Pharmaceutical Patent Profits Facilitate Innovation

Roy Bodem

            Without the potential for patent profits, there would be no reward for innovative ideas that lead to beneficial products. These products are the technological advances that make life better. Pharmaceutical companies have the ability to develop new drugs that can prolong life and provide cures to diseases that affect people worldwide. Patents are especially important to these drug companies because they can guarantee profit and make all the time and cost put into developing their new drug worthwhile. A patent is an economic catalyst to these pharmaceutical companies who push to research new and beneficial drugs on the premise that they will be able to reap rewards by way of profits.

            Profits for patented pharmaceutical represent a reward that pharmaceutical companies earn through years of research and development and only then will they be able to profit from their work. The patent system allows drug companies to profit from patents by prohibiting any other company from marketing and selling an identical prescription drug. This system seems to be the best way to provide drug companies with the reward of potential profit for the research and development spending that in necessary to develop new and innovative prescription drugs.

What is a patent?      

A patent is a property right to a product and in the case of pharmaceutical companies is usually in the form of a chemical formula that may not be duplicated by any rival company. The life of a patent is 20 years from the time the patent is issued. (Lehman, 2003) This gives the company ample time to profit from its invention. An invention is �any new or useful process, machine, article of manufacture, or composition of matter.�  (Lehman, 2003) This means that the inventor has the guarantee that that his or her product will be the only product of its exact kind on the market for 20 years.

            Inventions can also be new improvements to previous inventions. New inventions are evaluated by National Patent Offices to compare new inventions with previous inventions that are similar to be sure that the invention is novel and not just an obvious replica of a previously patented invention. (Lehman, 2003)

            Thomas Jefferson reviewed and granted the first patent and the patent review process has remained the same ever since. (Roth, 2005) Patents are reviewed by searching through previously granted patents to make sure that the patent is new and unique. This patent provides the researcher with the incentive to spend the costs, time, and effort to be granted a patent. (Roth, 2005) The inventor knows that his work will be rewarded with potential profits once a patent is granted because a patent ensures no competitor will be able to copy his or her idea and prevent the inventor from profiting. (Roth, 2005)

Patents must be enforced.

            Patents are enforced by the National Patent Offices, World Trade Organization (WTO) and evaluated by the World Intellectual Property Organization (WIPO).  (Lehman, 2003) These organizations provide the patent protection to those seeking the protection by giving judicial enforcement of the intellectual property rights. (Lehman, 2003) This means that a company could sue a rival if it felt its patent was being violated and have official documents at the National Patent Offices to substantiate its claim to a product.

            Patents are available for a variety of products including prescription drugs. Patents in the pharmaceutical industry are somewhat different and possibly more important than in other industries because of the laboratory research and clinical trials that must be done beforehand. This research costs the pharmaceutical company and is usually accomplished through capital investment on the basis that the result will lead to profit for the company. (Lehman, 2003)

Research and Development

The U.S. patent system is effective and attracts investment from companies who want to profit from industry. The U.S. market is perfect place to a pharmaceutical company to grow and profit. Expenditures on research and development in the pharmaceutical industry in the U.S. went from $1.7 billion in 1977 to $26.4 billion in 2002. (Lehman, 2003)

            The pharmaceutical industry in the U.S. is effective and turning out new and beneficial drugs each and every year. 2001 saw 402 new cancer medicines, 123 new treatments for heart disease and stroke, 83 new AIDS drugs and 176 new drugs for neurological diseases. These new pharmaceuticals are the result of patent incentive with companies expecting to have a return in their investment on the research and development of these new drugs. (Lehman, 2003)

            The U.S. is the world leader in pharmaceutical profits and research for the development of new pharmaceuticals. Ninety percent of all the biomedical research done in the world is done in the United States. Sixty percent of the profits generated by prescription drug companies are earned in the U.S. (Hoen, 2003) Without the innovation of the pharmaceutical companies of the U.S. then, most of the new drugs on the market wouldn�t even exist. This must mean that the system for granting patents that generate profits for companies who do the research to get the drugs on the market in the first place is the best way to promote the creation of new drugs.

            For example, Bristol-Myers Squibb spends over a billion dollars for research each year. Overall, drug companies spend more than $10 billion dollars every year on research. This spending has grown considerably in the past few decades as well, with research and development spending at only $1.5 billion in 1980. (Flint 1994) All this spending must payoff for the pharmaceutical companies or they will not be making such huge investments in researching new drugs.

