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The Holy Grail of Giant Pharma

"The Holy Grail of this Industry is Intellectual Property Protection." Nancy Chockley, President of National Institute for Health Care Management. The pharmaceutical business is a behemoth with $400 billion revenues worldwide. In United States, the revenue from prescription medicine sale is around $200 billion (estimated year 2000 figures). The $200 billion represents direct consumer purchases at drug store and from mail order and includes 25% mark-up for wholesalers, retailers and other middlemen. It does not include the large amounts spend in hospitals, nursing homes and doctor's offices. The profile of the top ten pharma companies is truly global in scope with the honors shared between American companies (Pfizer, Merck, Johnson & Johnson, Bristol -Myers Squibb and Wyeth), British companies (GlaxoSmithKline and AstraZeneca), Swiss companies (Novartis and Roche) and the French company Sanofi-Synthelabo occupying third place after the merger of Aventis in 2004 The top ten Pharma companies' profitability (including some European companies) remained steady at 25% of sales for the decade 1990-2000 (except for a drop in its fortunes during the Clinton Health Reform proposal). Overall profits of Fortune 500 companies declined by 53% in 2001, while the top 10 US drug makers increased profits by 32% from $28bn (20bn; 31bn) to $37bn, according to Public Citizen's analysis of the Fortune 500 data. Together the 10 drug companies in the list had the greatest return on revenues, reporting a profit of 18.5 cents for every dollar of sales, eight times higher than the median for all Fortune 500 industries, which was 2.2 cents. Even though there was pressure on the pharma giants for downward revision of profits on account of economic downturn, the industry was amazingly resilient by retaining its profitability in the region of 14.3% of its sales (year 2003) while the other industries in the Fortune 500 group was only 4.6% of the sales for the same year. The mainstay of the huge profits earned by the giant pharma companies is the blockbuster drug, which typically rakes in over billion dollars a year. The cholesterol-lowering drug Lipitor (Pfizer) gave earnings of $4.5 billion in 2001 and other blockbuster drugs Zoloft ($2.1 billion in sales), Norvasc ($1.7 billion) and Neurontin ($1.4 billion in sales) meant that Pfizer derived almost onethird of its revenue and profits from these four drugs. Merck has four blockbuster drugs, which are extremely profitable; of which a cholesterol reducer drug called Zocor alone grossed $2.7 billion for the company. According to Fortune, blockbusters "propelled the U.S. industry's phenomenal sales growth, from $22 billion worldwide in 1980 to $149 billion [in 2000, while] the industry's earnings rose 15 percent a year for much of the '90s." These astounding figures of the Pharma giant's profitability have given rise to mounting criticism by consumer groups who allege that the industry is guilty of overcharging drug prices. Certain non-profit consumer groups have also protested that the pharma industry has abused patent protection and the exclusive marketing rights to the detriment of cheaper copy (generic) drugs from coming into the market. Moreover in the recent past on account of sagging tax revenue collections and reduced profits for business the state funded Medicaid programs and employer sponsored insurance schemes have become increasingly unviable. This has brought unwelcome pressure on pharma industry to reduce the spiraling cost of prescription drugs. Predictably, the industry through its trade association (PhRMA) has fought back by saying that price regulation would kill research and innovative drugs. It has justified the patent protection and the exclusive marketing rights granted by the FDA (Food and Drug Administration) as one of the series of measures to mitigate the high costs of drug development brought about by FDA regulation to conduct expensive clinical tests for safety and high R&D expenses. It relied on the study of drug development by the Tufts Center, which said the drug industry spent $802 million on R&D based on year 2000. This figure of $802 million for each new drug on R&D expenditure

