Memo To The President: The Pharmaceutical Monopoly Adjustment Act Of 2017 – Health Affairs (blog)

Since 1980, Congress has enacted many laws granting pharmaceutical manufacturers monopolies that no other industry enjoys. These extra monopolies were created with the expectation that monopoly profits would spur greater investment in research to find important new drugs. In fact, they have caused US consumers to pay higher prices for medicines for longer periods of time while making the pharmaceutical industry far more profitable than any other industry. I believe the next president and Congress should take several key steps, which I outline below, to roll back these costly, unnecessary monopolies.

The Current Landscape

Current extra pharmaceutical monopolies include:

• Absolute freedom from generic competition for seven years for orphan drugs; for five to seven years for all new small molecule drugs; and 12 years for new biologic drugs.
• The right to extend the length of a patent claiming an approved new drug for five years up to a maximum of 14 years.
• The right to a six-month patent extension for conducting studies to determine the suitability of a drug for children.
• The right to delay approval from the Food and Drug Administration (FDA) of competitive generic and biosimilar drugs by merely asserting that patents may be infringed without regard to the merits of the assertion.
• The right to acquire the exclusive rights to drugs discovered as a result of government-funded biomedical research and to sell those drugs without any restraint on prices or profits.

The pharmaceutical industry has long argued that extra monopolies are essential because of the high cost of research to develop new drugs. For that reason, when Congress enabled competition from generic drugs by enacting the Hatch-Waxman Act in 1984 (which I helped draft as counsel to the generic drug industry), it simply assumed that extra monopolies were needed to offset that competition. That assumption has turned out to be wrong.

After paying all research costs and other costs of doing business, pharmaceutical manufacturers earn profits that average close to 20 percent of sales. The industry has consistently ranked as one of the most profitable industry sectors with returns that are more than double the median return for all industries.

Moreover, despite the fact that 85 percent of all prescriptions are now filled with a generic drug, net sales of branded pharmaceuticals in the US have grown from about $ 10 billion in 1984 to about $ 200 billion in 2015 and profits have skyrocketed in large part because US consumers pay the highest prices in the world for branded prescription medicines. Yet, Congress has not only failed to consider how much profit the extra monopolies generate but continues to explore legislation like the 21st Century Cures Act which would grant even more monopoly incentives.

A Profitable Industry

A close look at companies’ annual reports provides ample evidence that extra monopolies are directly responsible for the disproportionate profitability of the pharmaceutical industry. Consider the following examples.

• According to data aggregated by the research firm Statista from Pfizer’s annual reports, the company earned $ 115 billion on sales of $ 528 billion during the 10 years from 2006 through 2015, for an average profit of almost 22 percent. During the same period, Pfizer spent $ 139 billion on stock buy backs and dividends; over $ 155 billion on sales, informational, and administrative expenses; and only $ 82 billion on research. Revenues generated from extra monopolies Pfizer enjoyed during this period exceed $ 100 billion dollars. This revenue includes:
  • Twenty-four billion dollars from 1,393 days of patent extension and pediatric extension on Lipitor. This is the additional revenue which Pfizer received from sales between May 30, 2006 (when its primary patent on Lipitor would have expired) and March 24, 2010 (when its patent term and pediatric extensions expired.)
  • Nine billion dollars from a “pay for delay” patent settlement enabled by the Hatch-Waxman Act on a secondary Lipitor patent which is the revenue received by Pfizer from March 24, 2010, when its patent extensions expired, and early 2012 when generic competition finally commenced.
  • Sixty-seven billion dollars from sales of Xalatan, Lyrica, and Enbrel which are all drugs that were discovered as a result of federally funded academic research and exclusively licensed to Pfizer or a co-marketing partner under the Bayh-Dole Act.
  • Billions more from patent term and pediatric extensions ranging from six months to several years for Norvasc, Zoloft, Viagra, and other drugs which perpetuated monopoly pricing for multiple years on drugs which were each producing billions in annual revenue.
• Statista data aggregated from Gilead Sciences’ annual reports shows that between 2009 and 2014, the company spent a total of $ 10 billion on all research while it derived over $ 30 billion in revenue from Truvada and Atripla, two drugs for the treatment of HIV which include emtricitabine, a drug discovered at Emory University under a federally funded research grant. Emtricitabine is exclusively licensed to Gilead under the Bayh-Dole Act. The revenue stream from emtricitabine enabled Gilead to purchase Pharmasset, including its rights to Sovaldi, the Hepatitis C drug, for $ 11 billion. In 2014, Gilead earned a 52.3 percent net profit driven by the introduction of Sovaldi at a price of $ 84,000 per patient.
• According to aggregated data from Statista, Johnson & Johnson earned one third of its pharmaceutical revenue between 2011 and 2015 (about $ 30 billion) from sales of Remicade — a federally funded discovery made at New York University. Similarly, between 2006 and 2015, Amgen derived $ 90 billion from the sale of Neupogen and Enbrel which were discovered by federally funded researchers at Memorial Sloane Kettering and the University of Texas. The government’s annual $ 30 billion expenditure on biomedical innovation is producing more than $ 2 billion in annual royalties for academia which would translate to $ 40 billion in product sales at a royalty rate of 5 percent.
• Since 1984, patent extensions have provided well over $ 100 billion in extra monopoly revenue during the period of the extensions. The cholesterol-lowering statin drugs alone generated $ 60 billion from patent extensions and another $ 5 billion from pediatric extensions.

