Posted by: bridget | 19 February 2007

Merck and Patent Monopolies

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.

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Responses

  1. As a Texan I was quite disappointed that our governor wants to have buy the vaccine for all the public school children. Oddly, the Democrats aren’t complaining about this move by a Republican governor or screaming about one of his aides’ connections to Merck.

  2. Yeah, I was wondering about that. I read that your governor does have some Merck connection, but wondered why it is not a scandal.

  3. It’s a win-win situation. Liberals don’t mind because it benefits a pet cause (allowing more people to have more unprotected sex by protecting against a STD) and many conservatives (of the big business type) don’t mind since it means easy money for the corporation. I for one don’t like the idea.

    -J. Kaiser

  4. Mr. Kaiser: you’re not alone in being a conservative who doesn’t like the mandatory vaccine. Libertarians (like me) dislike the idea of the goverment usurping parental authority, and social conservatives don’t like the idea of protecting 11-year-olds against STDs under the theory that they can’t even wait until they are 18.

    Nevertheless, you are right – politics making strange bedfellows and all.

  5. This is a curious dilemma. I will first take issue with totaltransformation, and say that the HPV vaccine will definitely NOT encourage people to engage in unprotected sex (what of HIV? Herpes?)

    Should the government require that all women become vaccinated? No. That is completely a matter of choice for women. Should it be made available to women free of charge? Absolutely. Regardless of one’s opinion on premarital sex, this is a health issue, not an ideological one. HPV is the leading cause of cervical cancer. Having unprotected sex with even one person can lead to HPV, and it can be spread a number of other ways. Even in men, HPV can cause throat cancers (even more than tobacco). On a mere economical level, given the high cost of cancer treatments, $300 per vaccination is a steal.

    I suppose I take a much different approach toward health care and patents than the author, but I have issues with state/student funded institutions doing huge amounts of research (not only in precursors, but also often to the point of fully developing drugs), then having them marketed by companies which profit greatly. Of course, the share borne by the company is high (~$0.5b), but such gross profiteering at the public’s expense is, I find, unjust.

    Perhaps a monetary, rather than temporally-based patent system might be an alternative approach. So, perhaps once a company’s sales of a drug have exceeded its production costs by a factor of 2 or 3, their patent expires, and the chemical information enters public domain. Perhaps stipulations could be made that generics must be domestically manufactured, in order to prevent offshore companies from dramatically undercutting the original producer.

    But then, I’m from Canada, and consider health care a right, not a benefit borne of privilege. I believe that society as a whole benefits when the individuals within it are healthy, regardless of their values regarding sexuality, or their finances.

  6. Ntrail,

    Thank you for writing.

    I disagree, fairly strongly, with the idea of giving limited patent protection to pharmaceutical companies. We do not have the right to other people’s labour at the prices we want.

    First of all, for every drug that makes it to market, 500 do not. So when you are talking about “recouping the cost,” do you mean recouping the cost for that one drug or for all 500 that failed to get the one that worked?

    Second, to state the obvious: you can’t get a patent on something that already exists in the pubilc domain. Why that matters: immediately before the product was put on the market, no one had any access to it, at any price. It is hard to say that you have some sort of fundamental human right to something that just existed two days ago.

    Third, I see no reason why “the government” should pay for this. I put that in quotes for the simple reason that the government is like a child: it has no money of its own. When you say that “the government” should pay for something, you are missing the point: you are asking you fellow citizens to pay for something that you like but have no desire to pay for yourself. (The fact that you may pay “your fair share” of taxes is inadequate: you are still not paying for the entire cost of the programme you endorse.) Try private charity. If enough people think it is worthwhile, they’ll give money so everyone can afford it. If not, then query why you – or anyone else – is really the more moral person, the one who really knows what is right and wrong.

    Fourth, I have different values than you do. I want people to get really, really rich making great medicines. I want people who do a tremendous amount of good to be monetarily rewarded. I do not think that wealth ought to be limited to those who are useless – professional athletes, movie stars, and trial lawyers – but think that wealth is the natural reward for production and adding to society. Wealth is the means by which men trade parts of their lives – and for those who make miracle drugs, that “wealth” is barely adequate compensation for years of grueling study, expensive education, and long hours in the lab. Oh, let’s throw a pretty wonderful intellect on there, that could be doing things like investment banking.

