Dr. Daniel Sutter: Patents, profits and pandemics

Knowledge is the basis of economic prosperity, and the knowledge contained in a COVID-19 vaccine or cure would be enormously valuable. We have traditionally relied on patents to reward innovation, but an alternative exists that could be appropriate for vaccines during pandemics.

Patents reward knowledge creators with a temporary monopoly. Monopolists generally charge high prices, so patents let inventors recover the costs of research and development plus earn a profit. Patents helped spur the Industrial Revolution, demonstrating their effectiveness.

Over 160 candidate COVID-19 vaccines are in development, with more than a dozen in human trials. Our patent system has succeeded: investors funded scores of teams of smart medical researchers. The danger exists, however, that price controls may be applied to a COVID-19 vaccine, making investors less likely to fund future vaccine research.

Patent purchases date back to France in 1839. A government patent purchase rewards the inventor immediately, as opposed to over time with profits on sales of the product. A fair price should reflect profits over the life of the patent, adjusted downward to reflect the immediate payout and for uncertainty about profits.

I advocate buying promising vaccines’ patents before testing for effectiveness, so the purchase price need not cover the cost of the Food and Drug Administration (FDA) approval. Economic theory suggests that patent purchases should incentivize research as effectively as patents.

The FDA approval process now represents the major challenge for the candidate vaccines. The process involves three phases. Phase I tests the vaccine on a small group of subjects to ensure safety and antibody production in subjects. Phases II and III involve tests on first several hundred and then several thousand persons to establish effectiveness. This lengthy process is why many believe a vaccine could not be on the market until 2021.

The 1962 Harris-Kefauver Amendments authorized FDA regulation of the effectiveness of new drugs. The rationale is fear that pharmaceutical companies will sell ineffective drugs to an unsuspecting public for profit using manipulative advertising.

This prospect seems particularly frightening with COVID-19. Absent regulation, many desperate Americans might pay thousands of dollars for an alleged vaccine. An ineffective vaccine could worsen the illness as “vaccinated” persons resumed normal activities.

A significant body of research by economists demonstrates that reputation works surprisingly well in the market for drugs. Hospitals and insurance companies police manufacturers’ bogus claims. Many free-market economists, including me, believe Harris-Kefauver should be repealed. FDA regulation endures because many Americans deeply fear deceitful profiteering.

Let’s take this fear seriously and remove the potential for profit from approval of a COVID-19 vaccine with patent purchases. Purchases will reward medical researchers for their work devising candidate vaccines. The federal government could then devise an expedited testing process, recognizing that each day a vaccine is delayed during a pandemic can cost thousands of lives. We need not fear corporate profit-seeking influencing the effectiveness evaluation.

We could hold an expedited approval “tournament” for several candidate vaccines, with selling the patent to the federal government a condition for inclusion. Eliminating profit might also make human challenge testing more acceptable.

In human challenge tests, researchers intentionally expose subjects to the virus after inoculation. The control group receives only a placebo and is thus deliberately infected with a deadly virus. I believe informed consent makes this acceptable, but others may view a drug company profiting from control group deaths as immoral.

Patent purchases should also ensure a vaccine’s affordability. All drug makers could access the formula without paying royalties, so a vaccine’s price should reflect only the normally modest cost of ingredients and manufacture. Competition will keep a vaccine’s price in line with cost. A company charging $500 for a vaccine which costs only $100 will get priced out of the market.

I see patent purchases as a win-win situation. Medical researchers get compensated, rewarding of knowledge creation. An expedited approval process could quickly identify an effective vaccine. And an effective vaccine should be as affordable as possible.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.