For that $ 5 billion the government could have covered the entire cost of the studies needed for the 200 drugs that have received the pediatric patent extension. Instead, the pediatric extensions generated many billions in extra revenue for dozens of blockbuster drugs having annual sales of $ 1 to several billion per year.

Solution: The Pharmaceutical Monopoly Adjustment Act of 2017

Drug prices would be lower if the government directly negotiated prices and made more effective use of comparative effectiveness, formularies, and other negotiating tools. But the only way to ensure that high drug prices are paid for the shortest time is to roll back the extra monopolies. That is why the new Administration should send Congress the Pharmaceutical Monopoly Adjustment Act of 2017 which should contain the following rollback provisions:

A reduction of market exclusivity for biologic drugs from 12 to seven years

The 12-year biologic exclusivity undermines the patent system since it provides exclusivity for the expected commercial life of every biologic product without requiring any innovation. The granting of such a monopoly as a reward for investment without proof that there has been a useful therapeutic advance contravenes the constitutional requirement for “invention” as the basis for granting a monopoly.

It simply opens the floodgates to the promotion of high-priced, low-value drugs. Twelve-year biologic exclusivity was rejected in the Trans-Pacific Partnership (TPP) negotiations because most other countries see no reason why a biologic drug should receive longer exclusivity than other types of drugs. Long exclusivity for biologicals is also economically unnecessary because biosimilar products are not automatically substitutable for the original biologic, thereby assuring a profitable market for the original biologic after exclusivity expires.

Eliminate Patent Term Extensions

Patent term extensions, limited to a maximum of 14 years from the date of FDA approval, were created by the Hatch-Waxman Act to compensate for long delays in the FDA approval process. FDA now reviews and approves important new drugs in a matter of months. What is more, for the most important drugs, the median length of post-approval market exclusivity is now 14.5 years which suggests that few important drugs are eligible for a patent extension.

An unintended consequence of the patent extension system is that less innovative, me-too drugs like the cholesterol lowering statin, Crestor, and proton pump inhibitor, Nexium, have received longer extensions than the more innovative first member of those classes of drugs. Granting extensions for less innovative drugs serves no public interest and adds tens of billions of dollars to annual drug costs because of heavy advertising that stimulates demand for those low-value products.

Substitute a tax credit for the 6-month pediatric patent extension

Patent extensions for conducting pediatric studies create windfall profits for blockbuster drugs because the extra monopoly revenues can amount to 30 or 40 times the cost of the studies. If a drug is potentially useful in children, it should not be approved without evidence to establish that it is safe and effective for that use. The cost of such studies appear to be relatively minor and should logically be borne by the applicants who will profit from expanded FDA approval. At most, a research and development (R&D) tax credit for some or all of the cost of such studies may be warranted if the FDA believes such studies are essential but would place an unfair hardship on the applicant.