has been skillfully used by the industry to justify high drug prices. Public Citizen challenged the $802 million R&D figure per drug as being grossly overstated and said the revised figure would be 75% lower. It also pointed out that there were flaws in the samples as only drugs, which were not funded by the government, were taken into account. Many researched drugs that are publicly funded through the National Institute of Health did not form part of the samples. It also criticized the study for inflating costs by 50% basing its costing of R&D not on actual cash outlays but on opportunity cost lost by not investing the amount in other areas of investment such as the stock market. Moreover, the expenses towards R&D were tax deductible reducing the estimate by 34%. More controversially it alleged the industry churned out at least 50% me-too drugs, i.e., drugs that were not substantially better than the earlier drugs. It forwarded a proposal to the congress to subject the industry to price regulation in public interest. The troubles for the industry did not die down as consumer rights groups along with Federal and State authorities laid bare the machinations of the industry in abusing its monopoly position garnered by subverting patent laws and FDA regulation to its advantage. Money, wealth and political clout were used by the industry to pass laws, which may be termed as industry friendly. From the perspective of legislation passed by the US Congress favoring big pharma companies to make huge profits, three enactments may be examined in some detail. Firstly, the passing of the Bayh-Dole Act meant that tax supported basic research could be patented and academic institutions and small businesses who received public funding for their research could patent their discoveries and grant exclusive licenses to drug companies. This also applied to the publicly funded National Institutes of Health, which was enabled to license its research discoveries to drug companies. The negative impact on the public was summed up by research scholars Arti Rai and Rebecca S Eisenberg who concluded 'The presumption that patent incentives are necessary to promote research and development has less force for inventions arising from government-sponsored research than for inventions arising from purely private funding. It is therefore important that decisions about patenting the results of governmentsponsored research be made on the basis of a careful balancing of the costs and benefits that they entail for future R&D. Current law entrusts these decisions to the unbridled discretion of institutions, such as universities, that receive federal funds, but these institutions are inadequately motivated to take the social costs of their proprietary claims into account in deciding what to patent. A more sensible approach would give research sponsors, such as NIH, more authority to restrict patenting of publicly-funded research when such patenting is more likely to retard than promote subsequent R&D.' The public benefit from patenting tax funded research was negligible as the drug companies who developed drugs on the basis of such research never passed on the benefit of low or affordable drug prices to the drug user. Secondly, the protection offered by patent laws gives monopoly rights to drug companies if the drug invention is novel, useful and non-obvious. If the patent is granted by U.S. Patent and Trademarks Office (USPTO) to the drug company then it enjoys exclusive rights for a period of twenty years to shut out any competitors from selling drugs, which are patent protected. The granting of patents enables the drug company to price the branded drug at far above the cost of the drug and charge super profits. It has also the effect of preventing cheaper generic drugs from entering the market. Patent law has to maintain a delicate balance between rewarding innovation of the inventor and protecting the interests of society. In the case of pharma industry there is enough evidence to suggest that are very few innovative miracle drugs in the pipeline and that the drug industry is awash with me-too drugs. From the data collated from 1998 to 2002, 415 drugs were approved. Of those only 133 (32%) were new molecular entities and the others were only variations of old drugs. Only 58 were significant improvements over the old drugs. Truly innovative drugs were only 14%, that is, not more than 12 innovative drugs per year. The data for the years 2001 and 2002 suggest a deepening crisis for the industry, as there were only 7 innovative drugs were

introduced in the market each year. More shocking is the fact that the core research in the few innovative drugs stem from the public funded research sponsored by NIH. Therefore there is little by way of facts to support the contention of the pharma industry that it requires the support of patent laws to support the high costs of risky research. Thirdly, the Hatch-Waxman (Drug Price Competition and Patent Term Restoration Act of 1984) was designed to promote generics while leaving in tact a financial incentive for research and development. It allows generics to win FDA marketing approval and accelerate introduction of generic drugs by submitting bio-equivalence studies (as opposed to clinical data, which is costlier to compile). It provides a streamlined and less burdensome procedure of approval of a generic version of a previously approved drug through the use of Abbreviated New drug Application (ANDA) than the standard and more cumbersome New Drug Application (NDA). New drug makers must show that the new drug is safe and effective in NDA. It also grants a period