Wednesday, April 30, 2014

Changing the way drugs are patented

One of the big problems with drug research is the conflict between producing low cost drugs that can manage or treat various medical conditions and allowing drug manufactures the ability to remain in business by ensuring a profit. These conflicting objectives are further stressed in third-world and developing countries that do not have robust middle class populations that can afford high price medication or insurance that will cover this medication. However, it also must be understood on the issue of drug company profits that drug development successes have become more difficult in modern times and these successes must pay for the research and development of both the successes and the failures.

Originally fully functional patents, not provisional patents, offered market exclusivity sans negotiated licenses, for 17 years. However, patents issued after June 8, 1995 now have an original operation period of 20 years. In addition there are various options for extending the intellectual property protection of a patent based on how long it takes for the FDA to approve the drug for marketing and sale or if the drug falls into a specific category of treatment.

Drug companies also have other “less genuine” strategies for extending market exclusivity of a drug most notably “evergreening”. Evergreening typically involves making minute changes in drug formulation like the inclusion of chirality (left-handed and right-handed isomers), different inactive components or specific hydrate forms. Both the initial time period and evergreening have been widely criticized by generic drug advocates looking to hasten the emergence of lower cost options in the marketplace. Evergreening is viewed as especially troublesome because it is frequently thought of as gaming the system and a form of patent trolling by producing a weak secondary patent or change to support a nearly expired primary patent.

Unfortunately for generic drug advocates it is difficult to expect a significant change in the general length or structure of patent protections without a trade-off because of the research and development costs associated with drug development. Generic drug manufactures do not have to absorb the costs associated with drug discovery typically involving high-throughput active compound analysis and lengthy clinical trials. While the general costs associated with drug development are incredibly controversial with some estimates ranging from the upper hundreds of millions of dollars to even billions of dollars and other estimates ranging in the lower hundreds of millions of dollars, no rational person disputes that it costs at least tens to hundreds of millions of dollars to produce a new drug that fails in a phase 3 clinical trial and hundreds of millions of dollars to produce a successful new drug. Therefore, drug manufactures must have sufficient opportunity to neutralize those costs and other general overhead with revenue from their successes. While the principle creator of a drug can license production to another company, the lower prices that emerge in combination of the time limit associated with the patent greatly limit revenue and overall profitability.

Notwithstanding the fairness element in drug manufacturing profitability, waiting 15+ years for lower cost options of various new drugs is too long, especially in a world where bacteria resistance to existing antibiotics and understanding of biological methodologies associated with neurological diseases have advanced at a rapid pace. Therefore, a compromise needs to be reached that will allow drug companies to recoup their R&D losses as well as produce sufficient revenue for future research, yet still hasten the time taken for low cost generics to appear in the marketplace. The best strategy may be to create a mandatory compulsory license in the patent system for drugs that automatically triggers after a shorter market exclusivity period.

For example instead of a 20 year exclusivity period what if drug patents were 5 years of market exclusivity followed by a 10% royalty in perpetuity derived from price on all generics based off that patent. This strategy would allow lower cost generics to enter the marketplace typically 15 years earlier than they do now. While this arrangement will work better for those who want access to pharmaceuticals for poorer individuals both in developed and developing countries, does it allow pharmaceutical companies to cover the costs of R&D and continued expansion? This is a difficult question to answer in all situations because there are various moving parts, but a general idea to the efficacy of this idea can be demonstrated through a general example.

Suppose company A produces an effective suppressive treatment, drug A, for condition A. Note that this treatment must be taken continuously over a period of time, i.e. it is not viewed as a “cure”. This characterization is not surprising because a vast majority of pharmaceutical drugs that are commonly consumed in modern society have this feature, i.e. one prescription of statins do not permanently reduce cholesterol. Therefore, because drug A has to be taken constantly, multiple prescriptions will be filled over the course of a year; for this example the number of prescriptions per year for drug A will be 4. However, it has also been noted that due to the cost of non-generic drugs certain consumers “split pills” lengthening the total time required to fully consume a full prescription. Due to this behavior the example will assume that 3.5 prescriptions will cover a single year for drugs under patent. The price of drug A while on patent is 150 dollars per prescription with a manufacturing cost of 20 dollars yielding a profit of 130 dollars per prescription.

Typically due to the large prices of patent drugs the marketplace is limited to the more developed world. In this example the marketplace for drug A will be 900 million individuals and if condition A has an occurrence rate of 2% that would create a potential customer base of 18 million individuals. Over time this customer base will increase due to other individuals coming down with condition A and current consumers remaining on drug A. This increase will equal 1% of the current customer base (i.e. last year’s customer base). Starting as a new drug it makes sense that drug A will not acquire a full market share on the first year of its introduction. The market share will be 5% for the first year increasing to 10% for year 2, 20% for year 3, 40% for year 4 and leveling off at 70% for year 5 and beyond. For the current on patent method it will be assumed that no other company will be licensed to manufacture drug A and that after the patent expires in 20 years drug A will be pushed out of the marketplace entirely by lower price generics.

In the new suggested patent idea after 5 years on patent a 10% royalty for all generics would activate. Access to generics would open the entire rest of the world to treatment by drug A for condition A (another approximately 6.1 billion individuals). Since a number of chronic drugs are influenced by excess food consumption and less exercise it stands to reason that the occurrence rate for condition A in these developing and third-world countries will be lower. For the purpose of this example the occurrence rate for these new potential consumers will equal 50% the occurrence rate in the developed world (i.e. 1%). This scenario will produce an additional 30.5 million potential consumers for drug A. Generic prices are significantly lower than on patent drug prices, thus for this example the average generic price, which will service all individuals after 5 years even those in the developed world, will be 80% lower (i.e. 30 dollars per prescription). Due to the lower price, consumers will not feel the need to “split pills” thus the recommended 4 prescriptions per year will be observed. It is assumed that charitable organizations and NGOs will assist low-income consumers with purchases in poor countries. However, while NGOs and the like will help due to continuing income gaps, existing alternative strategies that have been utilized while drug A was under patent and distribution concerns in various countries where market stability is in question the global marketplace penetration of generic drug A will be 50%.

