Patent Monopolies in the Pharmaceutical Sector
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Patent Monopolies in the Pharmaceutical Sector
Patent protection creates a monopoly in the marketplace. Patents are intellectual property rights that are awarded to innovators who invent a novel product. The right allows the patent holder to exclude others from producing or selling the product in exchange for public disclosure of the information on how to recreate the product (Gubby, 2020). These exclusionary rights persist for an average period of 20 years, during which the patent holder is the only player in the marketplace for the particular product. These exclusionary rights create a monopoly defined as a marketplace characterized by a single seller, selling a unique product with no close substitutes. Consequently, a patent provides an economic advantage to the patent holder by restricting competition in the sale of similar products. The protection against competition allows the producers to maintain high costs for the product throughout the patent lifetime (Gubby, 2020). The patents have an adverse economic effect on consumers subjected to higher prices with no cheaper alternatives in the monopoly marketplace created by the patent.
The expiration of patent protection dissolves the monopoly marketplace through the removal of barriers to entry. Upon the patent expiring, the exclusionary rights that prevent the commercial use of the products are also extinguished. Therefore, other players can enter the marketplace and sell the same product using the formula outlined in the patent. The effect is the destruction of the monopoly marketplace that provided the patent holder with economic advantages due to a lack of competition (Pearce, 2006). In pharmaceuticals, other drug companies can enter the marketplace even before the expiration of the patent term belonging to a brand name drug company. This entry can be certified by the FDA through an application made by a generic drug company under the Hatch-Waxman Act (FTC, 2010). Patent holders may seek to maintain their monopoly by entering into agreements with the generic drug companies to defer the generic entry later, thus extending the patent protection. One such agreement is the pay-for-delay agreement that attaches compensation from the brand name company to the generic company to delay the generic entry (FTC, 2010).
The pay-for-delay agreements provide a benefit for producers and a disadvantage for consumers. The agreements allow the brand name drugs to enjoy a prolonged monopoly where the lack of competition from generic drugs maintains the drugs’ high prices (Gubby, 2020). The brand name drugs may cost as much as 90% more than the generic drugs, which implies an economic advantage for the brand name drug producer (FTC, 2010). The generic drug producers also gain from the agreement because of the payouts that may involve direct payments or agreements not to engage in competition in the future, which guards the future profits of the generic drug producers (FTC, 2010). The agreements are disadvantageous to consumers because they result in more consumer spending, as is evidenced by the prescription spending statistics in 2011 in the US. Despite brand name drugs accounting for only 18% of all prescriptions written, they accounted for 73% of all consumer spending (Wyatt, 2013). Consequently, the agreements detrimentally affect consumers due to increased consumer spending on brand name drugs even when cheaper generic drugs are readily available.
Pay-for-delay agreements should not be allowed. The agreements deprive the healthcare sector of the advantages of a competitive marketplace. The anticompetition schemes created by the agreements allow the brand name companies to overprice drugs despite the availability of cheaper and equally effective generic drugs. The excesses caused by the agreements result in an economic cost of $ 3.5 billion each year on consumers (FTC, 2010). The agreements’ detriments are also imposed on other producers, other than the brand name and first to file generic company. The first to file generic drug company receives exclusionary rights for 180 days. When paired with the extended period of patent protection caused by the pay-for-delay agreements, which usually lasts about 17 months, a cork in the bottle effect is created. This effect locks out other generic drug producers, thus causing competitive disadvantages due to suspended sales (FTC, 2010). Therefore, the agreements should not be allowed since they result in unnecessarily high consumer spending and economic disadvantages to generic drug companies other than the first to file company.
References
Federal Trade Commission. (2010). Pay-for-delay: how drug company pay-offs cost consumers billions. Washington, DC: Federal Trade Commission, 16.
Gubby, H. (2020). Is the Patent System a Barrier to Inclusive Prosperity? The Biomedical Perspective. Global Policy, 11(1), 46-55.
Pearce II, J. A. (2006). How companies can preserve market dominance after patents expire. Long Range Planning, 39(1), 71-87.
Wyatt, E. (2013, June 17). Supreme Court Lets Regulators Sue Over Generic Drug Deals. NY Times. Retrieved November 20, 2020, from https://www.nytimes.com/2013/06/18/business/supreme-court-says-drug-makers-can-be-sued-over-pay-for-delay-deals.html#:~:text=WASHINGTON%20%E2%80%94%20Pharmaceutical%20companies%20that%20pay,Supreme%20Court%20ruling%20on%20Monday.