July 2015
`
`
`
`
`
`
`
`The Impact of Exempting the
`Pharmaceutical Industry
`from Patent Reviews
`
`
`
`By Dean Baker*
`
`
`
`
`
`
`Center for Economic and Policy Research
`1611 Connecticut Ave. NW
`Suite 400
`Washington, DC 20009
`
`
`tel: 202-293-5380
`fax: 202-588-1356
`www.cepr.net
`
`
`
`
`
`
` Dean Baker is the Co-director and an Economist at the Center for Economic and Policy Research in Washington, D.C.
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`CFAD VI 1053 - 0001
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`Contents
`
`
`
`Executive Summary ........................................................................................................................................... 1
`
`Introduction ........................................................................................................................................................ 2
`
`Patent Protection and Drug Prices .................................................................................................................. 3
`
`Quantifying the Costs of Eliminating the IPR Process for Pharmaceuticals ...................................... 7
`
`The Impact of the IPR Exemption on Research Spending ................................................................. 11
`
`Who Pays the Cost? ......................................................................................................................................... 13
`
`Conclusion ........................................................................................................................................................ 16
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`References ......................................................................................................................................................... 17
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`
`
`
`Acknowledgements
`
`Nicholas Buffie provided essential research assistance and Kevin Cashman helped with comments
`and editing.
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`Executive Summary
`
`This paper analyzes the impact of an amendment to Senate Bill 1137, offered by Senator Thomas
`
`Tillis, which would exempt patents related to pharmaceuticals and biological products from the Inter
`
`Partes Review (IPR) process. The IPR process was established in the America Invents Act, which
`
`was passed and signed into law in 2012. The process is intended to provide a quick and low-cost way
`
`in which dubious patent claims can be challenged by those who might be affected. In the first two
`
`years in which it was in place, almost one-third of challenged claims were canceled or removed
`
`according to data from the United States Patent and Trademark Office (USPTO).
`
`
`
`Based on this data, the paper argues that the IPR process appears to be an effective mechanism for
`
`quickly removing dubious patent claims before they impose major costs on the economy.
`
`
`
`It notes that many drug companies have made dubious patent claims on drugs that were both
`
`medically important and involved substantial sales revenue. Such claims have often been rejected by
`
`patent offices in other countries as well as the USPTO. However, since patent law in the United
`
`States is very friendly to patent holders, those making dubious claims have often benefited even
`
`when these claims are eventually overturned. Also, because there is an asymmetry between the
`
`potential benefits to a patent holder who gets to maintain a monopoly on their drug and a generic
`
`producer who is trying to gain the right to sell a drug in a competitive market, it is likely that many
`
`dubious claims end up going unchallenged.
`
`
`
`The paper notes research showing large gaps between patent protected drug prices and the prices of
`
`generics. The later typically sell for just 10 to 20 percent of the price of the former and in some
`
`extreme cases, less than one percent. This means that if patents are improperly granted, the public
`
`could end up paying far higher prices for drugs.
`
` set of calculations shows that in a low-cost scenario the additional costs from improperly granted
`
` A
`
`patents could be over $73 billion in the 20-year period from 2018–2037. In a middle-cost scenario,
`
`the higher cost would be almost $146 billion and in the high-cost scenario it would be almost $220
`
`billion.
`
`
`
`Much of this additional cost would be borne by public sector health care programs, most
`
`importantly Medicare and Medicaid. In the low-cost scenario, Medicare would pay $24 billion over
`
`this 20-year period while Medicaid would pay an additional $7 billion. In the middle-cost scenario,
`
`Medicare would pay an additional $48 billion and Medicaid would pay $14 billion more. In the high-
`
`The Impact of Exempting the Pharmaceutical Industry from Patent
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`cost scenario, Medicare would pay an additional $72 billion over this 20-year period while Medicaid
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`would pay $21 billion.
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`
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`The paper also points out that if the exemption of the pharmaceutical industry from IPR allows for
`
`improperly granted patents it is also likely to lead to misdirected research spending, as drug
`
`companies attempt to innovate around these patents in order to share in the patent rents.
