Explaining why AstraZeneca were having difficulties that were making them plan large layoffs, the analyst talked about the “patent cliff”, and the interviewer insightfully observed that it was the motivation to continuing innovation. The “patent cliff” is the end of the 20 year monopoly on an invention. During the 20 years period, the pharmaceutical company has no competition and is free to charge whatever it wants for a drug. It is thus able to make enormous profits.
As soon as the 20 years are up, other drug companies are able to use the knowledge that’s freely available in the commons to produce the drug at a price the market will bear rather than at a monopoly price. The inventor is then able to continue making and selling the drug, but not at monopoly prices. The only way to continue making monopoly profits is to invest in research and to continue to innovate. Thus, the “patent cliff” is actually a spur to innovation and achieves exactly what the social contract behind patents was intended to achieve – a incentive for research and innovation so that the pubic commons is enriched.
In other comments on the news, I could clearly hear people ready to use this news to demand extensions to the patent span for pharmaceuticals. But a key quote from the BBC article contains the real sting in the tail – it’s not the loss of patents that’s to blame as much as a failure to innovate fast enough:
The company is also facing the loss of patents on some of its products such as anti-psychotic treatment Seroquel, and has not yet released alternative money earners.
While the equation clearly depends on the monopoly as a reward for innovation, the spur to innovation is actually the expiry of the patent. While some would have us believe that extending patent terms would increase innovation, there is clearly a balance to be achieved. If patent terms are extended, there’s a real risk of reducing the incentive to innovate. We have to remember that the point of society granting patents and temporary monopolies is not to reward innovation; it is to encourage it.