The pharmaceutical industry has deeply contributed to human welfare. Indeed, new drug enforcement has played a vital role in increasing longevity and enhancing the quality of life. For this reason, issues of justice are particularly sharp, especially concerning the accessibility of drugs to the people who desperately need them.
The question that is raised is whether the drug market should be completely free or be subject to state intervention and if the answer to the question is the second option, it is then necessary to analyse which is the most efficient and right way to intervene. This article focuses on the role of intellectual property rights and patents in the development and accessibility of new pharmaceuticals.
Is state intervention needed?
In short, we believe there is a need for state intervention in the pharmaceutical sector for the following reasons. It takes several hundred million dollars to discover, develop, and gain regulatory approval for new medicine. The absence of patent protection, or some equivalent barriers, could free ride on the innovator’s governmental approval and duplicate the compound for a small fraction of the originator’s costs. Imitation costs in pharmaceuticals are extremely low relative to the innovator’s costs for discovering and developing a new compound.
One of the reasons why most new drugs fail to reach the market is because research and development (R&D) in pharmaceuticals is extremely expensive. Furthermore, the full R&D process from synthesis to governmental approval involves undertaking successive trials of increasing size and complexity.
By contrast, the development costs of generic compounds are relatively modest. In most countries, generic compounds must only show that they are bio-equivalent to the pioneering brand to receive market registration. This process only takes a few years and costs one to two million dollars. The probability of success is also very high, as reflected by the fact that many generic firms typically receive governmental approval and enter the market within a short time window around patent expiration of the pioneer brand.
What we mean is that without state intervention, pharmaceutical companies would have less of an incentive to invest in innovation. The pharmaceutical industry has established a market failure: the production of positive externalities. There is a reduced incentive to invest in research and development because (without IP law) a company that invested in R&D will not have exclusive rights over the production and distribution of the drugs. That means that other companies, who did not spend money in R&D, could produce and sell the drug at a lower price. Due to the free riders, companies would not invest in R&D because the return of the money invested plus profits would not be expectable.
As companies seek profit, without the concession of patents, there would be less of an incentive to innovate. Without the concession of patents, the motivation to come up with something innovative will be very low, as companies aim to achieve profit. For instance, a company that wants to innovate, and has managed to create a new product, will be exceeded by a company that sells the same product for years. In addition, because those free rider companies did not have to develop new products, the innovative companies will have to sell at a lower price. Therefore, the profits of these companies will be significantly reduced.
Is patent protection the most efficient way to intervene? Comparison with alternative systems of state intervention
There have been suggested alternatives to the patent protection system currently in place, such as public funding of clinical trials. The data collected would be made available to the national and international public. However, this may cause a free rider problem because, even though only national residents (through their taxes) paid for the trials, people from other countries would also benefit. This poses a problem, as countries would be reluctant to fund clinical trials due to the fact that they can use the data collected by other countries, which use this system without spending any part of the public budget. The main reason why there is such a low interest in R&D investments is the production of positive externalities and the ‘free rider’ phenomenon.
Other alternatives to the current intervention system have been proposed. It is possible to implement a reward system in the pharmaceutical sector, in which the government would grant a reward to the private developers of a new drug. However, this system is problematic as it would be hard for the government to calculate the amount that should be granted. This means that an inadequate consideration of the government would not improve the drug innovation issue.
The alternatives proposed are not nearly as effective as patent protection. The latter is a hybrid system that benefits from the efficiency of the free market, meaning that the seeking of profits is a very good reason to invest in innovation. At the same time, patent protection allows the market failure to be corrected without significant intervention of the State, which means that, unlike the alternative systems, innovation is not slowed down by the public administration.
The problems of patent protection
It seems that the concession of patents is necessary in order to provide an incentive for innovation in the pharmaceutical industry. However, we must analyse if the current legal system is efficient in providing that incentive for innovation while making sure that drugs are still accessible to those who need them most.
Firstly, the concession of a patent means that a monopoly will be formed. This may be detrimental to present consumers, who must pay higher prices during that monopolistic period. Generics are sold cheaper to the public, allowing people with limited income to purchase drugs, including life-saving ones.
Secondly, we are currently in an ‘inventive crisis’ in the pharmaceutical sector. Even though the industry is still producing new substances at the same pace as the ones produced in the last decades, there have been few new drugs released. Companies have chosen to invest in improving substances already patented by them, rather than invest in developing new drugs.
We are experiencing a lack of investment in drugs for the treatment of diseases that do not affect a large consuming public, due to the fact that the selling of the new drug would not represent considerable profits. In this case, the financial interest trumps the social interest. Furthermore, the current IP model of recouping research costs — setting high prices until patents expire — is problematic. It provides an incentive for drug companies to invest in products in order to treat lifestyle diseases that primarily affect more developed nations, which can afford to buy them, and to ignore diseases that mostly affect the less developed ones.
In addition, in the case of pharmaceuticals, especially for products like cancer drugs, legitimate concern exists about the cost of restricting supply in the short run. Restriction amounts to making a trade-off between the health of people today and the health of even more people in the future. At some point, the patents will expire and the drugs will become widely available, but in the interim, some people who would benefit from these drugs today will not get them. With smartphones, the trade-off is not that onerous.
