2 Words That Could Bring Down the Entire Prescription Drug Industry

By Markets Fool.com

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March-in!

It sounds like a cross between a march on Washington and a sit-in, but march-in rights are a protest by the government, not against it. And those two words, if enacted, could bring down the entire prescription drug industry.

I'm not exaggerating.

Under the Patent and Trademark Law AmendmentsAct -- often called the Bayh-Dole Act for the law's authors -- the National Institutes of Health (NIH) has the right to exercise "march-in" rights to stop a monopoly for an invention that was funded by the agency if the invention isn't available for "reasonable terms."

A few months ago, Bernie Sanders and other senators wrote a letter to the NIH to supporting a request from Knowledge Ecology International and the Union for Affordable Cancer Treatment that the NIH hold a hearing to determine if the agency should use its march-in rights on Medivation's prostate cancer drug, Xtandi, which was partially developed through grants to researchers at University of California, Los Angeles. Medivation's partner Astellas sells the drug for $129,000 in the U.S., but only charges $39,000 in Japan and Sweden, and just $30,000 in Canada, according to the Senators.

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The problem with ending monopolies

First, let's get something out of the way: It's wrong that other countries spend less on prescription medications than the U.S., but that's not really the debate here.

We can all agree that a drug company should be able to make $X profits on a drug that has Y benefits. We can argue about whether Y benefits are worth $X profits, but whatever $X profits are deserved by the drug developer, the cost should be shared internationally in some fair manner. The system is clearly broken because other developed countries aren't paying their fair share. If other developed countries paid more, patients in the U.S. could pay less and the companies could make the same amount.

But the solution to an unfair system for American patients isn't to make it unfair to drugmakers. If the NIH were to end the patent and allow others to sell copycats of Xtandi, it would save American's money now, but create problems for developing drugs in the future. Companies develop drugs with the expectation that they're going to make a profit on the drug -- more in the U.S., less in other parts of the world. No investor in their right mind is going to accept the risks associated with drug development knowing the potential rewards could be ripped out from under them because the NIH deems the drug too expensive.

Saved for now

NIH director Francis Collins replied to Knowledge Ecology International this week telling the nonprofit that the agency declines to even initiate a march-in investigation. Collins summarily dismissed the request, arguing that the only justification for using march-in rights and ending the patents on a drug is that the drug is in short supply, which isn't the case for Xtandi.

Knowledge Ecology International plans to appeal Collins' decision to the Secretary of Health and Human Services, Sylvia Burwell.

Should investors be worried?

Everyone wants lower drug prices, which makes it a very popular topic with lawmakers. But unlike constituents that generally have a short-term view -- "I want cheaper medication now!" -- lawmakers and the agency directors they employ understand there are negative consequences to cutting drug prices in the U.S. Investors should expect a lot of rhetoric, especially in an election year, which may result in volatile stock prices for drugmakers, but ultimately policymakers will let the free market prevail.

A free market, of course, means that drug prices will go down when there's competition; we're seeing that currently in the hepatitis C market where new entries have forced Gilead Sciencesto lower the cost of its hepatitis C drugs. Rather than worrying about march-in rights, investors should look for companies with drugs that offer a sustainable advantages over the competition.

The article 2 Words That Could Bring Down the Entire Prescription Drug Industry originally appeared on Fool.com.

Brian Orelli has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.