Inequality Explained: The trouble with pharmaceutical patents

Can policy change lead to more equitable access to life-saving medicines?  

A pharmacist counts pills in a pharmacy in Toronto. REUTERS/Mark Blinch

This explainer was written by a group of UBC graduate students as part of our Lind Initiative series on inequality. It was an assignment from a course on public policy. 

With drug and prescription medication prices skyrocketing to unprecedented levels in recent months, the issue of unaffordable and inaccessible health care has never been so important to address. Here we examine the problems with patents and explore options for addressing inequality in the public health sector.

The concerns with patents

Intellectual property policies in the U.S., Canada and other research powerhouse nations have prompted concerns over price gouging, geographic discrimination and other strategies that can lead to profit at the expense of affordable medicines. Patents and marketing exclusivity are, however, still widely considered an integral component of biomedical research and development. While manufacturing a drug is generally cheap, the process of research and development costs much more. Various estimates place the cost anywhere between $300 million and $2.6 billion (though the higher figures are often disputed) per drug brought to market, and companies expect sufficient intellectual property protection on their marketed drugs to recoup these development costs. This isn’t unreasonable to ask, and governments are happy to restrict competition for these companies as long as development and production of novel medicines continues. 

How current polices can hurt the rich and poor alike

Though the idea of a government enforced monopoly may seem like a necessary incentive for drug manufactures, it is not effective in stimulating important pharmaceutical innovation, nor a sustainable means of delivering medicines to poorer countries in the long run.

Pharmaceutical companies are part of an industry that enjoys the largest profit margin compared to any other private industry, even surpassing oil and gas. The ratio of revenue spent on promotion and marketing – upwards of 25 percent – compared to the 1.3 percent devoted to discovering new molecules is striking. The pharmaceutical industry, in both domestic policies and under potential trade agreements like the TPP, is granted exclusive power over the market; companies rationally use this power to make as much profit as possible before their exclusive rights expire. There are real and under-discussed consequences to this system.

As Nobel laureate and economist Joseph Stiglitz writes, “research needs money but the current [intellectual property] system results in limited funds being spent in the wrong way.” Ten million people die each year due to a lack of access to essential medicines, and nearly three billion worldwide are at risk from diseases that lack market incentives for drug development. The Commission on Health Research for Development found that less than 10 percent of worldwide resources devoted to health research were put towards health in low and middle income countries, where over 90 percent of all preventable deaths worldwide occurred.

Although high drug prices as a result of the intellectual property system have long been identified primarily as a problem for developing countries, they are becoming a growing concern even for industrialized nations. Pharmaceutical patents and exclusivity reduce access to lifesaving drugs, and allow technologies developed with public funding to be purchased and monetized by private entities in developed nations. Taxpayer-sourced research funding from governmental organizations like the Canadian Institutes of Health Research or the National Institutes of Health is a major component of the R&D landscape. Furthermore, between one fourth and one third of new drugs originate on public university campuses, but are then bought out by the industry to be monetized. Though development costs are borne by the taxpayer, the benefits of the research are mostly enjoyed by private parties. 

A case study in price gouging: Sofosbuvir

A representative example of this dual problem of high prices and concentrated rewards is Sovaldi, the brand name of Sofosbuvir, a drug commercialized by Gilead Sciences to treat hepatitis C, which without effective treatment is a chronic and potentially lethal condition.

The U.S. government’s Medicare insurance program spent nearly $4.5 billion in 2014 on purchasing the drug for the millions of Americans affected by hepatitis C, despite helping to fund the original research. Raymond Schinazi, a professor of biochemistry at Emory University, was the original developer of the drug and relied heavily on funding from the U.S. government via the National Institutes of Health and Department of Veterans Affairs.

