Fighting the Patent Wars

America’s pharmaceutical industry leads the world. But that hasn’t stopped America’s politicians from threatening to destroy it.

Because of new drugs, Americans live longer and better. But many people nevertheless believe pharmaceuticals cost too much. It is easy to take drugs for granted. Hundreds of new medicines are in the process to combat cancer, heart disease and strokes, AIDS, infectious diseases, and more mundane conditions. Observes Frank Lichtenberg of Columbia University, “On average, each new drug approved during the period 1970-91 is estimated to have saved 11,200 life-years in 1991.” Unfortunately, finding new products costs money - more than $30 billion on research every year. Yet Congress is considering legislation to trim patent protections in order to speed generic drugs to the market. The McCain-Schumer bill would, advocates claim, “close loopholes” under existing law by, for instance, dropping the stay now granted on a generic when a patent-holder files an infringement suit.

Curiously, the attack on pharmaceutical patents is being led by the so-called Business for Affordable Medicine. In fact, BAM itself has many non-business members, including labor unions and governors.

But at its core are firms acting in their capacity as employers providing health insurance. They include General Motors Corp., Wal-Mart, Verizon, Eastman Kodak Co., Motorola Inc., Weyerhaeuser Corp., Kellogg Co., and Georgia-Pacific Corp.

Earlier this year BAM’s co-chair, Jody Hunter, complained: “All prescription drug purchasers, including the corporations that belong to BAM, are frustrated by the rising cost of prescription drugs.”

That’s hardly surprising. They probably are frustrated with the high cost of other medical treatments as well.

But expense should not drive the pharmaceutical debate. Prescription drugs cost a lot, but without them people would die sooner, have more miserable lives, and spend more on alternative medical treatments.

Trade-offs are inevitable. Attempting to control prices directly (as many state legislators and congressmen want to do) or lower them indirectly (through patent adjustments by Congress) would reduce the number of new drugs and the speed with which they hit the market.

Today patents run for 20 years, but drug makers, in contrast to BAM members, lose half or more of a patent’s useful life to the FDA approval process. Since most pharmaceutical leads result in dead ends and most drugs lose money, firms have only a very short time to sell a few blockbusters to fund their entire operations.

Nevertheless, the 1984 Hatch-Waxman Act created a major exception to both patent and drug laws by allowing generics firms to use and test patented drugs and avoid repeating the FDA-approval process. This allows generics producers to be prepared to sell on the day a patent expires. Generics now account for almost half of the market, up from just a fifth in 1984. Only about 6 percent of generics sales result in infringement actions, many of which are settled out of court. Of course, as BAM points out, that 6 percent includes many important and expensive drugs.

But patent law means nothing if it doesn’t first protect the holder of a valid patent. The automatic stay only applies when a generics firm attempts to use a legal exception to begin selling before the patent’s expiration.

BAM estimates that further trimming patent rights, causing the slightly earlier release of some generics, would save $71 billion over the next decade. That seems hopelessly optimistic. BAM also assumes that generics are as good as brand products. That may be the case for most of the people most of the time. But not always.

At least, according to BAM member General Motors Corp. Merrill Matthews, a visiting scholar at the Institute for Policy Innovation points out that GM strongly opposes what it terms “imitation parts,” because they may wear out sooner and “could cause major safety problems.” Why does GM treat “imitation drugs” differently?

Anyway, if customers are entitled to declare prices to be too high, then why stop with pharmaceuticals?

I think cars and film cost too much. So does cereal. Maybe Uncle Sam should go after BAM members.

In fact, many of them rely on patents. Matthews points out that Motorola was number 19 in the number of patents granted last year, with 778. Kodak came in at 20 with 719. General Motors ranked 93 with 176. The drug makers, in contrast, ranged from Bayer, with 362, to AstraZeneca, with 40.

In 1984 Congress managed to strike a balance between patent and generic drugs that simultaneously yielded vibrant research and generic industries. No other nation comes close on either score.

Congress should look carefully before it leaps. There is no obvious right or wrong answer to questions - such as how long and what details? - when it comes to patents. But there are obvious right or wrong reasons. Arbitrarily trying to save money may be the worst reason of all.

Doug Bandow is a senior fellow at the Cato Institute.