of additional marketing exclusivity to make up for the time a patented pipeline drug remains in development. This extension cannot exceed five years for molecular drugs, seven years for orphan drugs (with a market less than 2,00,000 people), and three years for changes in already approved drugs. This is in addition to the 20 years exclusivity granted by the issuance of a patent. Another provision of the Hatch-Waxman grants a 30-month stay to drug companies holding patents to file infringement action against generic manufactures that challenge their patents listed in the FDA orange book. This happens when the generic manufacture about to enter the market is required to certify that the patent is either invalid or irrelevant and that there would no infringement if the generic drug enters the market. This is known as Paragraph IV certification and serves as notice to the patent holder of the branded drug. This prompts the brand name drug company to file action for infringement against the generic manufacturer within a period of 45 days even on legally invalid grounds. Automatic 30-month stay is granted until the infringement dispute is resolved. This has become controversial in recent years and has provided stupendous profits to drug companies, as pharmaceutical companies have used the provision to keep generics off the market for the extra period of 30-months. Apart from the controversial use of the loophole of the 30-month stay and prolonging market exclusivity, brand name drug companies enter into collusive arrangements with generic manufacturer by paying them off to defer entry into the market. As six months are given to the first generic company by FDA for its exclusive marketing no other generic company can enter the market, the brand name company is able to exploit the situation by charging high profits. There are variations of the same theme but the effect is the same: to restrain competition and discourage the entry of cheaper generic drugs into the market. Brand name drug companies also exploit the child testing exclusivity rule. The law states that if drug companies test drugs on children then an automatic extension of six months is given to the patent. The drug companies misuse this rule by testing medicines meant for adult diseases on children. Pediatric exclusivity is a windfall for the drug industry. The average cost for testing on children per drug is around $4 million and if the testing is required for 188 drugs the total cost to the industry would be under $800 million but the extension of the six month period in exclusivity would grant the drug companies a bonanza of around $30 billion in added sales. The drug companies are also adept in using negative flak. Citizen petitions are filed before the FDA falsely alleging that the generic drug is unsafe and hazardous to health. Most of the claims fail but they serve to delay the entry of generic drugs into the market. The strategy adopted by drug companies to limit competition had a backlash. The Federal Trade Commission (FTC) in detailed report of July 2002 sharply criticized the drug industry for misusing certain provisions of Hatch-Waxman. The report said ' In spite of this record of success, two of the provisions governing generic drug approval prior to patent expiration (the 180-day exclusivity and the 30-month stay provisions) are susceptible to strategies that, in some cases, may have

prevented the availability of more generic drugs. These provisions continue to have the potential for abuse'. The adverse comments of the FTC documenting the widely anticompetitive activities within the pharmaceutical industry caused public uproar. An amendment to the Hatch-Waxman was introduced incorporating the recommendations of the FTC report. It was passed in Senate but failed in the House. Under pressure the present Bush administration promulgated its own regulation that would limit drug companies to one thirty- month period for suing generic company. But the regulations are vague as to whether the limitation applies to one stay per drug, one stay per patent or one stay per company. The regulation also introduces a loophole by not specifying any time limit for filing infringement action. Consumer activists have criticized the regulations as being watered down and still in favor of the drug companies. The battle between the consumer and the drug industry is far from over. * The Truth about the Drug Companies - Marcia Angell * Public Citizen - Pharmaceuticals Rank as the most profitable Industry* Ibid. - Would Lower Prescription Drug Prices Curb Drug Company Research & Development? * Bayh-Dole Reform and the progress of biomedicine * The shifting functional balance of patents and Drug Regulation- Rebecca S Eisenberg HealthAffairs. * Pharmaceutical company tactics to extend patent protection- Robert WeissmanMULTINATIONAL MONITOR-June 2002-volume 23-number 6. * Generic drug entry prior to patent expiration - FTC - July 2002. C R Sridhar