The story goes that pharmaceutical companies need patents (along with price discrimination and advertising freedom, among others) in order to pay for the exorbitant research costs that are required to produce new drugs. The drugs are a huge fixed cost, but producing pills costs pennies, if that. Therefore a pharmaceutical company can maximize profit by charging people exactly what they can afford to pay - in the United States, that is fairly high, but in the rest of the world (or even Canada) the price is lower. In order to cover their investment they must run tons of advertisements to get more and more people to take the pill. All these things are required to cover investments, many economists say, and to drive the research of new "important", "lifesaving" drugs.
Liberal economist Joseph Stiglitz (winner of the Nobel Prize in Economics, who's book Globalization and Its Discontents I flipped through earlier this year) points out in an article in the May PAER that:
drug companies spend far more money on advertising and marketing than they do on research, far more on research for lifestyle drugs (for conditions like impotence and hair loss) than for lifesaving drugs and almost no money on diseases that afflict hundreds of millions of poor people, such as malaria. It is a matter of simple economics: companies direct their research where the money is, regardless of the relative value to society.
In a related issue he notes that:
companies raced to beat the human genome project in order to patent genes such as that associated with breast cancer. The value of these efforts was minimal: the knowledge was produced just a little sooner than it would have been otherwise. But the cost to society was enormous: the high price that Myriad (let me pause to see if this is a public company - it is, MYGN), the patent holder, places on genetic tests may well mean that thousands of women ... will die.
The good news is that there is a simple and effective solution, which immediately rewards the researchers: prizes for cures, similar to the past Ansari X Prize and the current Archon X Prize. He notes that "since governments already pay the cost of much drug research directly or indirectly, through prescription benefits, they could finance the prize fund." It would probably end up saving governments money.
He says that the prize funds would only complement the patent system, which could remain in place to research important things like Viagra and Propecia. I suppose the developers who received the prizes couldn't patent their drugs - though they might not want to anyway, since the drugs he has in mind mainly afflict the poor.
Anyway. Good idea.