Giachino (00:05.0079 - 00:45.0619)
Welcome to IP Protection Matters. I'm your host, Renee Giachino. Today, we are joined by Wayne Winegarden. Wayne is a Senior Fellow in Business and Economics at the Pacific Research Institute and is Director of the Center for Medical Economics and Innovation. To follow his work and the work of the Pacific Research Institute, check out pacificresearch.org. Today, we'll be talking with Wayne about the economic implications of regulatory policies and how price controls undermine patents and intellectual property protections.
Wayne, welcome to the show. It's a pleasure to have you join me.
Winegarden (00:45.0630 - 00:47.0009)
It’s great to be here. Thanks for having me.
Giachino (00:47.0259 - 00:55.0709)
Before we dive into these important issues, I thought I'd give you a moment to tell us a little bit about what you're currently working on at Pacific Research Institute.
Winegarden (00:55.0720 - 01:18.0690)
We're working on many things. We cover education, California issues, health care, energy and the environment. We cover a wide range of issues. Personally, I'm following what's happening in Sacramento. We just passed our budget. So we're following all the different spending initiatives and the special session as well.
Giachino (01:18.0980 - 01:35.0360)
Very good. Well, I want to start by talking about a piece that you recently wrote where you outlined how Senator Bernie Sanders’ highly publicized press release, where he's proposing price controls, will ultimately harm patients. Can you elaborate on this for us?
Winegarden (01:35.0559 - 02:42.0089)
Absolutely. I think it's important to remember we're talking about health care. We focus a lot on the patients who are trying to afford medicines - that's a very important issue - but what's also just as important is that there are a lot of patients out there that don't have efficacious treatment that are waiting for that miracle cure to be developed. When we talk about price controls and start taking away the ability of the companies who develop the medicines to cover the cost of capital. That is a really essential concept - the cost of capital. If we can't cover that, then we're not going to have the incentive to develop new medicines.
So people living with Alzheimer's, people who are living with muscular dystrophy, people who are living with pancreatic cancer, they're not going to have the ability to have those treatments developed. That hope is being taken away. That was one of the things that I really wanted to emphasize. I think it's an important part of the conversation. There are many patients waiting for these cures and we need to think about them as well.
Giachino (02:42.0470 - 03:28.0339)
Let’s talk about the so-called Inflation Reduction Act, which was passed back in August 2022. They've recently released the list of the different medicines that will be subject to these types of policies - the drug price controls. It effectively imposes those price controls on a portion of the pharmaceutical market. By design, the reach of these price controls is going to expand every single year. Certainly, you have already talked about the intended consequences of this policy and what they hoped would reduce overall spending on the drugs. What are the unintended consequences of these regulations in addition to the lack of innovation?
Winegarden (03:28.0660 - 05:15.0520)
First, it's important to note that our price system is very complicated. In terms of the intended consequence, the list price, which is what the benchmark that people always refer to and what we see, isn't the actual net price - the price of all the discounts and rebates that are paid into the system. So when you actually look at the negotiations in terms of what developed, it actually wasn't that far off from the discounts that were actually already being put into the system that are very complicated, but were already being negotiated. In terms of the initial outcomes, the negotiations really didn't create any new savings at all.
So you're impacting beyond that innovation aspect. You're changing the way companies are going to be pricing for the worst. You’re creating more perverse incentives, which could lead in some ways to higher prices earlier on in order to get different types of revenues. You're changing a company’s incentives to continue to look for additional uses of medicines. Once the medicine has been approved, companies continue to do what's called post marketing research to try to figure out how can we make the medicine better. How to make the side effects more moderate. How can we bring this to more conditions. And so you're also taking away the incentives to expand the benefits of the medicine. So you have all those different types of unintended consequences that are all adverse outcomes for patients.
Giachino (05:15.0531 - 05:23.0589)
How do you respond to Senator Sanders’ claim that the exclusivity period is enabling pharmaceutical companies to earn excessive profits?
Winegarden (05:24.0000 - 07:31.0510)
If Senator Sanders is saying that we need to address the IP system and how that works, then there are a lot of important reforms that we can look at to improve how that system functions. Especially because right now when you get your initial protection or the initial exclusivity period, you're not on the market. So you're losing more than half of your exclusivity period during the time when you're actually developing drugs and getting regulatory approval.