`
`
`
`Introduction
`
`
`In the summer of 2011, a large bipartisan majority in both houses of Congress approved the Leahy-
`
`Smith America Invents Act (AIA), which President Obama signed into law on September 16, 2011.
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`The purpose of the law was to modernize the patent system in order to better foster innovation and
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`to reduce the extent to which patent suits can improperly impede technological progress. The
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`problems in the prior system were widely recognized, which is why the bill was able to gain such
`
`broad-based support.
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`
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`One of the main provisions of the AIA was the creation of the Inter Partes Review process. This
`
`process allows third parties to contest the validity of patent within nine months of its issuance
`
`before the Patent Trial and Appeal Board. The basis for review must relate to either Section 102 or
`
`Section 103 of Title 35 of the United States Code. These sections refer the requirement that a patent
`
`be novel and non-obvious, respectively. The purpose of this provision is to provide a relatively low-
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`cost mechanism for challenging inappropriate patents so that they can be revoked before there are
`
`substantial commercial consequences.
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`
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`The need for such reviews stems from the fact that the United States Patent Office is under
`
`enormous pressure to grant patents and may often error on the side of the applicant. In 2014, there
`were over 618,000 patent applications filed.1 With just 9,300 examiners, this translates into almost 70
`patents per examiner per year.2 Many of the applications are hundreds or even thousands of pages,
`
`mostly in technical language. Under such circumstances, mistakes are inevitable. The ease of getting
`
`a patent was famously demonstrated in 1997 when two inventers were able to get a patent on a
`peanut butter and jelly sandwich.3 The Inter Partes Review process was established to provide a
`
`
`1 USPTO (2014b), Table 2.
`2 Ibid, p. 11.
`3 USPTO (1999).
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`timely and low-cost mechanism to counter the pro-applicant bias inherent in the patent issuing
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`process.
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`
`
`An amendment to Senate Bill 1137 offered by Senator Thomas Tillis would exempt patents related
`
`to pharmaceuticals and biological products from the Inter Partes Review process established by the
`
`AIA. This study examines the implications of this proposed exemption for the pharmaceutical
`
`industry. Specifically it discusses the likelihood of patents being granted improperly in this sector
`
`and the potential implications in terms of higher drug costs for the government and the private
`
`sector.
`
`
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`Patent Protection and Drug Prices
`
`
`Spending on prescription drugs has grown rapidly both as a share of health care spending and as a
`
`share of GDP. Prescription drugs rose from just 0.3 percent of GDP in 1959 to 2.1 percent of GDP
`($373.6 billion) in 2014.4 One of the reasons that prescription drugs were not originally covered
`
`under Medicare when it was established in 1965 is that the cost was small enough so that it did not
`
`impose a major burden on most seniors. This rapid growth in drug spending has continued even as
`
`other the growth in other health care costs has slowed. Over the last four years spending on
`
`prescription drugs has increased at average annual rate of 6.7 percent, with an increase of 10.9
`
`percent in the year from 2013 to 2014. By comparison, spending on health care services, the
`
`category which accounts for the vast majority of health care spending, has increased at just a 4.3
`percent annual rate since 2010 and a 4.0 percent rate in the last year. 5
`
`
`
`The main reason that drugs are expensive is patent protection and other forms of protection for
`intellectual property.6 In the absence of these protections, the vast majority of drugs would sell at
`
`relatively low prices. Chain drugs stores sell hundreds of generic drugs at prices of less than $10 per
`
`prescription. As a group, these drugs are not necessarily simpler or easier to manufacture than the
`
`brand drugs that sell for hundreds or even thousands of dollars per prescription. The difference is
`
`
`4 These data are taken from the BEA (2015), Table 2.4.5U, Line 121, divided by Table 1.1.5, Line 1.
`5 Ibid., Table 2.4.5U, Line 168.
