Over the last couple of decades, the pharmaceutical industry has come under attack for its perceived shortcomings amid claims that it’s greedy, profiteering nature has caused significant harm.

However, these problems stem not from the profit motive, but rather because in 21st-century, technologically advanced Australia, pharmaceutical research and development (R&D) is financed by means of 15th-century medieval government monopoly: patents.

It is assumed by governments, industry and economists, without evidence, that patents comprise the optimal mechanism for financing R&D. It has become a faith.

In fact, the perverse incentives and problems generated by pharmaceutical patents are so numerous that only a few can be described in detail here. They include:

• Monopoly pricing
• Non-innovative copycat drugs
• Withholding of negative clinical trial research
• Regulatory capture
• Uncompensated appropriation of public R&D
• Intimidation of researchers
• Conflicts of interest between medical professionals and industry
• Fraud
• Tragedy of the anti-commons
• Endless litigation
• Misleading high-pressure advertising
• Distorting physician prescribing
• Anti-competitive behaviour
• Astroturf campaigning
• Corporate takeover of universities
• Exaggerated R&D expenditures
• Rent-seeking
• Counterfeiting
• Capture of medical journals

And most tragic of all: death.

Some economists have suggested alternative policies, such as prize funds, patent buybacks, compulsory licensing, advance market commitments, patent pools, and more public funding.

Unfortunately, while theoretically superior, little research has been performed to compare these alternatives to our patent system – and certainly not in terms of taxpayer cost and employment.

Instead, the government intervenes to “regulate” industry and subsidise consumers through the Pharmaceutical Benefits Scheme (PBS), with the aim of dealing with the problems caused by the initial intervention of patents.

Government provides the PBS subsidy, tax breaks, R&D credits, corporate charters, the patent office, patent enforcement and the court system. And god-only-knows what state and local governments offer to industry.

Simply put, Australia provides over $9 billion in subsidies and protection to an industry that generates a $22 billion turnover, resulting in a miserably low $1 billion worth of R&D.

Industry has been known to add administrative and marketing costs to inflate R&D, let alone what is misallocated in regards to non-innovative copycat drugs. Half of all industry employment is in wasteful sales and marketing.

A big problem is that there is conflicting data regarding the industry from the Australian Bureau of Statistics, Medicines Australia, Department of Innovation and Australian Institute of Health and Welfare.

This has resulted in a lack of accurate statistics – a state of affairs that plays nicely into the hands of industry.

For instance, the Department of Innovation says the industry employs 13,400 R&D workers, but Medicines Australia’s industry survey reports that this is much less. A public audit is desperately needed to discover what the facts are.

A public alternative

I propose a new system whereby the government directly finances R&D, and all drugs are produced as generics at market-competitive prices.

By appropriating 1% of GDP ($12 billion) annually, the government can provide $3 billion to each of our four major R&D-intensive institutions – public labs, universities, for-profit firms and non-profit foundations – through either direct funding or contracts.

It will be necessary to fund a small subsidy program for low-income earners, the elderly and chronically ill, as well as financing health and medical journals, patient groups and continuing medical education.

The CSIRO’s annual report provides a good model for how funding could be allocated: capital investment (10%), labour (54%), and supplies (36%). An employment breakdown is provided: R&D (65%), technical (15%), administration (18%) and management (2%).

R&D employees are paid around $95,000 annually, so $12 billion will produce 44,000 R&D jobs – more than three times what industry claims to employ.

If half of the $12 billion results in R&D, then it is six times what industry performs. If it is the full amount, then twelve times.

Monopolistic pricing is eliminated, making medicines easily affordable.

As the link between R&D and sales is severed, there is little to no incentive for industry to engage in the wide array of outrageous behaviour to maximize sales. The pharmaceuticals market will shrink in size as prices reflect production costs.

Australia already has R&D institutions in place and the government has shown no problem with spending. This policy is a conventional and conservative proposal, given it eliminates government monopoly and utilises free market production.

A more equitable model

Australian stakeholders – consumers, taxpayers, scientists, and academics – must realise that the patent system does not work in their interest.

It is a policy purposefully designed to redistribute wealth and income upwards to the rich. It is a conservative nanny state policy.

It works for the corporate elite and rentier oligarchy, which are dependent on reverse Robin Hood policies – take from the poor and give to the rich.

Ironically, free-marketers and conservatives are at the forefront of supporting government monopoly and corporate socialism. Liberals are not much better in this regard.

Unfortunately, the corporate elite have ensured that Australia is obligated to enforce patents through legal treaties administered by the World Trade Organisation and the usual round of “free trade” agreements that promote the most toxic form of government monopoly.

These legal barriers, however, do not prevent Australia from establishing and funding alternative systems.

Furthermore, they do not force the government to give patents to firms, only to enforce patents granted – and have only done so because government is under the delusion that patents are the best way to finance R&D and create employment. The government can also pass a law that disallows patenting of any publically financed R&D. These treaties, however, still pose big problems to reform.

The public has a long road ahead of itself to reform the R&D system, given that it must deal with the barrage of propaganda dispensed by government and industry.

The ideology that upholds the patent system is built upon a foundation of quicksand that quickly collapses upon close inspection.

In the end, the change will be worth it, given the enormous economic return on medical and health research.