(Patrick: We occasionally, when we bother to post at all, as we haven't in over two years, accept guest posts from experts in fields of interest we don't cover. Today's post is written by Molly Ratty, a lawyer practicing in the field of patent litigation. We solicited this post. It is not written on behalf of Ms. Ratty's firm, or her clients. Her only compensation is satisfaction in the knowledge of a job well done.)
A couple of weeks ago, the New York Times Editorial Board decided to wade into the issue of drug pricing, and while I’d like to say I was surprised at the level of ignorance and advocacy of ham-handed government force to get drug prices down, sadly, the Times was true to form. Nearly the entire piece is based on the assumption that drug companies are morally bankrupt for trying to profit from their work, and should be punished or shamed into doing the right thing, as if the right thing is not to earn a profit from the beneficial drugs they invent for patients. Now California Senator Kamala Harris has waded into the fray, promising that she’ll act, if Congress does not, in the first 100 days of her administration. (Exactly how, she does not say.)
The issue of drug pricing is an extraordinarily complicated one, made more complicated by how other countries, notably our friends in Canada, manage pricing of the same drugs being sold here by international corporations. The truth is, Americans do, in effect, subsidize the cost of drugs sold in other countries that have price controls and single payer systems. It may not be fair, but the result is astonishing innovation and access to drugs that were unimaginable even twenty years ago. Everyone should be exceedingly cautious about radical changes that could easily stifle innovation in drug development. We are better off having these drugs developed, even if some cannot afford them, than we would be not having them at all.
The editorial spoke favorably about some of Trump’s long-term proposals, most of which are also based on ham-handed, top-down government force, but purported to offer a few “things the administration could do now, using the power it already has, to help the situation.” The fact is, there is no “right now” solution to the problem and almost none of the Times’ proposals would work “right now” anyway. Moreover, the Times’ approach brings a sledgehammer to the job of repairing a watch. Their proposals, and those of Trump and his ilk, could cause significantly more market distortion and even higher prices than we already have.
In the Popehat tradition, I’ll try this in a Lawsplainer
format (which is not trademarked as far as I know, but should be because it’s awesome). First, some background.
Why are drug prices so high? It costs a lot to bring a branded drug to market. Estimates range from about $700M to $2.7B for each drug that is a new chemical compound. These estimates don’t take into account all of the failed trials and false starts, which also cost money. Only one in ten drugs makes the jump from Phase I studies to market, and because of regulatory hurdles, drug companies are having a harder time bringing new products to market than ever before.
The drug industry has prospered and flourished under capitalism—the ability to make a profit by providing a good product that is useful to people. Drug companies have produced treatments and cures that were almost unthinkable fifty years ago. This is a good thing and we should encourage it, not stifle it.
We encourage drug innovation mostly through marketing exclusivities, like patents and FDA exclusivity periods. During the lifetime of a patent, such exclusivities allow drug companies to prevent anyone else from selling a competing or generic version of a protected drug. At the end of the patent, anyone can make and sell the drug, since a patent requires the inventor to disclose the product’s methods. And, if drug companies have no competition on a certain drug, they can charge just about any price they want, with few exceptions. We can and should lower the cost of regulatory approval, by streamlining FDA approval requirements, but that won’t reduce drug prices, not if drug companies have and keep monopolies over their drugs.
That’s really why certain drug prices are so high—lack of competition. And the best way to bring drug prices down is through generic competition. That doesn’t mean we should throw out the patent system, because we also want to give drug companies incentives to invest in drug development. It’s utterly useless to demonize drug companies for wanting to extract profits from their work. Their work is good for society and we want more of it. Profits encourage more of it. But, drug companies shouldn’t be allowed to extend their monopolies as much as they have. We need a better balance of innovation and competition.
How do we balance innovation and competition?
Generic competition works. According to a 2013 FTC study, more than two generic entrants can drive down prices by up to 50%. In 2017 alone, generic drugs generated $265 billion in savings for patients. In fact, in that same year, almost 90% of dispensed drugs were generics, but generics account for only 23% of prescription spending.
