The Other Drug War (Part 1)

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Note: This is from Aug, 2001.

 

http://www.mercola.com/2001/aug/15/drug_war.htm

 

 

The Other Drug War (Part 1)

 

 

 

Page 1 of 2

 

by James Love, The American Prospect

 

For several decades, the pharmaceutical industry has benefited from a

combination of government intervention and laissez faire: the federal government

provides stringent intellectual property right protections and generous public

subsidies for research -- but does not regulate drug prices.

 

As a result, the United States has been a leader in the development of new

drugs, but it also faces the highest drug prices in the world.

 

Until recently, there has been little public controversy over the pricing of

drugs or the terms under which private firms obtain the rights to

government-funded research. But as health care costs have soared and policy

makers attempt to deal with AIDS and the general crisis of health coverage and

cost, the drug companies are coming under increasing scrutiny.

 

No sooner had Bill Clinton taken office than he began criticizing drug prices.

As part of national health care reform, the administration and Congress are

considering various proposals to subsidize vaccines and broaden government and

private insurance coverage of pharmaceutical products. Measures to expand health

care coverage while containing costs would seem to require new attempts to

control drug prices.

 

As part of national health care reform, the administration is rethinking how

public interests intersect -- and collide. An important part of this question is

how the government manages the transfer of publicly funded drug research and to

what extent it regulates private companies that benefit from this transfer. The

stakes are enormous.

 

If the drug companies are to be believed, government attempts to control drug

prices would cripple the industry's research and development efforts, slow the

pace of innovation, and damage one of the nation's leading high-technology

export industries.

 

But if the government fails to act, the result will be continued inflation of

drug prices, often at the expense of patients who can't afford to buy drugs they

need, taxpayers who bear costs under Medicaid and Medicare, and consumers who

generally face higher insurance premiums.

 

 

 

 

 

The federal government funds about 42 percent of all US health care research and

development (R & D) expenditures, including a significant portion of R & D costs for

new drugs. The government plays a particularly important role in the highest

risk research projects, including basic research, where commercial payoffs are

least certain. It also pays a significant share of the later stages of drug

development.

 

For example, in the area of federal expenditures on human use clinical trials, a

relatively advanced area for drug development, the National Institutes of Health

(NIH) will spend an estimated $868.8 million in fiscal year 1993.

 

The Center for the Study of Responsive Law's Taxpayer Assets Project (TAP)

recently studied the role of federal funding in the development of new drugs

approved for marketing by the Food and Drug Administration between 1987 and

1991. The results illustrate the degree to which the drug industry relies on

government money to develop privately owned products.

 

While the FDA approves hundreds of drugs every year, the number of new or

important drugs is relatively small.

 

For example, in 1991 the FDA approved 327 new and generic drugs and biologic

products. Only 30 approvals were for new molecular entities (NMEs) -- drugs

distinctly different in structure from those already on the market.

 

Only ten of these drugs received a priority rating, which is reserved for drugs

that afford a " significant therapeutic gain, " treat " severely debilitating or

life threatening illness, " or treat AIDS. For the group, seven of the ten

priority drugs were developed with significant federal funds.

 

The Taxpayer Assets Project also studied the funding of all cancer drugs that

were discovered since the National Cancer Institute's (NCI) new drug program

began in 1955 and approved for marketing by the FDA through 1992. Of the 37

cancer drugs, 92 percent, or 34 cancer drugs, were developed with federal

funding.

 

A more surprising finding of the Taxpayer Assets study concerned the pricing of

the NMEs that received FDA approval from 1987 to 1991. The median wholesale cost

(a completed treatment or a year, whichever was less) was $1,485 for the drugs

that were developed without federal funding, and $4,480 for the drugs that were

developed with federal funding.

 

That is, the drugs that were developed with government funding were 3 times as

expensive as the drugs developed without government funding. In 1991, the most

recent year of the study, drugs developed with federal funding were over 11

times more expensive than drugs developed without federal funding.

 

Why are drugs developed with government funding so expensive? From the point of

view of the drug companies, the answer is why not -- that is, why not charge

whatever the market will bear?

 

 

 

The Cost Of Drug Development

 

Drug companies emphasize the high costs and risks associated with the

development of new drugs and argue that these factors justify the policies

concerning the transfer of government-funded technology to the private sector.

 

However, while there is broad recognition that drug development is a risky and

costly enterprise, there is considerable controversy over the methods used to

" transfer " ownership of government funded technology to the industry.

 

The most widely quoted estimate for the cost of developing a new drug was a

Tufts University study sponsored by the pharmaceutical industry, which pegged

the average cost of developing a new drug at $231 million, based on industry

data on the costs of clinical trials for 99 new drugs.

 

The Tufts study's $231 million dollar figure has been widely misinterpreted. The

Tufts researchers found that the average inflation-adjusted cost of clinical

research was about $20.4 million.