            The profits on patented prescription drugs make continued research and the development of new prescriptions possible. One reason this is true is that when patents are granted, all parts of the patented invention are published for others to read and learn from. (Londolt, 2004) This means that as opposed to keeping new drug formulas a secret, patents publicize the inventor�s research when granting protection. (Londolt, 2004) Once pharmaceutical formulas are available to all, anyone has the ability to develop ideas further or introduce similar products so long as they are not in violation of the original patent. This furthers innovation and encourages the development of new drugs. (Londolt, 2004)

The Patent Process

            The drug discovery process is extremely complex. Pharmaceutical companies do not just research and develop a new product and then get a patent. Most pharmaceutical patents are filed in phases. First a company seeks patents on �early discovery,� this includes screening, identification of a target, and data involved. (Londolt, 2004) Next, the company seeks a �lead development� patent that covers chemical synthesis activity against targets and compound development leading to clinical trials. (Londolt, 2004) Then, subsequent patents may be filed on finished products too. This means that pharmaceutical companies must be concerned with the protection of their work at several stages of the development process and illustrates how important patents are to ensuring pharmaceutical companies will have profit potential.

Merck�s Breakthrough

The companies who have the capacity for advanced research and development tend to be the most profitable because their research and development allows them to patent a drug that has the potential to be extremely profitable, but it is likely that without this profit potential the pharmaceutical companies wouldn�t have the incentive to research new drugs in the first place. For example, Merck�s Mevacor, a cholesterol reducing drug, and successor Zocor dominated the cholesterol reducing drug market in the 90s. Merck managed to maintain about 40% of the market with Mevacor and then Zocor. This industry dominance was due to years of research on the part of Merck until the FDA approved Mevacor and it was put on the market in 1987. In fact, Merck spent almost two decades developing Mevacor. (Conaway, 2003) They must have been expecting a big payoff. In fact, U.S. companies spending on research and development in 2001 topped $30 billion. (Conaway, 2003) Patents are the solution to this huge amount of spending and the only way that big pharmaceutical companies are insured that their years of work and billions in research dollars will be worth anything.

Patents allow the pharmaceutical companies to set prices at a high level, because they have somewhat of a monopoly on their product and don�t have the competitive economic forces present that normally are able to bring down price. (Conaway, 2003) This seems to be a source of complaint, as prescription drugs are priced higher than most people would like, but how are pharmaceutical companies supposed to have the research and development dollars to spend without the profits from their existing patents?

Mevacor is a good example of innovation in the pharmaceutical industry in that Merck�s Mevacor led to the industries most profitable sector, cholesterol-reducing drugs. Statins like Zocor, are a part of the $11 billion a year sales of anti-cholesterol drugs. The development of statins, with Mevacor being one of the first, is regarded as one of the foremost medical breakthroughs in the last 30 years. (Conaway, 2003) Merck new that it was on to something and sought a patent for the molecule that would soon be a part of Mevacor. Merck patented this promising molecule on June 15, 1979 long before Mevacor was developed and ready for the market in 1987. (Conaway, 2003)

In this paper it was and will be stated that patent protection allows for a monopoly on the formula that has been researched and developed by the pharmaceutical company. This is true in that patents provide the company to sell it�s product without fear of a rival selling an exact copy, but it is also true that the possibility of a rival producing a similar product will not infringe on the patent protection of the company and still be able to take away some of the company�s profits.

The best example of this occurrence is with Pfizer�s Lipitor. After Mevacor broke the market and it�s improved predecessor Zocor continued to dominate, there was a rush to develop an even better anti-cholesterol drug that would take away from some of Merck�s profits. Pfizer managed to accomplish this task with its introduction of Lipitor in 1996. Lipitor�s sales took over Zocor for first place in the increasingly competitive anti-cholesterol prescription drug market. (Conaway, 2003) This must mean that patents do not stiffly competition. In fact they many even encourage it. It also illustrates that once a patent has been granted the company does have a monopoly on their product, but may not be able to dominate the industry or even sector of the industry, as was the case with Merck�s Zocor. So, patents may not create a true monopoly, since multiple products with patents that are different can be created to serve the same market. (Conaway, 2003) Perhaps pseudo-monopoly is the best way to describe the market protection that a granted patent gives to a pharmaceutical company.

