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CHAPTER 20

DO PHARMACEUTICAL PATENTS COST LIVES OR SAVE THEM?

Balancing Incentives for Innovation with Prices More Disease Victims Can Afford

There’s nothing better than a little pill that will end your pain, kill your infection, lift your depression, keep cancer at bay, prevent unwanted pregnancy, or reduce the risk of heart attack, as if by magic. Although Americans spend more than $150 billion on their magic pills each year, most of the world’s population won’t find the pill they need. No pill has been developed to cure many of the diseases prevalent in developing countries, and some existing pills are far too expensive for most people. For better or worse, patents provide monopoly power to the pharmaceutical companies that hold them, conveying the ability to charge high prices as an incentive to invest in research and development (R&D). Pending alternative solutions, trade-offs exist between strong patent protection that motivates new drug discoveries and weak patent laws that promote price competition and give more people access to lifesaving cures that already exist. As the debate rages on, it is prudent to examine both sides of the story, given that millions of lives are at stake.

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At the core of drug firms’ decision to develop new therapies is their expected monetary return, which depends in large part on the willingness of the federal government to provide them with the monopoly power of patents.

—Michael J. Gluck, Federal Policies Affecting the Cost and Availability of New Pharmaceuticals¹

¹ See www.kff.org/rxdrugs/3254-index.cfm.

A pharmaceutical patent grants the exclusive right to produce a drug for 20 years. An extension of up to 5 years can be requested to compensate for the time it takes the Food and Drug Administration (FDA) to approve a drug, as long as the period between approval and patent expiration doesn’t exceed 14 years. Copyright laws perform a similar function for books and other writings, protecting against competitive duplication for the lifetime of the author plus 70 years. The intent of patents and copyrights is to provide a financial incentive for substantial efforts. The incentives seem to work. Jacob Schmookler demonstrated that expected profits drive the pace and direction of innovation in many industries.² And Edwin Mansfield estimated that 65 percent of pharmaceutical products were introduced as a result of patent protection.³

² Patents, Innovations and Economic Change: Data and Selected Essays. Edited by Zvi Griliches and Leonid Hurwicz. (Cambridge, MA, 1972: Harvard University Press, 1972).

³ “Patents and Innovation: An Empirical Study,” Management Science, February 1986.

Further evidence of the power of patents comes from the influx of R&D funds that occurs when a country starts protecting pharmaceutical patents. The U.S. Department of State reports that after Japan and Italy instituted strong patent protection in 1978, investments in pharmaceutical R&D quadrupled over a 10-year period.⁴ Brazil gained about $2 billion worth of investment in new high-tech industries after the country enacted effective patent legislation in 1996. Mexico strengthened its pharmaceutical patent protection in 1990 and during the next 3 years saw related investments increase from $41 million to $103 million annually.

⁴ http://usinfo.state.gov/products/pubs/intelprp/progress.htm. (This link is no longer active.)

There is more than greed at the root of the pharmaceutical industry’s interest in revenues. According to the Pharmaceutical Research and Manufacturers of America, the average new drug costs in the neighborhood of $500 million to research and develop. Along the way, each new drug carries with it the risks of failure; dangerous side effects; and expensive lawsuits, such as those filed recently against the makers of many widely used medications (both prescription and over the counter), including Vioxx, Bextra, Zyprexa, Crestor, Prempro, Baycol, Accutane, Oxycontin, Rezulin, Paxil, Celebrex, Neurontin, and Fen-Phen. Food and Drug Administration approval of a new drug requires the completion of three stages of clinical trials: safety tests, efficacy tests, and expanded randomized trials to again check both safety and efficacy. As much as 40 percent of all R&D expenditures go toward these trials. Once the risks have been taken and the firm that develops a new medicine has incurred the costs, it takes little money to replicate the drug. If it were legal to do so, competitors could enter the market with relative ease and seize valuable market share.

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Patent protections are in place, however, and have fostered the development of products that significantly improve health and extend life. These include chemotherapy medicines, clot busters, antibiotics, blood pressure medications, pain relievers, cholesterol-lowering drugs, AIDS cocktails, drugs that slow the progress of breast and prostate cancer and Parkinson’s disease, sleeping pills, and antidepressants.

