Would Longer Drug Patents Really Lead to Lower Drug Prices?

9/5/12

Imagine needing a drug to save your life, finding one that is likely to work, and then realizing you can’t afford it. This was the ironic situation that recently confronted a research physician who was diagnosed with leukemia, the very disease he had devoted his life to studying. Fortunately, the doctor’s friends raised the money to buy him this medicine; once administered, it put his disease into remission. Many of the newest generation of drugs are unbelievably expensive, with a course of treatment running tens to hundreds of thousands of dollars. Even with insurance, a twenty percent co-pay on one of these prescriptions could easily cost more than a new car. Why are so many new medicines so high-priced?

Some drugs are costly because they were designed to treat rare [orphan] diseases that have few patients. However, a more general explanation for high drug prices is because the majority of these medicines have a short window of time to recoup their development costs as a result of patent limitations. Patents are one of the critical cornerstones on which the biotechnology industry was built. Many people wrongly believe that owning a drug patent gives the patent holder the right to make and sell that medicine. In actuality, patents give their holders the right to prevent others from practicing their invention, which in this case means selling their drugs. Essentially, this grants them a monopoly for as long as the patent is in place. U.S. patents currently last for 20 years, affording a considerable period of time to earn a return on investment while competitors are kept out of the marketplace. A substantial amount of money can be earned during this time interval. Pfizer’s atorvastatin (Lipitor) holds the record for most total revenues earned by a drug, pulling in more than $125 billion during the 14.5-year period that this drug was sold under patent. Like many Olympic records, experts believe it will be a very long time, if ever, before this total is bested.

The effective lifespan of a drug patent can theoretically be cut in half if it takes 10 years to bring the medicine to market. In practice, several strategies act to mitigate this problem. Patents are usually awarded a number of years after they are filed. A common strategy among companies seeking pharmaceutical patents is to move their applications along at a tortoise-like pace, thereby providing more patent coverage time once their drug is approved for sale. Drug companies have also developed a variety of techniques that effectively extend their patents on drugs. One such approach involves manufacturing new (and separately patentable) medicines that simply further purify the active chemical substance, or they make minor changes to its structure, a strategy known as evergreening. The Drug Price Competition and Patent Term Restoration Act (also known as the Hatch-Waxman Act) of 1984 provides patent holders of FDA approved drugs with a lengthened term of patent protection to compensate for the time involved in running clinical trials as well as obtaining FDA review and approval. This can add as many as five years of extended patent protection. The intention of the Act was to encourage drug industry innovation by guaranteeing that patented drugs could be sold for a long enough period of time to make them profitable for drug makers. Calculating how long it will take for a drug to become profitable before it even comes to market remains more art than science, and some poor selling drugs likely never recoup their development costs.

Patent coverage extensions can play a significant role in protecting drug revenue streams. In a well-documented case, The Medicines Company missed a patent extension deadline by a couple of days in 2001 for their blood thinner bivalirudin (Angiomax). This legally permissible extension was meant to compensate for the patent time used up while the FDA reviewed their drug application. Unfortunately, this minor clerical error (by outside counsel) had the potential of costing the firm almost five years of patent protection and nearly a billion dollars in lost drug sales. The Company spent millions of dollars lobbying Congress to pass legislation (sarcastically referred to as “The Dog Ate My Homework Act”) that would retroactively correct for the filing mistake. The Company commissioned studies that purported to show that a longer patent life for Angiomax would actually save the health care system billions of dollars because the drug is associated with a lower risk of bleeding than a competing medicine that sells for a significantly lower price. However, an independent analysis by the Congressional Budget Office came to the opposite conclusion. They estimated that extending the patent would actually cost hospitals (and thereby consumers) an extra $1B over a seven-year period. In 2012 The Medicines Company finally obtained their patent extension, which will enable them to reap a very large return on the money they spent on lobbying and litigation.

You may have noticed that biopharmaceutical firms seldom miss an opportunity to report just how expensive it is to develop new medicines. While many question industry-provided numbers, there can be little doubt that this lengthy and laborious process really can cost big bucks. However, individual drug prices do not appear to be directly tied to their development costs. According to an analysis by pharmaceutical analyst Richard Evans (as quoted in a Forbes article), drug price increases accounted for nearly half of U.S. pharma sales growth since 1980, and 145% of U.S. sales growth over the last half decade. Price increases, and not new, innovative medicines, accounted for a significant percentage of the profits earned by drug companies. This illustrates the tremendous pricing power that monopolies provide.

It has been suggested that drug prices would be considerably lower if patent holders (i.e. drug companies) had a significantly longer period of time to recover their considerable investments in bringing their medicines to market. I’m not an economist, but you don’t need to know the difference between Adam Smith and Adam Sandler to get a sense that lengthening drug patents might not really lead to decreased drug prices. My expectation: biopharmaceutical companies will simply keep prices high and milk their cash cows for a longer time period. These arguments regarding patent length have mostly been hypothetical because drug patents generally aren’t extendable to a large degree. Having said that, we now have a real-world opportunity to observe what at least one company did after receiving a significant (15 year) extension to their patent coverage. The company is Amgen, and the patent is on the blockbuster rheumatoid arthritis drug etanercept (Enbrel). How has this situation come about?

