Should Non-Patent Exclusivity be Conditioned on Launch Price? One Scholar Puts Forth “A Modest Proposal”

By Kurt R. Karst –      

The folks over at Inside Health Policy brought to our attention a recent article authored by Len M. Nichols, Ph.D., Director and Professor of Health Policy at the George Mason University Center for Health Policy Research & Ethics that we thought FDA Law Blog readers would also find of interest.  The article, titled “What Price Should We Pay for Specialty Drugs?,” discusses an issue near and dear to us: non-patent exclusivity. 

Using as a springboard the recent hullabaloo over the pricing (and profits) generated by SOVALDI (sofosbuvir) Tablets, which FDA approved on December 6, 2013 under NDA 204671 for the treatment of chronic hepatitis C infection, Dr. Nichols puts forth a thesis: “[the] degree of profitability is higher than necessary to induce investors and researchers to develop the next Sovaldi, or specialty drugs in general, and therefore we should seek policy changes that would help re-balance our competing objectives of innovation and affordability.” 

What does that mean exactly?  Folks in the pharmaceutical industry probably aren’t going to like the answer.

According to Dr. Nichols, there’s a policy problem between encouraging innovation and ensuring affordability of drugs.  This particularly true among so-called “specialty drugs,” writes Dr. Nichols, who defines such drugs as “complex to manufacture, can be difficult to administer, may require special patient monitoring, and sometimes have FDA mandated strategies to control and monitor their use.” 

Our policy problem is rooted in the reality that striking the right regulatory balance between encouraging innovation – by granting temporary monopoly pricing power – and ensuring affordability by encouraging post-monopoly competition is, well, very, very hard.  Of late, our policy effort has not been commensurate with the complexity of the problem. . . .

[C]onsumer advocates want prices to be as low as they can be, as soon as they can be, to tilt the balance in [social wefare] toward consumer surplus and away from profit, given that we keep the right kinds of innovation flowing.  Manufacturers, on the other hand, want more of [social wefare] to be captured in profits as long as possible, as that does keep the incentive to invest high.  Public policy is about setting rules and regulations to balance these two competing forces – competition and innovation – to maximize social welfare while being mindful of the distribution of [social wefare] as well.

Industry’s increasing focus on high-profit specialty drugs – as well as orphan drugs – has thrown things out of whack, says Dr. Nichols.  Over the past couple of years, there have been various policy proposals aimed at achieving a “course correction,” including grants, tax credits, and even doing away entirely with exclusivity in favor of a medical innovation proze fund (see our previous posts here and here).  Dr. Nichols has a new proposal to throw in for consideration.

Noting that revoking patent protection is not a practical (or realistic) way to address the problem he lays out, Dr. Nichols says that we should consider revoking non-patent exclusivity if a company proces a drug too high:

What if we changed existing law enough to say this to developers of newly approved specialty drugs: you can price them as you will, this is America, but if you price them high enough, you will forfeit the marketing and/or data exclusivity grants that the FDA is empowered to make – but not your patents from the US Patent Office – and encourage competitors to enter the market with all our regulatory powers and fast track authorities.

How high is too high?  That depends if your company is an “established firm” or a “new firm”:

For the established firm, “too high” is a price that net of production, marketing and current R&D costs will yield a rate of return on sales more than 20% above the cost of market capital for the manufacturer, the rate at which the firm can raise new funds from shareholders, investors and bankers.  This implicitly assumes the amount of R&D they are doing at any given time is an “equilibrium” amount and thus this approach will fund today’s R&D activities even given the expectation that some will not pay off.  Thus, the “regulated” price preserves cash flow for a robust amount of R&D, the major purpose of new cash flow for an established firm. . . . 

New firms with new products who are without a portfolio of products to sell at the moment and a pipeline that is being developed in a kind of equilibrium will need a higher rate of return than this. . . .  I propose allowing the new firm to earn 50% more than their cost of capital upon launch of a new, first in class specialty drug, where the cost of capital includes the cost of servicing and eventually retiring their new product-specific debt.  We should also recognize that new firms need marketing spending to take market share from established treatments, however inferior, so they should have a smaller or zero marketing discount in their rate of return calculation.  This will preserve the incentive for the new firm to develop and market new drugs and to remain independent. 

As more companies focus on the development of specialty and orphan drugs, we’re likely to see greater debate – and more proposals – on how to best achieve balance between encouraging innovation and ensuring drug and biologic affordability.