    So why are we limiting the returns of people who do the most good? Oh, that’s right – because we all have a “fundamental human right” to turn them into our slaves.

  7. I suppose part of the issue I was getting at with the government researching drugs is that ‘the government’ IS already doing that in colleges and universities all over the world. And for the most part, this information is disseminated, largely free of cost to the world via academic journals and research papers. However, this investment is rarely recouped, since chemical companies (of any kind) aren’t paying for much of this (other than subscription fees).

    However, I am looking at health care from very different model, wherein the state pays for virtually all health care. So for the state to pay for a good portion of the research (in universities), only to have that information used to manufacture a drug that is marketed back to it at exorbitant costs is a bit ridiculous. Basically companies like Merck benefit from these externalities, but expect protection to profit from the organization providing them.

    If we were to provide ‘fair’ protection from competition to pharmaceutical producers, then patent limitations would allow for profits to approximate those of other industries. However, this is not the case. Pharmaceutical companies tend to have profit margins 3-5 times higher than the averages of other industries.

    Personally, it doesn’t matter to me if people are getting rich making anything (except items clearly detrimental to the public), but my issue arises when this wealth is accrued by pricing live-saving goods prohibitively… It becomes a sort of extortion. Sure, a life-saving drug may not have existed two days ago, but two days ago was a different world, in which someone suffering from the now-curable disease was condemned to death. Now to know that that life can be saved, but to set the price so that it is not available to the ~20% of (US) people who have no health care, well, that’s just criminal.

    The state paying for health care is usually not the case of people not wanting to pay for health care themselves: The middle and upper class could, and in many places, do. But universal health care ensures that everyone CAN have access to it. I am middle class, and am happy that my taxes are used to pay for people who can’t afford vaccinations and treatments. I think that a society is better off when everyone is taken care of. I don’t believe that the state caring about the welfare of its citizens is a bad thing. It’s curious that the USA spends the most on health care ($5267/capita/annum), but is ranked 38th worldwide in the effectiveness of its health care. I think there’s some deadweight loss somewhere…

    Also, having worked in laboratories, I can assure you that the majority of people there aren’t in it for the money. Those on the end of the microscope until 1am aren’t the ones collecting multi-million dollar bonuses. For the most part, I’ve found that people doing any kind of research do it because they believe in what they are doing, love the intellectual challenge, and come home with a sense of pride in contributing to a better world. That is the real payment.

  8. Ntrail,

    If that is your take, there is a very, very simply solution: you, and all those who think like you, can form a non-profit pharmaceutical company. It would accomplish two ends:
    1. providing life-saving drugs at a low cost; and
    2. encouraging price competition, if the drugs your company invents perform the same function as those of for-profit pharmaceutical companies.

    I disagree with your contention that it is “criminal” to make money. So when a doctor charges $10,000 for a life-saving surgery, is that criminal? If a patient does not have a right to that doctor’s life (because we do not enslave people, remember?) and work, why should that patient have the right to someone else’s work?

    You don’t get to dictate prices. Ever. The price someone charges is the means by which he negotiates for the cost of his life – life that could otherwise be spent

    Oh, for all of your comments about how rocking good Canada is, why are there two tiny problems with it, those being:
    1. Canadians are going to America for health care; and
    2. America kicks Canada’s butt in medical technology and development?

    GO CAPITALISM!

    By the way, here are the costs for HPV:
    http://helvidiuspachyderm.wordpress.com/2007/02/25/texans-sue-to-stop-vaccinations/

  9. I like your idea for the non-profit pharmaceuticals. Care to help me raise some funds?

    I never said it was criminal to make money. I just have problems with the kind of profiteering that is being carried out. I think the case of the HPV vaccine is an example of this.

    Careful, about the statistics… They only factor in cervical cancer treatment. We’re forgetting about the genital warts, which are a life long, itching, burning problem. These are perpetual costs in acid and liquid nitrogen.