`6 In addition to patent protection, many drugs enjoy effective monopolies through data exclusivity, which prohibits competitors
`from establishing the safety and effectiveness of their product by using the test results filed with the Food and Drug
`Administration (FDA) by the first company gaining approval. In addition, the first generic drug to enter a market is granted a six-
`month period as the sole generic competitor, which allows the manufacturing to charge a higher price than in a market fully open
`to competition.
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`that the brand drugs enjoy some degree of monopoly as result of patents and other forms of
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`protection.
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`
`
`Of course, the patent system serves an important purpose by providing an incentive for
`
`pharmaceutical companies to research and test new drugs, but this incentive must be carefully
`
`structured to ensure that it is encouraging research and innovation and not just rent-seeking at the
`
`expense of the rest of society. The AIA was an effort to recalibrate the system to limit the incentives
`
`for such rents. The specific purpose of the Inter Partes Review process established under the AIA
`
`was to allow for a relatively low-cost mechanism through which the validity of patents could be
`
`challenged. It replaced the Inter Partes Reexamination process which had been in place prior to the
`
`passage of the AIA.
`
`
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`The logic of this process is straightforward: if a patent has been improperly awarded it is best to
`
`have this fact determined as quickly as possible. Consumers should not have to pay patent protected
`
`prices for an item that should be available in a competitive market without a patent monopoly. Also,
`
`competing firms benefit from knowing as quickly as possible if a patent is valid. They may have
`
`incentive to try to invent around a valid patent in order to share in a portion of the patent rents.
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`This can lead to misdirected investment if it subsequently turns out that the patent is not valid. In
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`addition, it is much cheaper and quicker if the decision on a patent’s validity can be made by a patent
`
`review panel rather than bringing the issue into federal court. For these reasons, the Inter Partes
`
`Review process is sound policy.
`
`
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`It is important to recognize that the Tillis Amendment is not intended to end the Inter Partes
`
`Review (IPR) process in general, just to exclude patents related to pharmaceutics and biological
`
`products from process. There is not an obvious reason why these patents would be singled out for
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`special treatment. While the review process is relatively new, it does not appear that the
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`pharmaceutical industry has been singled out for harassment by this process. In the first two years
`
`that the review process has been in place, pharmaceutical patents accounted for 5.6 percent of the
`patents for which review petitions were filed.7 By comparison, these patents have accounted for 3.1
`
`percent of all patents issued over the years 2008–2012, the most recent period for which data is
`available.8 This indicates that pharmaceutical patents are more likely to face an IPR than patents
`
`more generally, but their risk of review is not hugely out of line with the risk faced by other patent
`
`holders. Furthermore, based on past trends, there would have been more than 16,000
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`pharmaceutical patents issued in this period. With a total of 114 petitions, less than 0.8 percent of
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`pharmaceutical patents have faced review petitions in this period.
`
`7 USPTO (2014a).
`8 USPTO (2014c).
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`The USPTO does not provide data on the outcomes of IPRs by category, but it appears that most
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`of the petitions for review have not been frivolous. In the first two years after the AIA was passed,
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`the review board agreed to hear 3,344 claims out of 5,045 claims that were challenged, or just over
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`
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`66 percent as shown in Table 1.
`
`
`
`TABLE 1
`Outcome of Inter Parte Review Petitions
`(as of September 2014)
`Patent claims challenged
`Patent claims reviewed
`Patent claims withdrawn
`Patent claims found unpatentable
`
`Challenged claims removed
`Reviewed claimed removed
`Source: USPTO (2015).
`
`
`
`
`5045
`3344
`606
`999
`
`31.8 percent
`48.0 percent
`
`Of this group, 999 claims were found to be unpatentable while 606 claims were cancelled or
`disclaimed.9 This means that of the claims challenged, almost one-third (31.8 percent) were
`
`subsequently removed in one manner or another. Unless the quality of patents issued for
`
`pharmaceutical patents is markedly higher than for other patents, the IPR process would appear to
`
`be an efficient mechanism for reducing the number of unwarranted patent claims.
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`
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`There are certainly many issues that have been and could be raised about the validity of
`
`pharmaceutical patents. Other countries that have considerably stricter standards for patents have
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`denied patents for drugs that are patented in the United States and therefore can command a high
`
`price due to monopoly power.
