It’s the Patents, Stupid — Why Drugs Cost So Much in the U.S.

SHANOOR SEERVAI: In the U.S., prescription drugs cost more, much more than they do in other countries. Many Americans find their medicines unaffordable. And half of all adults with low incomes go without care because of costs. As prices continue to rise, policymakers on both sides of the aisle want to change the way the U.S. pays for drugs. But what could Congress do?

I’m Shanoor Seervai, and on today’s episode of The Dose, I’m bringing this question to Robin Feldman. She’s a professor at the UC Hastings College of Law and an expert on intellectual property and pharmaceutical law. In her research, she consistently calls for greater transparency in drug prices, reform of the U.S. patent system, and realigning the incentives for innovation.

Robin, thank you for joining me.

ROBIN FELDMAN: Thank you for having me.

SHANOOR SEERVAI: Right now, there may be more political will than at any other time in the past five years to make some significant shifts in policy and law around the cost of health care, specifically around drug prices for consumers. As we near the midterm of the Biden administration, is there urgency among lawmakers? Are any changes imminent?

ROBIN FELDMAN: There are opportunities and there are policies and negotiation strategies that could help. So policymakers can look at this from a variety of directions. First, there is obviously the legislative arena, but layered on top of that is also the regulatory arena. And within that, I do think policymakers have a lot of opportunity. For example, we saw last fall the FTC [Federal Trade Commission] convene a multilateral task force to look at consolidation in the pharmaceutical industry and try to study how to improve it.

So again, you can see action by a regulatory agency itself coming out of that, or you could see Congress directing an agency to do something. But I think you may be asking me how to fix all of this: What can we do to move forward?

SHANOOR SEERVAI: I think that’s the goal.

ROBIN FELDMAN: So let me offer a couple of thoughts. I do believe it begins with the competition agencies that govern mergers, particularly the Federal Trade Commission. If you want to make progress on concentration, perhaps competition agencies should not just improve their merger analysis, but also consider additional conduct remedies and constraints for things that have already happened. In other words, one of the conduct remedies we often see is that a large company, a brand company, one of the companies may be asked to divest a product in the pipeline. So a competition agency could say, well, we were expecting that product to be developed and to inject competition in the industry — did that ever happen? And if not, what else should we be asking to make sure that this now large, merged entity actually does have some competition. I like to call this adopting a robust second-look policy.

In addition, consumers are captive to their health plans. Few consumers are able to change plans just because they don’t like the price of a drug and they’d have to factor in many other health plan considerations. Moreover, most consumers can’t even figure out the price they will pay for drug in comparison to competing products. For consumers, volume bargaining also undermines competition tools. If you buy up a hundred little fish with drugs that don’t directly compete, it’s not going to ring any alarm bells at a competition agency. But it can be dangerous for competition, because when a pharma company holds a large position in the market across a portfolio of drugs, the company can offer volume discounts that a smaller competitor cannot meet.

SHANOOR SEERVAI: Of course, you know, if the price of broccoli goes up, maybe we buy brussels sprouts instead. But, as you say, you can’t do that with your medication. So what is standing in the way of making drug prices lower? I’m trying to understand what legislators can do to make life easier for consumers, particularly the ones who can’t afford their medicine.

ROBIN FELDMAN: Some of this simply has to do with having a competitive market. If you can create a competitive market, then you will get a better outcome for consumers.

SHANOOR SEERVAI: So how do we create a competitive market for pharmaceuticals?

ROBIN FELDMAN: In my view, competition agencies should have a policy where they go back and look at what has happened with the mergers and acquisitions of the past. So let me give you an example: Both PBMs [pharmacy benefit managers] and the drug companies claim that the prices and the terms they negotiate — including extremely complex rebate deals — both of those claim that all of that information is a trade secret. The health plan isn’t allowed to know, the consumer isn’t allowed to know, even government regulatory agencies aren’t allowed to know completely. This is an ineffective functioning for a market. In my view, I believe that’s an incorrect interpretation of the notion of trade secret. But that whole structure has to be changed: whether it gets changed by Congress, to mandate transparency, whether it gets mandated by various agencies that are involved, or whether it’s mandated by the courts analyzing this.

SHANOOR SEERVAI: So then let me ask you: What is standing in the way of mandating or enforcing price transparency?

ROBIN FELDMAN: Drug companies and PBM middle players both have resisted any transparency changes, and they are powerful players in the legislative and regulatory arenas, both at the federal level and at the state level. Drug companies alone spent something like $280 million in lobbying in Congress last year. And, in fact, there are more drug company lobbyists in Congress than there are members of Congress. It is difficult to get legislation through. Both of these very powerful entities see transparency as completely against their interests. These are profit-making companies, and transparency would threaten their profits by opening markets in a more competitive manner.

SHANOOR SEERVAI: Right. So is there actually political will on both sides of the aisle to do something about this problem? Or do you think that this effort will go the same way that previous reform efforts went, even under the Obama administration?

