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Why government confiscation of drug patents is the wrong way to increase competition and reduce prices

Dec 18, 2023 by Dean Clancy

UPDATE (February 5, 2024): AFP submitted a letter to the federal register urging the administration to withdraw its proposal. Click here to read the full letter.

Last week, the Biden administration announced a plan to give itself a new power to confiscate pharmaceutical drug patents whenever federal officials deem a prescription drug “too expensive.”

Under the still-developing plan, federal officials could “march in” to confiscate the patent on a high-priced drug and give it to someone else.

The administration claims the government needs this power to combat drug-company “price-gouging” and to promote pharmaceutical innovation and competition. The opposite would happen.

The plan is also illegal. While under the Bayh-Dole Act of 1980, the president has limited march-in rights, he may only invoke them when a promising product that was developed with the help of taxpayer-funded research is not “accessible to the public,” meaning the patent-holder is preventing the product from being produced or marketed. The law says nothing about the product’s price.

The Act’s purpose is to ensure federally subsidized innovations are turned into actual products. It was never intended as a tool to impose backdoor government price controls.

Indeed, Senators Evan Bayh and Bob Dole explicitly noted in the congressional debate that “the law makes no reference to a reasonable price that should be dictated by the government.” The Act’s march-in rights authority, they explained, is “not contingent on the pricing of a resultant product or tied to the profitability of a company that has commercialized a product that results in part from government-funded research.” Instead, they argued, government should march in “only when the private industry collaborator has not successfully commercialized the invention as a product.”

In unilaterally proposing to redefine the term “accessible to the public” to mean “available to the public at a price we deem fair,” the Biden administration is clearly acting beyond its authority.

And in promising to reduce drug prices, it is clearly exaggerating, because less than 15 percent of new drugs are based on a patent derived from public funding. (Most drug products involve numerous patents.)

Several previous administrations have been publicly exhorted by politicians and formally petitioned by pressure groups to use march-in rights to control prices. But in every case, they wisely said no.

Indeed, no president has ever invoked march-in rights. And for good reason. Doing so would have profound negative consequences for innovation and patient health.

Understanding march-in rights

Congress enacted the Bayh-Dole Act of 1980 to stimulate innovation by encouraging the transfer of federally funded research from universities to the private sector.

As we have seen, one of the Act’s provisions, the march-in rights authority, grants the federal government the power to intervene and license an invention, but only when certain conditions are met.

Those conditions are:

  1. the benefit of the invention is not being made available to the public on reasonable terms,
  2. the patent holder has failed to achieve practical application of the invention, or
  3. the patent holder is engaging in anti-competitive behavior.

The phrase, “on reasonable terms” here does not refer to a producer’s terms of sale, but rather to an inventor’s terms of license, that is, to the agreement by which the inventor licenses the product to be produced and marketed. It has nothing to do with the product’s sale price.

Negative effects on pharmaceutical innovation

Invoking march-in rights to control drug prices would suppress life-saving medical innovation for at least three reasons. It would:

  • Discourage private investment. The threat of march-in rights would discourage private companies from investing in the development of new drugs. Pharmaceutical research and development require substantial financial investment and risk-taking. On average, it takes 10 years and $3 billion to bring a new drug to market, partly because drugmakers must test thousands of compounds to find one that works and partly because the federal government requires lengthy and expensive clinical trials to prove to its satisfaction the drug is safe and effective. Inventors who know their investment can be destroyed for arbitrary reasons are less inclined to pursue innovative research in the first place.
  • Discourage collaboration. The Bayh-Dole Act is widely viewed as fostering fruitful collaboration between academic researchers and private industry. But the prospect of march-in confiscations of a product based on price would strain these partnerships. Drug companies will be hesitant to collaborate with federally funded academic institutions if there’s a risk the government could use that collaboration as a pretext to step in and alter the terms of their agreements.
  • Discourage beneficial risk-taking. Developing new therapies is a high-risk, high-reward endeavor. The potential for march-in rights based on something as hard to control as price upsets the delicate balance between the risks and rewards of drug development. Manufacturers will become more conservative in their research choices, focusing on safer but less innovative projects to avoid the perceived threat of government intervention.

Negative impact on patient health

Patients, too, would suffer under Biden’s proposed illegal expansion of march-in rights, in two big ways.

  • Delayed access to innovative treatments. The actual invocation of march-in rights to control prices would lead to high-stakes legal battles, and thus to potentially years-long delays in bringing innovative treatments to market. Such fights would divert scarce resources and attention away from the critical task of getting life-saving therapies to suffering patients.
  • Fewer incentives for breakthroughs. Pharmaceutical research companies rely on the exclusivity granted by patents to recoup their substantial investments in research and development. The potential for arbitrary invocations of march-in rights will diminish the certainty of this exclusivity, and thus reduce the financial incentives for companies to pursue groundbreaking treatments for diseases with unmet medical needs.

Negative economic impact

The president’s proposed use of march-in rights would also put the U.S. at a competitive disadvantage.

  • Hobble American competitiveness. Medications are a top U.S. export. The global pharmaceutical industry is highly competitive, with companies from various countries vying intensely for market share. And pharma companies employ more than 300,000 Americans directly and millions of others indirectly. Imposing backdoor price controls through march-in rights will put U.S.-based pharma companies — the world’s innovation leaders —at a disadvantage to their international counterparts, needlessly hobbling our economy.

Conclusion: Using march-in rights to impose government price controls will only harm human health

While the Bayh-Dole Act’s march-in rights are meant to, and do, balance public interests, and accelerate the dissemination of publicly funded inventions, using them to impose backdoor government price controls will lead to significant harms with devastating effects on human health and well-being.

Government confiscation of drug patents is the wrong way to increase competition and reduce prices. The right way is to give every American a Personal Option — a doctor- supported plan that makes health care more affordable, dependable, transparent, and hassle-free without any government mandates or meddling.

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