Patents in the Pharmaceutical Industry: Economics Term Paper

Patents in the Pharmaceutical Industry

Intellectual property theft through piracy and counterfeiting has risen dramatically over the last couple of decades. As a result, the level of activity of pirates and counterfeiters has increased, and so has the scale of organizations participating in the same. The pharmaceutical industry, which forms the basis of this text, has been widely affected; more than "90% of donor-funded HIV medicines" in the market today are generic (ITPC Factsheet, n.d., p. 1). Patents are a major instrument in the enforcement of intellectual property rights.

What exactly do patents protect in the pharmaceutical industry?

A patent on a drug gives the owner, in this case the inventing pharmaceutical company, the exclusive "right to prevent others from making, using, importing, or selling it" (Elliott & Bonin, 2002, p. 1). Intellectual property law was incorporated into the global trading system with the 2005 passage of the TRIPS (Trade Related Aspects of Intellectual Property Rights) legislation, which offers protection to the patent rights of pharmaceutical entities by prohibiting generic companies from manufacturing patented drugs (Elliott & Bonin, 2002).

Why are some industries more vulnerable to patent right violation than others?

The pharmaceutical, music, and software industries have been affected by piracy and counterfeiting more than any other industry. However, these are also the most profitable industries in the world today, way ahead of all other sectors (Elliott & Bonin, 2002). With regard to the pharmaceutical industry, the costs of production are high, given the amount of research and development involved. However, the fixed costs are covered by the fact that the industry operates on a global scale, and enjoys massive scale economies. The variable costs, on the other hand, given the significance of the industries, are often covered by public subsidies through both direct government investment and tax breaks for research. This implies that the marginal costs of production are relatively low, and hence the price-cost margin is significantly high. It is these high profit margins that attract new entrants in the form of copyrighters and pirates; and as is the case in the model of perfect competition, competiveness is determined by the entrants' ability to copy the incumbents' production.

What should the pharmaceutical companies do in this situation?

One of the crucial goals of the Treatment 2.0 Agenda has got to do with the development of "cheaper drugs; fixed- dose ARV combinations that are easier to take,…