On Wednesday, a group of House Democrats released a set of “progressive principles” on COVID-19 drug pricing for any Phase 4 Congressional relief package. Unfortunately these principles, whatever their intentions, will only serve to hamper the world’s progress toward a COVID-19 vaccine (and other drugs to treat the virus).
Reps. Jan Schakowsky (D-IL), Peter DeFazio (D-OR), Rosa DeLauro (D-CT), and Lloyd Doggett (D-TX), several of them close allies of Speaker Nancy Pelosi, shared the following “three protections” they expect to see in the next Congressional bill on COVID-19:
- “NO EXCLUSIVITY: Pharmaceutical manufacturers should not be granted exclusivity for any COVID-19 vaccine, drug, or other therapeutic—whether it has been developed with U.S. taxpayer dollars and publicly funded, or not.”
- “STOP PROFITEERING: Pharmaceutical companies must not be allowed to sell any COVID-19 vaccine, drug or therapeutic at an unreasonable price, whether or not it has been developed with U.S. taxpayer dollars.”
- “FULL TRANSPARENCY: For any COVID-19 vaccine, drug, or therapeutic, pharmaceutical manufacturers must publicly report the total expenditures of the manufacturer on: research and development, disaggregated by clinical trial phase and the percentage of those total expenditures that was derived from Federal funds; materials and manufacturing; and meeting statutory standards and carrying out post-market requirements of the Federal Food, Drug, and Cosmetic Act.”
A few of these points may sound reasonable at face value. For example, it would be pointless for a COVID-19 vaccine or drug to be so expensive that only the world’s wealthiest people or institutions could afford it. However, drug innovators are not racing to develop a vaccine (or other COVID-19 treatment) merely in order to sell it to the highest bidder. They are racing to be among the first to develop globally approved and distributed drugs that could help put a stop to the deadliest pandemic the world has faced in generations (with a sufficient financial margin to justify such an extraordinary effort). The careful incentives established by U.S. intellectual property (IP) law have an important role to play in this race for a cure, and the progressive principles outlined above would unduly interfere with and erode those incentives.
Let’s take them in turn.
Exclusivity is a fundamental incentive for both rapid drug development and fierce drug competition. Don’t take our word for it - here is what the nonpartisan Congressional Research Service (CRS) has to say:
“Patents are generally justified on the basis that temporary exclusive rights are necessary to provide incentives for inventors to create new and useful technological innovations. This rationale maintains that absent legal protections, competitors could freely copy inventions once marketed, denying the original creators the ability to recoup their investments in time and effort, and reducing the incentive to create in the first place. Patent incentives are said to be particularly necessary for products like pharmaceuticals, which are costly to develop, but easily copied once marketed.”
In short, exclusivity works. The landmark 1984 Hatch-Waxman prescription drug law, for example, established a six-month exclusivity period for the first generic drug manufacturer that successfully challenges a brand manufacturer’s patent as “invalid, unenforceable, or [one that] will not be infringed by the generic product.” These challenges are risky, as they can lead to legal and regulatory costs for both brand and generic manufacturers. The promise of six-month exclusivity, though, has led to hundreds of so-called “Paragraph IV certifications,” bringing generic drugs to market faster than they would without such incentives in place.
These are extraordinary times, for sure, and the generic drug incentives mentioned do not apply specifically to the COVID-19 discussion. But these extraordinary times also require extraordinary investments, which in turn require, at a minimum, some incentives for drug manufacturers to work on a cure. CRS notes, in the same report cited above, that “though [a drug] patent term is generally twenty years, delays in PTO and FDA approval can decrease the nominal Orange Book patent term to 15.9 years, and generic competition can result in an effective market exclusivity of only 12.2 years. This effective market exclusivity is less than the sixteen years that one commentator suggests is necessary to recoup the brand’s fixed costs for research, development, and clinical testing.”
Completely eliminating exclusivity periods would no doubt do even more damage to a drug manufacturer’s efforts to recoup their fixed costs. It could convince some of these drug manufacturers that the significant costs they are incurring to research and develop a vaccine will ultimately not be worth the potential returns - even if the manufacturer charges what progressive lawmakers would consider a “reasonable” price (more on that below).
Profits and Prices
Progressive lawmakers want to prevent manufacturers from charging “an unreasonable price” for a COVID-19 drug or vaccine, but they do not define what would constitute an “unreasonable price” to them. The lawmakers do, however, want to ensure whatever they consider a “reasonable” price is settled up front:
“An ‘after the fact’ enforcement mechanism is not efficient enough for a public health emergency—we must mandate up front that manufacturers agree to a reasonable price.”
One of many problems with this approach is that it is unclear what costs drug manufacturers will incur in developing COVID-19 tests and vaccines. Those costs will differ dramatically if drug R&D takes six months, versus one year or 18 months or two years. They will also differ dramatically based on the regulatory approval costs the manufacturer incurs in the U.S. and in foreign countries , and based on how public and private sector actors do and do not collaborate on drug R&D.
