Should a patentee with market power be allowed to charge monopoly prices?: March-In Rights and the NIH

Patents are no longer referred to as monopolies. Rightly so because the exclusive rights granted do not normally confer monopoly power in any relevant market. However, sometimes patents do confer so much market power that the owner can charge prices that bear no relation to the cost of manufacture (except for being well above that cost). Abbott’s patents covering its antiretroviral drug ritonavir likely serve as one such example. Although not likely a true monopoly, Abbott is able to charge much more than its marginal costs. In the US, Abbott charges about $12 per 100 mg pill on its drug under the brand name Norvir. And, most patients are on a multi-pill daily regimine. In other high-income countries around the world, the drug is ordinarily sold at less than $2 per pill. Apparently to relieve political pressure, Abbott also lowers its price paid by the US Gov’t for purchases under medicare and medicaid. Abbott has also apparently refused to allow its drug to be combined with other anti-viral treatments that would reduce cost and make life generally easier for patients.

The drug is protected by U.S. Patent No. 5541206, No. 5635523, No. 5648597, No. 5674882, No. 5846987, and No. 588604. And, there is little suggestion that these patents are invalid.

In a recent filing, Knowledge Economy International (KEI) has asked the NIH to use its March-In Rights to force Abbott to lower its price charged to US consumers. http://keionline.org/node/1573. The legal hook for KEI is that the US government funded a substantial portion of the initial drug development. That initial funding was critical and Abbott only fully committed and took-over all research funding once it realized the high likelihood that the drug would be a major profit source. Under Bayh-Dole, the US government has “march-in rights” for patents such as these to ensure that the innovations are reaching the marketplace in a way that serves consumers. However, the US government has never actually used its march-in rights. Although the US Gov’t has not actually marched-in, a prior petition to the NIH is seen as one reason why Abbott reduced its price charged for the drug to the U.S. Gov’t.

The Norvir situation is one of many cases that KEI sees as problematic. More generally, the organization has asked the NIH to adopt two rules to guide the use of March-In rights.

Rule 1: Ceiling on prices to U.S. residents: The Secretary shall normally grant open licenses to third parties to use patented inventions that have benefited from federal funding, subject to the payment of a reasonable royalty and an appropriate field of use, if a product or products based upon those inventions are sold in the United States at prices [more than 10%] higher than in other high income countries. . . . A licensee may rebut the presumption of unreasonable pricing by providing evidence that its actual risk adjusted R&D costs would not be recovered, but for the charging of higher prices in the U.S. market, or other evidence specific to the risk adjusted costs for the licensed invention.

Rule 2: Use of invention for a dependent co-formulation technology: The Secretary shall grant licenses to third parties to use patented inventions that have benefited from federal funding, subject to the payment of a reasonable royalty and an appropriate field of use, if a product based on those patented inventions: (a) is a drug, drug formulation, delivery mechanism, medical device, diagnostic or similar invention, and (b) is used or is potentially useful to prevent, treat or diagnose medical conditions or diseases involving humans, and (c) its co-formulation, co-administration or concomitant use with a second product is necessary to effect significant health benefits from the second product, and (d) the patent holder has refused a reasonable offer for a license.

I expect that the NIH will again reject this petition and refuse to exercise any march-in rights or develop a framework for the future. However, you may begin to wonder why Congress included march-in rights if they are never to be used.

29 thoughts on “Should a patentee with market power be allowed to charge monopoly prices?: March-In Rights and the NIH

  1. “Should a patentee with market power be allowed to charge monopoly prices?”

    Okay, I may be just a “101 Integration Expert” and do realize there is an ocean of patent law beyond my tiny niche, but isn’t a patent a temporary monopoly?

    Thus a temporary monopoly should be able to charge monopoly prices, temporarily!

    And any business can charge any price they want. Just like any consumer can pay, or not pay any price they want.

    The increase in these anti patent, anti capitalist, socialist leaning articles on the leading patent blog is disturbing.

