What’s wrong with IP rights? Protecting medicines from competition can be costly

Gram for gram a HIV medicine costs more than gold.
What makes drugs so costly?
Is it research and development, or have the prices of essential, life-saving drugs been ramped up by a lack of transparency and abuse of a system intended to reward innovation?

Estimated read: 7 minutes

26 April 2019 is World Intellectual Property Day. Intellectual Property. IP. Must be important, to have its own day? So, what do you know about it?

It’s something to do with rights, right? Along the lines of if you invent something, something that you’ve invested time, money and more than a sprinkling of ‘genius’ in, then you can patent your invention for 20 years. That ensures that someone else can’t just come along, copy your idea and make a quick million bucks off the back of your hard work. Sounds fair enough?

A lot of people think of an inventor in a shed, or state-of-the-art tech when you say ‘IP’. But what about when it’s medicines being patented? You can choose whether or not to buy a swanky new gadget, but you don’t choose to get sick, and you don’t choose to need a medicine that gram for gram costs more than gold.

That’s why some people think medicines shouldn’t be owed by anyone, that they are for the good of the people and shouldn’t be monetised at all. Like Jonas Salk, inventor of the polio vaccine, who when asked ‘who owns the patent?’, famously said: “The people, I would say. There is no patent. Could you patent the sun?”

On the other hand, many would argue, discovering new medicines takes time. Lots of it, decades of development and testing, depending on which accounts you read. Plus, after rigorous testing for efficacy and safety, the majority of drugs don’t make it to market (unless you lie about it of course), and who’s supposed to foot the bill for that?

If (and we’ll come back to this word shortly) companies, rather than governments, invest all this time and skill, then there’s got to be an incentive, right? After all, pharmaceutical companies aren’t in it simply for the good of their health, they are a profit-making industry and don’t feign otherwise.

The flow of invest-reward-invest-reward is supposedly what keeps the cogs turning; new medicines being invented; sick people made better.

Then why do pharmaceutical companies seem to get so much flack these days? After all, it sounds like they are just protecting their hard work. Why do treatment activists and pharmaceutical companies who, on the face of it, should be on the same side, have such a bad reaction towards each other? Let’s examine the hotly contested research and development (R&D) argument.

‘Monopolies are necessary in order to recoup the investment and put more money into developing new drugs.’  This, or phrases along these lines, are Big Pharma’s favourite tropes. The industry has repeated this for years. But is it true?

Let’s break it down. To assess the argument’s merit we need to discover who invests in R&D, whether the amount being recouped is fair, and whether that actually leads to more innovation.

R&D: It’s NOT a solo venture

Billions go into biomedical research and development every year. Each year it fluctuates from country to country, and it is generally a combination of public money and industry investment. 

The current trend is for the majority of investment to come from industry. It’s to be expected, as the whole point of the present system is for those that invest to get a return. No-one’s begrudging a fair profit, after all that was the idea: invest-reward-invest-reward. 

The pharmaceutical industry is the third most profitable in the world, so there are pretty healthy returns, and it’s a strong indicator that profits have gone way beyond a point of merely recouping costs.

The pharmaceutical industry is the third most profitable in the world.

Add to that that not all investment comes from industry, it varies from country to country, but a decent percentage comes from government. Take the USA as an example, in 2017 67% of medical investment came from industry, but 22%, not an insignificant proportion, was funded by the government. 

Research published in 2018 showed that National Institutes of Health (NIH) funding contributed to published research associated with every one of the 210 new drugs approved by the US Food and Drug Administration from 2010–2016. Collectively, this research totalled more than $100 billion.

Where is that return on the government’s investment going?

Who’s paying for patents?

Only last month, a Washington Post headline ran: An HIV treatment cost taxpayers millions. The government patented it. But a pharma giant is making billions.

The drug is Truvada for PrEP, the company is Gilead.

The New York Times also ran a piece on the same example. In it the columnists, co-founders of PrEP4All, explain how the price for generic Truvada costs less than $6 per month in other countries, “but Gilead charges Americans, on average, more than $1,600, a markup from the generic of 25,000 percent.”

It continues: “Infuriatingly, American taxpayers and private charities — not Gilead — paid for almost all of the clinical research used to develop Truvada as PrEP.” 

