As previously blogged, Merck has donated significant amounts of money to politicians who agree to mandate that middle school girls take their new vaccine, Gardasil. If all fifty states pass such measures, Merck’s revenue will be approximately a billion dollars. Merck is the only pharmaceutical manufacturer who makes an HPV vaccine, so a requirement to get the vaccine amounts to a government mandate to purchase a Merck product.
Merck applied for a patent on Gardasil in March of 1995; the patent was granted in October of 1998. Under US patent law, they have the patent for either 17 years from date of issuance (October 2015) or twenty years from date of application (March 2015), whichever is longer. (Note that a generic company cannot bring a drug to market under an ANDA during the March-October 2015 time period.) They have applied for an extension of the patent term.
Under the Hatch-Waxman Act, another company can file a Paragraph III certification and seek to bring a generic to market on 08 October 2015 (without the requisite clinical trials). However, Merck can extend their patent term for up to an additional five years, for a total of fourteen years of patent exclusivity. (The fourteen years is statutory; the full five years may not be granted if Merck was able to bring its vaccine to market before Oct. 2006.) The first generic manufacturer will get six months of market exclusivity; generally, during that time, the price of both drugs will remain the same. Six months after Merck’s patent expires (either in 2016 or as late as 2021), the market will be open and the price will drop.
Obviously, if Merck can command mandatory use of its product and can dominate the market until 2020, but keep its prices high until 2021, it has the ability to make a fortune. This is a capitalist, pro-patent blog, so there will not be any complaints about pharmaceutical manufacturers who make a good product and then make a profit off of it. The real issue, however, is the imposition of a government-imposed monopoly, which undermines market forces.
One theory of patent rights is that they correct for a market failure: without exclusivity, an inventor could not recoup development costs, as he would have to price his product to be competitive with free-riders. (Note that estimates for development of drugs range from $100 million to $800 million.) Inventors have the same incentive that any other seller of goods has to charge a reasonable amount: the maximisation of profit. A seller who charges too much will lose customers (who will choose to do without the new product); a rational actor will choose a price that will maximize not total sales, but profit. This theory is inapplicable when the government mandates that citizens purchase a certain product that is under patent. The seller has no incentive to sell his product at a reasonable price: no matter what he charges, people will be forced to buy it, and, if he charges too much, the government will cover the difference.
This creates a second market failure. Generally, it would be corrected as other competitors come onto the market; however, in the pharmaceutical world, the development, testing, and approval process would take approximately fifteen years, by which time the drug would be off-patent anyway. The obvious solutions to this problem are: 1) government-determined pricing structures; or 2) re-working the patent system to eliminate the market failure.
Both of these solutions are problematic. A company that develops a socially beneficial drug should be able to reap financial rewards for it, both as a matter of principle and of policy. Pharmaceutical manufacturers test approximately five hundred drugs to find one that works and invest enormous amounts of time and money into drug development. Profit from one drug allows them to develop more drugs. If the government were to determine the price that could be charged – and therefore limit the profit – drug companies would have a disincentive to create socially beneficial drugs.
The government could change our patent laws (theoretically; the US follows many international norms), such as by allowing generics to compete whenever a drug is required. There are federalism issues here: patent laws are national (and, to some extent, international) in scope, while medicine and the health/safety/welfare of citizens have typically been state concerns. The federal government would either take over the business of determining which vaccines are necessary for pre-school, or State policies would influence federal law. Other solutions – forced auctions of the patents, government production of the product, or price controls – would create the same disincentive for companies to create truly beneficial drugs. They would also undermine the patent system in general – a system which is predicated on a quid pro quo of disclosure of an invention in exchange for temporary market exclusivity.
This is all a very long way of pointing out that the States should not really go about requiring that their residents innoculate themselves with patented drugs, especially when done at the behest of the patent holder.