  2. Normally, government should do only that which will not be done by private companies.

    Or can not be done effectively by private companies, for various reasons.

  3. Confused, why should government invest in drug research?

    Given that private industry will do so anyway, at their own expense, in exchange for patent rights, this is a very good question. Normally, government should do only that which will not be done by private companies.

    Confused, who do you believe the government made any investment here at all? It would be good to know before we jumped to any conclusions about this case, or about the general case.

  4. So, the government’s (public’s) contribution in research at the front end has zero value? Should not the public recoup at least some of the taxpayer money that the NIH used to fund the research? Shouldn’t the govt have a say in the price if it funded the front-end of the research? If no is the answer to these questions, then why should the govt invest in drug research at all? I suppose in some ways the policy is to give incentive to the drug company to take the ball and run with it (bring the drug to market) if the govt has footed the bill for the research. But that does not justify 600% times price in U.S. than in other countries. Clearly there is a problem with charging what the market will bear as Dennis mentioned, which for drug research not funded by the public would be okay, but for drug research funded by the public it is not. The govt will not march-in because those in the NIH are too cozy with the private sector, i.e. that swinging door policy.

  5. Confused:

    Dennis said,

    “”That initial funding was critical and Abbott only fully committed and took-over all research funding once it realized the high likelihood that the drug would be a major profit source.”

    To me, this phrase makes no sense at all. Why would the government need to ask a private company to take over research if anyone knew it was going to be profitable? If it was so profitable, why not auction it off?

    What I think happened is that the project looked to be a loser and the government was happy to find someone to take over the project. Thereafter, the private company took the risks and made the investment. The reason for the success probably was not the government.

    If this is true, the government would shoot itself in the foot if it adopted a policy whereby if a government project were taken over by a private company and became a success, the government would stripped the private company of its rights; but if the project were a failure the private company would absorb the losses. Such a policy would be self-destructive for any government.

  6. I did my law review article on March in Rights some 15 years ago, same issue back then except with AZT. I have a hunch that the lobbysits weigh in heavily on whether the govt exercises its march-in-rights.

  7. “The public can be no worse off than if the patented invention was never made, ”

    Not necessarily. People of skill may well not be so motivated to make yet another cure if they know one already exists regardless of the $$$.

  8. “And the most fascinating factoid of all (for us patent-minded folks): the most likely perp, Bruce Ivins, was an inventor on patents covering anti-anthrax technology (6,316,006 and 6,387,665, directed to anthrax vaccines).”

    Yeah that’s him, never mind.

    After all, he had to invent the cure before he waged bio war.

  9. “To this day, the anthrax attacks remain the most significant post-9/11 terrorist attacks in the United States.”

    Weren’t they all by that one guy?

  10. There was a big controversy over this in 2001-2002 (link to cptech.org) during the anthrax attacks on Congress and the resulting Cipro shortage. Bayer reduced the price on Cipro by about 50% (still about 2x-3x over the proposed price from a competitor) which defused the political issue.

    To this day, the anthrax attacks remain the most significant post-9/11 terrorist attacks in the United States. And the most fascinating factoid of all (for us patent-minded folks): the most likely perp, Bruce Ivins, was an inventor on patents covering anti-anthrax technology (6,316,006 and 6,387,665, directed to anthrax vaccines).

  11. Okay, so invent a different drug since the numbers don’t work out on your design around. Business theory is not rocket surgery.

  12. And while you’re at it, feel free to invoke the KSR “common sense rule” and redefine ordinary words to mean their opposites.

    But I don’t know what OST is, either.

  13. Your attempted strawman misses the first line of my third paragraph.

    Can you show me the statutory tie-in to this “public must get a ‘reasonable price’ for a patented item” notion?

  14. “That initial funding was critical and Abbott only fully committed and took-over all research funding once it realized the high likelihood that the drug would be a major profit source.”

    How do you know this?

  15. The prices serve a vital patent function: the incentive to design around.

    Let me get this straight.