I think there are absolutely improvements that should be made to create greater certainty in terms of the investment, as well as greater certainty in terms of when competition comes into play. That's a very essential element or social compact that we're talking about when the innovators gets that exclusivity period to get the opportunity, not a guarantee, but an opportunity to cover the cost of capital.
But once that opportunity has been provided, we need to foster competition. In terms of the IP system, absolutely we can improve it. What’s funny when you throw out terms like “excessive profits are fair” is that those are relative terms. So we never actually define what that benchmark is that you're looking at. And when you start digging into it, you start realizing that most drugs fail. One drug finally gets to market and is finally available to patients and you have the market outcome. Many drugs will come to be available to patients and they're not that big of a seller or the doctors don't prescribe them. The efficacy isn't really what people would want. So they're not used much. So when you finally get a drug, they then get through the FDA and it has high demand, you've got a lot of costs and a lot of failures that you have to compensate for.
Winegarden (07:31.0989 - 08:22.0209)
When you actually look at the return on equity of pharmaceutical companies and biopharmaceutical companies compared to the market - now we're getting into the cost of capital issues - it's not that extraordinary. The pharmaceutical companies are not making excessive profits when you look at risk adjusted return on equity, because you're talking about 10 to 15 years and three billion dollars to develop a drug. That's a very long risky endeavor. So the pricing is trying to compensate for all of that. Then when we look at the actual financial returns it's very normal for the rest of the market, which means that you're able to attract the capital for those investments. And if you didn't meet those benchmarks and you didn’t attract the capital, we wouldn't have the opportunity to get those treatments.
Giachino (08:22.0660 - 09:00.0606)
If my memory serves me right, I think I read somewhere that only about 10% of these drugs actually make it through the lengthy trials and to market. As you said, innovators can spend on average upwards of $2.5 to 3 billion developing these new medicines over the course of 10 to 15 years. So I think it's not surprising that generic companies can produce drugs cheaper than the company who created the medicine originally can. But let's take it outside of the pharmaceutical arena because this isn't just happening with drugs and in the pharmaceutical arena. Isn't that right?
Winegarden (09:00.0616 - 09:37.0590)
These are issues that all sorts of industries are dealing with and they're going to vary by industry. If you go into the IT and technology industry, you have a different IP issue because there are so many patents inside the iPhone or inside the technology. That creates all sorts of different complexities. One of the really difficult things about being a cutting-edge, knowledge economy is that the US economy is is addressing important IP issues that become more and more complicated as technology becomes more and more advanced.
Giachino (09:37.0900 - 10:20.0940)
So let's go back to where you're currently living - California where the Pacific Research Institute is located. Even more specifically Silicon Valley, which has long been known as the home of many, maybe even most of America's greatest startups. Certainly the data is out there. You're already facing high taxes, burdensome state regulations and high crime rates. They've driven many of these startups out of the state of California. What impact do you think the continued threat to IP protection is going to have on California generally and more specifically on its economic situation?
Winegarden (10:21.0330 - 12:20.0630)
The IP threat is a national threat. So it's going to affect Austin, Texas, as much as it's going to impact San Jose, California. Nationally that threat is there. In California you have an additional burden. Not just Silicon Valley. It’s very much a death of a thousand cuts in terms of driving a lot of the companies out. But it's not just that taxes are exceptionally high in California. We have a top rate of 13.3%. It is not just that housing costs are expensive. It's all of these combined. Gas is $6 a gallon. So it's everything combined. So when you have the IP difficulties on top of that additional risk, it changes that relative price.
So it is going to impact California more because in addition to that risk you have all of the other complications you have to deal with, which can on the margin encourage someone to be in Austin. While you still have those IP risks in Austin, the risk that you are bearing relative to the other risks is lower. So it's just another encouragement to leave because if the IP is going to hit you, you're better off in Austin than you are in San Jose. So it's adding another burden on top of all of our self-created or self-inflicted problems that creates another kind of relative disadvantage, even though it's hitting the country evenly because of the state of where we are currently starting compared to all these other places.
Giachino (12:20.0929 - 12:35.0710)
Let’s talk about another burden - the ill effects from abusive lawsuits. Those are also well-documented. They include higher costs for consumers and reduced economic output. What impact have you seen those lawsuits have on innovation?