This is not uncommon. Often drugs initially developed in the public sector are bought, not invented, by pharma companies, which then complete the development and file the patent.

In this case surely the argument, that such high prices are necessary to recoup costs from years of investment, has to be thrown out of the window. 

Gilead has earned $36.2 billion on Truvada since 2004 according to its annual reports. The total funding needed to get the HIV response back on track has been estimated at $26 billion annually.

Why is the USA government paying for a drug that it largely funded, and allowing an unfair profit to be made by a private company when there’s a shortfall in HIV funding?

Treatment activists have been wondering whether it’s the “cosy relationship” between government and Gilead that prevents the government taking a stand on a patent that by rights shouldn’t belong to a pharmaceutical company. 

Not only is the pharmaceutical industry is the world’s third most profitable industry, it’s also THE largest lobbying power in the USA.

Why is the USA government paying for a drug that it largely funded when there’s a shortfall in HIV funding? And why the need for such heavyweight lobbying?

Say Truvada for PrEP was the exception and not the norm. If the system was fair and therefore it was patently obvious that countries must pay for the price of investment, then why the need for such heavyweight lobbying?

Industry’s influence on, or in, government 

As THE largest lobbying power in the USA, pharmaceutical companies effectively have a seat at the government’s table, and not just figuratively speaking.

Pharmaceutical companies have a seat at the USA Government’s table, and not just figuratively.

Alex Azar is a lawyer, pharmaceutical lobbyist and former drug company executive. He’s also the current Secretary of Health and Human Services. Let’s repeat that. A pharmaceutical lobbyist holds the USA’s most senior health role.

In ‘NO is not enough’ Naomi Klein describes what’s happening in Washington since Trump’s election as a “naked corporate takeover”. Klein writes: “Apparently, all that wining and dining of elected officials, all that cajoling and legalised bribery, insulted their sense of divine entitlement. So now they’re cutting out the middlemen – those needy politicians who are supposed to protect the public interest – and doing what top dogs do when they want something done right: they are doing it for themselves.”

Who else who sits on Trump’s cabinet? Sitting alongside Azar is a millionaire investor who lied about his net worth. He’s the Secretary of Commerce. An investment banker and previous hedge fund manager is Secretary of the Treasury. Exxon-Mobile, General Dynamics, Boeing, and Goldman Sachs alumni and board members have also sat round the table in Washington in official roles. This shows that Azar is not the only one holding a position with a glaring conflict of interest. “Trump’s cabinet of billionaires and multimillionaires tells us a great deal about the administration’s underlying goals,” writes Klein.

When you think of it it beggars belief, you couldn’t make it up, and yet it’s true. How about numbers though, can you make those up?

How much does drug development cost?

Unfortunately the one thing numbers can’t add up to is agreement.

Estimates for the cost of a medicine, “from invention to pharmacy shelves” varies from $30.3 million to $2.7 billion. This guys argues, in Forbes, that it’s the upper limit. In his words: “What really drives up costs is the fact that 90% of medicines that start being tested in people don’t reach the market because they are unsafe or ineffective. The $2.7 billion figure includes the cost not only of these failures, but also of not putting the money spent on them into something that would give a more reliable return.”

The high-end figures come from industry-funded studies, and as an MSF report states, they chose to include “arbitrarily inflated” costs yet don’t account for the public support.

Big Pharma is notoriously un-transparent about R&D costs. While that remains the case we’ll never know the true costs, but even if you take the low end of the calculations it begs the question, ‘how much profit is enough?’.

How much profit is enough? Blockbuster Drugs

Take a ‘Blockbuster Drug’, two words that, for many, sit together uncomfortably. The pharmaceutical industry defines a blockbuster drug as one that meets the “$1 billion USD annual sales milestone”.

Let’s do a quick calculation: $1 billion per year (minimum) x 20 years standard monopoly = $20 billion (minimum). 

That was easy. However, it might take a blockbuster drug up to four years to reach its potential. Let’s knock off $4 billion – of course they don’t earn nothing in the first four years, but just for ease, plus let’s also minus the top-level, industry-funded estimate ($2.7 billion) that a company invested.

That’s now ‘dwindled’ down to $13.3 billion. Of course, not every drug is grossing $13 billion plus, but we also know not every, if any, drug costs $2.7 billion to create either. To provide some context, Avatar is the most expensive movie ever made. The costs were over $478 million and it grossed over $3 billion worldwide. At least $10billion less than a blockbuster drug.

