The Patent System – or How Pharmaceutical Companies have Rigged Drug Prices in America

The patent system, a key component in America’s pharmaceutical monopolies, has artificially inflated drug prices far beyond their manufacturing costs. According to Bloomberg, Americans pay more for prescription drugs – an average of $1,200 a month per person – than any other nation in the world. While pharmaceutical lobbyists typically attribute this to high innovation – which might have been true following WWII and up to the 1960s during which drugs such as antibiotics, antihistamines, and even oral contraceptives first came on the market – today’s drug companies paint a very different picture.

A Brief History of the US Patent System

Mark Twain once wrote that “a country without a patent office and good patent laws was just a crab and couldn’t travel any way but sideways or backwards.” As Twain makes clear, developing drugs – or any technology for that matter – without patents would be unprofitable, and innovation would ultimately decline. However, what Twain might not have anticipated is that the abuse of the patent system can also lead to a lack of innovation through cartels, anti-competitive behavior, and the restriction of public knowledge. 

There is a clear trade-off between inventors and society at large. How individuals view the patent system largely depends on whether they value individual ownership – as in the French’s approach to droits d’auteur (literally “author’s rights”) – or common knowledge. Patents protect inventors until they have made a profit, upon which they expire and open up the market to more competition – or at least, this would be the case in an ideal society. 

The first patent law seems to have originated in Venice in 1474 in order to protect the city-state’s glass-blowing industry. Similar laws were also used by the English Crown during the 17th century, although it was with the onset of the Industrial Revolution, a time of rapid innovation and growth, that the patent system truly got underway. 

Patents protect inventors until they have made a profit, upon which they expire and open up the market to more competition.

The United States – born out of such a period – adopted a sort of “pre-patent” in its Constitution, most notably in article 1, section 8, clause 8, which states: “Congress shall have power… to promote the progress of science and useful arts by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”

The first United States Patent Act was released in 1790 and modified a short three years later, notably by the then Secretary of State Thomas Jefferson. It describes patentable subject matter – a definition that has remained mostly unchanged – as “any new and useful art, machine, manufacture or composition of matter, or any new and useful improvement on any art, machine, manufacture or composition of matter.”

Patent laws underwent a few fundamental changes during the 1800s, especially as to who could hold patents, but it was towards the end of the century that antitrust laws began to gain more ground in American society, thus changing patent distribution. 

In this “trust-busting” era – which lasted up until the 1960s – the Food and Drugs Act was passed, creating the Bureau of Chemistry that would later become the Food and Drug Administration (FDA). One of the most relevant examples of the government’s “break-up” of cartels was following a report by the Federal Trade Commission (FTC) in 1958, which found that a handful of companies had kept prices excessively high for the antibiotic tetracycline. 

It was towards the end of the century that antitrust laws began to gain more ground in American society.

The FTC responded by charging five drug companies with blocking new competitors, thereby forcing the companies to license out tetracycline at a lower price. To the benefit of such companies, the antitrust era was eventually phased out, allowing more lenient patent laws to be passed and thereby abused. 

The most notable of these is the Bayh-Dole Act of 1980, which allows publicly funded universities and non-profit institutions to claim patents on discoveries financed by government research. Another amendment to the patent system was the Hatch-Waxman Act of 1984, which allow patents to be extended five years in order to compensate for the delays in the FDA approval of a drug. 

However, most patent extensions are achieved through “legal loopholes” along with pro-patent Court of Appeals of the Federal Circuit decisions, allowing patents to surpass their original duration of 20 years.

What are these Loopholes?

Pharmaceutical companies often resort to tactics known as evergreening that extend the life of a patent by slightly modifying the drug. These variations can consist of new forms of release, new dosages, new combinations or formulations, new means of administering a drug, repurposing a drug to treat another disease, or re-branding an older drug. 

In many cases, the drug remains fundamentally the same, yet its price soars. This is due not only to price hikes by the company itself but also to unfair patenting practices that prevent the release of similar generic drugs that could increase drug competition and thus bring down prices.

Pharmaceutical companies often resort to tactics known as evergreening that extend the life of a patent by slightly modifying the drug.

For example, the pharmaceutical company AbbVie, formerly Abbot Laboratories, first received approval from the FDA for its drug Humira in 2002. Humira, which stands for “human monoclonal antibody in rheumatoid arthritis”, received its first patent in 1994 when the drug still belonged to BASF, the German chemical company that first developed the drug. 

After acquiring the rights to the drug in 2000, Abbot got permission to treat psoriatic arthritis in 2005, spinal arthritis in 2006, Chron’s disease in 2007, plaque psoriasis in 2008, and ulcerative colitis in 2012 with Humira, which meant that the company could apply for new patents to be issued with each disease treated. 