    1) A drug comes on the market, say ten years after the first patent was filed.

    2) As soon as you see the ridiculous prices, you think “hey, I could get me a piece of that if I invent a competing product!”

    3) Let’s be generous and say that you invent such a product the very next day.

    4) The very next day after that, you file a patent application on your product, because how else are you going to get a piece of that huge market the patent system has encouraged you to enter? Gotta make sure the public doesn’t get a reasonable price on your product either. All in the public interest, of course.

    5) Ten years after that, you finally get FDA approval for your competing product. Which is great, you’re very thankful, the patent system has been so encouraging and supportive and everything… oh wait, you just noticed that the first high-priced drug is now off patent, and its monopoly-priced market has evaporated. Your expensive patented drug is now competing with a generic. Not its own generic, but close enough.

    Either way, a Nanny-state forced price mechanism is not the answer.

    No, actually it’s the question. See, the patent system is a… oh, what’s the point?

  16. OK, fine. I think you’ve outdone yourself this time, though

    Your thoughts – as usual – are off the mark.

  17. Your use of dictionaries is to no avail. I invoke the common sense rule of KSR.

    Just think of naked capitalism – government exists for a reason and “free market” simply has never meant an unregulated market.

    The “notion” or “ideal” of free market is one thing – I am talking about reality.

  18. LOL. Like “free beer,” right?

    Merriam-Webster:
    free – 4b: not subject to government regulation.

    Dictionary.com:
    free market – an economic system in which prices and wages are determined by unrestricted competition between businesses, without government regulation or fear of monopolies.

    Investopedia:
    free market – A market economy based on supply and demand with little or no government control. A completely free market is an idealized form of a market economy where buyers and sellers are allowed to transact freely (i.e. buy/sell/trade) based on a mutual agreement on price without state intervention in the form of taxes, subsidies or regulation.

    About.com:
    free market – A free market economy is an economy in which the allocation for resources is determined only by their supply and the demand for them. This is mainly a theoretical concept as every country, even capitalist ones, places some restrictions on the ownership and exchange of commodities.

    BusinessDictionary.com:
    free market – Where buyers and sellers can make the deals they wish to make without any interference, except by the forces of demand and supply.

    FreeDictionary:
    free market – an economic system that allows supply and demand to regulate prices, wages, etc., rather than government policy

  19. bja – Agreed.

    The prices serve a vital patent function: the incentive to design around.

    I am repeatedly amazed when people who should know better continue to miss this most basic part of patent law.

    The public can be no worse off than if the patented invention was never made, so the patent holder should be able to charge whatever they want to charge. If they charge too high a price and no market is there to support that price, then either the price will come down – or it won’t. Either way, a Nanny-state forced price mechanism is not the answer.

    What people do with their property right is not a part of patent law – we already have other laws in place (i.e. antitrust).

  20. God bless the free market and competition.

    I think you mean “God bless Title 35 USC,” cause we’re certainly not talking about a “free market” here.

  21. Don’t like Abbot’s prices? Invent a better drug, or beat them to the punch. God bless the free market and competition.

  22. didn’t notice anything in Rule 1 about the drug company making any profit– only about recovering its R&D costs… This would certainly stimulate innovation, and collaboration with the academic sector.

  23. The U.S. Government has never invoked “march-in rights”, which are available only where the Government provided funding. However, the U.S. Government uses 28 USC 1498, which effectively grants a compulsory license to the Government for inventions the government did not fund, frequently. It’s used routinely by DoD, and in one rather strange case (Advanced Software v. Federal Reserve), was used by the Federal Reserve.

    The Government has never dared to invoke 28 USC 1498 in the drug area. There was a big controversy over this in 2001-2002 (link to cptech.org) during the anthrax attacks on Congress and the resulting Cipro shortage. Bayer reduced the price on Cipro by about 50% (still about 2x-3x over the proposed price from a competitor) which defused the political issue.

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