Money’s pull on the pharmaceutical industry doesn’t always lead to ideal decision making. The major producers, known collectively as “Big Pharma,” set their priorities knowing that rich people with impotence or hair loss can pay more for remedies than can poor people with deadly diseases. As in other industries, drug companies have the incentive to cater to the wealthy and maximize the length of patents and the extent of profits. Between 1997 and 2002 Big Pharma hired 675 lobbyists and spent $544 million lobbying Congress, federal agencies, and the White House.⁵ The efforts of the drug lobby have not gone unrewarded. In 1995, the Uruguay Rounds Agreements Act extended the length of patents from 17 years to 20. In 2003, the Medicare Prescription Drug Improvement and Modernization Act subsidized drug purchases for seniors while it removed provisions of the act that would have allowed the reimportation of cheaper drugs from Canada.

⁵ See www.pcactionfund.org/buyingalaw/.

In the opposite corner of the pharmaceutical boxing ring are special-interest groups fighting for a different set of priorities. For example, the Drugs for Neglected Diseases (DND) Working Group, Doctors without Borders, the Global Alliance for TB Drug Development, and the Medicines for Malaria Venture represent the interests of developing countries (in which 80 percent of the world’s population lives), but funding for these groups is relatively small and their ability to reach legislators is limited.

The pharmaceutical industry’s efforts to maintain barriers to entry and high prices go beyond lobbying. When the patent on a popular drug lapses, the manufacturer may tweak the product, obtain a new patent, and then convince consumers that the “new” product is a must. When the primary patent for the heartburn medicine Prilosec expired in 2001, drug maker AstraZeneca came out with Nexium. To understand the difference between these two drugs, you should know that chemicals often come in two versions, called left and right isomers, that are mirror images of each other. Prilosec contains both isomers, whereas Nexium contains only the left isomer of the same chemical. In other words, there isn’t a whole lot of difference between the two drugs. In another example, Schering-Plough introduced the antihistamine Clarinex (desloradadine) when the patent for Claritin (loradadine) expired in 2002, although loradadine turns into desloradadine after it is swallowed.⁶ Overall, the FDA classified 75 percent of the 119 drugs it approved in 2004 as similar to existing drugs in chemical makeup or therapeutic value.

⁶ See www.drugawareness.org/pdf/tnrdrugpiece.pdf.

Related controversies involve Big Pharma’s massive expenditures on advertising and drug companies’ aggressive sales forces. In fact, however, advertising and marketing campaigns can provide valuable information, depending on their nature. The remainder of this chapter focuses on the greater problem of how to address illness in the developing world, where deadly diseases are common and most patients are poor. The high cost of patented pharmaceuticals is also a problem in the United States, where 45 million people do not have health insurance and 10 percent of health-care expenditures are for drugs.⁷

⁷ See www.buckeyeinstitute.org/article.php?id5223.

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Pharmaceutical companies simply have no financial incentive to invest in the development of new treatments for diseases that affect people who can’t afford the medicines.

—Els Torreele, Co-chair of the Drugs for Neglected Diseases (DND) Working Group⁸

⁸ See http://multinationalmonitor.org/mm2002/02june/june02corp1.html.

The Global Forum for Health Research⁹ is focused on remedying the 10/90 gap, a term signifying that only 10 percent of global health research is devoted to 90 percent of the global disease burden. A survey by the DND Working Group completed in 2001 by 11 pharmaceutical companies in the United States, Europe, and Japan revealed that, in the previous year, none of the 11 had devoted R&D money to cures for sleeping sickness; 1 or 2 had spent money on treatments for leishmaniasis, Chagas disease, or malaria; and 5 of the 11 had spent money on tuberculosis (TB) cures. Out of the roughly $106 billion of annual spending on health research worldwide,¹⁰ slightly more than $100 million, or 0.1 percent, is spent on drug R&D for the four most neglected diseases.¹¹

⁹ See www.globalforumhealth.org.

¹⁰ See http://www.globalforumhealth.org/filesupld/press%20releases/Financialflows%20final.pdf.

¹¹ See www.doctorswithoutborders.org/publications/reports/2001/fatal_imbalance_short.pdf.