And indeed, that is exactly what they did. According to Fortune Magazine, the US Patent and Trademark Office granted AbbVie “more than 30 patents on the ways in which the drug is administered; more than 25 patents on various formulations of the drug; more than 50 patents related to Humira’s manufacturing processes; and about 20 patents on the delivery devices that customers use to take the medicine.”

In total, the non-profit organization I-MAK reports that AbbVie has filed 247 patent applications for Humira, 89% of which were filed after Humira first went on the market – quite an excessive number for a company that did not even develop the drug in the first place. AbbVie’s CEO Richard Gonzalez has argued that Humira should not be considered one drug, but many, with the FDA’s approval of 132 out of the 247 patents AbbeVie applied for seeming to second this. 

Humira’s average price in the US increased from roughly $19,000 per patient in 2012 to more than $38,000 in 2018.

By comparison, the total number of patent applications submitted for Humira at the Europe Patent office is 76, some of which were either “withdrawn, refused during examination, or revoked after patent challenges”. Furthermore, cheaper rivals to Humira have recently gone on the market in Europe, causing Humira prices to fall considerably in a number of countries.

In contrast, Humira’s average price in the US increased from roughly $19,000 per patient in 2012 to more than $38,000 in 2018, helping AbbVie’s revenue to grow from $18.8 billion in 2013 to $32.8 billion in 2018.

Humira, the world’s current best-selling drug, would be on the Fortune 500 list if it were its own company, surpassing even corporations such as Visa, General Mills, and Monsanto.

Other Forms of Monopoly

Unfortunately, AbbVie is far from being the only pharmaceutical company to engage in such fraudulent, patent-extending activities. Pfizer – also known as a reoccurring “patent offender” – has filed 118 patents for its painkilling drug Lyrica while increasing its price by 163% since 2012. The drug, which first went on the market in 2004, had a patent that was scheduled to expire in 2018 but received a twenty-year extension through a “dosage manipulation”, meaning that patients would be prescribed a single pill per day instead of two or three. 

Pharmaceutical companies have sought to block generic drug competition through patent extension for approximately 38 years.

There are countless other examples: from companies such as Biogen, Roche, Genentech, and Johnson & Johnson to drugs such as Rituxan, Herceptin, Remicade, and Avastin, used to treat conditions as diverse as cancer and arthritis. I-MAK reports that for every drug, there were approximately 125 patent applications filed, 71 of which were granted in 2017.

In total, pharmaceutical companies have sought to block generic drug competition through patent extension for approximately 38 years. Furthermore, many of these companies have not only successfully appealed to extend patents, but continue to dominate markets through congressional legislation. 

For example, Congress approved the Medicare Prescription Drug, Improvement, and Modernization Act in 2003, which effectively banned the federal government from negotiating drug prices with pharmaceutical companies, with taxpayers footing the overpriced bill. 

Pharmaceutical companies could now hike up drug prices – maintaining their monopoly – with virtually little to no pushback from the government. Between 2012 and 2016 alone, Medicare spending on Humira increased by 224%, with average spending per beneficiary more than doubling from $16.1k to $32.8k. 

It has been shown on average that drug companies continue to spend more on drug promotion than research and development.

Not only is such a clear abuse of “free-market principles”, but the profits earned through these price hikes are rarely redirected toward more research and development, but rather toward more drug promotion. In 2013, Johnson & Johnson spent roughly $17.5 billion on sales and marketing – which goes towards advertising as well as persuading physicians to prescribe their drugs – but only $8.2 billion on research and development. 

Although there have been disputes as to what constitutes sales and marketing in the pharmaceutical industry, thereby complicating spending comparisons, it has been shown on average that drug companies continue to spend more on drug promotion than research and development.

The Future of Drug Prices in America

Although President Trump has vowed to take on the pharmaceutical industry, it is unlikely to see this happening in the time of his presidency, as the coronavirus pandemic in the United States continues to dominate the political scene. 

With the race for a Covid-19 vaccine, access to affordable medicine has never been more relevant. Putting an end to pharmaceutical companies’ monopoly through tighter patent legislation – and government intervention in setting drug prices – would provide cheaper access to life-saving drugs for millions of Americans. 

Without competition from generic drugs, pharmaceutical giants will continue to raise drug prices while consolidating their position in an almost unbeatable market scheme. Until these companies are held accountable for their frequent abuses in past years – from Purdue Pharma’s role in the current Opioid Crisis to EpiPen’s price hike of 400% in 2016 – drug prices are unlikely to decrease.

Spreading awareness of these abuses – that are contrary to the core mission of the patent system, which is to further innovation – is one of the best weapons we have in ending the senseless suffering of far too many Americans who can no longer afford prescription drugs.   

Let the true innovation begin.