`
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`For example, India refused to grant a patent for the cancer drug Glivec.10 As a result, a generic
`
`version of the drug is available in India at a cost of $2,500 a year. The patent protected version in the
`United States sells for $70,000 a year, nearly thirty times as much.11 Similarly, Gilead Sciences was
`unable to win a patent in India for its Hepatitis C drug, Sovaldi.12 The patent protected version of
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`the drug sells in the United States for $84,000 for a three month course of treatment. Doctors
`
`Without Borders estimated that a generic version could be produced for just over $100 a year.
`
`
`
`
`9 These data are taken from USPTO (2015).
`10 Kulkarni et al. (2013).
`11 Harris et al. (2013).
`12 Silverman (2015).
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`These are, of course, extreme cases involving unusually expensive drugs. Also, India has among the
`
`strictest patent standards in the world (i.e. it is difficult to get a patent), but they do illustrate the sort
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`of money that could be at stake with an improperly granted patent in the pharmaceutical industry.
`
`But it is not necessary to make comparisons with India’s patent system to find important examples
`
`of potentially improper patents. There are plenty of cases of questionable cases of important patents
`
`where issues have been raised in U.S. courts.
`
`
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`For example, AstraZeneca made modest alterations to its heartburn drug Prilosec just as its patent
`
`protection was expiring in 2001. It repackaged the drug and sold it as Nexium, on which it was able
`to enjoy patent protection until 2014.13 The drug Clarinex, which was marketed by Schering-Plough,
`
`provides another example of this sort of patent abuse which is sometimes referred to as
`
`“evergreening.” Schering-Plough brought Clarinex to the market just as the patent on its incredibly
`
`successful allergy drug Claritin was about to expire. Clarinex was essentially the same drug, with
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`extremely minor modifications. (One of Schering-Plough’s main claims for the superior benefits of
`Clarinex was that it could be taken with grapefruit juice.14) Shering-Plough’s claims for the
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`patentability of Clarinex were eventually rejected by the courts, but the process effectively extended
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`the life of its patent on Claritin by 46 months since patents generally are treated as being in effect
`
`through the life of a dispute.
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`
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`This situation points to the benefits of the sort of early intervention allowed by IPR process. There
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`is a fundamental asymmetry in the stakes between the party defending and the party attacking a
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`pharmaceutical patent, if it pertains to a drug that is already being successfully marketed. The
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`company defending the patent stands to make monopoly rents for the whole time that the patent
`
`remains in effect. By contrast, the party attacking the patent only stands to gain the right to sell the
`drug in a competitive market.15
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`
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`Since the monopoly profits are much larger than the profits from selling the drug in a competitive
`
`market, the holder of the patent has far more incentive to defend its patent than a potential generic
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`competitor has in contesting the patent. The threat of high legal costs can discourage many potential
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`competitors from even trying to enter the market since they may conclude that the profits would not
`justify the expenses even if they won their suit.16 This asymmetry in the incentives facing patent
`
`
`13 The case of Nexium is discussed in Midha (2015).
`14 This case is discussed in Bansal et al. (2009).
`15 They may enjoy six months of market exclusivity, which would allow them some amount of extra-normal profits, although even
`this benefit has been eroded by recent court decisions that allow the seller of the brand drug to market its own generic in the
`period of exclusivity.
`16 This asymmetry can also lead to outright corruption since the patent holder can share some of its profits with a potential
`competitor in order to keep them out of the market. For example, Warner Chlicott allegedly made payment to two generic
`manufacturers to keep them producing a drug in competition with its oral contraceptive Loestrin (see Chiem (2013)).
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`holders and challengers is problematic from a larger economic perspective, since the monopoly
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`profits earned by the patent holder come at the expense of the rest of the economy. Specifically,
`
`insurance companies, governments, and patients will all pay far more for drugs if they are
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`improperly subject to patent protection.