Repeal laws that delay FDA approval of generic drugs when patent claims are made

Under conventional patent law, an alleged infringer is free to compete unless and until a patent is judicially determined to be valid and infringed. Only then does a court award an injunction against future infringement and damages for past infringement. The Hatch-Waxman Act reverses conventional patent law and enjoins FDA from approving a generic competitor for 30 months based on the mere allegation of infringement. That provision has encouraged drug makers to obtain secondary patents of dubious validity on almost every new drug solely to improperly delay generic competition.

Hatch-Waxman also included a provision intended to root out bad patents by giving the first generic manufacturer to challenge a patent a 180-day head start before subsequent generic applicants could receive marketing approval. Patent owners and challengers have routinely “gamed” this system by entering into “pay for delay” settlement agreements that take advantage of the 30-month approval delay and 180-day generic exclusivity to delay any generic competition and split the resulting monopoly profits.

These special provisions giving extra monopoly protection to pharmaceutical patents were enacted in 1984 because drug makers convinced Congress that most generic manufacturers were small family businesses that would be unable to pay infringement damages if a patent was upheld. That argument is no longer valid as most generic manufacturers are now large multi-national corporations. There is no longer any rationale for giving greater protection to pharmaceutical patents than patents on other subjects.

The evidence is overwhelming that this special system has improperly delayed legitimate competition and cost consumers billions of dollars. The US Patent Office now has procedures in place which permit a third party to seek an administrative review of whether the decision to grant a patent was correct. These reviews are being successfully used to weed out low-quality patents without the cost and delay associated with conventional patent litigation. But the pharmaceutical industry has been lobbying for legislation that would prohibit the use of these administrative procedures to review pharmaceutical patents. Congress should reject that effort and encourage maximum use of administrative review of pharmaceutical patents to ensure that generic competition is not being improperly delayed.

One aspect of the Hatch-Waxman Act that should not only be preserved but expanded to cover biologic drugs, is the requirement that the owner of an approved drug promptly disclose the identity of all patents that might be infringed in making a generic version of the approved product. Early knowledge of the existence of patents promotes non-infringement of valid patents and eliminates unnecessary litigation. Unfortunately, the Affordable Care Act does not require early disclosure of patents on an approved biologic product. Instead the law defines a “patent dance” designed to promote delay in the approval of competitive products. That dance should be repealed.

The fruits of federally funded research must be equitably shared with the public

The Bayh-Dole Act of 1980, transferred the ownership of federally funded biomedical inventions to academia and industry with no limitation on the prices to be charged or profits to be earned from those discoveries. Whatever merit that approach had 35 years ago, it is ill-suited to the current world in which the federal government pays for the vast majority of all basic research to discover new drugs. A system which puts a significant portion of the burden of paying for those discoveries on taxpayers but privatizes the right to unlimited profits from those discoveries is simply inequitable.

A new public/private partnership to replace Bayh-Dole is essential. A presidential commission should be appointed to make recommendations as to the precise structure of that partnership. But it must recognize that academic research centers funded by tax dollars, rather than pharmaceutical manufacturers, have become the primary engine of drug discovery. The pharmaceutical industry not only lacks the capacity to duplicate that engine but is increasingly dependent on it for the flow of new product ideas which are critical to its very existence. The substantial investment taxpayers are making in the discovery of new drugs must be rewarded by making sure that those drugs are sold at reasonable prices and do not produce excessive profits.

Spurring Future Innovation

Experience has proven that the government’s policy of granting extra monopolies to drug makers was a bad idea that has spurred excess profits for the pharmaceutical industry rather than more innovation. In truth, there is no greater spur to innovation than the need to replace the lost profits from the looming expiration of an existing monopoly. The rollback of extra monopolies may actually compel drug makers to become more innovative if they wish to continue earning above average profits. But at the very least it will lower drug costs by shortening the length of pharmaceutical monopolies.