Patent Law and Health Care Cost

Today’s Managing Health Care Costs Indicator is $3.5 billion

While I wasn’t paying attention late this fall, Amgen succeeded in getting a new patent for Embrel (entanercept), an injectable biologic medicine used to treat rheumatoid arthritis and other immune diseases.   Patent protection for Embrel was expected to end in October of this year. This new patent means “follow-on biologics” (the equivalent of generics) will in this instance be delayed for as long as 17 years. The new patent was issued in 2011 because previous patent applications had been flawed. Current law would set the expiration date based on the initial application, but Amgen is benefiting from previous law which started the patent expiration clock ticking the date the new patent was issued.

Embrel had sales of $3.5 billion in the US and Canada, and costs about $20,000 per year. Forbes Magazine suggested that this patent decision could be worth $6 per share, but that seems quite low (there are ~800 million outstanding shares;  this would have suggested the new patent has less than $5b in market value)    Amgen stock was trading at under $55 in November. It’s over $67 now.  That’s $10 billion in shareholder returns for this patent victory.

We think of patent law as a way to protect innovation, and encourage investors to put their capital into risky businesses like pharmaceuticals, where many promising drugs fail after large investments. 

But I’d argue that in this instance patent law prevents, rather than promotes, innovation.   What rational pharmaceutical chief would prioritize investing scarce resources in research and development when there are such high returns available from investing funds in lobbying and legal schemes to extend patent protection?  As long as Amgen can count on Embrel as a cash cow, the need to find the next big drug is diminished.