Dozens of drug manufacturers are working on a COVID-19 vaccine, and surely not all of them will recoup their research and development costs (R&D) by receiving approval for a viable, widely distributed drug. Some of them will certainly fail, and others will succeed without a significant profit on their inventions. In fact, one industry watcher expects the manufacturer Gilead to take a “‘humanitarian approach’ with a price to merely recoup its development costs.” Such expectations, while encouraging for many, will not be sufficient for all policymakers. For those still concerned about price, we note that if the federal government or a public university contributes to vaccine or drug R&D, they can include terms in their contracts with drug manufacturers that protect the taxpayer’s (or university’s) stake in the invention. However, studies indicate that public-private partnerships without excessive price controls make drug innovation more likely, not less. The Bayh-Dole Act in particular has helped pair universities with private manufacturers to bring new drugs to market - all without the problematic “march-in rights” some progressives have called for.
Even if the federal government were to require some kind of agreement on a “reasonable” upfront price from manufacturers, though, that price, if set too low, could convince manufacturers to drop out of COVID-19 drug development as their R&D and regulatory costs pile up. This would be doubly true if there is no accompanying exclusivity for an eventual cure, as outlined in the first progressive principle above. The effects of these progressive principles would be particularly acute for small drug manufacturers, who often have thinner margins than large drug manufacturers but have nonetheless constituted a majority of new drug developments in recent years.
The last progressive principle outlined by lawmakers appears to be a simple effort at attempting to punish manufacturers for the need to both partner with public institutions on drug R&D and market the drug in later stages. The “full transparency” measure seeks to parse out exactly how much a manufacturer spends on “research and development,” “materials and manufacturing,” and “carrying out post-market requirements,” but the lawmakers offer no compelling reason for including these requirements. Rather, the requirement appears to exist so that lawmakers can launch a fishing expedition and criticize pharmaceutical manufacturers.
Given the quotes from the lawmakers involved in developing these principles, this expedition has already begun:
- Rep. Schakowsky claims the lawmakers are “lifting up the urgent need to protect consumers from price gouging by Big Pharma.”
- Rep. DeFazio argues that, under the status quo, the federal government is “allowing Big Pharma to build their wealth upon our nation’s crisis.”
- Rep. Doggett claims that “[u]ntil Congress demands limitations, pharmaceutical manufacturers will remain the leading coronavirus profiteers.”
Policymakers should have the flexibility to balance both the urgent race for COVID-19 cures and the need to ensure widespread access to those cures. Here, though, progressive policymakers are putting the cart before the horse, at the potential risk of a fast and effective set of treatments for COVID-19.
We recognize it’s not enough to merely criticize the approaches above, so here instead are some principles that we suggest lawmakers should follow when it comes to COVID-19 drug development:
- LOWER REGULATORY BARRIERS: NTU has long pushed for the Food and Drug Administration (FDA) to streamline its regulatory approval process, and we have praised some measured progress on FDA’s part when it comes to standardized review templates for biosimilars and the agency’s record speed in reviewing generic drug applications. While FDA’s review process is still too lengthy and outdated, the FDA is working overtime during the COVID-19 crisis to hustle Emergency Use Authorizations (EUA) out the door so that the private sector can support America’s COVID-19 testing and treatment needs. We believe policymakers should continue keeping these lower regulatory barriers in place, and carefully evaluate which ones should stick around after the pandemic subsides. We also believe Americans should have access to a proven COVID-19 treatment soon after it’s available in other countries, not just as soon as it gets across the finish line with an overburdened FDA. Congress could also give careful consideration to the RESULTS for Coronavirus Patients Act (S. 3545 and H.R. 6260), which would ensure a drug or device approved to test for or treat COVID-19 that is approved in one or more allied countries gets put on a fast-track for FDA approval here in the U.S. Proper safeguards will need to be established for this fast-track process, which should be limited only to the most urgent circumstances, in order to accommodate valid concerns over “importing” too many policies from price-controlled countries.
- LET THE MARKET WORK: The market will most efficiently and effectively determine how to strike the balance between incentives for COVID-19 drug manufacturers to work quickly on a cure and the need to distribute any approved vaccine or drug widely. The manufacturers who first receive regulatory approval for drugs, vaccines, or devices to treat COVID-19 will not operate in a vacuum where they can charge anything they want. They will be negotiating with private payers who are either required to provide COVID-19 treatment at no patient cost-sharing or are doing so voluntarily. That market tension will ensure that most people have access to the drug at an affordable price.
- SUPPORT THOSE WITHOUT COVERAGE: However, not everyone who needs a COVID-19 treatment is covered by insurance. Policymakers can take steps to ensure that the uninsured or underinsured receive a COVID-19 drug or vaccine at an affordable out-of-pocket price. Policymakers could also enact an emergency program to provide low-cost or even free treatments for the roughly 10 percent of Americans who are uninsured. The Trump administration has taken steps to assist uninsured individuals, suggesting that a portion of the $100 billion allocated to health care providers will be to reimburse for COVID-19 care provided to the uninsured. To protect taxpayers, any present or future program would need to be designed with limited duration and scope, and with robust oversight mechanisms. This is not a recommendation a fiscal watchdog like NTU would make under normal circumstances, but as we noted these are not normal circumstances.
Quickly getting a COVID-19 vaccine in the hands of health care practitioners around the world will require the active and collaborative participation of numerous public and private actors. In outlining their overly restrictive principles, progressive policymakers are attempting to have their cake (full private sector participation in the race for a COVID-19 cure) and eat it too (a public sector monopoly on the terms and conditions of private sector participation). We believe our principles are a better way forward for public-private partnerships on COVID-19.