WASHINGTON (Jan. 12, 2023)—In a new report published today, the policy director for R Street’s Technology and Innovation team, Wayne Brough, examines the pharmaceutical industry’s market structure and the strategic patenting practices of drug companies to identify negative impacts on competition and consumer welfare. The study also highlights legislative and regulatory changes that address how the patent system functions. The goal is to ensure that reforms promote innovation while providing access to pharmaceuticals in a market where prices are not artificially high.

This report comes at a critical time, as the pharmaceutical industry is a major player in the U.S. economy. The industry contributes significantly to the nation’s economic output and employment by producing lifesaving products. Yet the industry’s pricing policies are widely scrutinized, with critics claiming that drug therapies are too expensive, higher than similar therapies in the European Union and other countries.

This phenomenon is, in part, driven by the fact that patents can be used to prolong market exclusivity and to delay competition in the pharmaceutical industry, which expends a large amount of capital in research and development (R&D). Even small changes to these patents can impact the market, particularly with revenue generated by successful drugs protected by patents. These drugs can have annual sales exceeding $1 billion, making even a brief patent extension strategy beneficial for companies.

These issues with patents are made worse by regulations governing how new products are brought to market, as the long approval process can detract from the timeframe of market exclusivity offered by a patent, weakening incentives to invest in the needed R&D. That same regulatory framework can limit the entry of other companies, preventing potential competitors from driving down drug prices.

Policymakers have responded to political pressure over drug prices by reforming patent policy to limit patent strategies focused on extending market exclusivity rather than on innovation. This has been addressed with legislation to encourage generic competition in the small-molecule drug market. Additional measures provided incentives to enable competition in the biologics market. Both the industry and policymakers have responded to the incentives generated by patents.

Drug companies seeking increased revenues often utilize the patent system to extend the exclusivity patents provide. The tactics from companies are manifold. One strategy is “evergreening” products, in which a company continues to file patents on a product only to extend monopoly protections. Another is building “patent thickets” around products, which entails obtaining a complex portfolio of patents that makes it more difficult for competitors to enter the market. Yet another strategy is encouraging “product hopping” to move consumers to new versions of a drug before competitors can enter the market.

For their part, policymakers have adopted wide-ranging patent reforms to improve their quality and established procedures to remove weak or broad patents. These measures are central to debates over drug pricing and offer opportunities to limit patent gamesmanship while still providing incentives to invent and innovate.

As Brough concludes, “[t]he debate over drug prices remains important and ongoing; identifying unnecessary impediments to a more competitive market for lifesaving drugs is a vital element of that debate. Patents are at the core of discussions of innovation and competition and, as such, should continue to be the focus of efforts to address the challenge of rising drug prices.”