    Canada actually has a very dynamic and productive medical technology industry, just not as big as America’s because, well, it’s a smaller country. And a lot of the groundwork for this development is done in universities.

    Curious that you should comment on Canadians obtaining health services in the states. There’s a damn lot of seniors coming to get their prescriptions filled here, because they can’t afford to back home. I wonder if any of them are getting Gardasil?

  10. No, I don’t care to help you raise money for a non-profit pharmaceutical company, because I like the for-profit versions quite well.

    Read my comment policy. If you do not like my statistics, come up with your own, not some amorphous mush about how there are “other costs” asociated with HPV. Numerical, comparative analysis.

    There is a saying in the pharmaceutical industry that it costs $1 billion to make the first pill and $1 to make each pill after that. A pharmaceutical company can – and does – charge less to overseas customers because it makes its money in America. Does the Canadian government subsidise the drugs for its members? In that case, it’s merely Americans mooching off of your government, which does not reveal some fundamental flaw in the system.

    The free market works. IMHO, that is your problem with it. It works better than you would like it to. Medicines cost too much? Don’t buy them. With HPV, it’s even better – stay abstinent, which is, last time I checked, both free and good for the psyche.

  11. The way the system works is in Canada is that the government buys bulk quantities of prescription pharmaceuticals and passes the savings on to the users. In effect, a monopolistic non-profit pharmaceutical vendor. And one in which I, and every other citizen is shareholder.

    So really, it’s all a matter of perspective. The state, in effect, is a corporation in which every shareholder has an equally weighted vote to choose the board, and whose dividends are paid out in the form of social benefits. A corporation in which people’s humanness, not their account balance, determine their value.

    And yet you would rather dismantle this corporation in favour of ones that value only dollars rather than people. I’m afraid I just don’t get it. Perhaps you’re fabulously wealthy, but you seem to care a lot about an economic system that, but for your dollars and cents, doesn’t give a damn about you.

  12. If by “fabulously wealthy”, you mean “over $100,000 in debt with student loans”, yes.

    No, it’s not self-serving – if I live to be 85, I’ll spend more than half of my remaining years, likely, benefitting more from socialised medicine (in theory) than not. Nevertheless, I remain firmly convinced that it is deeply immoral. I despise monopolies and monopsonies. I do not need my economic system to give me the warm fuzzies – I’m not so freakishly emotional as to need a group hug out of a freakin number – but I do expect it to work as designed.

    It does work, and work beautifully. One need only to look to the dizzying array of life-saving medications to understand how truly fortunate we are. A socialist society does not produce that. A socialist society, at best, produces what its government wants it to produce, not what people are able to produce via their intellect, ambition, and drive, or what multiple groups of people want to create.

    Yes, it is a matter of perspective. If the whole world were to take your approach, the pharmaceutical industry would dry up. Thousands of life-saving medications would never be invented. Pharmaceutical companies would look at the cost and timeline of drug development ($1 billion and 15-17 years, by the way), the potential liability (billions of dollars for a drug gone wrong, and, of course, the public relations nightmare), and conclude that, without a few blockbuster drugs from which they can make money, the risks of business outweigh the benefits.

    Cute language about “shareholder citizens” and the like, but it is a perverted meaning of the usual words. Shareholders are free to leave the company if the risks are no longer worth the benefits. They may trade their shares in the company’s management and control for money, should someone else want to take over. They are not bound in a suicide pact, into that company, if it goes downhill. Finally, and most importantly, the “corporation” in question is not a plantation full of slaves. Congratulations – you’ve taken the old Southern model – based on a “need” for agricultural labour, for the “greater good” of feeding a growing nation – and have prettied it up and moved it into the medical sector. Now, it is doctors and molecular biology Ph.Ds who have their work taken from them – who are not able to negotiate a profit for that work – it is those who have risked their personal fortune, their families’ very livelihood for these life-saving drugs, whom you would strip of their property. In hindsight, with a successful, life-saving drug, the risks are lower and the rewards higher, but, fact is, risk and return are related. Higher risk, higher return. Great. Let’s encourage people to take risks innovating.