Amgen acquired Enbrel when they purchased the biotechnology company Immunex in 2002. U.S. sales of this drug are currently running approximately $4.2 billion per year. Immunex’s original patent on Enbrel was issued in 1996 and is due to expire in 2013. The drug itself was not approved for sale in the US until late 1998, and Amgen didn’t acquire the rights to this drug until they purchased Immunex. Revenues on the drug have been shared with their partner Wyeth (now part of Pfizer), although this profit-sharing arrangement ends in October 2013, at which time all profits will accrue to Amgen.

In late 2011, however, Amgen received a new U.S. patent on etanercept (via a patent application that Immunex had licensed from Roche) that extended its legal protection until 2028. This newly issued patent effectively hinders the future entry into the U.S. marketplace of biosimilar (i.e. generic) versions of this blockbuster from companies that include Celltrion, LG Life Sciences, Merck/Hanwha Chemical, and Mycenex. These drug makers may choose to fight this new patent, or attempt to develop derivatives of this medicine that will enable them to get around it. This will be costly, however, because alternative versions of Enbrel will likely need to undergo clinical trials before the FDA would approve them for sale.

The lengthy patent extension—which could end up giving Amgen a 30-year monopoly—raised an obvious question: would it lead Amgen to lower the price of Enbrel? I can imagine … Next Page »

Stewart Lyman is Owner and Manager of Lyman BioPharma Consulting LLC in Seattle. He provides strategic advice to clients on their research programs, collaboration management issues, as well as preclinical data reviews. Follow @

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  • Thetree53

    Very interesting article, thank you!

  • Rdiaz

    great article.! May you one of theses days talk about “innovation and new target in Big Pharma”. I think they don’t believe in real innovation..

  • Josh1

    Super article, save for the inference that all R&D-oriented companies would follow the lead of AMGN and Embrel.

    Actually, there should be an understanding with governments that were R&D-oriented companies were to be granted “perma-patents”, or unending patents on future new medications, then they would be required to trim prices yearly on existing patent-protected mediations ahead of the actual expiration date.

    You would find three effects from this change of policy: 1) future new medications, including new oncology and narrow therapeutic use drugs, would be introduced at significantly lower prices than is the case today; 2) drug costs, as a percentage of health care spending, would fall precipitiously; and 3) there would be a veritable flood of R&D spending among both large and small drug and biotech companies seeking to introduce new medications.

    Similarly, in contrast to today, the stock P/Es for generic companies, which contribute virtually nothing to the advancement of medicines, save for lower prices on patent-expired drugs, would drastically contract in favor of expanding multiples for R&D companies.

  • anon

    The proposition is nonsensical.

    Longer lasting patents will lead to higher prices.

    One obvious sign: profit-seeking corporations want longer lasting patents. It isn’t so they can make less profit.

    • Josh1

      Not necessarily – longer patents will lead to lower prices as corporations realize that a longer stream of yearly profits will more than surpass profits obtained from sky high introductory prices on new drugs over 7-8 years of remaining economic life, after 12 years are spent on R&D and regulatory approval, which is case now under the present 20-year patent system.

      • Stewart Lyman

        Please re-read the article, as you clearly missed the point. Amgen just got a 15 year extension in their patent coverage for Enbrel, and the price actually went up! Longer patents do NOT always lead to lower prices.

        • herebutforfortune

          Indeed, common sense suggests a renewed monopoly entitlement would cause it to do just that for which monopolies are known.

  • http://www.facebook.com/elizabeth.green.betsy Elizabeth Green

    Great article – thank you!

  • Outtopasteur

    “Let me answer the question that I posed above: Did Amgen lower the price of Enbrel, a core constituent of its drug portfolio, once they were awarded the extended patent coverage?”
    isn’t the correct question : “would AMGN been in a weaker postion negotiaating pricing vs third party payers if they had longer exclusivity?”
    Why would they drop price after the horse is out of the barn?

  • Stewart Lyman

    Update 1-24-13: According to an article published on Fox Business news on Jan. 23, 2013, Amgen raised the price of Enbrel three times over a thirteen month period between Jan. 1 2012 and Jan 4, 2013. Each time the price was raised about 7%. What this means then is that the price increase from 2012 to 2013 was about 14%, and the price then went up another 7% in early 2013. The price increases are clearly meant to make up for declining sales of other products including Epogen, Neupogen, and Aranesp. The patent extension I referenced in my article has really bolstered the earnings of this cash cow!

  • Kevin

    The price if a drug will be set by market conditions based on supply & demand period. The firm will study the market functions and set price to maximize revenue on the drug, if raising the price increases revenue it will be raised. Elasticity of the product will determine the demand at new prices. If the price reaches a certain point, more people won’t be able to afford it and revenue could decline. Flooding the market with generics will increase supply, creating a downward price influence. The other way to lower price, would be through federal mandated price controls.

  • Beth

    I’m a graduate student, and not a huge follower of the pharmaceutical industry–my previous knowledge was very limited–but I really wanted to thank you for your articles as I further research the role patents play in the U.S. drug market. A lot of information regarding patents and the industry in general contains so much jargon that it is very difficult and exceptionally laborious to comprehend for someone new (and perhaps even veterans) to this industry. I never really leave comments but I wanted to let you know that your articles regarding these topics were well-written and extraordinarily helpful, giving enough definitions and explanations–without talking down to the reader–that anyone could follow, but still containing factual evidence and topics for further investigation (if one were so inclined). Very much appreciated.