`
`
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`While it is not plausible that the IPR process will eliminate all improper patents, or improper claims
`
`within patents, it is clearly desirable to have a process such as this in place so that patents can be
`
`contested at a point where the stakes are more balanced between the parties. It is also hugely
`
`beneficial that improper patents be identified as early as possible. This is not only because of the
`
`potential for inappropriate patent rents earned by the patent holders, but also due to the misplaced
`
`incentives created by an improperly awarded patent. If a patent is wrongly granted for a potentially
`
`important drug then competitors may waste resources attempting to invent around the patent in
`
`order to share in the rents. However, if the patent should not have been granted, then competitors
`
`would be able to enter the market without incurring these needless research expenses.
`
`
`
`Quantifying the Costs of Eliminating the IPR Process for
`Pharmaceuticals
`
`The examples given above (and many other instances that could be cited) suggest that the United
`
`States has a serious problem with patents being improperly granted to pharmaceutical companies.
`
`Wrongly awarded patents can impose substantial costs on patients, insurers, and the government. As
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`noted in the cases of Gilvec and Sovaldi, the difference between the patent protected price and the
`
`generic price could be on the order of 10,000 percent.
`
`
`
`Even with less expensive drugs, the price of the generic version will typically be just 10 to 20 percent
`
`of the price of the brand drug. The extent of the price difference will depend on both the cost of the
`
`patent protected brand drug and the number of generics that have entered the market. The latter
`
`usually increases with the amount of time since the expiration of patent protection.
`
`
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`FIGURE 1
`
`Generic Competition and Drug Prices
`
`
`
`
`Source: FDA analysis of retail sales data from IMS Health, IMS National Sales Perspective (TM), 1999-2004,
`extracted February 2005. Figure from FDA (2015).
`
`
`An analysis by the Food and Drug Administration found that average generic prices fell to around
`
`20 percent of the patent-protected price when eight or more generics were in the market and to less
`
`than 10 percent for drugs where the number of producers exceeded seventeen. In short, there are
`
`very substantial savings associated with generic competition.
`
`
`
`The major potential expense that would be associated with providing an exemption to the
`
`pharmaceutical industry to the IPR process is that an exemption would allow a drug to get or keep
`
`patent protection when a fair interpretation of the law would deny patent protection. As noted
`
`above, because of the asymmetry in the incentive for patent holders to defend a patent compared
`
`with the incentives for a potential generic entrant to challenge the patent, it is reasonable to believe
`
`that among drugs brought to market, some number of improper patents will be allowed to stand.
`
`The main cost from exempting the pharmaceutical industry from IPR will depend on the likelihood
`
`that improper patents would have been prevented by the IPR and therefore some number of drugs
`
`will wrongly be granted patent protection.
`
`
`
`To get some idea of the amount of money potentially at stake from improperly granted drug patents,
`
`we can look at the revenue from top selling drugs. The average sales revenue for the top 100 drugs
`for which data are available was $1,780 million in 2013.17
`
`
`
`
`17 Drugs.com (2015).
`
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`It is not possible to know the number of drugs based on improper patents the IPR would prevent
`
`that would otherwise survive later patent challenges. As noted before, the share of pharmaceutical
`
`patents that have been subject to review has been just under 0.8 percent. Of the claims in these
`
`patents, almost one-third ended up being cancelled or removed as a result of the review. (More than
`
`half of the petitions resulted in at least one claim being removed.) This means that just over one
`
`quarter of one percent of pharmaceutical patents were removed due to the IPR process in the first
`
`two years that it has been in place if they were cancelled at the same rate as other patents.
`
`
`
`However, this figure almost certainly understates the importance of IPR petitions to the industry.
`
`Presumably the patents that were targeted were chosen not only because the claims were dubious,
`
`but also because potential competitors saw them as being commercially important. It is therefore
`
`reasonable to believe that some of these claims would have resulted in drugs wrongly benefiting
`
`from patent monopolies.
