The large price increases on brand name drugs and the high prices of new specialty drugs are driven by a desire for greater profits and not by the cost of research.
The pharmaceutical industry no longer makes significant investments in drug discovery. Its pipeline depends on discoveries made in academic medical centers with federal funding. Under the Bayh-Dole Act, enacted in 1980, manufacturers acquire the exclusive rights to those drugs and are free to sell them at any price. That law no longer makes sense.
The industry's new revenue streams are largely coming from specialty medicines or orphan drugs with small potential markets compared to the drugs introduced a generation ago which treated chronic conditions affecting millions of patients. This change in the market size for each new drug should have resulted in lower revenue absent a large increase in the number of new drugs. But revenue continued to rise because of steep price increases on older drugs and launch prices on new ones that do not reflect value.
As the CEO of Regeneron recently stated: "We as an industry have used price increases to cover up the gaps in innovation." Sales data from IQVIA U.S. confirms that during the past five years, monopoly expirations reduced revenue by $65 billion; the number of prescriptions filled with a branded medicine declined by 29%; but total revenue increased by over 20%. Patients are simply paying a lot more for their drugs.
A recent Government Accountability Office study shows that pharma industry profits are more than double those of the 500 largest industrial companies and greatly exceed the amounts being spent on research. Profits are not invested in more research but are often used to pay enormous sums for drugs developed elsewhere. Gilead Sciences spent $11 billion, an amount greater than its total R&D expenditures from 2011 to 2015, for the hepatitis C drug Sovaldi. Pfizer spent almost two years of its R&D expenditures ($14 billion) to purchase Xtandi, a prostate cancer drug. The GAO also found that, "Industry spending focused on drug development rather than earlier-stage research, whereas direct federal spending, such as through NIH grants, funded a greater amount of basic research"
Under the Bayh-Dole Act, ownership of patents covering medicines discovered by academia with federal funding remains with those institutions, and they are permitted to exclusively license them to manufacturers in exchange for royalty payments. The National Institutes of Health now spends over $35 billion annually on research that produces a continuous stream of new monopolies for industry. As a result, the public not only pays for the discovery of many new medicines but also the exorbitant prices that industry charges for them. Lyrica, Remicade, Emtriva and Neupogen are all academic discoveries that became high-priced drugs and produced hundreds of billions in revenue. Xtandi, at $129,000 per treatment and Kymriah at $475,000 per treatment are more recent examples.
Bayh-Dole was enacted at a time when government investment in research was low; the discoveries by academics were broad concepts that required substantial additional investment to be translated into drugs; and industry was heavily investing in basic research. It was simply not foreseeable that public money would become the primary driver of drug discovery or that industry would become dependent on government to produce its pipeline of new medicines. Nor could anyone have imagined that drug prices would be so out of control that it could be less expensive for the government to pay the entire cost to develop a federally funded drug discovery than to give away unlimited monopoly power to the pharmaceutical industry.
Indiana Sen. Birch Bayh did foresee the need to preserve "rights of the Federal Government to use for itself and the public good, inventions arising out of research that the Federal Government helps to support" by providing the government with a royalty-free license to practice its discoveries and for the forfeiture of exclusivity if a licensee failed to make a new medicine available on reasonable terms. But NIH regulators have construed those provisions as if they did not exist. As a result, Americans routinely pay two or three times more than the European price for a drug discovered with their tax dollars.
In other areas of vital national interest, like weapons systems, the government pays the development costs and contracts for the manufacture of products based on cost plus a reasonable profit. Public utilities that depend on government monopolies earn a reasonable return on their investment but are often subject to rate regulation to assure reasonable pricing.
By whatever means, the current system—allowing new medicines discovered with public funds to be sold at prices that make pharmaceuticals America's most profitable industry—must end. Bayh-Dole must be amended to reduce the industry's monopoly power so that the price of new drugs fairly reflects the contribution of public funding in discovering them while still allowing for a reasonable profit.
Alfred B. Engelberg is trustee of the Engelberg Foundation in Palm Beach, Fla. He is a retired intellectual property lawyer with over 40 years of experience in pharmaceutical patent and competition issues and played a key role on behalf of the generic drug industry in the negotiations leading to the 1984 Hatch-Waxman Act.