Price is an inhibiting factor for the cures that already exist. The cost of treating a case of multidrug-resistant TB is between $1,500 and $4,000. A year of treatment with an antiretroviral drug cocktail for one HIV/AIDS victim in the United States costs $10,000 to $15,000. To put those prices into perspective, in Swaziland, where the incidence of HIV/AIDS is 42.6 percent, the average annual income is $1,350 and the unemployment rate is 34 percent. U.S. customers spend more than $150 billion annually on prescription drugs, but most global citizens simply cannot afford medicines with prices in the thousands of dollars. The World Health Organization (WHO) estimates that 14 million people die each year from communicable diseases, such as malaria, TB, sleeping sickness,¹² Chagas disease,¹³ and kala azar.¹⁴ Almost all deaths from communicable diseases occur among the poorest citizens of developing countries. With the neglect of the developing world’s problems has come the reappearance of old diseases, the use of old medicines that are highly toxic, and a growing number of diseases that are resistant to existing drugs.

¹² Human African trypanosomiasis.

¹³ South American trypanosomiasis.

¹⁴ Visceral leishmaniasis.

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The story of sleeping sickness provides a good example with a hopeful ending. Sleeping sickness is a parasitic disease that is 100 percent fatal if not treated, and it kills more than 65,000 people each year. Until recently, sleeping sickness was treated with melarsoprol, a toxic derivative of arsenic that killed 1 out of 20 of the patients who took it. Manufacture of a relatively new, safe, and effective drug called eflornithine was discontinued in 1995 because not enough people in the affected countries could pay a price (about $20 per dose) that would make it profitable. Eflornithine production resumed in 2001 after Bristol-Myers Squibb started using it in Vaniqa ointment to prevent growth of facial hair in women. With the encouragement of Doctors without Borders and the WHO, Aventis has also agreed to resume production of eflornithine and to donate enough of the drug to treat sleeping sickness worldwide for 5 years. Aventis will also work with the WHO to find a long-term solution for the manufacture of the drug and to develop oral formulations that are cheaper and easier to administer than the current, injected version. The next section discusses a host of other approaches to the issue of missing or expensive medicines.

The only way to solve this chronic health crisis is to change the way we think about medicines for neglected diseases. They must be considered public goods, not simply consumer products.

—Dr. James Orbinski, Co-chair of the DND Working Group

Louis Daguerre invented an early version of photography in 1837. After granting Daguerre a patent, the French government purchased it from him and announced that rights to this invention would be a gift “free to the world.” Harvard economist Michael Kremer suggests a similar procedure for pharmaceutical patents.¹⁵ The government could purchase patents in order to place them in the public domain; however, the dilemma of appropriate payment would arise. Kremer proposes an auction mechanism that causes bidders to reveal their valuations of a patent. The purpose of the auction is for the government to learn what a patent is worth, rather than for the high bidder to actually purchase the patent; however, to elicit realistic bids, the bidders must have some chance of actually receiving the patent. After the auction, a coin flip could determine whether the government or the bidder has the opportunity to purchase the patent for the amount of the high bid, and the inventor would have the right to refuse the high bid and retain the patent. Using this method, many patents could be obtained by the government at fair prices and made available to all interested competitors, thus eliminating monopoly prices without removing incentives for private R&D.

¹⁵ See http://papers.nber.org/papers/w6304.

Under other reform proposals, the trademark name for a drug would expire when the drug patent expires. For example, the drug company Pfizer sells sildenafil citrate as Viagra. When the patent runs out, generic versions of sildenafil citrate can be sold, but monopoly effects will linger if people are more familiar with the trademark name or if they mistakenly believe that the generic versions are somehow inferior to Viagra. Jennifer Haas and her colleagues estimate that, if available, identical generic drugs were consistently used, the annual cost of prescription drugs in the United States would be reduced by $9 billion.¹⁶ In some cases a trademark inadvertently becomes the generic name for a product and loses its legal status. This has happened with the names aspirin, cellophane, nylon, escalator, yo-yo, and milk of magnesia, among others.

¹⁶ See www.annals.org/cgi/content/full/142/11/891.

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Another ray of hope for treatment of neglected diseases comes from public–private partnerships, such as the Global Alliance for TB Drug Development and the Medicines for Malaria Venture, that might promote public- and private-sector research into less profitable drugs. Private foundations, including the Bill and Melinda Gates Foundation, have also become increasingly involved in developing cures for neglected diseases. The Gates Foundation,¹⁷ with an endowment of $28.8 billion, has already committed more than $750 million to the Vaccine Fund and $126.5 million to the International AIDS Vaccine Initiative.

¹⁷ See www.gatesfoundation.org.