`
`
`
`This benefit can take two forms. The first would be where a drug benefits from a patent monopoly
`
`where it really is not based on an innovation that is worthy of a patent. Glivec would arguably be an
`
`example of such a case. In this instance, the full sales revenue for the drug would be an excessive
`
`payment. The second form of benefit would be in cases where the manufacturer of a brand drug is
`
`able to extend its effective patent for a period of time with the use of questionable second patents,
`
`or submarine patents. Clarinex and Claritin provide one such example. In these cases, a drug
`
`company may be able to get somewhere between 2 to 4 years of additional patent protection for
`
`their drug.
`
`
`
`To try to get an estimate of how much the elimination of the IPR process for the pharmaceutical
`
`industry will cost the country in higher drug prices, we can set a range on the number of drugs that
`
`will be improperly receiving patent protection at a point in time due to the elimination of the IPR
`
`process. At the low end, it is reasonable to assume that the equivalent of at least one of the top 100
`
`selling drugs will be improperly benefitting from patent protection. This could mean that, at a point
`
`in time, either that one of the top 100 fits into this category, or that several less popular drugs with
`
`sales equivalent to the average of 1 of the top 100 are wrongly benefiting from patent protection as a
`
`result of the ending of the IPR process. Under the middle assumption, two of the drugs will be
`
`improperly benefitting from patent protection. Under the high assumption, three of the drugs will
`
`be improperly benefiting from protection, with one of the three taking the form of a major drug like
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`Glivic. This will be important not only for the price of the drug but for directing research in the
`
`industry.
`
`
`
`Table 2 shows projections of additional drug costs under each of the three scenarios described
`
`above. In each case, it is assumed that the annual sales of for major drugs rise at the same pace as
`projected by Center for Medicare and Medicaid Services (CMS) for the drug spending as a whole.18
`
`The additional cost is based on the assumption that generics would sell for an average of 15 percent
`
`of the price of the patent-protected brand drug.
`
`
`
`TABLE 2
`
`Cost in Higher Drug Prices from Ending IPR
`(millions of dollars)
`Year
`
`Low-Cost
`Scenario
`
`Middle-Cost
`Scenario
`
`
`2018
`
`2019
`
`2020
`
`2021
`
`2022
`
`2023
`
`2024
`
`2025
`
`2026
`
`
`
`
`
`
`
`2,005.1
`
`2,123.0
`
`2,258.1
`
`2,392.7
`
`2,536.1
`
`2,684.6
`
`2,841.7
`
`3,008.1
`
`3,184.2
`
`4,010.2
`
`4,246.0
`
`4,516.2
`
`4,785.3
`
`5,072.2
`
`5,369.2
`
`5,683.5
`
`6,016.2
`
`6,368.4
`
`6,741.2
`
`High-Cost
`Scenario
`
`6,015.3
`
`6,368.9
`
`6,774.3
`
`7,178.0
`
`7,608.4
`
`8,053.8
`
`8,525.2
`
`9,024.3
`
`9,552.6
`
`10,111.8
`
`2027
`
`2028
`
`2029
`
`2030
`
`2031
`
`2032
`
`2033
`
`2034
`
`2035
`
`2036
`
`2037
`
`
`Total
`
`
`
`3,370.6
`
`3,567.9
`
`3,776.8
`
`3,997.9
`
`4,231.9
`
`4,479.6
`
`4,741.9
`
`5,019.5
`
`5,313.3
`
`5,624.3
`
`5,953.6
`
`7,135.8
`
`7,553.5
`
`7,995.7
`
`8,463.8
`
`8,959.3
`
`9,483.7
`
`10,038.9
`
`10,626.6
`
`11,248.7
`
`11,907.2
`
`10,703.7
`
`11,330.3
`
`11,993.6
`
`12,695.7
`
`13,438.9
`
`14,225.6
`
`15,058.4
`
`15,939.9
`
`16,873.0
`
`17,860.7
`
`
`
`
`
`
`
`73,110.8
`
`146,221.6
`
`219,332.4
`
`Source: Center for Medicare and Medicaid Services and author's calculations, see text.
`
`
`
`18 CMS (2014), Table 11. The projections only run to 2023; the rate of growth of revenue for major drugs in subsequent years is
`assumed to be 5.9 percent annually—the same as the rate CMS projected for the growth from 2022 to 2023.
