Patents and Profits: The Pharmaceutical Industry Gone Rogue?

By Nadia O’Hara

For the past few decades, medication prices have been on the rise. The infamous EpiPen scandal is a glaring example of the inadequacies of the pharmaceutical industry. In 2007, Mylan Pharmaceuticals bought the rights to the EpiPen, a device that delivers epinephrine needed to treat severe allergic reactions. Since then, Mylan hiked up the price for the EpiPen, peaking in 2016 at over $600 per dose, approximately 400% of the original price. In this time, the chief executive’s salary rose over 600%. Clearly, this excessive price was not necessary to recoup development costs as often argued, but simply lined the pockets of the top officials. Cheaper generic alternatives of the EpiPen have since been produced after Mylan Pharmaceuticals were brought before the Congress for price-gouging. Nevertheless, the price is still high – often more than many can afford. Why was this allowed to happen? The answer lies in pharmaceutical patent and competition laws.

Pharmaceutical innovation is the driver of the pharmaceutical industry – providing new drugs to the populations and earning the company a profit. Companies then patent their new drugs, which provide a 20-year monopoly right, granting them market exclusivity. They can then charge monopoly prices for this drug as there is no competition. With drug development comes huge risk for the pharmaceutical company as it requires significant investment in money and time as well as heavy regulation. The traditional arguments for pharmaceutical patents that companies put forward are the need to recoup development costs, protection of intellectual property and incentive to innovate. After the patent is up, other companies can manufacture generic versions of the drug, which lowers the price and encourages further innovation in response to competition.

Theoretically, this system works as it balances the two forces of competition and innovation, while allowing companies to recoup costs and leads to accessible new drugs. However, many pharmaceutical companies have started utilizing strategic patenting which drastically increases that length of time the company monopolizes the market, preventing generic competition. Strategic patenting is usually achieved by applying for many secondary patents on a single drug. Secondary patents concern formulations of the drug, process used in its production, or non-formula products used in the drug outside of the primary active drug formula. Alternatively, the company makes small changes or ‘improved versions’ of the drug and use this to extend the patent. Many of these ‘improvements’ arguably have little impact on the actual therapeutic effect of the drug. Hence, they are termed sleeping patents. This type of strategy is often dubbed ‘evergreening’, as defined by Inderjit Singh Bansal:

“‘Evergreening’ refers to different ways wherein patent owners take undue advantage of the law and associated regulatory processes to extend their [intellectual property] monopoly particularly over highly lucrative ‘blockbuster’ drugs by filing disguised/artful patents on an already patent-protected invention shortly before expiry of the ‘parent’ patent.”

Strategic patenting means that competitors cannot try to produce a generic version of the medicine in different forms as they will inevitably infringe on a patent. Furthermore, the patents are usually filed in such a way that each patent extends the monopoly a bit further than the previous one. Consequently, the drug is covered by at least one patent for much longer than the original 20 years. This leads to incredibly expensive drugs, denying access to life-saving medicines for many decades. In fact, strategic use of patenting also works against one of the pharmaceutical companies’ main justifications for patenting – innovation. According to Olga Gurgula, a lecturer on Intellectual Property Law, strategic patenting stifles innovation by suppressing incentive to innovate for the originator company and generic competitors, leading to fewer new drugs on the market.

In a functioning patenting system, the expiration of one patent would increase innovation for the originator company, as they would need to develop a new product to remain competitive in the drug market. However, if the company is simply able to extend patent coverage on the first drug, they do not need to manufacture anything new to gain profits. This is especially true in the U.S. where the government plays a minimal role in drug pricing, allowing companies to raise the prices as high as they want. In the U.K and in much Europe on the other hand, governments negotiate directly with pharmaceutical companies, setting a maximum price for the drug. If the company does not acquiesce, then they lose access to that section of the market.

Even with this system, strategic patenting abuses still occur in Europe. A landmark case is AstraZeneca’s abuse of its dominant position in the pharmaceutical market. AstraZeneca excluded market competitors and maintained its monopoly despite the product in questions already being considered “generic” and therefore not under the protection of relevant patents. AstraZeneca unregistered the market authorizations for their Losec (the drug in question) capsules and re-registered them in a new formulation as tablets. By de-registering the original product, generic companies could not manufacture their versions of this drug, as EU law states the original ‘reference drug’ must exist on register before generic competition can begin. In 2005, the General Court of the EU fined AstraZeneca and the Court of Justice upheld this decision despite the company’s appeal in 2012. This could potentially be used as a precedent for scrutinizing strategic patenting more closely using competition laws.

Patents are necessary in the pharmaceutical industry. Companies need to recoup astronomical development costs and earn a profit, which then incentivizes further research and development. Nevertheless, it is clear that patenting in the industry has gone rogue. Some pharmaceutical companies are using the patent system for a different reason – to avoid competition and maintain a dominant position without having to invest in further development. This is a practice detrimental to all parties involved. As mentioned previously, drug prices rise, access to life-saving medicine decreases and innovation is stifled. It is time for the pharmaceutical industry to re-examine their priorities and hold pharmaceutical companies accountable for their excessive pricing strategies. The AstraZeneca case gives hope as a potential precedent for patent and competition law, but much work still needs to be done.

The views expressed in this article are the author’s own and may not reflect the opinions of The St Andrews Economist.

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