Why Are Drugs So &!$@#%! Expensive?

It’s true: prescription drugs are awfully expensive. In the United States, annual costs of prescription drugs exceed a half trillion dollars—that’s nearly seventeen percent of the nation’s personal health care bill. And they’re among the fastest growing segments of health care spending.

The cost is more than financial. Last year, about twenty percent of Americans chose not to fill at least one prescription due to financial considerations, while others rationed the drugs they did acquire. The rising cost of biopharmaceuticals is a critical national concern.

So, why exactly are these drugs so expensive?

The public discourse typically focuses on the most visible drivers of cost. These include research and development investments, the significant marketing and advertising campaigns of drug makers, an inefficient healthcare system, and regulatory hurdles, among many others. All are true.

But if we want to start reducing the cost of our prescription drugs, there’s another place to look, one too little considered, and one that research tells us can make a huge difference: secondary patents, or the patents that protect peripheral features of a drug rather than its active ingredient.

The Good and the Bad of Secondary Patents

Patents provide exclusive rights over a product for a full twenty years, enabling the rights holder (e.g., a drug manufacturer) to charge higher-than-competitive prices to recoup those research and development costs. After the twenty-year patent term expires, generics can enter the market, and the competition drives down drug prices and increases access to life saving pharmaceuticals.

The first patents are filed early in the research phase and typically claim the drug’s active ingredient. Later in the drug discovery process, however, firms often attempt to acquire secondary patents on different formulations, or dosages, or alternative forms of the drug’s active ingredient. Those later-
filed secondary patents extend the exclusivity period, allowing the patent-holder to extend their control of the price—and the profits. 

But do these secondary patents represent true innovation? Or do they provide little or no benefit, merely delaying the competition of generic, cheaper alternatives?

Consider Buspar, a drug used to treat anxiety. Bristol Myers Squib obtained a secondary patent on the meta­bolite of the active ingredient of Buspar on the eve of the active ingredient patent’s expiration. A metabolite of a compound is the modified form of the compound that results from ingestion or metabolization. There’s nothing novel or new about that. Under standard patent law principles, this patent should have never been issued. Indeed, a court later invalidated the patent on summary judgment. But until that judgment, Bristol Myers Squib reaped the benefits of keeping the price for Buspar arbitrarily high.

It’s not that all secondary patents are inherently dubious. Some do stem from continuous research and development and offer important clinical and therapeutic benefits. Take, for example, Lumigan, a drug which treats glaucoma.

The original formulation of Lumigan had a side effect: severe red eye. That led to a significant number of patients discontinuing the drug without telling their physician, and this sometimes resulted in blindness. Lumigan’s manufacturer, Allergen, developed a second formulation of the drug that reduced that adverse side effect, in turn improving patient compliance. Here, the secondary patent clearly provided a significant clinical benefit over the primary one, warranting an extension in market exclusivity.

Not all secondary patents are created equal, but our system of granting these patents does a poor job of distinguishing the good from the bad. We can do better.

Too Many Patents, Too Little Time

To know how to do better, we have to understand where the system actually breaks down. As simple as it sounds, the time spent on patent applications may be the problem.

On average, a patent examiner spends only nineteen hours reviewing a patent application. A typical pharmaceutical patent application might run to 100 pages, with extensive, highly complex claims. Clearly, nineteen hours isn’t enough time to do the job well. And because patent applications are presumed valid upon filing, if examiners don’t find and articulate a basis to reject an application in the allotted time, they are legally expected to allow it.

It’s easy to see how this hurried process leads to bad results.

Follow the Examiner

My new research, co-authored with Michael Frakes of Duke University School of Law, is focused on attacking this problem. Our research tests whether giving patent examiners more time to review patent applications on peripheral drug features will increase the quality of issued pharmaceutical patents. We also conduct a cost-benefit analysis of this reform.

To investigate empirically the link between examination time and the various markers of the legal validity, we followed the patterns of the examiners themselves.

Here is how we did it. Patent examiners are allocated a certain amount of time to conduct each patent investigation assigned to them. But, as they are promoted within the Patent Office, they typically incur a 10-15% decrease in that time allocation. Because of this, and because applications are assigned to examiners randomly, we could explore whether examiners issue secondary patents of more dubious validity when they get promotions that leave them with substantially less time to review applications.

Our results are striking.

Examiners do issue more dubious patents as they get promoted, dramatically so. And the research is also clear that adding time back to a review process, or even increasing it, can have just as dramatic benefits. Our numbers show that a 50% increase in examination time is associated with a 10 percentage-point decrease in the likelihood that the Patent Office will issue an invalid secondary patent.

Put another way, over just one year, a 50% increase in examination time per application would result in a staggering 17 years of accelerated access to generic drugs.

What would these 17 years of accelerated access mean?

It would mean that individuals taking prescriptions because their lives depend on them could realize lower prices, transforming other areas of their lives that would benefit from the resources they’d save. It would mean that patients rationing their prescriptions, or refusing to fill them at all, could finally access the health care they actually need.

It would mean, according to our estimates, a total consumer savings of somewhere between $2.53 and $5.28 billion—yes, billion—per year from lower prices and increased access.

But Can It Be Done?

Happily, increasing the time spent on these applications would be easy to do. No act of Congress nor any regulatory oversight is needed for the USPTO to simply hire more examiners, and the cost involved—our research shows that $20M is the right number—could come from straightforward changes to the fees pharmaceutical patent applicants pay. In other words, taking this step would be cost neutral.

There’s yet another hidden benefit to doing this: the elimination of administrative fees associated with downstream litigation around bad patents. The same research shows that approximately $32M in these costs can be saved by a more efficient and effective patent review process.

Investing in resources for the Patent Office won’t solve the entirety of the high cost of prescription drugs. Other
challenges, from the high cost of research to regulatory hurdles, are real and stubborn. But if we can save up to $5B with an investment of time, at no cost to American taxpayers, that seems like a good place to start. 

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