[Ip-health] Patented price gouging and the enduring enigma of drug costs

Elizabeth Rajasingh elizabeth.rajasingh at keionline.org
Thu Dec 18 06:35:52 PST 2014


WED, DEC 17 2014

​In a momentous development for Indian patent law, the Supreme Court
recently refused to entertain the appeal of Bayer AG, a German patentee at
the receiving end of India’s first compulsory licence. In 2011, the patent
office decided that Bayer had priced Nexavar, its anti-cancer drug, at an
exorbitant price (`2.8 lakh a month) and allowed Natco Pharma Ltd, a
generic company, to produce the same drug at 1/30th the price (`8,800).
As the name suggests, in sharp contrast to a voluntary licence, a
compulsory licence is mandatorily imposed on the patentee, whether she
likes it or not. Indian patent law is quite distinct from most other patent
regimes in that such a permit is not merely a matter of government
discretion but an entitlement in favour of any interested third party that
demonstrates that the patented invention is not working for public benefit
on account of it being unaffordable or not available in reasonable
quantities to the public, as was the case with Nexavar.
As expected, the patent office’s decision met with brickbats and bouquets.
Soon thereafter, Bayer appealed the verdict to the Intellectual Property
Appellate Board, a specialized tribunal, which upheld the decision for the
most part. Bayer then unsuccessfully approached the Mumbai high court
through a writ petition. It finally trudged up all the way to the Supreme
Court, only to have the apex court refuse to entertain its petition. The
courts’ dismissal effectively ends a legal saga that placed India under
tremendous political and trade pressure from the US and the European Union.
What is interesting to note is that Bayer took issue not only with the
issuance of the licence, but also with the royalty rate imposed. A
compulsory licence is not a free-for-all regime, but mandates that the
person using the permit pay a royalty that accounts in some part for the
value of the invention. Bayer rightly argued that its research and
development (R&D) costs ought to be taken into account to determine the
appropriate royalty rate. Surprisingly, however, Bayer refused to submit
its R&D costs to the patent office, leaving it free to rely on a broad
World Health Organization estimate of 6% as an average royalty rate under
the circumstances. This was then increased to 7% by the appellate board on
Bayer argued this point again at the Supreme Court, noting that this was an
unfair rate. However, much to the court’s chagrin, it refused to submit a
true account of its costs. This is hardly surprising, given that drug costs
have been the best-kept secret of the pharmaceutical industry—with one
exception. Big pharma selectively hands out data to one institution that it
funds (Tufts Center for the Study of Drug Development), which then comes up
with a periodic study every decade or so.
Not too surprisingly, the costs multiply at a fanciful rate with each such
study. The latest Tufts figures were released just last month, pegging the
price at an astounding $2.56 billion, up from $802 million in 2003.
However, the institute has yet to reveal its methodology for arriving at
this humongous figure, a methodology that has been vociferously attacked in
the past for several reasons, including the fact that the Tufts Center
fails to independently audit the figures submitted by a select cabal of big
drug makers. In fact, James Love, a health activist, submitted an affidavit
before the patent office during the compulsory licensing hearings,
demonstrating that Bayer benefited extensively from US tax credits and
public funding for its clinical trials of Nexavar, which ought to be
deducted from its overall estimate of drug costs.
Price gouging for patented drugs is not confined to India or developing
countries. Recently, US senators demanded an investigation into the pricing
of Sovaldi, Gilead Sciences Inc.’s anti-hepatitis C virus drug, currently
selling at a whopping $84,000 for a full three-month course (approximately
$1,000 a day).
Unfortunately, the legal regimes of most countries do not mandate a
revelation of true drug costs. Unless we have this data, we will never know
whether drug makers are undercompensated, overcompensated, or fairly
compensated. Granted, such a methodology may be subject to contest
(particularly around the inclusion of the costs of R&D failure), but surely
we can begin somewhere, without making the perfect the enemy of the good.
Given their excessive profits year after year, the prevalent perception is
that big pharma is being overcompensated. Till such time as these drug
companies are transparent about their costs and profits, India should use
this perception in its favour, coming down on the side of public health and
affordable medication, wherever possible.
In the past, I’ve recommended an investment protection model for
incentivizing drug innovation, noting that drug originators must
mandatorily submit their costs in order to merit market protection till
they recoup these along with a rate of profit commensurate with the health
impact of the drug. Will we see a shift to such a model soon? Only time
will tell. In the meantime, drug costs will continue to remain an enigma.​

Elizabeth Rajasingh
Perls Fellow, Knowledge Ecology International
1621 Connecticut Ave. NW, Suite 500
Washington, DC 20009
*elizabeth.rajasingh at keionline.org <elizabeth.rajasingh at keionline.org>* |

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