Could Washington Throw Out Medivation's Xtandi Patents?

Shares in Medivation (MDVN) tumbled on news that 12 members of Congress, including Democratic presidential hopeful Bernie Sanders, are lobbying the National Institutes of Health to hold hearings to discuss invalidating the company's exclusive rights to Xtandi patents it licensed from UCLA. The move was the latest salvo by politicians eager to curry favor with voters by taking a tough stance on predatory drug prices. Could saber-rattling in Washington lead to the NIH invalidating Medivation's rights to Xtandi, and if so, would it dramatically alter the business model of drug development? Find out in this clip of The Motley Fool's Industry Focus: Healthcare podcast.

A full transcript follows the video.

This podcast was recorded on March 30, 2016. 

Todd Campbell: This is a very, very interesting development in the whole payer push-back, if you will, on drug prices. We're going to get into this in a minute and hopefully we won't get too wonky about it for you. What we need to understand is that drug prices can be very high, and a lot of people are very upset at their high cost. Included among those people are members of Congress, who just sent a letter to the National Institute of Health asking them to conduct a hearing whether or not Medivation and Astellas Pharmaceuticals' Xtandi deserves to keep exclusivity on its patent for Xtandi.

Kristine Harjes: Yeah. There are a lot of components to this story that we're going to unpack for you. First off, let's talk a little bit about these march-in rights and whether or not they can even be used in this case.

Campbell: OK, let's give a little bit of background first. Obviously, for a commercial entity to provide funding for research and development, they have to run a lot of numbers to prove to shareholders that it's actually a wise investment. As a result, a lot of things that may be scientific breakthroughs don't get funded. The federal government steps into that gap and provides a lot of funding, especially to the biotech industry, for the development of scientific breakthroughs in things like cancer. The funding that gets provided, a lot of it comes from NIH, the National Institutes of Health. As a matter of fact, they have a budget that's about $31 billion a year, and about 80% of that money gets handed out in grants to places like universities that are conducting research that hopefully will lead to game-changing drugs.

Prior to 1980, money that was given via grants that resulted in a patent -- those patents had to be handed back to the government. They weren't owned by the university that received the federal funding. Now you can argue that sounds great, but the problem was that because the government couldn't offer exclusive licenses, only about 5% of the 30,000 patents that it had established up to that point had ever been commercialized. It just didn't happen. They passed an act in 1980 that basically granted universities that were conducting the research the right to patent and then license their discoveries to private companies, like in the case of Xtandi, Medivation.

Harjes: Right. Xtandi is the drug that we have been talking about, alluding to. This drug was developed by UCLA with grants from this money that Todd is talking about, which is taxpayer money. Then, this gives the government the right to revoke the patent if they deem that the terms are unreasonable. These are the march-in rights that we've discussed, which interestingly have never been used on a drug before, and potentially could set up a precedent that I'm sure a lot of drugmakers would get nervous about. Medivation shares sank 10% on this news. Xtandi is their only approved product, and it's a huge one for them.

Campbell: Yeah, it does $1.2 billion of sales in the United States alone. Obviously, that's the only that the march-in rights would have any kind of effect. The march-in rights basically stem from that same Act that was packed in 1980. Essentially what that provision simply says is that if ... It's designed basically to keep a company from licensing a patent and then never acting on it. Basically, you're supposed to be able to show that American consumers are being harmed because either the patent was never used to create, in this case, a drug that could be marketed, or if for some reason, the patent is being exploited in a way that was unsafe or somehow otherwise harmed American consumers. That's when march-in rights, theoretically, could be invoked. You mentioned that they've never been invoked to this point, so 40-plus years they've never been invoked.

There have been petitions, Sanders and the other congressmen, they're singling out Xtandi right now, but there have been other cases in the past where petitions from nonprofit groups, etc., have said, "Hey listen, you should invoke these march-in rights on this other drug." Probably the most notable one is an age drug, Norvir, that was made by Abbott Labs, which is now AbbVie (ABBV -0.30%), or at least the pharmaceutical unit. Sure enough, the NIH looked at all that information, they digested it, they considered it, and they determined that they should not be involved in the pricing aspect of drug research, or drugs that come from research, and that that should be legislated by Congress and not dictated by their ability to go in and do march-in rights. If anything were to change on that front, it could be a huge impact, because the reality is that there's hundreds of drugs now that are commercialized that stem from research that's been funded by federal programs.

Harjes: Yeah, indeed. It does seem like Xtandi and Medivation have a fairly good defense. This defense is coming mostly from Astellas, which is a partner on the drug. Astellas says that nobody actually pays full price for Xtandi, in their response to this letter. They quote that out of 20,000 patients on Xtandi last year, 81% of the privately insured ones paid $300 or less out-of-pocket per year, and 79% of patients on Medicare had not out-of-pocket costs at all. They also mention that they have this access program that made the drug completely free for more than 2,000 patients last year. Even though you get that big sticker price, these companies are arguing that nobody actually is paying that sticker price, so you can't come at us.

Campbell: Right, although that's a little bit disingenuous on their part, don't you think Kristine? Because they're looking at it, they're saying but they're only paying that out-of-pocket, but you certainly could argue that the high cost of drugs is influencing things like insurance cost.

Harjes: Absolutely. It all goes into our healthcare bill.

Campbell: Yeah. Yeah, they're going to say that. It's great that they have these programs that allow so many people to get access to the drug that may not otherwise have gotten access to it. I guess that really, it's going to come down to whether or not enough harm is being done by price for the NIH to act. Based on what they've done and said in the past with AbbVie, it wouldn't seem to me that they any interest in getting involved in the price battle, but only time will tell.

Harjes: Yeah. I agree with you there. I don't see enough that differentiates this case from the AbbVie case that I could see them having a different response. But if they did, it would have some pretty tremendous impacts on the industry.

Campbell: Yeah, especially in oncology. Cancer drugs -- I think I saw a study that was done, it looked at 40 years post the passage of the act in 1980 and said how many drugs have been discovered using federal funding. I believe it was 40 of 153 drugs were, for oncology alone. Those are big, big important drugs that have really changed outcomes for patients, and they bring in billions of dollars for the drugmakers. Yeah, there could be a lot of potential problems that would stand from exercising the march-in rights, including drugmakers not wanting to license research that results in discoveries from federal funding.

Harjes: Yeah, the patent landscape here is incredibly complex and definitely not something I want to dig into on this show since we're running out of time, but there definitely is an argument that because we have such a strong patent system in the United States, that's why we have so much great innovation in the healthcare sector and others.