On Global Drug Revenue and Patents

On Global Drug Revenue and Patents

Summary

There are two anomalous years in which the percentage of revenue at risk from patent expiry spiked, in 2012 and 2015. These can be explained by what is known as the ‘patent cliff’, referring to a period in which multiple ‘blockbuster’ drugs lost patent protection, something that generally occurs around 20 years after a drug acquires a patent. This means that drug companies become able to reproduce these drugs at a fraction of the sale price which, in some cases, results in vast, but anticipated losses to the original patent-holder- sometimes up to 80-90% of original revenue. The first of two cliffs occurred in 2012 when $35.1 billion revenue was lost, no doubt accelerated by the widely prescribed blood thinner, Plavix, becoming available for generic production. In the following year, global revenue generated by the sale of branded drugs decreased by 3.1%, with big losses offset by the production of new branded drugs. The second cliff occurred in 2015 when a multitude of highly important branded drugs lost patent exclusivity. This included Otsuka’s antipsychotic drug Abilify, which previously accounted for a quarter of the company’s sales. Some pharmaceutical firms use patent loss as an impetus to restructure to offset lost revenue. The increasing availability of generic prescriptions instead of branded medicines is demonstrable on the chart. In 2010, branded drugs generated nine times the revenue of generic drugs but by 2019, this dropped to seven times. In the US in 2010, generic drugs accounted for 77.2% of prescriptions and by 2016 this figure had increased to 89.5%, with a similar trend seen in the UK.

The two biggest players in UK pharmaceuticals at present are AstraZeneca and GlaxoSmithKline generating revenues of £16.9 billion and £30.8 billion respectively in 2018. Foreign firms with a major presence in the UK include Pfizer and Novartis. As of 2017, the industry provided 73,000 jobs in the UK and 723,000 across the EU. Current projections estimate that the global pharmaceutical industry will be worth US$1.12 trillion by 2022. Some of this growth can be explained by the ever-growing access to medical care as emerging economies rapidly reduce the amount of people living below the poverty line. According to the World Bank, in 2015 some 1.1 billion fewer people live in extreme poverty than did in 1990, generating ever more demand for generic and branded drugs. As the world population grows, orphan drug demand will also rise as increased genetic diversity is commensurate with a rise in incidences of rare diseases.

What does the chart show?

The chart plots the fluctuations of percentage of revenue at risk due to patent expiration (shown by the black line) measured against the right hand axis. Global sales revenue in $bn are plotted against the left hand axis and broken down into generic (shown in grey), orphan (shown in orange) and branded (shown in blue) drugs. The data is for the years 2010-2019. An orphan drug can be defined as a pharmaceutical agent intended for treatment, prevention or diagnosis of medical conditions that are considered exceptionally rare. Branded drugs are marketed under a specific brand name by the company that develops and holds a patent over it. Once the patent on a drug comes to an end, it is no longer enforceable in court. This means that other drug companies can provide the drug with the same chemical composition for a much lower cost as, unlike the company that held the original patent, they do not need to recuperate research and development costs. At this stage, a drug can be considered generic. A branded drug is often many times the cost of its generic counterpart, and therefore constitutes a much higher proportion of global revenue than both generic and orphan drugs.

Why is the chart interesting?

Patents are granted in order to guarantee drug companies that develop cutting-edge treatments a monopoly over the drug for an defined period which allows the company to inflate prices to secure a return of their research costs and to profit, although the balance and scale of profit is often controversial. In theory, the patent is provided with the hope that pharmaceutical companies will reinvest profits into further development of new treatments. Currently, about 17% of revenue is used for this purpose. However, this system fails to secure incentives for the production of orphan drugs, for which demand is, by definition, very low. Policies have been introduced to combat this, such as the US Orphan Drug Act in 1983 which included incentives including tax credits, grants and an extended period of market exclusivity. The EU introduced similar measures in 2000. A revenue increase of 118% is observed between 2010 and 2019 which is likely due to the influx of new orphan drugs onto the market after companies responded to new incentives. In 2016, 41% of drugs approved by the FDA were intended to treat orphan diseases. Among the newly synthesised drugs was the first treatment for Spinal Muscular Atrophy which affects an estimated 9,000 people across the US.

