing the clarity of the case with the importance of the patents to the industry.

    Like a number of scientific fields, inventions in the pharmaceutical industry mostly fall along relatively bright lines — a compound is a particular compound, and not any other. Once, it did not exist, and after the invention, it does. It’s hard not to see what falls under the purview of a patent on a new compound. (Of course, this oversimplifies, because one may combine old compounds, use them in different ways, etc., but the base case is pretty clear). Moreover, the amount of investment required to bring a new compound to the market is always great and pretty easy to put a number to. The case for protecting this investment via patents is therefore pretty compelling and obvious.

    Software, on the other hand, is simply a messier story. Yet one doesn’t give up on a set of laws or a system simply because its application is inherently more difficult — for giving up may engender a situation far more inequitable, oppressive, and counterproductive than that brought about by the complicated application of the set of laws or system. We don’t give up on legal decisions regarding child support and alimony because they lead to messiness and frequent, particular cases of unfairness, because a legal system without them creates circumstances only far worse.

    What I have never seen in any of the jihads against software patents is an attempt to explain how one is to prevent a company like Microsoft from dominating the industry simply by copying from innovators every idea that starts to look like a market success. People claim that copyright, trade secrets, and “first mover” advantage are enough to enable innovators to protect their investment in software — as if Microsoft does not exist, demonstrating beyond serious dispute that that view is utterly false.

    The estimates I’ve seen indicate that Microsoft currently receives about 90% of the profits of the consumer software industry. 90%! (Even Google and Yahoo hardly make a cent with consumer software — they charge for advertising instead.) What incentive does any innovator have to create a new consumer software application in such an industry, knowing that its certain fate would be that Microsoft would copy it out of existence, should it — heaven forfend — be enormously successful? There is only one way to protect such a potential innovator: patents. Take patent protection away, and the innovators it enables, and we will have to wait for Microsoft to come up with the innovation — something it has never done in the entirety of its existence.

  8. Joe and Dennis: re patents being needed in the drug area especially: could it be in part that this is because the FDA–another federal bureaucracy–imposes lots of costs on the entire drug development and approval process? If the FDA were to get out of the way, maybe that would lower costs enough to make the need for the feds to come up with incentives provided by yet another federal bureaucracy?

  9. Dennis: I am curious as to your view on the following. The standard justification for the patent system (and one you implicitly endorse) is the idea that the system provides incentives that encourage innovation that benefits the public.

    Would you agree that according to this standard, the patent system is a “good thing” only if its benefits “outweigh” its costs? (I have written on this here: There’s No Such Thing as a Free Patent,
    (link to mises.org))

    If so, your praise here of the patent system must presuppose that the benfits you point to in this case are clearly greater than the costs of having a patent system, right?

    If you do, could you explain why you think this is the case? How great are the costs of the patent system, for example, and how great are its benefits, and what is the “surplus” or excess? In other words, how do you know there is a surplus?

    I am not writing here to challenge you, but just out of curiosity. I’m a practicing patent attorney too and it’s not obvious to me what the costs or benefits of the patent system are, but it seems obvious that there are signficant costs. So it seems to me that it might well be that the costs exceed the benefits. You and other patent attorneys always seem sure that the benefits far exceed the costs (that is, when it is even acknowledged that there *are* costs). I am just curious what makes you so sure of this.

  10. Very true Joe — It is clear that innovation in the pharmaceutical industry is driven by IP rights. That is not necessarily the case in other technology areas.

    Over the next few years we will begin to hear serious calls to reform the patent system by dividing up rights by technology area. More rights will be available to pharmaceutical companies while fewer rights would be available to software companies.

  11. The fact that patents may serve a useful purpose for drugs is hardly a justification for allowing some of the other types of patents. Getting drug approval is a long expensive process. Patents for invention may not even be the best intellectual framework for protecting the investment that drug companies have to make to bring a drug to market. If we are really giving the drug company protection not for the creativity but for the grunt work and risk of bringing the product to market then we should say so directly through appropriate changes to IP laws.

    A drug is a free standing product and granting intellectual protection to drugs does not raise the problems which arise from inventions which inherently are intended to be incorporated into larger systems – giving rise to hold-outs, hold-ups and rent seeking.

  12. Dennis — It’s great that you point this out to people. The bringing forth of knowledge for all to use following expiration is of course the fundamental purpose of the patent system. Generic drugs are a wonderful example of this.
    It’s important to note, though, that the transition from patent-backed monopoly to competition didn’t always occur very efficienty in the drug industry. It took some very creative and effective patent legislation — the Drug Price Competition and Patent Term Restoration Act (aka the Hatch-Waxman Act) — to eliminate the de facto patent term extensions that pioneer companies used to enjoy after patent expiration. This change to our laws took place only 20+ years ago.

  13. Merck lost patent protection on cholesterol-lowering agent Zocor, which racked $4.4 billion in revenue last year. Zocor’s fate is inevitable: Its sales will shrivel as cheap generic alternatives flood the market. What’s unclear is the destiny of Pfizer’s Lipitor, the world’s best selling drug that controls nearly 55 percent of the $16 billion U.S. cholesterol medication market.

    Pfizer risks losing a significant portion of Lipitor’s $12.2 billion in sales because some patients on the low doses of the product can take a high dose of Zocor, experts said. Pfizer estimates that 76 percent of patients on Lipitor take the two lowest doses and health plans are aggressively promoting generic Zocor.

  14. I’m surprised Merck let their $4.4 billion dollar baby pass though their hands without a fight. I guess Zocor is no Mickey Mouse. Hopefully, this will encourage Pfizer to lower the $3 per pill price of Lipitor to compete with the $.03 per pill that Zocor will be sold at, which all will be better for the consumer thanks to the patent system to which you and I contribute. (Personally, I got tired of taking Zocor for my high cholesterol and dropped 80 lbs which fixed the problem. I’m glad others will benefit, however).

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