Drug Prices, Drug Patents, and the Biden Administration

BY DEREK LOWE 

The Biden administration has made headlines with a roadmap document suggesting the use of "march-in" rights regarding drug patents. And that should get some attention: this provision of the 1980 Bayh-Dole Act has never been used, and it would be a huge change in the way that the pharmaceutical industry is regulated in the US. It's a big topic, and I've broken it down into sections:

Part One: The Law Itself

Here is the actual text of the law regarding these. It applies to inventions that were made under a funding agreement from any Federal agency, and it gives that agency the right to request that the funding recipient make available some sort of licensing agreement (nonexclusive, partially exclusive, or exclusive) to one or more third parties if so requested (under the conditions below), and it gives the agency the power to make such licensing agreements itself if the inventors refuse. But this only can take place if the funding agency determines that such action is necessary because of one or more of the following conditions:

1. The inventor/assignee is not taking steps towards a practical application of the invention in a reasonable amount of time. 2. Particular health or safety needs are not being "reasonably satisfied" by the existing arrangement(s). 3. Requirements for public use specified by some other Federal regulation are not being met, or 4. The inventor/assignee is in violation of Section 204 of this part of the US Code, which requires that such inventions either be "substantially produced" in the US, or that the assignee has shown that this is not feasible or that good-faith attempts to do so have been unsuccessful.

Those first two provisions are the ones under discussion (and always have been - none of the previous petitions for the government to exercise march-in rights have been on the basis of the other two). It's worth noting at this point that this part of the law differs from another one that allows the government to use a patented invention without the permission of the patent holder while paying them "reasonable and entire compensation" for doing so. That one has been invoked before, with the only pharmaceutical case that I'm aware of being the manufacture of ciprofloxacin for stockpiling after the 2001 anthrax attacks. In that case, Bayer agreed to supply at a discount when this law invocation came up as a possibility.

Part Two: Federal Funding and Marketed Drugs

But march-in rights are a different story and a more complicated one, since it involves not just the government and a single company, but rather opens up the licensing of the patent to others. And the march-in provision is predicated on the invention having been realized through federal funding, which is where some serious arguing starts. I have posted extensively on this "Where Do Drugs Come From" topic over the years, most recently during my brief encounter with Rep. Alexandriz Ocasio-Cortez after a 2019 Congressional hearing on the topic. That post contains a long list of links to past ones, but I would particularly suggest - if you don't happen to have several hours to read old blog posts - this one and this one when that topic flared up here in 2004, and this one from a similar round of arguing in 2012.

In summary, in the great majority of cases the key inventive step - in fact, the actual subject of the chemical matter patents that are at the heart of pharmaceutical IP - has not been realized through Federal funding. My own estimate is that about 15% of marketed drugs actually came out of academic labs. A main point of blog post links earlier in the paragraph is that discovery of a biochemical target does not equal the discovery  of a drug - and in fact, most of the time it never does. I have spent the last 34 years of my life working in those steps in between the two, so I can get pretty worked up when people try to tell me that these steps are trivial, non-inventive, or don't exist at all.

Part Three: March-In Rights and Pricing

Let's table that argument for the moment, though, as much as I might like to duke it out all over again. Instead, let's look at the actual attempts to use march-in rights in the drug business. Twice, the NIH has explicitly stated that the Bayh-Dole march-in provisions are not intended as a price regulation mechanism and that it believes that these cannot be triggered by an ambitious interpretation of Condition 2 as summarized above. That's a big point of discussion now, though - the National Institute of Standards and Technology, while recently evaluating the march-in provisions, explicitly did not adopt a proposal that would have prohibited their use on the basis of pricing. That is, they left the door open to price as a factor, which is a first. Stat quotes a "senior government official" as saying that "In the (new) framework, it’s very clear that that price is a part of that inquiry"

White House advisor Lael Brainard is quoted here as saying that "We'll make it clear that when drug companies won't sell taxpayer funded drugs at reasonable prices, we will be prepared to allow other companies to provide those drugs for less" and went on to say that "These authorities are in existing laws, the last administration just didn’t want to allow them to be used in this way" That is certainly true, although it's worth noting that the Obama administration before that one also didn't want that, nor did any other going back to 1980. The attempt to make this a "Here's what Trump wouldn't do and we will" issue is disingenous, much as I dislike giving the Trump administration a break considering what the so much of the rest of it was like.