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`The Impact of Exempting the Pharmaceutical Industry from Patent
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`CFAD VI 1053 - 0012
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`In the low-cost scenario, the effect of an exemption of the pharmaceutical industry from IPR would
`
`be to raise annual payments for drugs by $2 billion in 2018, the first year in which the elimination of
`
`this process could plausibly have an effect on drug prices. The projected cost rises rapidly, based on
`
`the projection from CMS that spending on prescription drugs will increase rapidly. By 2028, the
`
`additional cost is projected to be almost $3.6 billion and in 2037 it is projected to be almost $6.0
`
`billion. The cumulative increase in spending on drugs over the 20-year period from 2018–2037 is
`
`projected to be more than $73 billion.
`
`
`
`The projections in the middle-cost scenario are twice as high by construction. Under the
`
`assumptions in the additional cost in 2018 from exempting the pharmaceutical industry from the
`
`IPR process would be over $4 billion. In 2037, they would be over $11.9 billion. The cumulative
`
`increase in spending on drugs in this scenario would be more than $146 billion over the 20-year
`
`period. In the high-cost scenario, the addition spending on drugs in 2018 would be $6.0 billion. The
`
`cumulative increase would be more than $219 billion.
`
`
`
`These projections of higher drug prices are substantial, but this primarily reflects the large and
`
`rapidly growing amount of spending on drugs. Even in the high-cost projection, the additional
`
`spending assumed due to the end of the IPR process for prescription drugs is increasing total
`
`spending on drugs by less than 2 percent.
`
`
`
`
`The Impact of the IPR Exemption on Research Spending
`
`The above discussion only dealt with the potential impact of improperly granted patents, due to the
`
`pharmaceutical industry’s exemption from the IPR process, on higher drug prices. However, if a
`
`pharmaceutical company is wrongly granted a patent which turns out to be central in the production
`
`of a major selling drug, then it can be expected that it will also lead to a major distortion in research
`
`spending. Other pharmaceutical companies will try to gain a share of the patent rents by attempting
`
`to innovate around the wrongly issued patent. This can lead to large amounts of money being
`
`misspent.
`
`
`
`To be clear, in the case where a pharmaceutical company has a valid patent, this sort of innovation is
`
`beneficial since it can bring down the price of the drug before the patent expires and generics can
`
`enter the market. This appears to be happening in the case of Sovaldi, the Hepatitis C drug. There
`
`are several pharmaceutical companies developing comparable products which either have already
`
`gained FDA approval or are likely to do so in the near future. This should lead to a situation in
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`The Impact of Exempting the Pharmaceutical Industry from Patent
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`CFAD VI 1053 - 0013
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`which effective treatments for Hepatitis C are available for a considerably lower price than Gilead
`
`Sciences, the patent-holder, was initially charging for Sovaldi.
`
`
`
`However, if the initial patent was wrongly granted, then this research will have been largely wasted.
`
`The drug should have already have been available as a generic, and therefore there would be no
`patent rents to be shared.19 This misdirection of research is an important cost associated with
`
`improperly granted patents. If the pharmaceutical industry’s exemption from IPR increases the
`
`probability of improperly awarded patents, then we should expect more misdirected research as a
`
`result.
`
`
`
`The cost of researching new drugs has been rising dramatically, so even a modest amount of
`
`misdirected research would imply a considerable degree of waste. A recent analysis by Joe Dimasi at
`Tufts University calculated that the cost of developing a new drug was $2.6 billion in 2014.20
`
`Furthermore, he calculated that the cost was rising at annual rate of 8.5 percent. If this rate of
`
`increase is assumed to continue into the future, and it is assumed that patents wrongly granted
`
`because of the industry’s exemption from the IPR process lead to the development of two new
`
`drugs (in 2025 and 2035) it would imply $20.8 billion in wasted research spending in the high-cost
`
`scenario over the twenty years from 2018–2037.
`
`
`
`This would be another cost in additional to the additional expense associated with paying patent
`
`protected prices for drugs. It is important to note t