Shareholder proposals at 2023 AGMs seek clarity on patent practices by large US drug companies, ensuring innovations are driven by science rather than profit.
The filing of seven shareholder proposals at US pharmaceutical firms request reports on how patents impact patients’ access to medicines and address non-competitive practices permitted by the “pervasive” issue of patent thickets.
The Interfaith Center on Corporate Responsibility (ICCR), a coalition of over 300 global institutional investors advocating for corporate social responsibility and representing over US$400 billion in AuM, said the proposals seek to “understand whether access and affordability are being considered in petitions for patent exclusivity extensions”.
Patent thickets occur when numerous overlapping patents on a drug are filed after the primary patent has been granted by the US Food and Drug Administration (FDA), allowing branded drug makers to hold off generic competition to keep their prices high. The situation leads to a “strong incentive” to delay generic competition as long as possible, the ICCR said.
“We support authentic innovation at pharma companies; patent thickets aren’t that,” Meg Jones-Monteiro, Senior Programme Director for Health Equity at the ICCR, said.
Lydia Kuykendal, Director of Shareholder Advocacy at Mercy Investment Services, told ESG Investor that the issue of patent thickets was “pervasive”, creating a drug industry “where there’s no competition” as pharma firms can drive up the prices at will.
While Kuykendal acknowledged that patents are important for innovation, the practice of “tacking on additional supplementary, secondary, tertiary patents on these drugs means that their patent life is extended by years”.
“You get a primary patent on a drug it lasts 20 years,” Kuykendal added. Additional patents then create an “extended exclusivity/monopoly period for a specific product oftentimes with questionable additional benefits.”
Patent clarity needed
The seven proposals that have been filed will be voted on at the AGMs of AbbVie, Eli Lilly, Gilead, Johnson & Johnson, Merck, Pfizer and Regeneron.
Johnson & Johnson and Pfizer’s AGMs kicked off the pharma AGM season on 27 April. Regeneron will close out the season in early June.
Kuykendal said that one of the main reasons the proposals had been submitted was due to difficulty finding information on pharma patents.
“Even though in the US and the EU there are legal requirements for publishing patent information, it’s hard to find,” she said.
Understanding the intellectual property (IP) that drugmakers own as well as the processes by which they use IP is challenging, Kuykendal said.
There is also a “chasm” between the number of patents reported by drugmakers and the number reported by academics and NGOs.
“If you look at the anticipated patent life in the US, it’s almost always shorter in the EU. What that tells us is that it really is law driving these patents and not science,” she said.
“Patient access and science should be the main driver behind innovation and IP practices.”
Last year, the ICCR filed much proposals at US drugmakers that aimed to understand anti-competitive behaviour involving potential patent abuse practices beyond patent thickets.
Kuykendal said the ICCR has since realised that this was “an overly broad ask” and used the offseason to create this more specific proposal as the area was “clearly of significant interest to investors”.
“In a world where one out of three Americans aren’t taking their prescription drugs because they can’t afford them pretty significant changes are on the horizon, and if drugmakers aren’t out in front of that they’re going to get left behind,” she said.
Encouraged by support for first-time proposals in the 20% range, Kuykendal said a key priority of the wider engagement activity by investors is to better understand “authentic innovation”.
Kuykendal flagged that the new, more-specific resolution received more than 29% approval at Pfizer’s AGM yesterday according to preliminary numbers. “This is a big deal for a first year resolution,” she added.
“There’s quite a lot of chatter in the US about what drives drug prices, and part of the reason that we all sort of speculate is because pharmaceutical companies won’t really disclose much about how they price their drugs. Every source outside of industry points to IP and patenting practices,” she added.
Last year, US President Joe Biden signed the Inflation Reduction Act into law. This resulted in changes in the US pharmaceuticals market, including measures to prevent increases in drug prices from surpassing inflation. The legislation has targeted a reform of Medicare‘s drug-pricing policy through price negotiations and higher inflationary cap price.
Kuykendal said that the act “is having an impact”, but that it does not tackle issues surrounding patents. Action is being taken however, with the Biden administration issuing an executive order requesting the US Patent and Trademark Office (USPTO) “ensure that the patent system incentivises innovation, does not “unjustifiably delay generic drug or biosimilar competition beyond that reasonably contemplated by applicable law.”
In response, the USPTO has issued several Federal Register notices highlighting increased scrutiny of patents for the pharmaceutical and biologics industries, and is also considering calls for patient voices to be included in patent considerations
The US Senate Judiciary Committee recently unanimously passed legislation to prevent drug companies using the patent system to delay competition from cheaper generics, including attempting to crack down on patent thickets by restricting the number of patents that patent holders can contest.
Kuykendal described the move as “pretty big deal”.