Patent-Protected Price Gouging: Drug Companies and Their Legal Monopolies

The U.S. spends more than $600 billion on prescription drugs each year. Photo by Images Money.

Bristol Myers Squibb is an American pharmaceutical company worth over $40 billion dollars. One of its highest performing drugs, Revlimid, is a chemotherapeutic that generates billions of dollars in sales every year, costing over $24,000 for just 28 capsules. The generic version of the drug, lenalidomide, is sold in the U.K. for less than a third of that price. Across the pharmaceutical industry, leading drug producers overprice their products for the purpose of profit, charging hundreds or thousands of dollars for dosages that cost a fraction of the final price to produce.

This price gouging almost exclusively occurs in the United States. Drugs sold in the U.S. cost anywhere from 25% to nearly 1000% more than they do in the U.K., with widely used medicines like Actimmune, Cinryze, and Chenodal costing several thousand dollars less in the latter for the same quantities. Pharmaceutical price gouging in the U.S. is the result of an abused patent system that protects monopolies, resulting in a few companies as the sole producers of highly demanded, life-saving drugs. While on paper the justification for this patent system has merit, in practice, the system devolves quickly into legal price-gouging.

When a company decides it wants to produce a new drug, it undertakes massive liability. Drug production, from first clinical trials to FDA approval, takes about 9 years on average. The actual production timeline takes even longer—usually 3 to 6 additional years—to account for initial discovery and preclinical testing in labs. Less than 12% of the drugs that enter clinical trials end up receiving FDA approval, and even fewer drugs make it to clinical trials. When accounting for the cost of failed products, a new drug takes roughly $2.6 billion to produce. As such, it's customary for drug companies to receive some type of incentive to undertake these risky and costly ventures.

Enter the U.S. patent system. When a company creates a new drug, it needs to file for both a patent and FDA approval. The patent begins to expire immediately after it is filed, and companies generally have to wait several years for both patent and FDA approval before they can actually market the drug. They can then apply for extensions of their market exclusivity (a prohibition on competing drugs will be approved during that time) to account for the filing time, clinical trials, and other factors. This system ensures that drug producers will have time to recuperate the costs of production during a brief monopoly period, after which competitors will be able to produce generic versions of their drug and drive down the price through competition. 

On the surface, this system seems to accomplish its goal of encouraging innovation: the U.S. is responsible for over 40% of new drugs developed worldwide. Compared to the next largest producer, the U.K., which accounts for only 10% of new drugs developed, the U.S. is clearly the frontrunner in pharmaceutical research. Despite this apparent success, the system in the U.S. fails in that many pharmaceutical companies are able to prolong their patent and thus preserve their monopoly long past its expiration date.

The extension of a pharmaceutical company’s monopolist designation is accomplished by applying for patents for alternative uses or making small tweaks to the existing patent. For example, one of the world’s most profitable pharmaceutical companies, AbbVie, has a patent for the drug Humira that was set to expire in 2016. AbbVie extended its patent until 2027 after the company elaborated on a previous patent by specifying the dosage for treatment. Widely-used drugs like Humira often have more than one use, and each new use, or even new dosage, can be used to refresh the countdown timer for generics to enter the market, extending patent life indefinitely.

This patent-extending phenomenon is not unique to AbbVie. From 2005 to 2015, nearly 80% of all drug patents in the U.S. were filed for a drug that was already on the market. This not only prohibits competition, ensuring that prices for these drugs remain high, but it also clogs the patenting process for new drugs, backlogging them behind hundreds of applications.

The patent is an important tool to protect intellectual property and encourage innovation, but the current system in the United States has too much room for abuse that has only hurt consumers with extortionate pricing and prevented new, potentially more effective drugs from reaching the market. For this reason, patent law must be updated to disallow renewals on patents for drugs that have already been approved.

The benefits of disallowing drug patent renewals are threefold. First, it will still grant monopoly periods for these companies, but they won’t be indefinite. As such, these monopolies will eventually end, allowing for “blockbuster” drugs (those with annual sales exceeding $1 billion) to face actual competition from generics, which will have the effect of driving down prices. 

Second, because companies can no longer rely on their drug monopolies to make up the bulk of their revenue, in the way AbbVie does with Humira, they will be encouraged to continue innovation in the hopes of securing new profit streams. In turn, this will encourage new drug production. For example, Takeda Pharmaceutical’s patent on Actos (a drug that controls blood sugar for people with type 2 diabetes) expired in 2012, tanking its sales as brand-name prescriptions were replaced with the generic competitor pioglitazone. In 2014, only two years later, Takeda sent Entyvio to market, a blockbuster drug that treats ulcerative colitis and Crohn’s disease. Since then, Entyvio has generated billions in revenue and now accounts for over 10% of Takeda’s annual total revenue. Now, with a multinational patent infringement lawsuit looming over Entyvio, Takeda has 12 new drugs launching by 2024 in hopes of securing another blockbuster product. Under threat of losing major revenue streams, pharmaceutical companies have demonstrated their willingness to innovate.

Thirdly, while many might speculate that this cutting back of privileges for prior patents will discourage research into new applications for existing drugs, it’s evident that such research can still occur. Defenders of the current patent system argue that it is beneficial that companies can extend the life of their patents by finding new therapeutic uses, thus encouraging further research into pre-existing drugs in a process known as “drug repositioning.” Drug repositioning, although abused to extend patents, is still beneficial as it develops a variety of new treatments for issues that may have been untreatable before. Effectively, this encourages a cost-effective alternative to developing entirely new drugs to treat various conditions.

Unfortunately, companies often stop researching pre-existing drugs as soon as their patents expire as they can no longer use them to extend their market exclusivity. This means that the patent system is only beneficial in encouraging drug repositioning so long as the monopolies never expire. 

However, there is an alternative. Removing indefinite monopolies will drop drug prices and save the U.S. government billions on high-cost name brand drugs. With so much money saved, sponsoring research into already existing pharmaceuticals via grants can yield affordable and effective results by simply investing in drug repositioning itself. Additionally, because these drugs are already developed and FDA approved, the government would not have to pay the costs associated with the extra years and trials associated with new drug development. Finding new applications for existing drugs will be both beneficial and financially feasible given the money saved by ending blockbuster monopolies.

Removing these renewals will challenge perpetual monopolies, promote innovation, and maintain research on drugs that are already on the market. Existing patent law supports the profits of industry giants at the detriment of both consumers and competitors. This small adjustment to patent law could save billions of dollars and help millions of people receive affordable access to life-changing medication. The current system walks the fine line between encouraging innovation and facilitating exploitative monopolies. It’s time to finally pick a side.

Andrew Fahey (CC '25) is a Staff Writer for CPR and an Economics-Political Science Major with a Concentration in Computer Science.