October 23, 2023
The New York Times ran an article with the unfortunate headline, “Ozempic and Wegovy don’t cost what you think they do.” The article goes on to explain that the drugs’ manufacturer, Novo Nordisk, gives discounts and rebates to the pharmacy benefit managers that purchase the bulk of prescription drugs, so the actual price paid is considerably less than the $900 to $1,300 retail price for a monthly dose. The article also tells readers that a number of other companies are developing drugs for obesity, so competition should be driving the price down further in the near future.
The True Cost of Ozempic and Wegovy
There are several important points that are overlooked in the article. First, these drugs don’t “cost” anywhere near what Novo Nordisk is charging, even after taking into account the discounts and rebates. In fact, they likely only cost around 1.0 percent of the retail price.
Novo Nordisk could probably cover the cost of manufacturing and distributing these drugs, and make a normal profit, if they sold them for $9-$13 dollars for a month’s dosage. Contrary to what is claimed in the headline, the NYT article is not referring to the drugs’ cost of production, it is referring to the price charged by Novo Nordisk.
The reason for the large gap between the price Novo Nordisk charges and its production costs is that the government has granted the company a patent monopoly. The government will arrest any company that manufactures Ozempic or Wegovy without Novo Nordisk’s permission.[1]
There is an enormous amount of money at stake with patent monopolies and related protections in the drug industry. We will spend over $600 billion this year on prescription and non-prescription drugs that would likely sell for around $100 billion in a free market without these protections. The difference of $500 billion comes to more than $4,000 a year per family. It’s roughly five times what the U.S. spends on food stamps each year.
Patent monopolies are also a big part of the story of upward redistribution in the U.S. over the last half-century. Patent and copyright monopolies likely shift more than $1 trillion a year from the rest of the population to the people in a position to benefit from these government protections.
It is often claimed that technology has been largely responsible for upward redistribution. In fact, it is our rules on technology that led to this upward redistribution. If the government did not give out patent and copyright monopolies, the gains from technology would be far more widely shared among the population. People like Bill Gates, who got incredibly rich from the patents and copyrights granted to Microsoft, would be far poorer with a free market.
There is a widely held myth that somehow people can’t be innovative if they work for a salary instead of the hope of getting rich by owning a patent monopoly. It’s not clear where this myth originated, but it is bizarre on its face.
There have been a huge number of great innovations from people working on salaries without any realistic hope of benefitting from a patent monopoly. According to a piece in the New York Times, Katalin Kariko, who just won a Nobel Prize for pioneering work in developing mRNA technology, spent most of her career going from lab to lab where she was supported by government grants. According to the piece, she never made more than $60,000 a year. While she has likely made a very substantial sum since the pandemic, due to her work with the German firm BioNTech, it is implausible that the expectation of this late-career bonanza was the motivating factor behind her earlier work.
Of course, the other major mRNA vaccine was developed by Moderna, operating under a government contract. (Incredibly, after paying for the development and the testing of the vaccine, the Trump administration also gave Moderna control of the vaccine, but presumably there was a sum that would have been sufficient to get Moderna to do the work without also giving them control of the vaccine.)
Government-granted Patent Monopolies Lead to Corruption #54,271
We just got another example of important work being done for pay when the American Prospect reported on how a former NIH employee appears to have developed a potentially important new cancer drug while working at the NIH. The scandal here is that Christian Hinrichs, the former NIH employee, appears to have established a company with a patent monopoly on a drug that he developed with NIH funding, which apparently also supported Phase I and II clinical trials of the drug.
This both demonstrates again the fact that people have no difficulty being innovative when being paid a salary, and also the sort of corruption that we see when the government grants patent monopolies. The second point should be apparent, but for some reason, it is never mentioned in major news outlets.
Every person who has been through an Econ 101 class can explain how a 25 percent tariff leads to corruption, since it raises the price of a product above its marginal cost. The same story would apply to patent monopolies, except by raising the price of drugs twenty or thirty times above the free market price, or even one hundred times the free market price, they are effectively tariffs of several thousand percent.
A patent monopoly encourages drug companies to push their drugs as widely as possible, even for uses where they might be inappropriate. It also gives them an incentive to conceal evidence that they might be ineffective or harmful. This is a substantial part of the story of the opioid crisis, where the major manufacturers concealed evidence that the new generation of opioids was highly addictive, as they encouraged doctors to prescribe them.
Patent monopolies can also lead to waste in research. As the NYT article notes, several other drug companies have obesity drugs in the pipeline, which presumably will be available soon. While this competition is beneficial in a context where drug companies have been granted patent monopolies, it would make little sense if drugs were being sold in a free market.
It is good to have multiple drugs to treat a condition, since not all people react the same way to a drug. Also, some drugs may not mix well with other drugs a patient is taking. Nonetheless, we will generally be better off devoting research to finding drugs for conditions where effective treatments do not already exist than developing multiple drugs for the same condition.
If we paid for research upfront, we could require that all results be fully open, so that researchers can quickly build on the research done by others. If there is a major breakthrough in a specific area, other researchers can then build on it and bring it to fruition more quickly.
They may also be able to identify pitfalls that could prevent researchers pursuing dead ends. For this reason, publicly funded open-research can potentially be far more efficient than patent monopoly supported research. Instead of encouraging secrecy, it would require openness.
Eliminating patent supported research could also put the pharmacy benefit manager industry out of business. If drugs sold at their free market price, it would make no more sense to have pharmacy benefit managers than to have paper plate benefit managers. These businesses survive and profit based on the large gap between the patent-protected price and the free market price. As this gap collapses, there would be no room for the industry to make profits and no need for the industry.
Drugs Are Cheap, Government-Granted Patent Monopolies Make Them Expensive
People who favor small government should be opposed to government-granted patent monopolies. The problem of high drug prices is caused by government interference in the free market. It would be much better for the economy and everyone’s health if we paid for the development of new drugs upfront and then let them be sold without protections. Unfortunately, the pharmaceutical industry is so powerful, it is almost impossible to get alternatives
[1] To be precise, Novo Nordisk would sue a company that produced these drugs without its permission. It would then get an injunction ordering them to stop production. If the company continued to produce the drugs in violation of the injunction, it would face criminal sanctions for violating an injunction, not for infringing on the patent.
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