New Prescription Drugs

With patents providing the incentive for companies like Merck to research and develop new and innovative pharmaceutical like Mevacor was, there is no doubt that new breakthroughs are on the way. Here are some breakthroughs ready to hit the market. (Table 1) In 2005, $252 billion dollars was spent on prescription drugs in the U.S. and this figure represented a 5% in crease from spending in 2004 that was $239 billion dollars. (Hoffman et al., 2007) With all this demand for new and current prescription drugs there is no doubt that patents are an important part of the huge market for prescription drugs.

TABLE 1

(Hoffman, 2007)

Is the Patent System Corrupt?

            When considering the scrutiny that pharmaceutical companies go through to put a new prescription drug on the market, some say that the patent system still is inadequate in how it goes about issuing patents to companies. One instance that displays that potential for the patent office to issue a patent when a company may not really deserve on is Purdue Pharmaceutical�s patent on Oxycontin. Purdue made about a billion a year on the sales of its pain medicine Oxycontin and it�s patent was granted based on Purdue�s claim that it had a novel innovation in that Oxycontin could be administered in small doses and be effective. (Roth, 2005) In 2004, Endo Pharmaceuticals attempted to sell a lower cost version of Oxycontin and was sued by Purdue for patent infringement. It was then determined that Purdue had done no clinical studies or research experiments to validate the effectiveness and safety of Oxycontin when it sought the patent for Oxycontin. Endo Pharmaceutical was allowed to introduce it�s version of Oxycontin and Purdue�s patent was invalidated, but Purdue still got to keep it�s billions in profits that it earned under patent protection. (Roth, 2005)

How could this have happened? It seems that the patent office isn�t perfect. This example illustrates how difficult the patent application and approval process is, and should be. It goes without saying that if patents are valuable protection that allow for pseudo-monopolistic market profits for prescription drugs, they should be granted only after an extremely scrutinizing patent review process to keep instances like Purdue�s Oxycontin from happening again. Although this example displays that patent enforcement has its faults, it still seems to be the best way to grant exclusive rights to a pharmaceutical company�s chemical formula.

When a Patent Expires

Once a patent has expired, generic drug companies are free to market and sell the previously patented prescription drug. The price of a particular drug is brought down by generic competition. (Hoen, 2003) Many drug companies will be loosing their patent protection. This is estimated to have a total impact of $27 billion on the pharmaceutical industry in 2007. (Hoffman et al, 2007) The expiration of patents allows the marketing of generics and reduction in the overall expenditures on pharmaceuticals by all those seeking them. (Hoffman et al, 2007) Here are some current pharmaceuticals ready to expire. (Table 2) The drug, manufacturer, class and experiation date for each drug are given.

TABLE 2

(Hoffman, 2007)

These patent expirations represent lost profit for pharmaceutical companies and although they may be able to promote a revise version of the original, known as a line extension, they are mostly out of luck. In fact, patent expiration in 2005 accounted for $30 billion on sales loss. (Davis, 2001) It goes without saying that pharmaceutical company executives probably don�t like to see their patents run out. What can pharmaceutical companies do to try to recover some of this lost profit from expirations?

            Often times, pharmaceutical companies simply try to move consumers on to a new, sometimes more effective, version of their drug that lost it�s patent protection. On example of this happening is with AstraZeneca�s Nexium. Nexium, known as �the new purple pill,� is AstraZeneca�s replacement for Prilosec and both are heart burn medications. In Prilosec, AstraZeneca had the best-sellin drug on the market in 2000, approximately $6.2 billion in sales. (Davis, 2001) Prilosec�s patent expired in 2001 though, and AstraZeneca would be faced with generic competition for its multi billion-dollar drug, leading to the potential of major profit loss.

Obviously, AstraZeneca did not was to simply loose all this revenue simply because its patent expired. No, they created a new drug, Nexium. Nexium would be able to replace Prilosec as it is and will be advertised as a somewhat more effective prescription than its predecessor Prilosec. (Davis, 2001) This could mean that AstraZeneca may not loose its sales revenue do to the expiration of Prilosec�s patent after all. This means there is a real possibility of fear of loss of revenue due to patent expiration causing pharmaceutical companies to develop new innovative prescription drugs that have the potential to earn them profit.