Part Four: Monopoly Power?

Meanwhile, President Biden himself quoted this document from his team, emphasizing that 25 drug companies control about 70% of the industry's revenues. I do not find that compelling evidence of monopoly or cartel practices myself, especially in an industry that depends on individually differentiated patented drugs. In fact, I'm trying to think of a major industry in this country that has things broken up into as many players as that. Commercial banking might qualify, but the four largest banks in the US had about half the sector's profits late last year. I believe that you'll hit the 70% US revenue figure by the time you get to about seven or eight automobile companies. Semiconductor fabrication hits 70% right after you finish counting TSMC and Samsung. You hit 70% market share before you even get out of the top ten car insurance companies. And so on. Counterexamples are welcome in the comments.

But I have one for you now, and it's quite relevant to the drug business: pharmacy benefit managers. Who are not drug companies, but rather the go-betweens in the delivery system. These are the companies that both private and government insurance plans (along with hospitals and other major customers) use to do price negotiations (whose details are not revealed) and handle the physical distribution of the drugs. The big three in that business (CVS/Caremark, United Health/Optum and Cigna/Express Scripts/Evernorth) hold over 80% of the market. They have higher revenues than the large drug companies themselves, which is an interesting situation and is not generally realized by the public.

Part Five: How Would This Work?

One more point, before I find myself going on about this all day. Who exactly are those "other companies" that will be enlisted to provide those drugs for less, should the administration try to exercise the march-in provisions? Generic drug manufacturers? There aren't really any of those in the US, you know - you will be providing a windfall to Chinese and Indian manufacturers as things stand, which is probably not what the administration has in mind. And how long will it take to get these things on line? Generic drug companies gear up for patent expirations to enter those markets, but if you decide that a drug that's years away from patent loss is now up for licensing, how hard will it be to get the manufacturing up from a standing surprise start? Note also that some of these are antibodies and biologics that have significantly greater manufacturing challenges. We will leave discussion of the immediate (and surely lengthy) court challenges that would follow any such attempt for the day anything like this actually happens.

So the practical effects of all this are going to be complicated to work out. But the march-in framework is of a piece with the Inflation Reduction Act provisions for Medicare/CMS price negotiations, which I last wrote about there. The Biden administration is signaling as loudly as it can that it wants to do something about drug prices, or failing that, wants very much to be seen to be trying to do something about drug prices. In politics, those two things can be nearly equivalent. 

Part Six: What It's Happening Now

Well, a lot of reasons. One of which is the aforementioned politics - you may well have noticed that we have an election season coming up next year, and the Biden administration is looking for winning issues to claim. I should make it clear right now that if that election comes down to Biden v. Trump, as it certainly and depressingly looks like it will, then I will still be voting for Joe Biden no matter how many strange ideas he has about the industry I work in or how many nasty things he threatens to do to it. It's that bad. 

But another reason, which I have mentioned here many times over the years, is that this very drug industry that has paid my salary for so long has also been acting as if such a day would never come. So no one should be surprised that someone is taking them up on that assumption. On the research and development side, we have produced a lot of real medical advances and saved a huge number of people from a huge amount of death and suffering. But on the sales and marketing side, this has been funded by relentless price increases and other marketing practices that have invited contempt and hatred. There is a constant roar about the ratios between these two (R&D and SG&A), and I have written about this a number of times as well: here are two posts from 2013 and another one from 2014. And we can't ignore the effect of low interest rates (and low cost of capital) on the industry's profits in recent history, either. My summary of all that stuff is that the drug industry is a very strange one, and it's all due to the >80% clinical failure rate. We bring in a lot of money and we spend a lot of money, and we milk our sales as hard as we can while we have them.

We have, though, been asking for trouble. Those price increases by the large companies are one big reason, and the headlines around crap like this are another. This is another one of those Martin Shkreli-style ideas to take a regulatory loophole for market exclusivity and exploit the hell out of it. In this case, it's a small outfit ("Rising Pharmaceuticals") that is supplying calcium disodium EDTA as an antidote for lead poisoning. This is an old treatment and an old compound, but they (like Valeant before them with the same compound, and others) have taken the opportunity to raise the price by a factor of ten. Because they can. And that's what people get to hear about the drug industry. Who wouldn't be pissed off?

https://www.science.org/content/blog-post/drug-prices-drug-patents-and-biden-administration