    Proof positive that socialists desire not just a minimum wage, but a maximum wage – a system that looks freakishly like communism. Wonderful. We can all starve together in a putrid, festering hellhole, because people like you have removed the sole motivation for anyone to produce, innovate, and take risks.

    Capitalism: the system whereby you benefit from helping others. What more can we ask for?

    Money, by the way, is the means by which I trade my education, work, and my very life for the education, work, and life of another human. It is a medium of exchange – that which converts the intangible into the tangible and fungible. It is the means by which we may equate my efforts at engineering, law, and teaching, and exchange them for the pharmaceutical acumen of other people. Sounds like a good deal.

  13. Removed for violation of comment policy.

    I think I’m seeing your side of things a bit more, and I’ve come to realize this: We are both well-educated, intelligent and critical people. However, you have a natural distrust of the state, whereas I have a distrust of for-profit industry. We’re basically looking at the same issue from the opposite point of view. And despite how I’m sure we’ve both examined a number of different perspectives of over our lifetimes, we’ve both settled upon the dominant views of our respective cultures.

    I guess you might say that we’ve both been ‘socialized’. ; )

  14. Ntrail,

    The passive-aggressive “winkies” are adorable, but my blog isn’t adorable, so they aren’t appropriate.

    Fact is, you’re wrong. You’ve yet to put forth a coherent argument that is grounded on anything more than emotions that are more appropriate for a PMSing woman than for an intellectual debate. “Oh, no, evil people want to make a living saving people’s lives! Oh, no, help me, Oh Sainted Government!”

    Such crap.

  15. Here’s the beef: Canada (with its more socialist approach to health care), and the United States (with its more capitalist approach), both spend ~0.1% of their GDP on pharmaceutical research. (http://www.oecd.org/dataoecd/21/40/37868186.pdf)
    This, I believe, demonstrates that socialist countries still can, and do, contribute significantly to the tome of medical knowledge, and not for the sole reason of making profit.

  16. You assume that Canadian pharmaceutical companies don’t make a profit by selling to American consumers.

    I think that assumption is completely baseless and incorrect. The very presence of the American for-profit pharmaceutical market encourages international production. We change to your method, and the international pharmaceutical development industry will radically change. Without America to shoulder a lot of the cost, it simply would not be worthwhile for talented people to expend their energies in making life-saving medications – certainly not when they could do other, less worthwhile activities, and not have people commandeer the products of their minds by virtue of their usefulness. (Said it once and I’ll say it again: under your system, the only people who can make money are those who do not contribute anything meaningful to a society. The more important the contribution, the more that socialists will limit the return on its investment. I could not think up a better way to ensure that a society will fail. You’re seeing a long, slow collapse, albeit a collapse temporary forestalled by the strength of the American capitalist system.)

  17. I imagine you’ll censor this, but I’ll ask it anyway… Have you traveled at all? I’m just curious. I certainly mean no offense. I don’t tend to meet people who so strongly espouse capitalist ideals who have been to the places where their cheap good are manufactured. I just think it’s important to consider that the choices that we in the middle class take for granted aren’t necessarily open to everyone. I don’t want to turn this into an argument. I just thought I’d ask. You can respond to my e-mail if you’d like. Or not at all. In any case, best of luck in on your bar exams.

  18. Oh, I heart ad hominem attacks. Once you have nothing left, either attack the conservative/libertarian as:
    1. an uneducated religious nutjob; or
    2. an uncultured, out of touch wealthy person.

    I will not grace such bullshit with a response; the idea that my arguments would be more valid if they came from someone else, or if I were to give more details about my life, is a sickening, anti-intellectual, knee-jerk protectiveness of your pseudo-communist ideals.

    I also heart non sequiturs. After all, we were discussing American policy, correct? I fail to see how traveling to Thailand and talking about Thai policy ought to influence America. Maybe you’re a little slow, but if those evil, rich Americans absorb the cost of new technology, it can be sold overseas at the incremental cost of production – i.e. Americans can pay for the development costs and profit, and the people in developing nations can get the drugs at the marginal increased cost of each pill. Since I advocate for a system which allows that, I must be completely out-of-touch with the needs of those in developing countries. Freakin idiot.


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