There seems to be a trend developing in that companies whose patents are expiring already have new and better prescriptions available for consumers to switch to as described previously. Is this a marketing ploy? Even if it is, it certainly represents innovation on the part of the pharmaceutical industry because in order to have new prescription drugs for patents to switch to when the patents expire on companies current prescription drugs, their must be some improved attributes to the new prescription drugs or the consumer will just keep taking the same thing in generic form.

Patent Expiration and Generics

The pharmaceutical company that produced the brand name drug can also produce a generic, but are less likely to several years after the patent expires. (Hoffman et al, 2007) Once the patent expires on a drug, authorized generic drugs can be made. This involved the original manufacturer of the drug and an authorized generic maker producing a drug that has the same formula, no brand name, and is sold at a lower price. The authorized generics are not marketed until patent protection is lost and are usually discontinued once other generics hit the market. (Hoffman et al, 2007) It is these other generics made by generic drug companies that represent cost savings to consumers and even though the pharmaceutical companies developed the drugs, after the patent has expired the generic equivalent of the previously patented prescription drug can be marketed and sold at low cost forever. This is why the excessive costs of prescription drugs only last for so long, and people who are paying excessive prices for prescription drugs only have to wait until the patent for their prescription expires and at that point they will likely see a generic equivalent that they can purchase for a much lower cost.

The Hatch-Waxman Act

            When a patent expires and generics are set to enter the market there are many obstacles that can prevent a generic from reaching the market and thereby providing consumers with the option of getting a much needed prescription for a lower cost. The Hatch-Waxman Act set out to expedite this process, while also keeping the patented prescription safe and thereby still providing the profit possibility incentive for major pharmaceutical companies.

            In 1984, only 20% of the pharmaceutical prescriptions written were for generics. This was due, in a large part, to the fact that federal regulations required generic drug companies to test for safety and efficiency even if the drug they were marketing was exactly the same as a brand name that had been on the market for years. (Conaway, 2003) The Hatch-Waxman act relieved the generic drug companies from performing these tests and thereby reduced their cost. Under the Hatch-Waxman Act, generic drug companies would no longer have to perform expensive tests themselves. Generic drug companies would only have to show that their drugs were equivalent to the ones that were previously tested by the big name pharmaceutical companies because if the formula was the same and the drug has already been tested, what is the purpose forcing generic drug companies to re-test their drugs and possibly prevent them from being able to market a generic due to the costs associated with the expensive testing processes? (Conaway, 2003)

            Nearly half of the prescriptions today are for generic drugs, an improvement that can certainly be credited to the Hatch-Waxman Act. These generics save consumers billions of dollars in costly prescriptions each and every year. (Conaway, 2003)

            In addition to the benefits for generic drug companies, the Hatch-Waxman Act also provided more protection for the pharmaceutical companies patented drugs. If a generic drug company filled an infringement suit over a companies patented prescription drug, then the generic company could not simply start producing the drug. (Conaway, 2003) A 30 month minimum was put into place by the Hatch-Waxman act to protect the patented drug company�s profits while the patent infringement lawsuits were being sorted out in court. Also brand-name companies were given an initial five years before generic drug companies were even able to challenge the patent. Most of the time this five years is only enough for a brand-name drug to be patented and then get FDA approval. (Conaway, 2003)

            The Hatch-Waxman Act has helped to modernize the patent system as it helps generic companies produce more generic drugs that are cost-saving medicines for the many consumers that need them. At the same time the Hatch-Waxman protects the current brand-name drug companies by keeping their profits safe during an infringement suit and setting a time limit as to when generics can challenge their patents. It seems that new laws such as the Hatch-Waxman Act are reforming the patent system to make it even better than it already is. There certainly will a future Act such as Hatch-Waxman that will expand on the regulations of patent system or reform it to a new and greater status.

Hatch-Waxman and Antitrust

            Recently there have been some interesting developments related to the Hatch-Waxman Act in that brand-name pharmaceutical companies are paying off generic drug companies to not produce generics so they can continue to reap the profits from their patented prescription drugs. For example the brand-name company Schering-Plough recently paid $60 million to Upsher-Smith, a generic company, to not introduce a generic drug. (Field, 2003)