The most expensive movie ever made grossed $10 billion less than a ‘Blockbuster Drug’.

A less dramatic way to look at it would be to take each drug on the World Health Organization’s (WHO) list of essential medicines and compare the cost and price of all the drugs on it. That’s what researchers at the University of Liverpool did. The research looked at cost of production, which included manufacturing, formulation, packaging, taxation and a 10% profit margin. It found a significant gap between the cost and price of the majority of medicines on the list.

Still though: Innovation, innovation, innovation

So prices for patented medicines are excessive. However, perhaps even for those uncomfortable with such steep profits being attached to medicines, maybe the incentive of earning billions is OK if it achieves an end goal of discovering more effective drugs, and more breakthroughs and cures?

After all, once the 20 year patent period has expired we should expect that competition gets introduced, prices drop massively, and pharma companies race to find new, effective (and profitable) drugs.

But wait. A patent doesn’t always end after 20 years. There’s a common practice called evergreening. This is when companies effectively extend their monopolies by applying for multiple, overlapping patents, with small changes, on the same drug.

A monopoly often doesn’t end after 20 years.

Take Thailand. During an 11 year period (1999-2010) 82% of patent applications were examples of evergreening, and 72% of patents granted also fell into that category. In one example there were six patents and a total monopoly period of 31 years on one drug.

Even in cases of genuine innovation, it means nothing if you, or your government, can’t afford the drug that’s needed to save your life. 15.2 million of the 36.9 million people living with HIV do not have access to treatment.

Investing in drugs, or patents?

Instead of incentivising innovation, the practice of evergreening patents actually stifles innovation, leading to less medical breakthroughs. If you can continue to make millions or billions on an existing product it removes much of the profit motivation to develop new products. 

Paediatric drugs have particularly suffered due to this practice, due to a ‘limited market’. It seems that sick children just aren’t profitable enough. 

“We are not markets, we are people” – Lorena Di Giano, Executive Director, Fundación GEP.

A country can refuse to grant an unmerited patent, including evergreening patents, while an application is pending, or, when a patent is granted issue what’s called a compulsory license, which effectively overrides the monopoly if there is a public health need. The classic case for the latter is when a government can’t afford to treat all people in need at the prices charged, and to prevent or tackle a public health crisis, it uses its legitimate right to source more affordable, trusted, generic versions.

This is all laid out in a multilateral agreement know as TRIPS (Trade Related Aspects of Intellectual Property Rights Agreeement) and the Doha Declaration (Declaration on the TRIPS agreement and public health. The problem is that often when governments legitimately push back pharmaceutical companies use their legal and financial muscle to push back harder. 

Examples of how that ‘push back’ has manifested in the past include threatening an impact on trade, or refusing to register new drugs in a country. One reason countries may decide not use the ‘flexibilities’ entitled to them under the TRIPS Agreement is the fear of these types of consequences. Another theory as to why these rights aren’t enacted in the first place is because if industry is within governments or at least influencing them, then governments are less likely to act, as they’d effectively be pushing back against their own interests.

The current system, connected to the enigma of R&D costs, keeps prices and profits unfairly high, and there’s little or no recourse. One proposed solution is de-linkage. The argument is that R&D funding should not be tied to the price of the product. Monopolies and high prices would be replaced with alternative incentives based upon cash rewards, and expanded funding for research, drug development, and clinical trials through a combination of grants, contracts, tax credits, and other subsidies.

The R&D argument is unmerited

The current system, and the arguments made by pharma that prop it up, amounts to a lot of profit but not much else.

There are many more examples of IP abuse that can be cited here, and so for an industry built on medicines, there’s an unhealthy amount of controversy.

If you wnat more convincing, consider these salaries: Among the recent top 10 highest paid pharma bosses was the Gilead CEO taking home $13.9 million a year; the AbbVie chief exec securing a $18.8 million salary (that’s the company that pulled all new drugs when a country enacted its rights), and the Bayer boss earning $25.27 million.

That’s per year, just take that in. In just one year, 110,000 children died of HIV-related illnesses. $25 million, ONE person’s salary, could be enough to provide 416,000 children with life-saving HIV treatment for a year. Now that’s got to make you sick.