Last year, America celebrated the 40th anniversary of the Hatch Waxman Act, which established the legal framework that has led to the development of transformational medicines for the world and established the U.S. as the world’s most efficient generic drug market. But in the last few years, we have eroded some of the attributes that sustain investment in the expensive and risky business of drug development. Meanwhile China is improving its intellectual property, including with concepts used in the U.S., and becoming a global leader in drug development. But it isn’t too late to change the course.
While the Inflation Reduction Act (IRA) doesn’t do anything to change a drug’s intellectual property protection, it does change the expectation of profit from a successful invention. The IRA directs the government to select certain drugs for price controls in Medicare, not because they lack clinical benefit, are blocking out a competitor, or have too high a price, but because enough people use the drugs that they are costing the federal government more money than some other drugs. This ill-defined federal pricing intervention is eroding the system that sustains investment in drug development, encourages generic market entry, and has contained cost growth.
Whether one agrees philosophically or not with the idea that investment in clinical study is affected by the expectation of a financial reward, it is a reality. It takes a lot of money – billions, in fact – to move a promising concept from the lab to a patient (safely). This doesn’t even account for the financial losses for failed efforts to discover a new drug (most fail).
While imperfect, the U.S. market-based system with intellectual property protection and (mostly) competitively negotiated prices has resulted in a proliferation of medicines for life-threatening and infectious diseases – and made our country a global leader in drug development. The alternative, a government deciding what diseases get treatment, seems at least as flawed and considerably more fraught by comparison.
Drugs are like no other good or service, which is why they are treated differently in the law. Their ingredient costs are usually low, but demonstrating those ingredients can modify disease safely is very expensive. So, the U.S. has established a system of intellectual property and data protections and reimbursement which allows a drug developer to market certain ingredients for certain diseases with the exclusive right to use the clinical data they collected, for a period of time. The patents on drugs are for 20 years, but because it takes significant time (and a large amount of money) to develop a new drug, most drugs patents start to age while they are still being tested, before a company is making any money off the invention.
Even in a system that allows for a drug manufacturer to market their medicine exclusively for a period of time, many drug candidates are not profitable enough to sustain the interest of investors. The financial reward is also not sufficient to merit the huge investment in a clinical study that will probably fail. This can include rare diseases, antibiotics, or clinical studies for drugs in children. Policymakers have added additional protections for a limited set of drugs to extend the period of time, by months or even a few years, when clinical data can be used exclusively by the drug developer, meaning a generic company cannot get a copy of an approved drug. However, even with those protections, the vast majority of drugs have a generic competitor after 14 years. This is why more than 90% of all prescriptions in the U.S. are dispensed as generics.
It is reasonable for the U.S. government to be concerned about how much is spent on health care. In the U.S., we spend more and get less than in other countries, although it could be argued that this may result from our education, housing, and social services. But cutting costs with the price controls in the IRA is counterproductive, in particular, as it has taken years to build up the system that has helped to address the lack of financial reward for clinical development for drugs for rare diseases, children, and antibiotics. The IRA price controls don’t save that much money relative to the loss of health expected to come from eroding investment in drug development.
This is all happening as China moves in the other direction. In the past five years, the country’s share of global clinical trials has jumped by 57%.
If the IRA price controls satisfy some popular political itch, then they should be reformed to not work in a counterproductive manner to the intellectual property system. This could be achieved by shifting the price controls to be imposed after 13 years for any selected drug, when a drug would naturally expect a generic competitor. It has taken years to reach our leadership in drug development and should be sustained, not undone.
Kirsten Axelsen is a visiting scholar at the American Enterprise Institute and a consultant for biopharmaceutical companies.
