Would Longer Drug Patents Really Lead to Lower Drug Prices?

9/5/12

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that the response from any drug company in this situation would be to say that they couldn’t reduce drug prices because:

1) Their patent could be declared invalid or found to infringe another patent.

2) Competitors could develop a better product and take away market share, so they need to keep the price high.

3) Their company needs the income to recoup additional legal expenses that were incurred in order to get the longer patent coverage.

4) New rules in places like India and China allow the government to award compulsory licenses to competitors to make and sell patented drugs, potentially putting future revenues derived from other portfolio drugs sold in those countries at risk.

5) Sales were originally shared with another company, so revenues to their company were not “maximized” and therefore need to be recouped going forward.

Each of these rationalizations sounds logical, and all but the last one would clearly apply to nearly every drug already on the market. These same explanations could also be trotted out to justify why drug prices on products with theoretically longer patent lives (30, 40, or even 50 years, for example) could not be lowered.

Drug pricing is an extremely complicated topic, and figuring out the “correct price” of a particular drug can be challenging. Check out some of the proposed new rules associated with the Affordable Care Act to see just how problematic this can be. What exactly defines a drug’s price? Are we talking about the retail price in a pharmacy? The price paid by Medicare? By hospitals? The average wholesale price? Does “bundling” this drug’s sales with other medications affect the price that patients will pay? How do Big Pharma’s “Payment Assistance” and new co-pay coupon programs factor into these numbers? What percentage of patients actually qualifies for these discounts?

Drug prices have deliberately been made difficult to find, with obfuscation trumping clarity as the industry standard. Buying drugs, it turns out, most closely resembles the process for purchasing airline tickets and hotel rooms: there appears to be no real set price. What you shell out is different from what your neighbor pays, and few people really fork over the full (unlisted) price. The AWP (Average Wholesale Price) is the most often used cost benchmark, but because this number differs significantly from the real prices that are often paid for a drug, it is often derisively referred to as “ain’t what’s paid”.

Enbrel faces considerable competition in the marketplace from other anti-inflammatory medicines that bind with the TNF molecular target, as well as drugs that act through different mechanisms. One competitor, Abbott’s adalimumab (Humira), is poised to become the best selling drug in the world now that Lipitor has gone off patent. A product that might drive down the price of all injectable TNF inhibiting biologics, including Enbrel and Humira, would be an orally active rheumatoid arthritis medicine. Pfizer’s experimental drug tofacitinib (which has a unique mechanism of action) was recently recommended for approval in this disease indication by an FDA advisory panel, and awaits a final decision from the agency. Its price (compared to currently marketed drugs), in addition to its relative safety, efficacy, and convenience, will likely factor into whether or not this oral medication will be widely adopted if it is approved.

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? Obtaining this information took considerable effort, as drug-pricing data is almost as tightly guarded as US nuclear launch codes. Several local pharmacists couldn’t supply the answer, and major drug distributors Cardinal Health and McKesson wouldn’t share the information. Numerous calls to various Amgen customer information numbers were unproductive, but perseverance paid off and a helpful Amgen representative finally provided me with the number: The average sales price of Enbrel actually increased by 9.8 percent from 2011 to 2012.

Anyone shocked by this news clearly hasn’t been paying attention to healthcare issues in general and drug prices in particular. Any scientist will tell you that it’s always better to have more than a single data point when evaluating information, even in pharmaceutical economics. If you know of other drugs that received extended patent coverage for some reason, please cite the example and let us know whether the price increased or decreased thereafter. The cost of our medicines are derived from a complex formula that combines elements of innovation, perceived value, rationalization, regulation, competition, duration, and good old-fashioned greed. The trend, however, is ever upward at an unsustainable rate, and despite all of the chatter about the “patent cliff”, the industry remains highly profitable. The current crisis that is reshaping the biopharmaceutical industry is due to a number of different factors, but the length of drug patents does not appear to be one of them.

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.