 After acquiring Pharmasset, Inc. (the original developer of Sofosbuvir) for $11 billion, Gilead set the price of a 12-week treatment course at USD$84,000 for American patients — more than double the price originally set by Pharmasset. Though the cost was eventually reduced after public outcry, congressional inquiry and legally mandated discounts, the average cost of treatment remains at approximately $40,000 per patient in developed countries. Strong lobbying has induced Gilead to allow steep discounts and generics in 91 low-income nations; however, the discounted price is not granted to middle income countries with remaining health struggles like China or Brazil. Even the reduced price remains at approximately twice the third-party estimated cost of production.

Why change is needed

The reason why some argue that patents and exclusivity remain valuable, in spite of these challenges, is that in a free market the availability of information on how to produce a given good would lead to negligible profits. In the long run, this would disincentivize the overall production of any good. This may appear to justify the current system, but the health care market is unique and it might be the case that monopolies are over-trusted in this situation.

 Unlike other markets, most people do not choose what they consume; rather they rely on professionals to judge what drug or treatment regimen they should be purchasing. The prices of medicines do not necessarily influence any individual’s purchasing preferences, as people generally have little choice in the diseases they contract or the treatments they require. If anything, they would prefer to avoid both the disease and the treatment. Finally, most countries provide national healthcare systems in the form of health insurance. Consumers are required to pay a fixed fee to access all health services and goods, including medicines. This eliminates the consumer choice almost entirely.

Access to medicines is inextricably tied to human rights and empowerment. The World Health Organization recognized such access as a social right in 1946, and two years later it was included in the Universal Declaration of Human Rights. In 1966, the International Covenant on Economic, Social and Cultural Rights stated that access to health goods is a requisite for the realization of the right to health. Therefore, the drug market requires a custom-fit solution which incentivizes research and effective distribution to all economic classes, following principles of accessibility, availability, appropriateness and assured quality, while allowing drug and vaccine producers to remain competitive and financially viable. 

A medical prize fund

One potential solution to mitigate many of the issues brought about by the current intellectual property system is the replacement of granted monopolies with prizes for successful development of new and innovative drugs. Champions of various iterations of a central medical prize fund include Joseph Stiglitz, U.S. presidential candidate Bernie Sanders and NGO executives like James Packard Love. The central goal of this system, along with most other patent alternatives, is the decoupling of the research market and the product market. What this really entails is separating the (very high) costs associated with developing new drugs from the (much lower) costs associated with manufacturing drugs, meaning patients will no longer have to double-pay for both the research and the drug itself.

They claim this new system provides strong incentives for efficiency in research, as a large sum of money in the form of a prize caps the level of research costs which can be recouped. It also allows governments to direct research, granting prizes for neglected diseases without effective market incentives for treatment development. Market forces currently incentivize research into minor afflictions of the wealthy over deadly tropical diseases; testament to this fact, for example, is the greater funding received for treatment of male pattern baldness over research into malaria vaccines, a criticism commonly levied by Bill Gates. High income governments could even transition to the prize system without introducing new costs by repurposing small portions of their budgets to prizes granted by the National Institutes of Health and similar organizations for breakthroughs in malaria, schistosomiasis or other deadly tropical diseases. Some advocate for reallocating money from foreign aid budgets (a $35 billion pool in the United States alone), while Bernie Sanders’s bill proposes a funding level of 0.55 percent of annual GDP without further specifics.

Criticisms of the prize plan are primarily concerned with the centralization of power in research decision making, with opposition to granting national governments sole power over deciding what diseases “matter” enough to receive significant prize offers. Appointment of the Board of Trustees by the head of state, as proposed in Sanders’s bill, opens the system to risk of politicization –  a serious issue given the stark divide between the right and left wing regarding health issues. These criticisms, along with heavy opposition from the pharmaceutical industry and the lack of widespread discussion, make the medical prize fund a less than viable alternative for now.

The Health Impact Fund

A second potential solution is something in the line of the Health Impact Fund (HIF), an initiative developed by Aidan Hollis and Thomas Pogge, to build a system that promotes innovation in the pharmaceutical industry while guaranteeing equitable and affordable access to medicines. To achieve this, the HIF aligns the desired social function of pharmaceutical companies (develop drugs to improve human health) with their economic incentives in such a way that the quantity of money they receive is proportional to the benefits in global health they produce. Under this framework, pharmaceutical companies are motivated to produce drugs with a high impact on global health, instead of just those that generate a profit.

