Monday Jun 27

EXCERPT: The Privatization of Everything

Drug Prices and the Pirates of the Patent system

If we value discovery and innovation, if we believe that each new discovery is “a service rendered to society,” as Immanuel Kant argued, then we should value open knowledge and its broad dissemination. But we also value those who made the discoveries, and we know that many of our geniuses deserve to be paid. Our Constitution captured these sometimes competing needs by giving Congress the “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.” We should take note of the intent. It was not to protect individual property rights; it was explicitly for the purpose of promoting progress. Whenever our patent system, a delicate balancing act between public and individual needs, becomes distorted by private interests, we should err on the side of promoting progress.

Economist Mariana Mazzucato has a powerful insight into how our thinking about patents might return to this original understanding. The patent system, she argues, should be understood not as a defense of “intellectual property ‘rights’ in the sense of something that is universal and immutable, but as a contract or deal based on a set of policy choices.” The owner of that patent is making a deal. He gets a government-protected monopoly for a limited amount of time. But to get this benefit, he must show his hand, and accept the fact that his invention will ultimately be incorporated into the body of open knowledge as a public good.1

Over time, unfortunately, the balance has moved to the private side of the transaction. We have begun to assume that the whole purpose was always to protect property rights rather than the public good. “The current dominance of the narrative of entrepreneurs as wealth creators has,” Mazzucato notes, “shifted the balance of the patent system away from an emphasis on the diffusion of knowledge towards private reward.” The patent system now does more to inhibit the expansion of knowledge than it does to promote it. Patent trolls thrive in an environment where it’s easy to get a patent covering vague “discoveries.” Repeated budget cuts to the U.S. Patent Office mean there are fewer reviewers with less expertise in charge of making decisions on an even larger, and growing, number of applications. Faced with a long backlog and a loosening of regulations, they are forced to approve even questionable applications while hoping that the courts can figure it out down the line (this of course just amounts to shifting the costs).

What’s more, we allowed private businesses, after extensive lobbying, to rewrite patent law and redefine the boundaries of what can be roped off and placed in the private domain. The Bayh-Dole Act of 1980 effectively allowed patents not just on products but also on ideas and discoveries that might lead to a useful purpose. While the definition of what could be patented was changing, so too were business expectations regarding how long a patent monopoly can stay in place, and the brand-name pharmaceutical companies led the way. In the early 1980s the big pharmaceutical companies lobbied hard for changes to the Hatch-Waxman Act of 1984, which was supposed to encourage generic drugs. According to a patent lawyer who represented the generic pharmaceutical industry, “it did not take brand-name manufacturers very long to realize that it was more profitable to find ways to improperly delay generic competition on older medicines than to invent new medicines.” And so, even though the law was supposed to level the playing field, “for decades, brand-name manufacturers have gamed the provisions of Hatch-Waxman to delay competition.”2

The result has been higher prices and less innovation, except when it comes to delaying generic versions of a drug from coming to market. Big pharma has developed tactics like authorized generics, pay for delay, product hopping, and citizen petitions. In 2017 Amgen attempted to evade U.S. patent law by housing its patent for the dry-eye treatment Restasis with the Saint Regis Mohawk tribe, an attempt the courts shot down.3

But no tactic for extending a monopoly is perhaps more pervasive than “evergreening” patents. Hatch-Waxman opened the door, ever so slightly, to patent renewals, and the pharmaceutical companies kicked it wide open. A typical scheme involves making small changes to a drug, its manufacturing process, or its delivery system and using that opportunity to apply for a new patent. Just the application triggers federal protections, so they file lots of applications. The scale of the effort by name-brand pharma to keep popular drugs evergreen is staggering. One study found that each of the top twelve name-brand drugs in the United States have, on average, 125 patent applications associated with them. This strategy amounts to an average of thirty-eight years of applied-for patent protection—almost twice what the law allows. The most popular name-brand drug in the United States, the arthritis treatment Humira, is surrounded by a thicket of 247 patent applications representing a corporate plan for thirty-nine years without competition from a generic. Since 2002, the cost of Humira has risen by 144 percent.4

