Compulsory licensing could compromise cures

By / 8.28.2018

The drug industry, like any industry, has its share of bad actors. The loathsome Martin Shkreli is now serving time after his company, Turing Pharmaceuticals, jacked up the cost of a lifesaving AIDS drug by 5,000 percent. Mylan, a Dutch company, was caught overcharging the federal Medicaid program $1.27 billion for EpiPens, used to protect against deadly allergic reactions. These examples of price-gouging, and more, are inexcusable.

Yet a few bad apples do not justify dubious policy. One unfortunate proposal getting some attention recently is the idea of compulsory licensing, found in a bill introduced by Rep. Lloyd Doggett (D-TX). Under this approach, the federal government could deal with an “excessively high” price for a brand drug by forcing the maker to license the drug to a generic competitor.  The generic company would still pay royalties to the original patent holder, but at a rate set by the government.

Compulsory licensing could place downward pressure on drug prices. Pharmaceutical companies may price their drugs lower if they are afraid the federal government could issue a compulsory license to a generic drug maker. However, in the long run fewer companies may risk working on developing innovative, albeit expensive, treatments. The result: Fewer new drugs and treatments for disease.

Proponents of compulsory licensing argue that there’s no need to worry about innovation, because development of new drugs is supported by National Institutes of Health (NIH) investment in science. They cite an interesting new report published by the Proceedings of the National Academy of Sciences, which shows that $100 billion of NIH research funding helped support the development of all of the 210 new drugs approved by the Food and Drug Administration (FDA) between 2000 and 2016.

That number – $100 billion – sounds enormous, and by some measures it is. But it’s spread out over 17 years, so that translates into only $6 billion per year. Moreover, the reality is the NIH only funds a fraction of the development of these therapies. So while NIH spent $100 billion to support the development of the science behind these drugs, the pharmaceutical industry invested $896 billion into research and development, according to the government statisticians at the Bureau of Economic Analysis. This money helped develop these 210 drugs – as well as many others that weren’t effective enough to make it to market.

The truth is: Developing cures is hard, and companies have had to spend a ton of money on R&D, clinical trials, and FDA approval to bring new breakthrough treatments to market.

Two decades ago policymakers were promised cures for cancer, Alzheimer’s, and HIV/AIDS in exchange for increased funding to NIH and sequencing the human genome. Yet, despite years of scientific advances, we have made much less progress than anticipated in translating the science into viable therapies. For example, it seems each day we hear about a new potential treatment for Alzheimer’s only to have the results dissipate after further investigation.

When treatments like CAR-T therapy – which engineers a patient’s own cells to kill cancer cells and costs $475,000 for a one-time treatment– hit the market, it’s easy to criticize the drug companies for the price. But the truth is, as seen in the report, the NIH only subsidizes a fraction of the cost of developing these therapies.

Forcing companies to lose their exclusive licensing deals, after making huge investments of time and money to develop these drugs, won’t help us develop treatments any faster or cheaper. But it would reduce their incentives to work on complicated cures, especially those that would benefit only a small group of people.

Slowing down drug and biomedical innovation benefits no one. That’s why progressives should resist the false allure of compulsory licensing.