A price discrimination strategy of charging higher prices in wealthier countries to create incentives for innovation and lower prices in poorer countries to increase access to crucial remedies has been tried with limited success. Such price discrimination is difficult to maintain because the products can be purchased where prices are low and resold where prices are high. Nonetheless, the FDA reports that a large volume of drugs arrives in the United States from Mexico, India, Thailand, and the Philippines, where the products are sold for less or where cheaper counterfeit versions are available.¹⁸

¹⁸ See www.fda.gov/ola/2004/importeddrugs0714.html.

As for high drug prices in the United States, some observers suggest that the solution is to reduce the length of patent protection. Others want to allow imports from Canada, where the government controls drug prices. Of course, the U.S. government could impose price controls to achieve the same result. However, a large shift to purchasing price-controlled drugs from another country has the same effect as a decrease in patent protection: It lowers the incentives to create new products. To the extent that profits motivate critical R&D, lower prices alone, without compensatory reasons to innovate, are an incomplete solution.¹⁹

¹⁹ For further discussion of pricing issues, see Frederic M. Scherer, “The Pharmaceutical Industry: Prices and Progress,” New England Journal of Medicine, August 26, 2004, pp. 927–932.

Tax revenues are spent on research in government laboratories, government-supported institutes, and public universities. Perhaps such publicly funded research could fill more of the gaps in the treatment of disease. It might also be appropriate for policymakers to require more price concessions from the drug industry, in light of the benefits it receives from taxpayer dollars. Pharmaceutical patent applications include extensive citations of publicly funded research. A 2002 report by Michael Gluck cites a string of evidence that public dollars contribute to many patented discoveries, including a statement by an official of the National Cancer Institute that his institution played an important role in the R&D of 52 out of 77 FDA-approved cancer drugs and a finding that funds from the National Institute of Health or the FDA were used in the R&D of 45 out of 50 top-selling drugs approved by the FDA between 1992 and 1997.²⁰ Moreover, if research activities in public institutions could provide critical discoveries, then patent protection might become less necessary as a motivating force.

²⁰ See www.kff.org/rxdrugs/3254-index.cfm.

Governments in developed countries could make commitments to work on cures for deadly diseases elsewhere. Such commitments would test the value Americans place on benevolence. The United States currently spends a smaller percentage of its gross domestic product (GDP) on foreign aid than any other wealthy nation—about 0.1 percent—but this tightfistedness may not reflect Americans’ true ideals. A 2005 study conducted by the University of Maryland’s Program on International Policy Attitudes found that 65 percent of Americans would favor a commitment by the wealthiest nations to spend 0.7 percent of GDP on world poverty.²¹

²¹ See www.pipa.org.

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As a final reform suggestion, Gary Becker has proposed that the FDA approve drugs without requiring the second and third stages of trials,²² as was the policy until 1962. With an estimated 40 percent of R&D costs going to the trial stages, Becker argues that the sizable reduction in costs would justify a shorter patent life while offering increased incentives for companies to seek new drugs. The trade-off here is that, although the FDA would continue to judge drug safety, the burden of determining drug efficacy would be shifted to the public. This streamlined policy would bring new drugs to market quickly and at lower expense. It might also bring out “snake-oil salespeople,” selling so-called remedies that are cures for nothing except fat wallets, in numbers not seen since 1962.

²² See http://home.uchicago.edu/,gbecker/Businessweek/BW/2002/09_16_2002.pdf.

The current patent system does well at creating effective, though expensive, cures for many maladies of the wealthiest nations. In the eyes of critics, the failures of the pharmaceutical industry include misplaced priorities and inaccessible drugs. In 2000, Fred Hassan, chief executive officer of Pharmacia Corporation, told the World Conference on Clinical Pharmacology and Therapeutics, “The United States has become the must-win market for every pharmaceutical company. This does not mean ignoring other markets, but it does mean strategically concentrating resources and top management attention on success in the key market.” The puzzle of how best to allocate resources within the pharmaceutical industry has no easy solution, but it is important to consider because solutions would save or improve the lives of millions of people every year.

There is little doubt that many lives would be saved by improved access to drugs if patent protection suddenly ceased. The question is whether patent protection today will motivate drug innovations that will save even more lives in the future. Perhaps your generation will adopt alternative incentives or sources of funding for pharmaceutical R&D, so that the trade-off between affordability and discovery will end.