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'Holy Grail' of Giant Pharma

This article touches on some of the controversial patent-related strategies adopted by giant pharmaceutical companies in the US to limit the entry of cheap generic drugs and restrict competition.

‘Holy Grail’ of Giant Pharma

This article touches on some of the controversial patent-related strategies adopted by giant pharmaceutical companies in the US to limit the entry of cheap generic drugs

and restrict competition.


The Holy Grail of this industry is intellectual property protection.

– Nancy Chockley,

president, National Institute for Health Care Management

s is well known, the mainstay of the huge profits earned by the giant pharma companies is the blockbuster drug, which typically rakes in over a billion dollars a year. In the US, non-profit consumer groups like Public Citizen have protested that the pharma industry has abused patent protection and the exclusivemarketing rights granted to block the timely entry of cheaper generic drugs from coming into the market and have called for price regulation. Predictably, the industry through its trade association, Pharmaceutical Research and Manufacturers of America (PhRMA) has fought back by saying that price regulation would kill R&D and the introduction of innovative drugs. It has justified the patent protection and the exclusive marketing rights granted by the Food and Drug Administration (FDA) as one of a 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 expenditure. PhRMA been using an estimate for the cost of drug development of $ 802 million for the year 2000, worked out by the Tufts Centre for the Study of Drug Development in the US, a figure skilfully used by the industry to justify high drug prices.

Public Citizen challenged the above figure as being grossly overstated and said that a reasonably revised figure would be 75 per cent lower. It also pointed out that there were flaws in the sample, as only drugs, which were not funded by the government, were taken into account. Many researched drugs that are publicly funded through the National Institutes of Health (NIH) did not form part of the sample. It also criticised the study for inflating costs by 50 per cent; the costing of R&D was not based on actual cash outlays but on opportunity cost, the amount foregone by not investing the amount in the most preferable alternative area of investment. Moreover, the expense towards R&D was tax deductible, reducing the estimate by 34 per cent. More controversially, Public Citizen alleged that the industry churned out at least 50 per cent 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.1

The troubles for the industry have not died 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 favouring big pharma companies to

Economic and Political Weekly March 18, 2006

make huge profits, three enactments merit examination.

Patenting Tax Funded Research

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 Eisenberg who concluded “The presumption that patent incentives are necessary to promote research and development has less force for inventions arising from governmentsponsored 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.”2 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 a patent is granted by the US Patent and Trademarks Office (USPTO) to the drug company, then it enjoys exclusive rights for a period of 20 years to shut out any competitors from selling the drug that is patent protected. The granting of patent 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 the innovation of the inventor and protecting the interests of society. In the case of the pharma industry there is enough evidence to suggest that there are very few innovative and highly efficacious drugs in the pipeline and that the drug industry is awash with me-too drugs. Let us consider the 415 drugs that were approved between 1998 and 2002. Of those, only 133 (32 per cent) were new molecular entities and the others were only variations of old drugs. Of these only 58 were significant improvements over the old drugs. Thus, truly innovative drugs were only 14 per cent of the number approved, that is, there were 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 seven innovative drugs that 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.3 There is little by way of facts to support the contention of the pharma industry that it requires the support of patent laws to back the high costs of risky research.

Hatch-Waxman Act

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 the FDA’s marketing approval and accelerate the introduction of generic drugs by submitting bioequivalence 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 the Abbreviated New Drug Application (ANDA) rather than the standard and more cumbersome New Drug Application (NDA). New drug makers must show that the new drug is safe and effective in the 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 that hold the patents to file infringement action against generic manufactures that challenge their patents listed in the FDA orange book. This happens when the generic manufacturer who is about to enter the market is required to certify that the patent is either invalid or irrelevant and that there would be no infringement if the


Economic and Political Weekly March 18, 2006 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. An 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.4

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 manufacturers by paying them off to defer entry into the market. As FDA gives a six-month period to the first generic company for its exclusive marketing, no other generic company can enter the market, and 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. This rule is misused by the drug companies by testing medicines meant for adult diseases on children. Paediatric 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.5

FTC’s Negative Comments

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 strategies adopted by drug companies to limit competition have had a backlash. The Federal Trade Commission (FTC) in a detailed report of July 2002 sharply criticised the drug industry for misusing certain provisions of the 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”.6

The adverse comments of the FTC documenting the widely anti-competitive 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 the Senate but failed in the House of Representatives. Under pressure, the present Bush administration promulgated its own regulation that would limit drug companies to one thirty-month period for suing the 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 criticised the regulations as being watered down and still in favour of the drug companies.

The battle between the consumer and the drug industry is far from over.




1 ‘Would Lower Prescription Drug Prices Curb Drug Company Research and Development?’

2 ‘Bayh-Dole Reform and the Progress of Biomedicine’ by Arti Rai and Rebecca Eisenberg at articles/lcp66dWinterSpring2003p289.htm.

3 Marcia Angell, The Truth About Drug Companies: How They Deceive Us and What to Do About It, 2004, Random House, New York, pp 54-57.

4 ‘The Shifting Functional Balance of Patents and Drug Regulation’ by Rebecca Eisenberg in

Health Affairs, 2001.

5 ‘Pharmaceutical Company Tactics to Extend Patent Protection’ by Robert Weissman in Multinational Monitor, Vol 23, No 6, June 2002.

6 ‘Generic Drug Entry Prior to Patent Expiration’, Federal Trade Commission, July 2002.

Second 4-Week Refresher Course in Public Economics for the South Asian Region

NIPFP proposes to organise a four week refresher training programme in Public Economics for the South Asian Region, during May 29-June 23, 2006. The participants would be college or university teachers, faculty in research institutions, normally under 45 years of age. Preference would be given to teachers teaching Public Economics/Public Finance. The teachers who attended the programme last year need not apply.

The programme would be organised at the Institute premises. Participants would be reimbursed 2AC train fares. All local hospitality would be provided by the Institute.

Intending candidates may send their C.V. to the following address by April 1, 2006.

Director National Institute of Public Finance and Policy 18/2, Satsang Vihar Marg Special Institutional Area New Delhi 110067. E-mail:, Fax: 26852548, Tele: 26857274

Economic and Political Weekly March 18, 2006

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