Table 1 below summarizes the major features of each strategy:

Table 1 – Important Initial Condition Elements

Current Patent Method:

Initial Customer Base – 18 million;
On Patent Years - 20
New Customers – 1% growth per year;
Price - $150;
Occurrence Rate – 2%;

New Patent Method:

Initial Customer Base – 18 million;
On Patent Years - 5
New Customers – 30.5 million after year 5 and 1% growth;
Price - $30;
Occurrence Rate – 1%;

After analysis of the above scenario the major results are summarized in the below table:

Table 2 – Important Financial Results

Current Method:

Total Revenue after 20 years - $9,952,552,601
Total Revenue after 40 years - $9,952,552,601
Total Consumers per year after 20 years - 4,754,302
Total Consumers per year after 40 years - 0

New Method:

Total Revenue after 20 years - $5,211,049,656
Total Revenue after 40 years - $10,260,542,661
Total Consumers per year after 20 years - 74,872,229
Total Consumers per year after 40 years - 93,272,020

Breakeven Year - 39

Not surprisingly after 20 years the current method produces a larger profit for company A versus the new proposed method. However, after 40 years the new proposed method creates more profit. After both 20 and 40 years the number of consumers that are aided by the new method is significantly larger. The most debilitating controllable factor preventing greater yearly revenue from the new method is market penetration. In the above example the 50% market penetration was viewed as conservative. If market penetration were 70% the breakeven year would be between year 30 and year 31. Of course it must be acknowledged that the nature of this example is heavily influenced by various factors, thus this result cannot be taken as the typical result in all situations.

Clearly the new method is superior for drugs that do not have an initial high price point like antibiotics. Another advantage of using this method for antibiotics is that while there exists the small probability that human beings will one day no longer suffer from the chronic conditions (high cholesterol, high blood pressure, erectile dysfunction, etc.) heavily reducing the need for these types of drugs, it is very unlikely that humans, sans becoming cyborgs, will be able to escape pathogenic infection and the need for antibiotics. Therefore, this new method should work better for antibiotic research in long standing companies versus the current system.

It should be noted that at least two important elements were excluded from the above analysis that should have significant economy impact due to a lack of specifics and pertinent information. First, the principle pharmaceutical developer, company A, typically will spend millions of dollars in direct to consumer advertisement and hundreds of millions marketing to physicians. It is rational to expect that a disproportionate amount of these advertising dollars will be spent in the initial launch of the drug to create interest and market share. However, it stands to reason that at least 50% of the total money spent on advertisement will occur between patent years 6 to 20. Under the new system this money would not be spent on advertisement and could be directed towards other activities like future research.

Second, as discussed above various pharmaceutical companies devote significant resources both in researcher labor and money to increase the length of their patents through the process of evergreening. Under this new system pharmaceutical companies would not have the ability to extend the patent, thus would not devote financial capital and man-hours to trying. The total value of these resources is unknown, but it stands to reason that an appropriate estimate is in the millions of dollars in direct capital with the additional costs born of the unknown opportunity costs of devoting valuable research staff to try to save the patent on an expiring drug rather than research a new drug.

Another side benefit from this system should be a reduction of the counterfeit drug market. The principle reason that counterfeit drugs are a desirable criminal enterprise is the high per unit profit margins. However, with only five years of patent protection the longevity of the counterfeit marketplace is significantly eroded making it financially risky for individuals to attempt to create a supply chain to forge these types of pharmaceuticals. Even if individuals do counterfeit these types of drugs the overall potential for harm is significantly lessened because of the small patent window before safe generics can enter the market replacing the counterfeit drugs.

However, one of the biggest concerns with this new suggestion is that while it will work for “blockbuster” drugs and should provide a boon to critical new antibiotic research, smaller marketplace drugs, most notably for orphan conditions, would be hurt due to the limited volume profitability potential. Both blockbuster drugs and antibiotics work in this new system because of the volume of individuals who will take these drugs over the decades long lifespan. Drugs for orphan conditions by definition do not have a large volume of potential consumers. This lack of a customer base is why orphan conditions have typically been neglected for so long in general practice. Those companies that do attempt to create drugs for these conditions are motivated largely by the ability to corner a market with small volume but large per unit profit margins. Cutting patent protection for these orphan drugs by 75% would be devastating for their profitability, which would lead companies not to attempt to discover them in the first place. Therefore, if the above suggestion is incorporated into new patent enforcement then a special condition must be made for orphan condition research.

Changing the operational nature of patents, especially in such a volatile market, due to the critical nature of pharmaceuticals in human longevity, cannot be taken lightly. The suggestion above attempts to address the two conflicting forces in the field by allowing drug developers the ability to take advantage of their successes to produce the necessary revenue to produce additional successes while also ensuring a humanitarian morality that drives the desire to place quality pharmaceuticals into the hands of those in need at affordable prices. The above financial analysis identifies the 5-year lifetime 10% royalty patent idea as a viable alternative to the current patent structure. However, as noted above an exception clause must be made for drugs that are being developed for orphan conditions lest those diseases may continue to be forsaken due to their characteristics as a financial loser. Overall while there are some financial elements that were only generally covered in the above analysis due to a lack of information and differential situations, it currently stands to reason from a logical perspective that changing the patent enforcement rules for pharmaceutical drugs could be a win-win for both global consumers and pharmaceutical companies.

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