Regarding another problem of the patent system, brand-name companies constantly abuse it, tweaking old molecules to extend monopolies so that prices remain high and profits remain considerably large. In the pharmaceutical trade, when brand-name companies patent new inventions that are just slight modifications of old drugs, it is called ‘ever-greening’ and it is a practice that is not doing a whole lot to improve people’s health. Generally, when you evergreen something, you are not looking at any significant therapeutic advantage. You are looking at a company’s economic advantage. The response from the brand side is that they are trying to protect their markets so they can further invest in R&D. In addition, even if they make a modification to a drug, doctors are still able to prescribe the generic version of the older product. Having said that, the brand-name companies invest a significant amount of money into marketing the newer version, and that marketing is designed to influence the activity of the doctors. However, patents should only be awarded as a way to stimulate research and innovation that is beneficial to people’s health. Therefore, a tweak in a drug should only be awarded a patent if it provides an improved medication.
Furthermore, the concession of a patent can halt further developments and innovations if the owner of the patents so wishes to do. Various patents prevent companies from commercialising products and damage innovation. Unfortunately, such broad patents are held by non-practising entities (patent trolls), which do not contribute to innovation. The enforcement of poor quality patents has led to controversial opinions about this system.
Finally, the concession of patents also promotes excessive litigation with inherent high costs.
Private companies, as well as consumers, benefit from patent protection. It is the most efficient way to promote research, innovation, and development, which in the pharmaceutical sector translates to more and better life-saving and life-quality-enhancing drugs.
However, patent protection causes some issues and should be regulated properly. As such, we put forward several solutions:
- The ‘ever-greening’ phenomenon should be strictly limited. Patents should only be awarded as a way to stimulate research and innovation that is beneficial to people’s health. The drug improvement process should be considered a patent only if it provides enhanced medication.
- In terms of time management, patent protection of drugs should be strictly reduced to what is necessary for the companies to be returned for the money invested in R&D plus a reasonable profit.
- When a patent expires and a generic brand wants to sell the drug, the brand name company should be legally prohibited to pay the generic brand not to sell the generic, which would, of course, cost less and consequently shorten the profits of the brand name company.
- Any abuse of the patent’s rights should be forbidden. When another private company or another entity wants to further develop the drug, the holder of the patent of said drug should not be able to stop that from happening under any circumstances. If the project of development is of substantial interest to the public, the holder of the patent can either assume itself said development or allow another entity to do so. However, these cases would of course be exceptional and scarce. In these cases, governments should intervene and grant a compulsory licence.
- Public investment in the pharmaceutical sector should be directed to the development of life-saving drugs or life-enhancing drugs that cure or treat diseases that do not affect many people. The development of those drugs by private companies is not appealing, due to the fact that the profits will be limited to consumers that have the disease. As such, states should bear the cost of R&D fully or partially.
- Life-saving and significant life-enhancing drugs that are sold by private companies that own a patent at a high price should be bought by the State in order to distribute to those who cannot afford it for a lower price or for free.
- Concerning less developed countries, it is idealistic to think that they would be able to afford the cost of all these public investments. However, international organizations and non-governmental organizations have budgets that can and should be directed to the development of life-saving and important life-enhancing drugs to treat diseases that mainly affect people in poorer countries and as such are not developed by private companies.
- Furthermore, it is possible for countries to issue a compulsory licence in cases of a health crisis. TRIP sets out specific provisions that shall be followed if a compulsory license is issued, and the requirements of such licenses. The principal requirement is that attempts to obtain a license under reasonable commercial terms must have failed over a reasonable period of time. This requirement may be waived in particular cases of national emergency or extreme urgency or in cases of public non-commercial use.
It is important to make a final note regarding the pharmaceutical sector in general and its need for public intervention. What has been said by the establishment of a monopoly through the concession of a patent and its inherent price above the free market level does not mean that prices should be determined solely by the monopolist and its relationship with the consumers. The consumers, due to the nature of things, are not in a position to negotiate the prices of said goods. A person in a situation of critical health is not in a position to negotiate the price of the drug that can possibly save their life. Neither are said person’s loved ones. All these people put in this situation would most likely agree to whatever price the monopolist proposed, no matter how high, no matter how devastating to said person’s finances.
Consequently, prices should be negotiated between the state and the private company that sells the drug. The price agreed should, of course, be high enough for the private company to get back the money it invested in research and make a considerable profit. The price cannot be lower than that as it would not promote innovation.
Patent protection of drugs is the most effective mechanism to ensure that there is an incentive for the research and development of new life-saving and life-quality-enhancing substances. However, patent protection raises several issues that should be taken into consideration in the way that it is regulated.
We may call it a ‘necessary evil’ as it makes drugs more expensive in the short run, which in this sector translates into death and worse quality of life. However, patent protection is needed to promote pharmaceutical innovation; plus, the evil brought by the monopoly can be lessened. Indeed, the patent legal system can be tweaked in order to ensure that (1) private companies are investing in the research and development of life-saving and life-quality-enhancing drugs; (2) those in need of said drugs have access to them even if they do not have the means to pay the full price.
The restriction of competition through the granting of a patent should exist but be limited in time and in scope in order not to limit further development and in order to allow the free market to work after a brief (but necessary) period of time of monopoly and therefore to allow the lowering of prices through competition. Furthermore, measures of public intervention can be taken in order to ensure that those who cannot afford the monopolist price will still get the drugs needed.
In short, it is possible to articulate the objectives of innovation and accessibility and in doing so achieving a system that is economically efficient and at the same time just.
By Joana Gomes Beirão
This material was published in Lawyr.it Vol. 5 Ed. 3, September 2018, available only online.
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