But that price increase is relatively modest. We’ve also seen the high-profile example of Daraprim, which Turing Pharmaceuticals raised from $13.50 to $750 a tablet in 2015. Or Sovaldi, used to treat hepatitis C, which debuted at $84,000 for a full twelve to twenty-four week treatment. Overall, we’ve seen drug prices triple over the last ten years. Most industry analysts see at least another doubling in the next ten years. Everyone knows this is a problem. One out of four people with diabetes is rationing their insulin doses—taking less than the required amount so more doses will be available—because they can’t afford this life-sustaining drug. Hospitals are making expensive drugs less accessible. When the University of Utah hospital system saw its annual cost for Isoproterenol, a heart medication that can help stabilize patients in shock or after a heart attack, go from $300,000 to $1.9 million (or from $440 to $2,700 a dose), it took drastic measures. According to Erin Fox, the system’s director of drug information, “We were forced to remove isoproterenol from our 100 emergency crash carts. Instead, we stocked our pharmacy backup boxes, located on each floor of our hospitals, to have the vital drug on hand if needed. We had to minimize costs without impacting patient care.” Our fellow citizens are taking trips to Canada and Mexico for drugs, or taking risks with dodgy online suppliers. We all know this is wrong. We have been slower to come to the realization that it doesn’t have to be this way.5       

The lack of action on drug prices is rooted in the argument that if we regulate or control prices, we will kill innovation. The argument assumes that the free market is the main driver of innovative drugs. This is false. A long history of partnerships between the public and drug manufacturers shows how false this is. The pharmaceutical industry would likely not exist if it weren’t for the stream of public funding—nearly $900 billion— that started flowing in the 1930s. Even after the industry received government protections during the 1980s that were supposed to lead to more innovation, the public kept chipping in. Between 2010 and 2016 every single one of the 210 drugs approved by the FDA had received an assist from the National Institutes of Health through a total of $100 billion in funding for research projects. Those 210 drugs were the result of some 118,000 NIH Research Project Grants, which shows how complex and involved drug development can be. Like some of our highest achievements, they can be realized only through extensive support and vast resources. Seldom does a single private company have the resources to go it alone.6

Sovaldi, the hepatitis C drug that costs $1,000 a dose, and its later incarnation Harvoni, are derived from a compound discovered under NIH and Veterans Administration–funded research. The public provided some $300 million toward this research, and the drug company Gilead did the follow-up research, making an important but smaller contribution to bring the drugs to market. The real breakthrough was in the discovery of the compound, and it’s this kind of research that’s often too risky for private investors to get behind. But once the groundwork is there, companies and investors start to line up. In this case, given how these drugs could be priced, it was a no-brainer for investors. Gilead made $45 billion in revenue in the first three years. It’s hard to imagine how it could have spent more than the public’s $300 million on research. One thing we do know about big pharma, however, is that they spend more on marketing than they do on R&D.7

The big drug companies have become “financialized” and have a huge role in the Wall Street ecosystem. They are significant lures for private equity and hedge funds that have no real interest in biotechnology but have lots of interest in lots of money. Martin “Pharma Bro” Shkreli was a poster boy for this phenomenon, before he was sent to prison. He and his ilk see a winning formula in pharmaceuticals, and it’s not unlike the one harnessed by the academic publishers and AccuWeather. First, find useful and important knowledge funded by the public. Take it, for free. Then get the government to protect you so you can “innovate.” Pump money into marketing and draw investors. Set an absurdly high price knowing that people will pay because the public has protected you through patents. Rest assured that the profits you make won’t have to be sacrificed to R&D because the public is already working hard on the next big innovation. That means you can reward your investors.

