Pharmaceutical drugs are expensive, both to produce and to consume. The average cost to develop one new drug is approximately $2.6 billion, and those expenses are reflected in the drug’s brand-name price tag. In addition, less than 14 percent of newly discovered drugs ever make it to the approval stage and reach the market.
According to a 2017 study by the AARP, the average cost of therapy for a brand-name prescription drug was roughly $6,800 per year.
Following the introduction of generic alternatives into the market, drug costs have been shown to have declined by an impressive 85 percent. Overall, the use of generics, in combination with the innovation from brand name drugs, has produced tremendous savings — $1.67 trillion from 2007 to 2016 alone. This shows the positive benefits of competition.
However, for prices to remain low and quality to remain high, it is critical that the incentives for everyone to innovate and compete remain preserved. While some believe that the government can achieve this balance through new rule-making processes, the empirical data shows that no one knows how to best strike this stability than the private companies themselves.
For example, within Congress and state governments, there is an ongoing push to limit name brand and generic drug manufacturers’ ability to reach private agreements, known as patent settlements, which allow them to negotiate a timeline for the release of generic drug alternatives.
This ensures that the brand name companies are deservedly compensated for their innovative medical advancements and that permanent monopolies over treatments do not arise. When analyzing the current framework of the industry, it is clear that limiting these agreements will only serve to reduce consumer access to innovative medicines, all while imposing upward pressure on costs.
Under the current law regarding pharmaceutical patent s— the Hatch-Waxman Act of 1984 — generic drug companies have the right to sue their brand name counterparts before their patents’ expiration.
In many respects, Hatch-Waxman has been a boon to the U.S. medical industry. The U.S. now develops 57-percent of all new medicines compared to just 31 percent before the law’s implementation, and the market share of generics rose to 90 percent in 2017 from 13 percent in 1983.
At the same time, however, the need for issuing lawsuits has resulted in a bevy of slow, expensive legal challenges to patents. Patent settlements have served as a bulwark against that trend, reducing the number of lawsuits by allowing disputing parties the option to resolve their conflicts outside of a courtroom.
Opponents of patent settlements don’t see the agreements as useful tools to curb the price of drugs or reduce unnecessary lawsuits. Instead, patent settlements are viewed as harmful and anti-competitive. While no one should be willing to tolerate market-stifling deal-making, data from the Federal Trade Commission (FTC) suggests that patent settlements themselves are not the problem.
On May 23, the FTC found that in 2016, only one of the 232 agreements between generic and brand drug companies potentially involved “pay-to-delay” — when a manufacturer of a patented drug pays the manufacturer of a generic drug to delay launching its competitive product to extend its exclusivity period.
That marks the lowest level of “anti-competitive agreements” in 15 years. Additionally, previous research found that “the vast majority (at least approx. 86% and up to approx. 92%) of patent disputes filed were resolved without compensation to the generic manufacturer and/or without restrictions on generic competition.” These settlements are about speeding up the timeline of innovation and competition, not stifling them.
Without the threat of looming lawsuits, generic drugs are quicker to enter the market. According to the most recent data, about 92 percent of patent settlements accelerate patient access to affordable medicine. Not to mention, the agreements also save the drug companies untold millions of dollars in legal fees, reducing the administrative costs of drug production and bringing down the immense price tags associated with health care.
Business dealings are exercises in compromise, and patent settlements exemplify this reality. In the tug-of-war between brand name firms and generic drug manufacturers, both can come together to negotiate acceptable terms that allow the free market to prosper for American consumers.
While anti-competitive deal-making should not be condoned or permitted, patent settlements permit this compromise without the need for costly legal battles or government intervention. It’s the free market at work, and America should no doubt allow the practice to continue.
Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in finance and economics.