What role do intellectual property laws play in encouraging innovation?
They are absolutely essential. IP protections like patents reward those who succeed in creating new medicines and ushering them through the regulatory approval process. They do this by guaranteeing that the IP rights holder behind a new drug will have a period of exclusive sales.
There are several kinds of IP protections that apply to drugs in the United States. Patents, of course, are enshrined in the Constitution. New chemical entities get five years of data exclusivity post-approval. A previously approved drug can get three years of exclusivity for a new use, dosage, or strength. Drugs that treat rare, “orphan” diseases can get seven years of exclusivity. Biologics can get 12 years of exclusivity.
These IP protections give drug companies the chance to earn a return on the billions of dollars they invest in drug research and development. The very possibility of this kind of return on investment is what makes it worthwhile to take big risks on experimental new drugs and therapies.
The Inflation Reduction Act, signed into law under President Biden in August 2022, erodes the incentives that IP rights give drug companies to invest not just in new drugs but in new indications for existing drugs. Small-molecule drugs can be ensnared by the IRA’s price controls nine years post-approval; biologics can come up for price controls 13 years after approval. If companies know that price controls are coming, they’ll be less likely to invest in the sort of clinical research that can garner a follow-on approval — say, for treating an additional form or earlier stage of cancer.
More than four in ten of the cancer therapies approved between 2000 and 2024 received follow-on approvals. In other words, much of the innovation in this space happened after a drug’s first approval. Price controls will render such post-approval research uneconomical.
How do price controls damage innovation? You talk a lot in your book about how government-imposed price controls negatively impact pharmaceutical innovation. Can you explain why this industry is particularly affected by these types of economic policies?
There are a number of ways in which price controls make it harder for drug companies to invest in innovation. The simplest is that price controls necessarily limit how much money a drug company can earn from a particular medicine. That’s their purpose, after all. And when drug companies’ revenues decline, so do their research budgets.
Price controls also add enormous uncertainty to the economics of drug development. Inventing medicines is a risky business. It costs around $2.6 billion, on average, and can take over a decade to bring a new drug from the lab through the regulatory process and onto patients. Nine in ten drug candidates fail to make it to market.
If the government is in charge of setting drug prices, firms have no way of knowing — or controlling — how much a new medicine might earn.
That makes it difficult to justify spending billions of dollars over the course of a decade to bring that medicine to patients. Investors will not fund risky research projects if price controls threaten their ability to earn a return on their investment.
As for your last question — why is the pharmaceutical industry particularly affected by price controls? Well, novel drugs can be expensive, given their development costs and investors’ demand for a return. Drugs can also cure disease. They can extend or enhance our lives. In some cases, they can be the difference between life and death. People understandably want to have access to them when they need them. And price controls offer the veneer of affordable access.
But price controls are a blunt instrument. Empirically, they don’t guarantee access. Just the opposite. Other countries with price controls often lack access to the novel drugs we take for granted here in the United States.
Price controls can also lead to shortages. When governments forcibly control the prices of goods, their manufacturers tend not to invest in creating additional supply. They redirect their resources elsewhere.
The economic truth is that competition provides the incentives for companies to keep prices down while also moving medical science forward. We’re seeing this right now in the market for GLP-1s. Novo Nordisk recently announced it would reduce its prices on Wegovy and Ozembic substantially. It was a clear response to competition from Eli Lilly, whose own GLP-1 Zepbound has been gaining market share in recent months.
This is how markets are supposed to work. Price controls get in the way of this dynamic — and stifle innovation in the process.
Sally C. Pipes is the president, CEO, and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute.