Generic drug companies usually get on the market by challenging patents that cover the branded drug. In 1984, Congress passed the Hatch-Waxman Act, which gave generic drug companies a streamlined way to get FDA approval for drugs that are therapeutic equivalents to branded drugs, and an opportunity to challenge patents covering the branded drug before the generic launches, which eliminates generic companies’ exposure to damages for patent infringement. In exchange, branded companies get certain opportunities to extend their patent terms, based on how long it takes to get FDA approval, and a 30-month period in which the FDA cannot approve a generic product, if the brand sues the generic company for patent infringement.
This system has worked pretty well, and we have 35 years of experience with it. Since Hatch-Waxman passed, we’ve experienced an explosion in the number and size of generic drug companies and the availability of generic drugs. But there’s a problem if generic drugs cannot get to market because of patents, particularly in the case of patents that were never worthy of being granted in the first place. That’s what we have now. We have a patent system skewed toward granting and upholding patents that never should have issued. What’s worse, branded companies erect thickets of multiple patents on a single product that have the effect of extended the patent life cycle of the product. (Any readers in the tech industry should be familiar with the problem of “patent trolls”.)
Here’s an extreme example: Let’s take a hypothetical drug company, we’ll call it Erectomax. Erectomax files a patent application for a good drug it discovered, one that relieves “male reproductive troubles.” Erectomax gets a patent that covers not only the drug compound the company discovered, but millions of chemical variations on that drug compound. Erectomax later files another patent application, that contains more data on its drug, and that only covers the specific compound the drug company discovered, and ends up extending patent protection over the compound for another several years. Maybe then, Erectomax files an unrelated application to cover a method of treatment and extend patent protection for their FDA-approved indication, which extends patent protection for even more time. Finally, Erectomax files applications for a specific formulation of the drug or particular blood levels and a method of manufacturing the drug that can provide additional patent protection. In this way, Erectomax can lock up not just its miracle compound, but almost the entire concept of related drugs for treatment of “male reproductive troubles,” potentially for decades.
The problem is, rigid court-developed rules on patent invalidity and infringement often don’t match up well with reality. There should be no good reason for a drug company to get coverage of all these things from compound to treatment to formulation to manufacturing process, each of which frequently has the practical effect of extended the monopoly over the branded drug, but cases like this happen often. The Federal Circuit and district courts, particularly in Delaware and New Jersey where most of these cases are filed, bend over backwards to uphold patent validity and infringement in these cases and the problem is getting worse.
There are several ways to manage these problems, including changing the rules for issuing patents and making it easier to invalidate them, and gearing patent awards toward new drug discovery, not just tweaks on older, existing drugs. Or, perhaps even tying patent term expirations to the launch of the product, as Europe does. In addition, we could make some fairly simple changes to certain FDA exclusivities that would encourage more patent challenges that would allow courts to weed out bad patents. We could also provide incentives, via, for example, limited exclusivities, for generic companies to make drugs that have a limited market that would not otherwise be attractive to them.
The point, however, is that the system as originally designed already works, or it could with a little tinkering from the appellate courts or Congress. It absolutely needs adjustment, but it works! Why would any reasonable person want to march the government in with heavy-handed regulatory requirements that depend on the judgment of unaccountable bureaucrats who often don’t have a clue what they’re doing; who will force prices down at the expense of innovation and impose additional business and uncertainty costs to making drugs? And yet, that’s exactly what the New York Times is proposing.
Why not use patent seizure or march-in rights?
The most controversial of several proposals from the New York Times is its proposal for the government to use patent seizure or so-called “march-in” rights to snatch back patents already issued. The Times dismisses out of hand patent law reform as “fantastical,” but thinks it’s a great idea to just grab patents already issued based on some bureaucrat’s assessment of whether a drug has made enough money.