Another interesting trend emerging in the pharmaceutical industry is the increased outsourcing of research and development to academic institutions or private contract research organisations (CROs) to reduce costs. Tasks such as big data analysis, genetic engineering and safety and efficacy testing on animals are often contracted to CROs. Developing new drugs is a risky venture for pharmaceutical firms, who usually spend between $0.8-$1.7 billion on the R&D process despite  many drugs failing at the last stage of testing. By outsourcing research to state-of-the-art research facilities, Pharma companies can mitigate risk by only buying into viable endeavours that are further along the development process. For example, some pharma companies are now using CROs that are utilising AI/machine learning technology to assess testing data and uncover important trends in a manner and at a pace previously unavailable to them. Despite the outsourcing of R&D being subject to the usual pitfalls of subcontracting, the drug discovery outsourcing industry is anticipated to continue its growth, reaching an estimated value of $43.7 billion by 2026.

Ethics in pharmaceuticals have long been controversial, particularly of late with the scandal involving Martin Shkreli, CEO of Turing Pharmaceuticals. Shkreli faced criticism after his company acquired rights to produce the drug Daraprim (used to treat parasitic infections) and then raised the price from $13.50 per tablet to $750. However, Shkreli claimed that these inflated prices were only to be paid by insurers and would not affect individual patients.  In fact, his stated business plan was to purchase inexpensive drugs, increase their price and utilise the profits to fund research into development of new orphan drugs and, quoted in the FT, went as far to say that executives who reject this model are ‘defrauding their investors’. However for many opponents of the financialisation of drugs research, this case was seen as typifying extreme greed. Among critics of the current system, many feel that it disincentivises companies from pouring hundreds of millions of dollars into research and development of a new drug, when they can secure far more lucrative profits by other means. Many pharmaceutical companies now opt to trade patents and profits of newly-approved drugs with each other, rather than developing them independently. Further to this, patents do not provide incentives for the research and discovery of cures or vaccines, which are often less profitable than treatments. Similarly neglected are tropical diseases which disproportionately affect people in the less economically developed world who lack the means to pay high prices for drugs.

Resultingly, many developing countries did not provide patent protection to pharmaceutical companies until the implementation of the Trade Related Aspects of International Property Rights (TRIPS) agreement by the WTO in 1995, which enshrined adherence to patent law for all member states. Because TRIPS was precipitated by the HIV/AIDs epidemic, the act was seen as relating particularly to pharmaceutical patents. While the production of treatments for the virus appeared successful, the cost ($10,000-15,000 per person) took it out of reach of the vast majority of patients. Both the governments of South Africa and Brazil entered landmark legal battles with the pharmaceutical companies over the provision of the HIV drugs, culminating in 2001 with the Doha Agreement. While no specific amendments were made to TRIPS, it was stressed that it should prioritise the importance of public health and ‘access to medicines for all’. Furthermore, it supported the idea that governments could issue compulsory licences circumventing patent protection when an imminent risk to public health exists, usually during a pandemic. However, in 2008, the Thai government became one of the first governments to issue compulsory licenses for drugs that treat non-communicable diseases such as cancer. It was estimated that these licences would save the Thai government up to $150 million per year. India followed suit in 2012, reducing their cost for treatments of liver and renal cancer from $96,000 per year to just $2,124 per patient.

More recently, a section of the Dutch Patent Act has come into force giving pharmacies special dispensation to manufacture drugs for individual patients provided that they have a prescription from a physician. After pharmaceutical firm Leadiant increased the price of the drug CDCA almost 500 times, the Pharmaceutical Accountability Foundation recommended that the Dutch Competition Authority take legal action against the company. In the interim, local pharmacies are able to provide the drug to patients at a far lower price. Many other European countries have since introduced similar legislation.

Although the cost of certain drugs may seem high, the pricing is not uniform. Providing healthcare to over 60 million people, the NHS is able to leverage its buying power with pharmaceutical companies in order to obtain drugs at a much lower price in bulk. American medical insurance providers are not afforded the same luxury, as prescriptions and prices are set piecemeal among multiple actors. President Trump has stated that the inflated costs faced by American patients are a result of ‘freeloading’ by foreign social healthcare services. Coupled with his aversion to any single-payer system in the US, it is likely that he would seek to put upward pressure on prices paid by providers such as the NHS. This position might inform future trade-related conversations between the UK and the US.

Week 28, 2019

Posted by Aimée Allam