Dean Baker writes some very good sense about Tamiflu and compulsory licensing:

MaxSpeak, You Listen!: BIRD FLU, BIRD BRAINS, AND ECONOMISTS : Those of you who like to prepare for potential crises in advance, rather than waiting until after the fact (i.e. not FEMA), may have been following the debate over dealing with a potential outbreak of the Avian Flu.... One of the key issues is whether the government should be stockpiling large quantities of Tamiflu.... The major obstacle to large-scale stockpiling is that the drug is under patent by Roche, the Swiss pharmaceutical company. Roche has limited manufacturing capacity for Tamiflu, and would charge a high price in any case.... [T]he claim of manufacturing complexity is not accurate. The Indian drug manufacturer, Cipla, determined how to reverse engineer the drug in two weeks and is now prepared to begin making a generic version of the drug available in January....

The most extreme case is the one that Roche may find itself in. It may have monopoly rights to a drug that could literally mean the difference between life and death to tens of millions of people in the rich countries. This could be REALLY big money. If the government takes away the potential for this incredible windfall, by requiring that the drug be licensed so that it can be mass produced, then it does reduce the expected return on future investment. To put it simply, if there is a 1 in 10,000 chance that a drug company's new drug will be the next Tamiflu, but the company knows that it will then be required to license this drug rather than making $200 billion in profit, it will reduce its expected profits on its new drugs by $20 million ($200 billion/10,000).

While we cry over this loss of expected profits, let%u2019s ask why are we in this mess to begin with? In other words, why are we relying on patent monopolies to finance drug research? The Holy Grail in economics is that price should equal marginal cost. Yet, drug patents lead to situations where prices are hugely out of line with marginal cost, in some cases by a factor of 100 or more. Drugs are almost invariably cheap to produce; they are only expensive to consumers because of patent monopolies.

Of course patent monopolies in prescription drugs lead to all the bad things that economists warn about when prices diverge from marginal cost. The most immediate effect is the deadweight loss that results from people not getting drugs that they could afford at the competitive market price, but not at the patent protected price. And, this is not just poor people in Sub-Saharan Africa, there are tens of millions of people in the United States who do not take the optimal drug or the optimal dosage because patent protection makes it too costly. Monopoly profits give drug companies incentives to undertake expensive and often deceptive marketing campaigns.... Patent monopolies also provide incentives to research copycat drugs.... Patent monopolies also encourage drug companies to conceal negative research findings.... [P]atent monopolies encourage drug companies to spend large amounts of money on lawyers, lobbyists, and propaganda to protect and extend their monopolies.

The $220 billion question (current U.S. spending on prescription drugs) is where are the economists? Remember, economists are people that get high blood pressure from 10 percent tariffs on shoes or pants. When Bush put a temporary tariff on steel imports that maxed out at 30 percent, economists all over the country became apoplectic. So why is the economics profession overwhelmingly silent about drug patents, which are the equivalent of tariffs of 300 percent on average, and affect a product that is much more important to our economy and our health?

We recognize that patents are a way to provide incentives for research, but where is the economic research that shows that they are the most efficient way? You won't find it, because economists have mostly chosen to ignore the issue.

Just for the record, the U.S. government already spends $30 billion a year on biomedical research.... Why shouldn't we believe that if we doubled this appropriation, to replace the $25 billion that the drug industry claims to spend on drug research?...

Given the enormity of the stakes, you would think that there was a major debate within the economics profession about the best method of financing drug research. While there has been a limited amount of writing devoted to the topic, most economists are too busy dealing with tariffs on pants and other crucial items. Maybe mass deaths from a flu pandemic will help to reorient priorities in the profession.

The answer is that we don't trust the NIH to be able to set up procedures that cover all the bases in drug research. Low-probability but high-payoff projects are likely to be underfunded by the government--but properly funded by private companies willing to roll the dice.

However, these ex ante considerations vanish ex post when an epidemic threatens: nationalize Tamiflu now!