How patents play a role in drug pricing

19 January 2018

In this week's Expert View, Kevin O'Connor, partner at Neal, Gerber & Eisenberg, provides his perspective on the role played by patent law in the pricing of pharmaceuticals in the US market.

The cost of prescription drugs is at the forefront of discussions among patients, advocacy groups, prescribers, payers, pharmaceutical companies, and policy makers. One factor – though not the only factor – in driving the cost of prescription drugs is the availability of competing products. Certain competing products, such as generic or biosimilar versions of approved drugs, are not immediately available as a result of the market exclusivities granted to the innovator company by the federal government in the form of exclusive marketing rights and/or patent rights. The rationale for granting such market exclusivities is to incentivize innovation and development of new, better, and/or safer prescription drugs.

The single largest cost to a pharmaceutical company in developing a new drug is securing regulatory approval, which entails conducting several clinical studies to demonstrate that the drug is safe and effective. Even conservative estimates of the cost to develop a new prescription drug are in the range of $500 million to $1 billion. See, eg, Prasad & Mailankody, JAMA Intern Med. 2017;177(11):1569-1575. The Tufts Center for the Study of Drug Development estimated that the average pre-tax industry cost per new prescription drug approval at $2.6 billion. Though the various estimates differ in methodology (eg, whether opportunity costs or the cost of failed candidates are factors or not), it is undeniable that the quest to bring a new drug to market is a costly undertaking.

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