Pharmaceutical Profits and Public Health Are Not Incompatible

We need the capital and creativity of the private sector to take on the coronavirus.

A researcher working on a vaccine for Covid-19 in Denmark last month.
Credit...Thibault Savary/Agence France-Presse — Getty Images

Daniel Hemel and

Mr. Hemel is an assistant professor at the University of Chicago Law School. Ms. Ouellette is an associate professor at Stanford Law School.

The rapid spread of the coronavirus has revived a decades-old debate over pharmaceutical policy, with both sides doubling down on long-held views. Advocates for broader drug access insist that pharmaceutical companies must not be allowed to reap large profits from Covid-19 vaccines and treatments. Free-market true believers — including officials in the Trump administration — argue that pharmaceutical businesses must be allowed to set prices beyond some patients’ reach.

This either-or choice was always a false framing. And as the Covid-19 crisis tragically illustrates, it’s a dangerous one too. Patient advocates need to acknowledge that pharmaceutical companies aren’t the enemy — the virus is. But it’s equally urgent for free-marketers to recognize that with government help, we can reward businesses for groundbreaking innovations without sacrificing poorer patients along the way.

The latest flare-up in this battle began even before the first recorded Covid-19 death in the United States. At a Feb. 26 hearing, Representative Jan Schakowsky, Democrat of Illinois, pressed Health and Human Services Secretary Alex Azar to pledge that any Covid-19 vaccine or treatment would “be affordable for anyone who needs it.” Mr. Azar refused, saying “we can’t control that price because we need the private sector to invest.”

Predictably, Mr. Azar’s statement set off fireworks on Capitol Hill. Congressional Democrats called on him to reverse his stance. Representative Schakowsky demanded that Mr. Azar “not allow any pharmaceutical manufacturer to set a price” for a Covid-19 vaccine that “would cause private insurers to raise premiums or further exacerbate the federal deficit.”

As the death toll from Covid-19 began to mount, the push to limit returns to pharmaceutical companies at the cutting edge of coronavirus research only intensified. Gilead Sciences, a California-based biotechnology company whose antiviral drug remdesivir has emerged as a potential Covid-19 treatment, soon became a target.

On March 23, the Food and Drug Administration granted Gilead’s request to designate remdesivir as an “orphan” drug. A drug qualifies as an orphan if it treats a disease affecting fewer than 200,000 people in the United States at the time of the application, even if the disease becomes more widespread. The number of Covid-19 diagnoses in the United States fell well below that threshold at the time Gilead applied and when the F.D.A. designated the drug an orphan.

An orphan designation would have kept generic remdesivir off the market until 2027 unless the F.D.A. determined that Gilead could not meet demand for the drug. But remdesivir is covered by Gilead patents that do not expire until at least 2035, so this benefit is largely duplicative of what Gilead already enjoys under patent law. More immediately, an orphan designation would have allowed Gilead to claim tax credits for 25 percent of clinical trial expenses — a benefit potentially in the range of $40 million.

Although $40 million is a drop in the bucket compared with Covid-19’s social costs, politicians balked. Senator Bernie Sanders called Gilead’s application for orphan status “truly outrageous” — a day before he voted for a stimulus package with more than $50 billion in grants and low-interest loans to airlines. The consumer-rights advocacy group Public Citizen and 50 other organizations denounced Gilead’s use of “a loophole in the law to profiteer off a deadly pandemic.” The backlash quickly led Gilead to withdraw its request.

Ours is not the only country where Covid-19 has unleashed efforts to stamp out pharmaceutical profits. Last month, the Geneva-based Doctors Without Borders broadly called for “no patents or profiteering on drugs, tests or vaccines” for Covid-19. That campaign followed efforts by Canada, Israel, Germany and 33 members of the European Parliament to limit or override patents for drugs directed at the virus.

These drives to scale back patent protection for Covid-19 vaccines and treatments are motivated by a noble objective: to ensure that lifesaving drugs will be broadly affordable. But the unintended consequences are worrisome. The smaller the rewards for coronavirus drugs, the less that pharmaceutical businesses are likely to invest in research and development. Not only will that extend the current crisis, but it also will deter drugmakers from pursuing research directed at potential future pandemic-causing virus strains.

This doesn’t mean that governments must make a choice between ensuring patient access and encouraging drug development. With creative policymaking and political will, we can — and ought to have — both.

Governments can offer strong incentives to drugmakers while ensuring affordability by committing to patent buyouts for effective treatments. In a buyout, the government purchases the patents on a new drug — typically at a price that matches or exceeds what the patent holder otherwise would have earned — and then allows makers of generics to produce and sell low-cost versions. If, for example, clinical trials establish the efficacy of remdesivir in treating Covid-19, then the federal government should buy the U.S. rights to the drug from Gilead and give generic manufacturers free rein to ramp up production.

How much should the government pay? If remdesivir saves 10,000 American lives, then its value to our society — using traditional tools of cost-benefit analysis — would be as much as $100 billion. For a fraction of that sum, H.H.S. could buy the drug rights from Gilead and still leave the company with an eye-popping profit. Unfortunately, the $2 trillion Covid-19 stimulus package passed last month included only $11 billion that H.H.S. can use for patent buyouts, and the department will most likely need to draw down some of those funds for other purposes, like procuring diagnostic tests and purchasing other medical equipment. Mr. Azar’s department needs more money for patent buyouts.

Another time-tested tool for rewarding innovation while ensuring widespread access to new technologies is a “challenge prize.” We have proposed a prize for an effective coronavirus vaccine of $500 per vaccinated person, with the federal government footing the full bill. That almost certainly would make a Covid-19 vaccine profitable — potentially one of the most profitable drugs in history.

Patent buyouts and challenge prizes would of course add to the federal deficit — something that Representative Schakowsky, for one, said she was unwilling to do if it meant drugmakers would profit. But with Covid-19 already shutting down the economy and stealing thousands of lives, cutting costs on drugs directed at the disease is the very definition of penny-wise and pound-foolish. Worse yet, if we refuse to offer generous rewards for vaccines and treatments this time, we will find fewer pharmaceutical companies willing to invest in vaccines and treatments that address threats likely to emerge or return, such as the Zika virus, Dengue fever and new types of influenza.

None of this is to suggest that the only way to spur innovation is to dangle large payouts in the faces of pharmaceutical businesses. Reputational incentives and altruistic inclinations will lead some companies to pursue Covid-19 cures. Scientists employed by government agencies and academic institutions will make major breakthroughs too.

But to contain Covid-19 now and sustain a pipeline of drugs directed at other infections with pandemic potential, we will almost certainly need to enlist the capital and creativity of the private sector. We don’t need to compromise patient access, but we will need to promise profits to businesses that develop effective vaccines and treatments. Among all the costs that we as a society will bear because of this virus and later ones, the payout to pharmaceutical companies will be a rounding error.

Daniel Hemel is an assistant professor at the University of Chicago Law School and Lisa Larrimore Ouellette is an associate professor at Stanford Law School.

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