Big pharma rides this formula toward profit margins of 15–20 percent, and then turns to tell their customers that high drug prices, and all the suffering these prices produce, are just the cost of innovation. Meanwhile, 74 percent of the patents they file are just variations on a theme—an old drug with either a new delivery system, different dosage, or slightly altered manufacturing process. The real innovation still comes from the public: nearly 75 percent of all new “priority rating” compounds, the most radical new drugs, originate in NIH-funded research.8

The public has not abandoned research and innovation; private drug firms have. And they have become infected with a particular Wall Street virus, one that prioritizes money made from interest, rents, patents, market manipulation, and extraction over money made from actually creating things. The public, having already paid once for the research that gives us our most important treatments, has every right to lay claim to the knowledge behind these products as public goods. What’s more, the very legislation that contributed to the current problem contains key solutions that have been largely ignored. The Bayh-Dole Act from 1980 tried to balance the loss of public control over publicly funded research by permitting price caps on important products. This provision has never been used. Not once.9

If we are realistic about how innovation happens, if we look at the facts of how important inventions arise through a combination of public research and private follow-through, we could do away with the view that the common good must be sacrificed to immutable property rights. The public contributed to these useful inventions; the public gets a say in how they can be accessed. Long before our current era of religious-level fervor for the free market, we granted the public the right to use patents. Under current law, the government has the right to create or have created generic versions of drugs in order to serve a public need. The government must also pay a “reasonable and entire compensation” to the patent holder. The amount can be negotiated or challenged in court, but the right of the people to access patented public goods cannot be denied. This right exists. It’s codified in U.S. law. But our current slavish devotion to private profits ensures that its use is exceedingly rare.10

There have been a few exceptions. The military asserted government patent use for night-vision goggles and lead-free bullets. The Treasury has adopted patented software without permission. The patent holders received royalties, they made a lot of money, the free market did not collapse, and we didn’t slide into socialism. If we can do this for soldiers and accountants, we can do it for fellow citizens who pay taxes that go toward pharmaceutical research. In fact, it might not even come to that, if we simply assert the leverage that government patent use conveys. During the 2001 anthrax scare, Tommy Thompson, the secretary of health and human services, tried to create an emergency stockpile of Bayer’s Cipro, the only effective anti-anthrax drug. Bayer first pushed back on requests to ramp up production; then it quoted an unconscionable price. Secretary Thompson’s moves to assert the right to a government patent use, however, got the company’s attention. The public obtained the supply it needed at half the regular price.11

Can we expect to see such forceful moves again? Today’s Republican Party seems to have sprinted in the other direction. President Trump’s rhetoric on lowering drug prices rang hollow after he appointed no fewer than sixteen drug-industry insiders to top health-related administration positions. Even after losing his HHS secretary, Tom Price, to a scandal arising from his coziness to the health industry, Trump doubled down on his romance with big pharma by replacing Price with the president of Eli Lilly, Alex Azar. At the time, Azar’s company was suffering PR blowback from its steep hike in insulin prices and a lawsuit claiming it engaged in price fixing. Perhaps sensing that his new secretary had no interest in affordable drugs, Trump opted for his favored policy option—the shameless lie. “Drug prices are coming down, first time in 51 years because of my administration,” he said in 2019, despite reports later that the prices of 4,412 name-brand drugs had gone up in the year prior. Only forty-six drugs saw prices go down.12

Still, the need to lie tells us something. We all know, on a gut level, that the current situation is wrong. But it is exponentially more wrong when we realize that we have been paying for the research and that the drug profiteers are taking advantage of a patent system designed to benefit the public. And even that wrongness is compounded again by the fact that our politicians have long had the tools to fix this problem but have refused to act.

That lack of political will goes back to our ingrained belief that innovation arises only from competition and lightly regulated corporations. This belief has brought us secretive charter schools, a defunding of public higher education, an absurdly inefficient system for publishing research, attacks on the National Weather Service, and unconscionable drug pricing. When it comes to the creation of knowledge and real innovation, it’s the public that has the resources and willingness to take risks, and it has the added benefit of being able to work toward a solution that benefits all, not merely a solution that enriches a few. Such solutions, as with drug pricing, are at hand. But first, as we said at the beginning of this book, we have to change the conversation.

Donald Cohen is the executive director of In The Public Interest based in Oakland, California.

Allen Mikaelian received his M.A. in history, with distinction, from the University of London’s Institute for English Studies. He lives in Washington, D.C., and serves as a board member and adult literacy tutor with the Washington Literacy Council.

Copyright © 2021 by Donald Cohen and Allen Mikaelian. This excerpt originally appeared in The Privatization of Everything: How the Plunder of Public Goods Transformed America

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