Patents, Price Gouging and the Enduring Enigma of Drug Costs


In a post yesterday, I expressed my bewilderment at the closure of India’s first (post TRIPS) compulsory licensing dispute by the apex court which, while refusing to admit Bayer’s appeal, curiously noted that it was leaving the “questions of law” open. Jagdish Sagar, an IP practitioner and thought leader noted in the comments section that: “I share your puzzlement, but this is not the first such gnomic order that I have seen.”

Investment Protection for Drug Originators: Mandatory Submission of R&D Costs?

In an editorial in the Mint, I now reflect on the dispute and its implications for one of the best kept secrets of the drug industry: namely R&D costs. For those interested, I reproduce the article below. Towards the end of this piece, I refer to an earlier piece of mine on investment protection for pharmaceuticai inventions, where I advocate a mandatory disclosure of R&D costs for each drug. I note that while it is a tough task to determine R&D cost per drug, we ought to begin somewhere without making the perfect the enemy of the good. Fortunately, with the advent of rational drug discovery, we have a framework in which it becomes a tad bit easier to determine the broad start time and end time of the R&D for each approved drug. And can compute all expenses in this period, irrespective of all the failed leads generated for a single target. I go on to recommend that costs submitted by pharmaceutical companies be subject to patent opposition like regimes, so they can be rigorously contested.. For those interested, the investment protection model is available for free download on this SSRN page.  

Also the affidavit filed by James Love, a leading health activist and founder of KEI, that was relied on by the Supreme Court to dismiss Bayer’s charge that they were under-compensated through the royalty rates fixed by the Patent Office (6%) and the IPAB (7%) can be found here. KEI’s critique of the latest Tufts Study on drug R&D cost can be found here.

And lastly, here is the text of the Mint editorial. Needless to say, I’d greatly appreciate comments and critique.

Patented Price Gouging and the Enduring Enigma of Drug Costs

“In a momentous development for Indian patent law, the Supreme Court recently refused to entertain the appeal of Bayer AG, a German patentee at the receiving end of India’s first compulsory licence. In 2011, the patent office decided that Bayer had priced Nexavar, its anti-cancer drug, at an exorbitant price (Rs.2.8 lakh a month) and allowed Natco Pharma Ltd, a generic company, to produce the same drug at 1/30th the price (Rs.8,800).

As the name suggests, in sharp contrast to a voluntary licence, a compulsory licence is mandatorily imposed on the patentee, whether she likes it or not. Indian patent law is quite distinct from most other patent regimes in that such a permit is not merely a matter of government discretion but an entitlement in favour of any interested third party that demonstrates that the patented invention is not working for public benefit on account of it being unaffordable or not available in reasonable quantities to the public, as was the case with Nexavar.

As expected, the patent office’s decision met with brickbats and bouquets. Soon thereafter, Bayer appealed the verdict to the Intellectual Property Appellate Board, a specialized tribunal, which upheld the decision for the most part. Bayer then unsuccessfully approached the Mumbai high court through a writ petition. It finally trudged up all the way to the Supreme Court, only to have the apex court refuse to entertain its petition. The courts’ dismissal effectively ends a legal saga that placed India under tremendous political and trade pressure from the US and the European Union.

What is interesting to note is that Bayer took issue not only with the issuance of the licence, but also with the royalty rate imposed. A compulsory licence is not a free-for-all regime, but mandates that the person using the permit pay a royalty that accounts in some part for the value of the invention. Bayer rightly argued that its research and development (R&D) costs ought to be taken into account to determine the appropriate royalty rate. Surprisingly, however, Bayer refused to submit its R&D costs to the patent office, leaving it free to rely on a broad World Health Organization estimate of 6% as an average royalty rate under the circumstances. This was then increased to 7% by the appellate board on appeal.

Bayer argued this point again at the Supreme Court, noting that this was an unfair rate. However, much to the court’s chagrin, it refused to submit a true account of its costs. This is hardly surprising, given that drug costs have been the best-kept secret of the pharmaceutical industry—with one exception. Big pharma selectively hands out data to one institution that it funds (Tufts Center for the Study of Drug Development), which then comes up with a periodic study every decade or so.

Not too surprisingly, the costs multiply at a fanciful rate with each such study. The latest Tufts figures were released just last month, pegging the price at an astounding $2.56 billion, up from $802 million in 2003. However, the institute has yet to reveal its methodology for arriving at this humongous figure, a methodology that has been vociferously attacked in the past for several reasons, including the fact that the Tufts Center fails to independently audit the figures submitted by a select cabal of big drug makers. In fact, James Love, a health activist, submitted an affidavit before the patent office during the compulsory licensing hearings, demonstrating that Bayer benefited extensively from US tax credits and public funding for its clinical trials of Nexavar, which ought to be deducted from its overall estimate of drug costs.

Price gouging for patented drugs is not confined to India or developing countries. Recently, US senators demanded an investigation into the pricing of Sovaldi, Gilead Sciences Inc.’s anti-hepatitis C virus drug, currently selling at a whopping $84,000 for a full three-month course (approximately $1,000 a day).

Unfortunately, the legal regimes of most countries do not mandate a revelation of true drug costs. Unless we have this data, we will never know whether drug makers are undercompensated, overcompensated, or fairly compensated. Granted, such a methodology may be subject to contest (particularly around the inclusion of the costs of R&D failure), but surely we can begin somewhere, without making the perfect the enemy of the good.

Given their excessive profits year after year, the prevalent perception is that big pharma is being overcompensated. Till such time as these drug companies are transparent about their costs and profits, India should use this perception in its favour, coming down on the side of public health and affordable medication, wherever possible.

In the past, I’ve recommended an investment protection model for incentivizing drug innovation, noting that drug originators must mandatorily submit their costs in order to merit market protection till they recoup these along with a rate of profit commensurate with the health impact of the drug. Will we see a shift to such a model soon? Only time will tell. In the meantime, drug costs will continue to remain an enigma.

ps: Due credit to Prof Fred Abbot, who first used the term “enduring enigma” for one of his terrific pieces on TRIPS.

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