            Antitrust issues are a stake in this patent payoff business in that litigation of patent infringement disputes sometimes result in reverse payments to generic companies. The Paragraph 4 of the Hatch-Waxman act covers patent infringement lawsuits, but this may also be where litigators are able to justify the payoffs of generic drug companies. Brand-name drug companies should not be able to pay off generic companies in order to keep a generic off the market so they can continue profiting from their patent. (Bulow, 2003) These side payments are considered very questionable in relation to violating U.S. antitrust laws. Antitrust laws are in place in the U.S. in order to keep companies from controlling the market. This must represent some flaws in the wording of the Hatch-Waxman Act and certainly displays the potential for reform of the Act. (Field, 2003)

The Morality of Patents

During the time a prescription drug company has a patented product; it has a monopoly on the benefits the prescription drug offers to consumers. When a company has a monopoly on its product it is free from market competition and can therefore charge whatever price the market will pay. (Hoen, 2003) This price is usually the most profitable price as few companies will choose do charge less on the basis that they want to help people who need their medicines for a better, healthier life. This is somewhat of a downside to the patent system in that those who are receiving the newly marketed drugs are only those who can afford them.

            There is a conflict between companies who have rights to make profits on innovative new drugs and those who wish to direct companies to innovate new pharmaceuticals for developing countries. (Hoen, 2003) The amount of new medicines developed over the last 25 years is approximately 1.400. Only 1% of these new medicines have been for tropical diseases, such as new malaria drugs, that kill thousands of people every year. (Hoen, 2003) Developing world�s diseases do not represent a profitable venture for pharmaceutical companies and that is why innovative drugs for the people of the developing world are not being developed. (Hoen, 2003)

            Some even say that the patent system is a fault for the lack of prescription drugs available to developing countries. (Sterchx, 2005) Also, that the patent system is the main contributing factor to the lack of essential drugs in developing countries because the patent system raised drug prices and provides less choice of sources of drugs. Some would even call the patent system inhuman, as poor people in developing counties are dying because they cannot afford to buy prescriptions drugs they need and the fact that these prices are necessary to ensure pharmaceutical research and development is an unacceptable excuse. (Sterchx, 2005) Insuring that sick people have access to the prescriptions that they need should be the goal and because the current patent system does not achieve this for the men, women, and children of developing countries some think that the patent system should be redone and changed so that these people do have access to the prescriptions drugs that they need. (Sterchx, 2005)

            This assertion that the patent system is a fault for the lack of prescription drugs in developing countries may be jumping to conclusions. Is it really the patents given to pharmaceutical companies and the subsequent expensive prescriptions the reason developing countries don�t have the prescription medications they need, or is it public policy that is public policy and lack of aid to poor, developing countries that is to blame.

            This issue may have to be resolved through politics and government intervention. The patent system is not at fault for the fact that these patients throughout the world cannot pay for available drugs nor have access to them. (Lehman, 2003) Something is being done in that in 2004 the Bush Administration did subsidize the purchase of HIV medicines to be distributed to poor countries. (Lehman, 2003)

            Better yet, if private companies in developing countries are able to develop their own prescription drugs they will not have to depend on countries like the U.S. for aid. Organizations such as the Gates Foundation and Global Malaria Initiative fund the creation of pharmaceutical industries in developing countries that potentially can help combat the wide range of problematic disease these countries are suffering from. (Lehman, 2003)

            In summary, a patent is a property right to a product and in the case of pharmaceutical companies is usually in the form of a chemical formula that may not be duplicated by any rival company. Patents are enforced by National Patent Offices and the World Trade Organization provides the patent protection to those seeking the protection by giving judicial enforcement of the intellectual property rights. The research and development of new prescription drugs is where the innovation takes place and patents provide the reward for potential profit encouraging pharmaceutical companies to research and develop more new prescription drugs year after year.

Patent expiration leads to the marketing and sales of generic equivalents to the previously patented prescription drugs. This patent expiration represents a loss in profits for pharmaceutical companies who may try to encourage customers to switch to a new and better equivalent of the previously patented prescription. The generic drug companies have benefited recently from the Hatch-Waxman Act that allows them to put their generics on the market without having to go through costly testing, only proving that their generic is the same as the previously patented brand-name prescription drug.

The patent system has been questioned not only by those expressing errors in the systems scrutiny of some granted patent, but because of the lack of much needed prescription drugs in developing countries that the patent system does nothing for. There is no question that these are concerns that have to be addressed in the future, but it doesn�t seem that changing the patent system is the answer. Although the there is always room for reform, there is no doubting that the patent system�s patents provide the reward of potential profits for which pharmaceutical companies will develop new and innovative prescription drugs.

References

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