Why are our medicines so expensive? Spoiler: Not for the reasons you are being told…

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Patents are a policy tool used by governments to incentivise (investments in) useful innovation for society. By awarding patents, governments provide a temporary monopoly right on the exploitation of an invention. It allows patent holders to exclude others from using or selling the invention for a limited time (to recoup investments and reward the risks taken and efforts delivered). In return, patent holders must disclose the detailed methods and ways to make the invention, in order to foster follow-up innovation. Patents are not a natural right nor a true property. They were originally designed to strike a balance between public and private interests. They are a matter of national competency: every country enacts laws and policies to allow the patenting, and its enforcement, within its territory. What can be patented? ‘Inventions’ in any technological domain that satisfy the following three criteria: Novelty (not yet described anywhere prior) Inventive step (not obvious for someone skilled in the field of technology) Industrial applicability The main legal framework governing patents globally is the 1994 World Trade Organisation (WTO) Trade Related Intellectual Property Agreement (TRIPS) that came into effect on January 1^st, 1995, and that globalised the minimum standards on patents. 1995: WTO TRIPS agreement: All countries must award and enforce patents on all technologies, including pharmaceuticals, for a minimum of 20 years, Limited transition period for LMICs, being extended for lowest-income countries The 2001 Doha Declaration on TRIPS and public health: reaffirms the right of all countries to use flexibilities in the law to protect public health, e.g. compulsory licences But in practice … Pharmaceutical lobbies and countries with important pharmaceutical industrial sectors (such as US, EU countries, Switzerland, Japan) have strongly pushed back against their use, and exert pressure through trade agreements and other channels to adopt more stringent rules than required under TRIPS (‘TRIPS-plus’) Prior to 1995, countries applied different degrees of patent protections in line with their technological capacity, industrial policy and/or public policy objectives, for instance: No patents on pharmaceuticals or only short-duration First establish technical capacity through copying; then protect innovation through patents Only process patents – no product patents (Switzerland till 1970s, India till 2005)

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No relation between cost and price For many years, medicine pricing was analysed through classic market dynamics and commodity price structuring. It suggested that the price companies charge for new medicines reflects the combined production cost, and the investments and risks taken for developing the new medicines, with a profit margin, subject to the laws of competition, supply and demand. Patent monopolies were thought to allow recouping the costs of investments in R&D. However, the recent price hikes and excessive prices have clarified that medicine prices are largely based on what companies can get away with, independent of production and R&D costs [28,39]. Especially in the US, pharmaceutical companies exert unilateral market power to set prices and have been shown to take advantage of that systematically [56]. Moreover, there is a general lack of transparency on who pays how much for (new) medicines, further undermining the potential for market efficiency [30,31]. With official list prices at unprecedented heights, companies negotiate secret purchase agreements with different buyers (can be government, region, hospital, health insurance company) striking deals that combine commitments on volume, bundles with other products, price, market exclusivities, and even liability waivers as we have learnt from leaked contracts during Covid-19 [57,58]. Secrecy as the ultimate protection of commercial interests In addition to the opacity around medicines pricing, there is also a lack of transparency about how much it actually costs to develop new drugs, with estimates ranging from several € 100 millions, to multiple billions, with much of the R&D being based on prior publicly-funded research or directly supported by additional governments grants or otherwise subsidised [23]. However, without transparency on who has paid for the R&D, how much, and how prices are being structured and justified, it is tough to have an informed societal debate about what ‘fair’ medicines pricing would look like, despite best efforts from the World Health Organisation [30,37]. High prices and revenues are (not) required to pay for continued innovation The most used justification for high prices is that the revenues generated through them are critical to pay for future innovation. However, despite the well-guarded secrecy around how much medical innovation costs, studies have shown that drug companies often spend more on marketing than on R&D, while a similarly large portion of the profits goes to shareholders and investors, through dividend payments and stock buy-backs and only a modest fraction is re-invested in R&D [39,51]. Moreover, most newly registered treatments do not provide added therapeutic benefit compared to what we have already, a figure that did not increase over the years despite higher drug pricing levels and a continued high-profit margin for the pharmaceutical industry as a sector [39,46,48]. Alongside the related pharma argument –or threat– that ‘cutting drug prices will hurt future innovation,’ this purported link between revenues through high prices and investments in therapeutic advances is not supported by evidence. High prices reflect the societal value of a medicine A final myth to debunk is that critical or life-saving treatments are ‘worth’ their high price, either because it would save even higher costs of additional treatments or hospitalisation, or simply because a willingness to pay is a price reflection of ‘value,’ translated in monetary market value, or price. Gilead used the former argument to justify the price of US$ 84,000 (€ 77,628 at current exchange rate) for a hepatitis C cure (cheaper than liver transplantation that might be needed if left untreated), while the latter is at the core of the industry-driven narrative of ‘value-based pricing.’ In that logic, which confounds medical or personal value with monetary market value [59], water and other vital products and utilities should be expensive too, and be allowed to become commercial luxury products instead of the basic elements of life to which all people should be entitled, as enshrined in the Universal Declaration of Human Rights [60].

Figure 1. The misalignment between expected medical innovation objectives based on health needs, and the drivers of pharmaceutical companies. Illustration by Piero Olliaro.

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