On rent-seeking, too, the picture is less dire that it was. Drug prices in America are still the world’s highest on average, but the rate of increase has slowed. According to IQVIA, a data firm, once secret rebates offered to big customers are discounted, net drug prices rose more slowly than inflation in 2018 and 2019. Political pressure is only one reason. Consolidation among health insurers and pharmacy-benefit managers (big middlemen) who pay for drugs gave them more power to negotiate price cuts. It has got harder to mint cash from blockbuster drugs. Deloitte, a consultancy, reckons that the internal rate of return on in-house R&D at a dozen big drugs firms fell from 10% a decade ago to 2% in 2019—below their weighted-average cost of capital of 7%. The average cost to bring a drug to market has increased by two-thirds since 2010, to some $2bn. And the forecast for peak sales for each new drug has also fallen by half over that period. Often big firms prefer to buy smaller innovative rivals. According to EY, a consultancy, American drugs firms spent $185bn in the past five years on biotech acquisitions. Roughly a third of revenues at big drugs firms are the result of IP arising from acquisitions.
What would happen if patent rules were weakened? Rent-seeking would fall, but innovation might, too. One way of getting a sense of this is to look at how much innovation happens outside America, where IP rights are often weaker or less well enforced. In most industries innovation is now happening globally, not just in America, but in pharma it still has a powerful American skew. Two-thirds of worldwide biotech venture-capital investment takes place there. Despite China’s advances on other fronts, in life sciences it still accounts for only about 15% of the global total of venture-capital funding. Similarly, even as American multinational pharma firms have become more global (earning roughly half their revenues abroad), their preference for domestic R&D has risen, with 88% of it done in America.
This suggests that America’s government will eschew wholesale changes that damage innovation. But it still might loosen the patent regime to reduce rent-seeking from old drugs. In 2019 the Federal Trade Commission, a regulator, found that the industry is relying less than it used to on egregious “pay for delay” agreements, through which it paid generics firms to hold off on launching low-cost rivals to pricey drugs coming off patent. However, Big Pharma is still using other wheezes, such as “evergreening” IP protection beyond the initial 20-year period by filing a thicket of patents on minor modifications. More can be done to rein in such abuses.
The S&P index of big drugs firms has risen by roughly 20% over the past five years while the broader equity market has doubled. Despite miraculous covid-19 treatments, this year the pharma index has declined by nearly a tenth. It is clear that even as spending on innovation rises, presumably reflecting confidence that important IP rights in America will remain intact, investors think the opportunity to print easy money is not as good as it was. That seems about right.■