Josh Dowlut's  Instablog

Private pharmaceutical companies earn monopoly profits on the back of public research.  Over the last 10-15 years, they have shifted from doing the bulk of the basic research to merely navigating government barriers to entry and patent churning while the bulk of the basic scientific research falls on universities paid for with public money.  One way to corral runaway medical costs and prescription drug costs would be to end this practice by replacing the monopoly status of a patent with an open fee agreement that paid a return on investment for innovation costs, but didn’t use the force of government to prevent businesses from manufacturing and selling life saving drugs that were principally developed with public money.  As the old econ example of the perfectly inelastic product goes, “How much would you be willing to pay for a life saving drug?  How ever much you have.”

Most of the basic scientific research, especially biomedical, is done at the university level with public funding, yet the end drug makes its way to monopoly status. Researchers at Hopkins game the system and withhold research until they have patent protection and their own company setup to profit from molecules that were invented with public money. It is about as brazen as me setting up a toll booth for my private benefit on the public road in front of my house because I repainted the lines or patched a couple potholes while on the city's payroll.  It is the theft of work product and the victim is society as a whole.

The trend of recent years has shifted to where the universities invent the molecule and the pharmaceutical companies figure out dosage levels and navigate FDA hurdles. Pharmaceutical companies have significantly scaled back their basic research and increasingly resort to "patent churning" where they develop new applications, or slightly different versions. Think Rogaine Foam or Retinol for fighting wrinkles instead of acne. The release of these "innovations" tends to coincide almost exactly with the patent expirations showing that this gamesmanship is slowing innovation. Worth a skimming over is "Our Daily Meds" by Melody Peterson. 

Private pharmaceutical companies spend $17 billion/yr on RD. The Federal government spends 25B. The key difference is the Fed's money is spent doing basic research and pharma’s money is spent navigating FDA approval and tweaking existing drugs to qualify for new and extended patent protection. This is very much the story of private monopolists exploiting public research. While there are exceptions to every rule and practice (especially if you go back to the 1960's and 70's), The National Academy of Sciences shares my thesis and shared it before the 111th Congress on March 3, 2009: http://www7.nationalacademies.org/ocga/testimony/Science_Funding_Overview.asp

Excerpted from their testimony:

"After WWII until roughly the end of The Cold War, American corporations operated some amazingly distinctive and productive scientific research laboratories....

"Today, these corporate laboratories are still highly capable of developing new products (Intel, for example) and conducting superb applied research but they do very little basic research compared to earlier years. The major responsibility for conducting such research now is with our universities."

Their 2009 position represents a shift from their 1996 position. The 96 position does however show that even 14 years ago exploitative suspicions and accusations were sufficient to warrant a PNAS response: http://www.pnas.org/content/93/23/12725.full

"We find evidence of significant reciprocal interaction, and reject a simple “linear” dichotomous model in which the public sector performs basic research and the private sector exploits it."

The CBO also shares my thesis.  From a 2006 CBO report on research development in the pharmaceutical industry: http://www.cbo.gov/ftpdocs/76xx/doc7615/10-02-DrugR-D.pdf

"Nevertheless, introductions of innovative new drugs have slowed. At the same time, drug companies have been able to charge high retail prices for new drugs that are only incrementally different from older drugs whose prices have fallen."

”Only about one-third of the drugs approved annually in the United States are new compounds; the rest represent modified forms of—or new uses or—existing drugs."