It takes a lot of money to bring a drug to market. According to studies of the US pharmaceutical industry, the cost of researching and developing a new treatment can range from $300 million up to $4.5 billion. The process can take from five to 15 years. With such high up-front costs, pharma companies need to ensure that, if their drug is approved, they will recoup their investment and, in most cases, make a profit.

In the US, as well as most other countries, patents are a legal mechanism that allow pharmaceutical companies to exclusively sell a drug they have developed, helping them recoup their investment A patent is a legal document that guarantees an inventor the sole right to market their invention for a certain amount of time. They are a form of intellectual property (IP), like a copyright or trademark.

How Patents Benefit Drug Manufacturers

Owning the exclusive rights to manufacture and market a drug provides companies with significant benefits. As the sole source for a particular drug, they face no competition from other manufactures of the same drug. This allows them to set their drug price based on what will allow them to recoup their investment costs and on what they believe insurance companies – or patients – will be able and willing to pay.

In the US most drug patents expire after 20 years. Once this happens, other manufacturers may produce “generic” versions of the drug. A generic is a chemically identical version of a brand-name drug. Many pharmaceutical companies specialize in manufacturing generic versions of drugs whose patents have expired. Generics usually cost far less than their brand-name counterparts, and lead to competition between multiple companies marketing the same drug. By design, this will usually lower the price of a treatment for consumers significantly.

Why – and When – Researchers Patent Drugs 

While the patent system can lead to higher costs for new drugs, the financial incentives it creates are often essential to getting a treatment through development. Developing drugs is extremely expensive. At each stage of development, the costs involved increase exponentially – from roughly hundreds of thousands of dollars for basic research, to millions for preclinical testing, to hundreds of millions or more for late-stage clinical trials. Also baked into the cost are the many other treatments that an institution might work on that fail before they can reach the market.

To help cover these costs, most of which are incurred before a drug can generate any revenue, drug companies generally need to attract investors. When planning a clinical trial or other expensive study, a company will share information about why they believe their treatment will be successful to attract potential investors. These investors – often both individuals and financial institutions such as private equity firms – help pay for the costs of testing. In return, they receive a portion of the profits if the drug makes it to market.

By patenting a treatment they believe has potential, an institution can maximize the profits that their drug will generate if it is successful. Institutions will often quickly patent a treatment they believe has potential early in the development process. This puts them in a better position to attract investment when it is needed to advance the drug to the next stage of clinical development. Even if a drug’s original inventor is a nonprofit institution or university, they will often still patent any potential treatment they invent. This makes it possible for future for-profit partners continuing the development of the drug to attract the investment required to fund later stage clinical trials.

Further Incentivizing Innovation in Rare Diseases

While most US drug patents expire after 20 years, in some cases the FDA grants companies an additional “exclusivity period,” allowing them to maintain exclusivity after their patent has run out. For example, a drug developed to treat an “orphan disease,” or a disease that affects less than 200,000 people a year in the US, will receive seven additional years of exclusivity. They are also granted more flexibility to set a higher price for their drug once it reaches the market. This aims to help further incentivize drug companies to invest in treatments for diseases with smaller patient populations, which tend to be less profitable than drugs for more common conditions.

Extending Market Exclusivity

Beyond the initial patent term and any additional exclusivity period, drug companies also have an additional path to extending the time they can solely profit off their invention – filing more patents. Usually, a drug patent only covers one formulation of a treatment. Drug sponsors may file several patents for different formulations using the same compound for a variety of reasons, including:

  • Improvements upon the original drug, such as causing reduced side effects or requiring lower doses.
  • Creating a version that can be taken via a different route of administration, such as an oral version of a drug that was previously an injection.
  • Developing a previously patented compound for use in a different disease.
  • Combining a compound with another active ingredient to create a new combination drug.

By creating a variety of treatments from a compound they’ve previously developed, pharma companies can continue to profit from their inventions for several decades – even as generics come out for previous versions of their drug. These practices have led to the creation of many beneficial treatments for a variety of diseases, but they are not without controversy.

Addressing the Limitations of the Profit-Driven Model

Profit is a driver for a great deal of innovation in the pharmaceutical industry. Many blockbuster treatments that have helped millions of people have also made their investors a great deal of money. However, the profit-driven drug development model poses problems for a disease like ALS, which is poorly understood, difficult to treat, relatively less common, and often quickly fatal.

ALS is designated an orphan disease by the FDA – meaning that drugs for the disease are eligible for an extended market exclusivity period, in addition to other benefits. However, this has not been enough to drive the investment needed to develop effective treatments. That’s why the ALS Therapy Development Institute (ALS TDI) exists as one of the world’s only nonprofit biotech companies.

As a nonprofit, ALS TDI is free to pursue any avenue of ALS research that we believe will help people with the disease, regardless of its potential to generate a monetary return on investment. We can do this because our research is primarily funded by donations from the ALS community. This has allowed us to focus exclusively on better understanding the disease and developing potential treatments for more than 25 years, and we will not stop until there are treatments for every person living with ALS.

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