ROBIN FELDMAN: We have seen some pieces of legislation that make progress, but it’s going to take so much more if we’re going to get to a rational pricing system and a functioning market. My fear always, in the legislative and regulatory context, is that policymakers will make small changes and pat themselves on the back and say, “We’re done. We’re going home.” But it takes political will to get through it.

SHANOOR SEERVAI: Are you optimistic that something will happen while Democrats control both the House and the Senate and we have a Democratic president in office?

ROBIN FELDMAN: I’m eternally optimistic. Lowering drug prices is a bipartisan issue. There is a litmus test constantly for members of Congress, and that is: when they go back to their districts and their states to campaign, they will find rank-and-file people who know what they’re paying out of pocket and know what they’re paying for their premiums. So if members of Congress say they’ve solved the problem, the public’s going to remind them that it’s still there.

SHANOOR SEERVAI: Let’s shift gears a little bit and talk about patents. Now patents are of course extremely valuable for protecting the intellectual property of drug companies. And they’re important so that we see biomedical breakthroughs. But in today’s landscape, have patents really become the problem?

ROBIN FELDMAN: I believe very deeply that patents are a critical driver of the nation’s innovation. You can invent software in your basement, but that’s not the case with pharmaceuticals. When you talk about patents and innovation, I believe you have to start with the question of what does it cost to develop a drug? And the simple answer is it costs a lot. Maybe not as much as industry likes to say. So one study, that was funded in part by industry, pegs the cost of developing a drug at over $2.6 billion. That’s been thoroughly debunked, among other reasons because they cherry-picked which drugs to put in there, and they used the most expensive ones that only account for a small percentage. But drug development isn’t cheap.

The problem is that the incentives we have in our patent system and with some of the surrounding systems are distorting things. There are loopholes in our system, and pharma companies have become adept at exploiting those and extending their protection on a drug. This is a practice known as evergreening. Companies pile new protections onto the same drugs over and over again. Sometimes they do it by making truly minor changes to a drug: changing from 25 milligrams to 50 milligrams, or shifting from one type of capsule to another. If you think of intellectual property like a wall, these techniques either make the wall longer — that is, they extend the length of time for protection. Or they make the wall thicker — that is, they add more patents or other protections that the competitors have to challenge.

SHANOOR SEERVAI: How do you distinguish between this and “true innovation”? Because what you’re describing is a game.

ROBIN FELDMAN: It is a game, and it has become business as usual in the pharmaceutical industry. In a peer-reviewed study I did, I examined all the drugs on the market for over a decade. And I found that 78 percent of the drugs associated with new patents are not new drugs coming on the market, they’re existing drugs. So in other words, a patent system is heavily about repurposing and recycling. And here’s what I think about repurposing and recycling: Science sometimes moves in small increments and sometimes in large leaps. In my mind, the question isn’t whether these changes or the individual repurposing is important. The question is whether market incentives are sufficient, or whether government should intervene in the market.

When a company makes a secondary change to a drug, such as adjusting the dosage or putting two drugs together, the R and D investment is usually much less than required for the drug’s initial develop. The company should be able to earn its reward in the market for that. If changing the dosage really is valuable to a subset of consumers, then they would pay more for that, and doctors would prescribe it, and that would be a successful change. One would not need patents to distort the market to do that. You get your reward in the market.

So one way to effectively cut down on a large amount of evergreening behavior would be to clarify and strengthen the obviousness doctrine within patent law. Now that could come from Congress, that could come from the courts, that could come from the regulatory agency, the U.S. Patent and Trademark Office — between those two, although they are somewhat constrained by what both Congress and the courts tell them. There was an interesting development this fall in which then acting FDA director Janet Woodcock, at the direction of a White House executive order, wrote to the U.S. PTO director and spoke about the need for increased cooperation between those two agencies. If you think about it, the FDA is experts in this field. They have extraordinary knowledge and expertise to share with the U.S. PTO about whether something that’s presented as an exciting, new, novel, and nonobviousness piece of innovation is actually something that would be very easy for someone who’s skilled in the field. Or if this fancy new combination of two drugs is actually something doctors have been doing for a long time. A greater cooperation between those agencies I think would help move the ball forward.

SHANOOR SEERVAI: We hear a lot about research, development. Innovation obviously is hard work. But, perhaps, would you say that drug companies are being compensated too highly for this work?

ROBIN FELDMAN: There is a way that the industry frequently discusses its compensation from the patent system and the cost of producing a drug that I find completely puzzling. I call it the narrative of failure. It’s an argument that’s frequently heard in D.C. Drug companies argue that they should be able to evergreen their patents because the patent reward for a drug should include the cost of all the drugs the company tried to create and failed at. From a patent perspective, that’s a very strange concept, because a patent is designed to reward success; it’s not a participation trophy. Inventors don’t get a patent for the inventions they tried and failed to create.