Winegarden (12:35.0719 - 15:02.0885)
They've had terrible impact. Look at Exxon Mobil. In the state of California, we're suing them because of global climate change and we're suing them because of plastics. And so that impacts them in a lot of ways. It is a diversion of resources. If I'm spending money defending a lawsuit, I'm not investing in technologies like better drilling techniques, cleaner drilling techniques, carbon sequestration, low emission sources or all sorts of those types of benefits. If you're spending money on lawsuits then you're not devoting resources towards those efforts.
I think even more troubling is that you're also changing the incentives of the organization. You're making the organization itself more risk averse. Innovation comes from not just sweat or brilliance, but it comes from taking risks. And so when you start increasing the cost of risk taking, you're going to reduce the amount of risks that people or organizations are willing to take, especially large organizations. So you're actually dampening that innovative environment.
When you look at Silicon Valley, an environment where the whole economic mantra is taking risks. Swinging for the fences and seeing if you can be the next Apple, NVIDIA, whatever artificial intelligence company, that additional litigation risk brings additional dampening. With the caveat that obviously the people who have been harmed need to be able to have redress through the courts. If you've stolen somebody's IP, we need IP protection and you should have access to the courts to rectify that. The same thing with the injury. We need the legitimate claims to go through, but it's the overly litigious. It's Attorney General Bonta suing Exxon over plastic even though the state's been aware of, using the recycled programs and part of the process the whole time. It is that type of disingenuous lawsuit abuse that harms the innovative environment.
Giachino (15:03.0094 - 15:38.0280)
Excellent points. I appreciate you delving further into those. One final question for you - President Biden recently announced a new program and funding for research on cancer surgeries as part of his administration's Cancer Moonshot Initiative aimed at reducing cancer death. Those proposed price controls and the other efforts that we've been talking about in the beginning of our conversation that undercut patents and their incentives, won't they work contrary to this whole Cancer Moonshot Initiative?
Winegarden (15:38.0489 - 17:34.0206)
Yes. It is the right hand working against the left hand. I think it's really important to recognize when we're talking about pharmaceutical innovations, biologics and hopefully the gene therapies that are coming down the pike that the government does important basic research. That is an important role for the government to do that kind of basic research that can't be commercialized. The government is very lousy at commercializing research. They take an idea or a notion of a scientific discovery and turning that into a usable therapy or usable medicine.
On top of it, the private sector spends significantly more money developing the treatments than what the government is spending on basic research, writ large, let alone the basic research that's devoted to the biopharmaceutical space. I bring all of that up because now we're talking about the Cancer Moonshot. We're saying the government wants to push that forward, but at the same time it's pushing down on the private sector and the actual institutions that would take different ideas that the government might come up with and turn them into those cancer treatments. We're actually hobbling those while we're spending more money on the government side.
So it's a very ineffective policy. It turns what should be a very valuable resource into something that can very well turn into just waste, fraud and abuse. We always hear about government spending because we're actually hampering the process that turns that core public good into the ultimate product that we want. In this case it is the research or more treatments for cancer.
Giachino (17:34.0556 - 17:51.0560)
You couple that with the Administration pushing these “march in” rights as another form of price control. The significant impact and threat that it is going to have on innovation and furthering IP protection is magnified.
Winegarden (17:52.0290 - 18:28.0979)
It is magnified outside of just the biopharmaceutical space, too. That is something important for other companies to recognize, too. While they're talking about “march in” right now with respect to drugs, once you have that kind of precedent set it will move into other industries. This technology becomes very important for national defense, se we're going to have a “march in” right there. This is a very slippery slope that we're playing with, which has incredibly important implications for health, but it goes much broader than that. It is a very troubling trend.
Giachino (18:29.0329 - 18:52.0270)
Wayne, thank you so much for all the work that you are doing on this. You are helping to educate us and educate anyone else who will listen. Our guest has been Wayne Winegarden, Senior Fellow in Business and Economics at the Pacific Research Institute. He's also the Director of the Center for Medical Economics and Innovation. Wayne, thank you for your time today. We'd love to have you join us again sometime.
Winegarden (18:52.0280 - 18:53.0160)
I would love that. Thank you so much.