Of course, this would need to be done on an individual, ad hoc basis, based on some, so far, unexplained assessment of which drugs are making “too much profit.” Notice the ad hoc nature of this proposal. No warning to drug companies. No advanced notice of what could happen if they price “too high.” No description of what “too high” actually is. This is a recipe for disaster.
It would not be done on a global basis and would therefore necessarily be limited in scope (in other words, it would be arbitrary). The Times hopes this would act like some sort of deterrent to those evil drug companies. It might. But it is absolutely certain to make drug companies adjust their pricing based on when they think they’ll face competition and when they think they’ll face the government grabbing their patents—adopting a “milking” strategy to squeeze out the highest profits possible, in the shortest possible time, before their patents are forfeited. It could actually have the effect of driving up prices across multiple products, in order for companies to save themselves from patent seizure of one big product. It’s not a long-term solution. It’s not even a short-term solution. It’s not really a fair solution. It’s certainly not a market-based solution, and would likely cause all manner of unintended consequences, including potentially stifling innovation.
Importantly, it would also introduce a lot of business uncertainty, because of its ad hoc nature. The harder it is for companies to predict what the legal and business future looks like, the more expensive things tend get for the company, while lining the pockets of lawyers. And when costs go up, guess what? So do prices. It’s beyond strange that the Times thinks this ham-handed approach would be more effective and realistic than a more elegant, long-term, and limited solution of patent reform.
What’s wrong with negotiating with drug makers or letting the government price drugs based on the benefits they provide?
The Times has miraculously discovered the benefits of government negotiating Medicare drug prices, as if this issue has not already been vetted and found wanting. In 2007, the CBO assessed whether allowing the government to directly negotiate would result in cost savings to the feds and concluded it would not. Rather, it would likely restrict drug options for Medicare patients, by the government removing drugs that are too expensive from Medicare coverage, or drive up costs for everyone else, by forcing other patients to pay more so that Medicare patient can pay less.
We don’t have a single payer system here, and the government cannot and should not negotiate on behalf of insurance companies. This might help Medicare patients, although that’s doubtful, but it would not help other patients. Moreover, there is no evidence whatsoever that the government is in a better position to understand the correct price for a drug than insurance companies or doctors do.
(Note: the bigger issue with respect to price negotiations is not the force applied, but pricing opacity and multiple layers of payers, which not only drives up prices but also makes it much harder to know the actual market value of a drug. Just look at this chart. There’s almost no relationship between the consumer of the product and the manufacturer.)
Why shouldn’t we get the FTC involved?
The Times’ final proposal, to get the Federal Trade Commission involved, is probably the worst of all. First, if the FTC had a current legal mechanism for going after drug companies, they would already be using it. There’s a very basic problem with invoking antitrust laws to go after products that have monopolies due to patents—the patents are almost always granting lawful monopolies. This is almost certainly why the FTC is not pursuing antitrust cases against drug companies. They would lose. But, more importantly, even if they could, they shouldn’t.
Antitrust suits are the most indirect, ad hoc way to get at drug pricing. It would drive up costs by driving up litigation expenses and, as with patent seizure, would end up subject to the whim of regulators. We should be trying to drive down costs to drug companies, not up. This would also increase business uncertainty, again driving costs up by, among other things, lining the pockets of lawyers. Lawyers don’t need more money and we don’t need more lawyers in this country.
* * *
There is a market-based solution to the problem of high drug prices, but we currently have a political class that is too enamored with wielding power and engendering class envy without any regard for the risks of squashing the incentive to innovate. Again, we are better off having drugs to which some patients might not have access, than for all patients to have no access whatsoever.
(The author: Molly Ratty, is a patent practitioner working in the United States Pacific Northwest. In her free time, she publishes "Sam I Am Not: The Journal of Critical Theory on the Works of Dr. Seuss," and walking her donkey, who is beloved by children across the Northwest as "Buster the Noble Wonder Donkey." She may be reached with comments or questions on Twitter.)
Copyright 2017 by the named Popehat author. https://www.popehat.com/2019/07/31/guest-post-the-new-york-times-war-on-drugs/
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