If you think about it from that perspective, then the reward an inventor receives with a patent shouldn’t include compensation for other failures. I think about it from a patent perspective and the fact that patents are rewards, not participation trophies. But you can also think about it from the perverse economic effects. If you asked me to design a patent system, I’d want one that encourages companies to succeed in the most efficient way possible. If the cost of failures is included in the reward, you turn the drive for efficiency on its head. So what you’re essentially saying is: the more you fail, the higher the reward will be when you do succeed. That’s not a model of efficient innovation if you’re encouraging people to fail more.

SHANOOR SEERVAI: That sounds like you’re telling people: if your drug doesn’t save people’s lives, don’t worry, we’ll give you more money for it.

ROBIN FELDMAN: Well there, you can have a system in which the government funds those things it feels is important, even if those don’t succeed. That’s really different from the patent system. In the patent system, we reward you only when you succeed. And from an economic perspective, designing that, we would like to encourage you to succeed in an efficient manner, if possible.

SHANOOR SEERVAI: Mm-hmm. And what you said brings me to a moment in which the U.S. government did give pharmaceutical companies money and said, whether you succeed or not, please make a vaccine. And so now when we think about the development of the COVID vaccine and other therapies to treat the disease, has this brought or will this bring any meaningful change in how we think about intellectual property and patents?

ROBIN FELDMAN: I think the COVID-19 pandemic has brought a number of interesting shifts, both in the public narrative but also in the perceptions of drug development. In terms of the narrative, prior to COVID the popular narrative was: pharma, stop gouging me. Once we’re in the middle of a pandemic, the popular narrative shifted to: pharma, save me. And I do believe that pharmaceutical companies deserve enormous credit for utterly miraculous vaccines and treatments developed in record time.

The COVID frenzy has also prompted a flood of money flowing to biotech companies everywhere. Now you might think all of that money flooding into biotech will help disrupt consolidation in the industry, spawn a new generation of players who can then battle the big folks. I wish that were the case, but that’s not the VC playbook. Venture capitals are looking for exits: someone to buy them out as soon as possible. They’re usually not interested in nurturing the little fish for a long period of time until they can grow up and challenge the big fish. That’s not their model. But I think COVID-19 vaccines are a spectacular example of government–industry cooperation. Government funding, both in the U.S. and abroad, supported the initial research that led to the mRNA vaccines. So from my view, that’s a good reminder that patents are important, but they’re not the only way to support innovation.

SHANOOR SEERVAI: Well, since you said abroad, I can’t help but ask about all the countries in which very few people have had access to any vaccines, forget about access to mRNA vaccines.

ROBIN FELDMAN: Part of the conversation about drug pricing, and the conversation about access to vaccines, the conversation about access to medicine in general is a question of equity. What kind of a nation, what kind of a world do we wish to be? And is it appropriate to have a system in which many, many people cannot access basic lifesaving care? I believe that kind of a picture creates tremendous discomfort for many people. And there’s nothing like a pandemic to bring that picture home.

SHANOOR SEERVAI: Now that that picture has come home, is there something new that regulators or policymakers will do to change this dynamic of global inequality and also inequality here in the United States?

ROBIN FELDMAN: If you’re looking globally at the pandemic, the Biden administration has taken the lead — in some of the international discussions to try to encourage the waiver of vaccines is an attempt at leadership in that arena — but it’s not playing out well.

I believe a more likely model would be the model that emerged with pharmaceutical companies who, after considerable international pressure, worked through deals for much cheaper prices on HIV medicines for Africa. I think that kind of model probably offers a much better approach. It’s a model that emerged with the HIV crisis. Public pressure on Gilead pushed Gilead to work out and deal, so that vastly lower-priced versions of HIV medications were provided for Africa. That kind of model I believe is the way forward for international vaccines, if there’s sufficient will on the part of both industry and the government to move forward.

SHANOOR SEERVAI: So, what we have to do is fix the patent system before the next pandemic so that we can vaccinate people.

ROBIN FELDMAN: This is not our last pandemic or our last epidemic. And studies suggest that the next great threat ahead for us, in addition to possibly other types of viruses, are antibiotic-resistant bacterias, which could kill large numbers of people. We have to use this experience of the pandemic to begin thinking ahead and to think about how we can orient the patent and innovation system toward those particular types of disease, treatments, and preventative measures that are of great need to a great many people.

SHANOOR SEERVAI: Robin Feldman, thank you so much for joining me on The Dose today.

ROBIN FELDMAN: Thank you for having me.

SHANOOR SEERVAI: This episode of The Dose was produced by Jody Becker, Mickey Capper, Naomi Leibowitz, and Joshua Tallman. Special thanks to Barry Scholl for editing, Jen Wilson and Rose Wong for our art and design, and Paul Frame for web support. Our theme music is “Arizona Moon” by Blue Dot Sessions. Our website is thedose.show. There you’ll find show notes and other resources. That’s it for The Dose. I’m Shanoor Seervai. Thank you for listening.