The amount that is awarded to innovations will be based on its impact in global health. The fund will reward the innovator over ten years with a share of the total annual reward pools, such that the share received is proportional to the innovation’s share of the total health impact achieved by all registered products. In other words, if a specific product accounts for 10 percent of the total health impact of all the registered products, the owner of the product receives 10 percent of that year’s reward pool (re-evaluated yearly), during 10 years, after which the product goes generic.

Under this arrangement, companies would have a greater incentive to produce and distribute drugs at the lowest possible price, and to do it in populous developing countries where the impact of the medicine would be larger. Moreover, they would have an incentive to focus on medicine to cure diseases that are fatal for most people, because that is where innovation would have the biggest impact on health, thus maximizing the reward for the company.

The HIF does not intend to dismantle the patent system; it would rather provide an alternative to produce and allocate new drugs. Industry would have the option to continue with their current business model or, instead, register a new drug with the HIF. However, if the company chooses the latter it loses the option of marking up pricing, thus selling at cost. Under this logic, the firm does not profit from selling the product, but from the rewards granted by the HIF.

To implement the HIF, governments would have to contribute with 0.01 percent to 0.03 percent of their Gross National Incomes to the fund, or 0.07 percent of current global spending on medicines. The HIF estimates that about $6 billion per year would be necessary to provide enough incentives for pharmaceutical companies to develop medicine targeted for the poor that drugs firms otherwise might not pursue. Contributors to the HIF would also benefit from cheaper drugs and from medical research focused on improving human health, rather than on maximizing profits.

The developers of HIF have proposed the implementation of a “mini-HIF,” a pilot project priced between $60 and $200 million funded by several sources including governments and foundations. The “mini-HIF” would serve to test the HIF’s effectiveness and would ultimately help determine the feasibility of implementing the HIF on a global scale.     

Looking forward

A major culture shift from profit-centred approaches to sustainable models that prioritize public health and well-being is required to counter the massive price hikes in drugs like the recent 2000 percent and 5000 percent price increases of Synacthen Depot and Daraprim by Mallinckrodt and Turing Pharmaceuticals, respectively. Prize mechanisms have the potential not only to increase competition amongst suppliers, but also avoid redundancy in the industry with drugs that differ only negligibly and reduce excess spending that could be incurred in marketing and promotion. The prize funding mechanism can work in conjunction with patent monopolies, as seen with the HIF,  that would hopefully be implemented faster and without obstruction from pharmaceutical lobbyists. On the other hand, more sophisticated push-pull mechanisms that circumvent intellectual property policies entirely, such as funding R&D upfront from grants or other federal funding mechanisms, have yet to fully be explored, though do have potential to benefit public health.

Of the 1.9 billion children from the developing world, there are 270 million with no access to health services (one in seven). Worldwide, 15 million children have been orphaned due to HIV/AIDS (similar to the total population of children in Germany or the United Kingdom). The dissenting voices of NGOs and civil societies have focused on the detrimental aspects that patent rights impose on what is argued should be a public good. In order to address the systemic inequality that is perpetuated by our current patent system, these dissenting voices will also need to come from governments and international organizations to combat a system predicated mainly on greed.

This explainer was written by a group of UBC graduate students as part of our Lind Initiative series on inequality. It can be reprinted under a Creative Commons license

Also in the series

The inaugural 2015 UBC Lind Initiative, hosted by the Liu Institute for Global Issues, examines the far-reaching effects of inequality. A speaker series led by economist Joseph Stiglitz and featuring Jill Abramson, Teju Cole, Jeffrey Sachs and Elizabeth May was held in the Fall Term of 2015, while a series of essays, analysis and feature stories ran concurrently on OpenCanada.org.

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