Eli5: What is the purpose of patents in the pharmaceutical industry and what kind of impact do they have on drug pricing?

Question

Eli5: What is the purpose of patents in the pharmaceutical industry and what kind of impact do they have on drug pricing?

In: 0

Answer 1

So I work in drug development and safety, so I can give a solid answer.
The idea behind new drug development is a company has to work out how to isolate and/or make, a brand new molecule that is the basis for a drug. Once they work that out, they have to do all the research to determine if it works as they hope, if it’s safe, what the dose to be effective is, the delivery system (pills, IV, cream, etc). Then, once they have all that, safety and stability testing can start. Meaning someone has to test that the container it’s packaged in doesn’t affect the product, how long and at what storage conditions does the drug stay safe and effective, making sure the final drug product matches the dosing listed on the package, all that. The patent for a new drug gets filed as soon as the new molecule is created, way at the very start of all of this process, because the patent is for the molecule itself. The patents are usually only good for 20, maybe 25 years. All the work to determine if the drug works and can be brought to market can take 10-15 years, and cost tens, if not hundreds, of millions of dollars for all the work that’s needed. And not all molecules that get patented turn into successful, marketable products, only about 1/100 goes all the way to market. So for all that money that goes into a new drug, to fund the continued research for the next compound, companies have to price such that they can make back all the money they invested in the first place, plus at least some level of profit so investors can also make some money, making them more willing to invest again, fueling the next thing. So when the company can truly start selling a new product, they have a window of maybe 5 years to make all their millions back, so the price of the drug reflects all the work that goes into producing it. Once the patent expires, other companies are free to start producing generic versions, often for far less money.