 

But by including a number of adjustments, including the " dry hole " risks of

failures and the opportunity costs of capital (foregone profits) the researchers

came up with a figure of approximately $75 million. To get the $231 million

figure, the Tufts researchers added $156 million, which they estimated to be the

cost of pre-clinical research, adjusted for inflation, the cost of capital, and

the risk of failure.

 

The $156 million for pre-clinical research, however, was not supported by

project level data, but was calculated on the basis of very rough aggregated

data, using heroic assumptions.

 

While the industry has used the Tufts study to emphasize the high costs of drug

development, it can also be used to argue that the prices for drugs developed

with federal funds should be priced much lower than drugs developed without

federal funding.

 

If, for example, the government has funded the pre-clinical research, then

two-thirds of the cost of developing a new drug has already been paid for. And

if the drug company obtains the rights to the drug after the conclusion of Phase

II trials, more than 84 percent of the development costs are already accounted

for.

 

The Tufts study also dramatically illustrates the significance of the point at

which a company acquires the technology. Government-funded medical R & D typically

focuses on the early stages of a drug's development, when the risks are the

highest.

 

For many drugs, the government has paid for most or all of the pre-clinical

research, and it frequently funds the development of the drug all the way

through FDA Phase II and Phase III trials. In these cases, which are many, the

drug should not be priced as though the firm had borne all the risks and made

all the investments.

 

After all, citizens should not have to pay twice for the development of the

drug, first as taxpayers and then as health care consumers.

 

But current federal policies for managing what drug companies do with government

research still reflect the priorities of the Reagan and Bush era agenda, where a

commitment to corporate interests often came at the public's expense.

 

Throughout the 1980s, lawmakers enacted a series of " technology transfer " laws

designed to provide incentives for commercial development and to prevent foreign

interests from benefiting from US-funded research and development. These laws

made it increasingly easy for drug companies to obtain exclusive rights to

federal research without being subject to pricing controls. To appreciate how

this combination of protection and laissez faire plays out, consider the case of

the drug Taxol.

 

Taxol, an important new oncology drug, may be an effective treatment for breast,

lung, and ovarian cancers. Taxol's only approved source is the bark of the

Pacific Yew, a rare and slowly maturing tree that is found mostly on federal

lands.

 

Taxol was discovered, manufactured, and tested in humans by NCI over a 30-year

period. Early studies on cancer patients were carried out under government

grants at a number of universities. By 1991 the federal government had completed

Phase II clinical trials on six types of cancer, and had plans to test Taxol on

24 more.

 

According to Dr. Samuel Broder, Director of NCI, the federal agency was " totally

responsible " for the development of Taxol, including the collection of the Yew

bark; all biological screening in both cell cultures and animal tumor systems;

chemical purification, isolation, and identification; and sponsorship of all

clinical trials. Broder has estimated the taxpayers will spend about $35 million

on past and future Taxol research.

 

Rather than allow many firms to develop Taxol competitively, NCI decided to

award the rights to a single firm in the form of a CRADA (a Cooperative Research

and Development Agreement, a contract between federal agencies and firms

outlining the terms of joint research efforts). The notice for the CRADA was

published in the Federal Register in August 1989, and firms were given just 45

days to respond, despite the complexity of the CRADA proposal. Four companies

responded.

 

The winning " bidder, " was Bristol-Myers, a firm that was particularly well

prepared, due largely to the fact that it had hired an NCI official, Dr. Robert

Wittes, who had knowledge of the NCI Taxol program. The Bristol-Myers Squibb

" bid " was submitted jointly with Hauser Chemical company, the firm that was then

under contract to NCI to manufacture Taxol for the government's clinical trials.

 

The Bristol-Myers/NCI CRADA gave the firm exclusive rights to NCI's

government-funded research, including the records of research completed before

Bristol-Myers entered the Taxol picture, as well as all " new studies and raw

data " from future NCI-funded Taxol research, which NCI agreed to make " available

exclusively to Bristol-Myers, " so long as the company is " engaged in the

commercial development and marketing of Taxol. "

 

The company also received the exclusive rights to harvest the Pacific Yew trees

found on federal lands.

 

In return, the government receives no money or royalties, but only Bristol-Myers

Squibb's " best efforts " to commercialize Taxol, including a commitment to supply

Taxol for government-run clinical trials, which were needed to obtain FDA

marketing approval for the drug, and to an ambiguous " fair pricing " clause for

Taxol.

 

The fair pricing clause is dubious. Prior to the CRADA, NCI had used Hauser

Chemical, a private firm, to manufacture Taxol for research purposes.

Bristol-Myers Squibb continued to contract with Hauser both to supply the

government with approximately 17 kilos of Taxol and to provide Bristol-Myers

Squibb Taxol for commercial sales, once the company received FDA marketing

approval.

 

According to Securities and Exchange Commission filings, Hauser agreed to supply

Bristol-Myers Squibb with more than 400 kilos of Taxol by August of 1994,

subject to FDA marketing approval, for approximately $100 million, or about $.25

per milligram.

 

The FDA approved Taxol for sale in the United States in December of 1992, and

Bristol-Myers Squibb announced a wholesale price of $4.87 per milligram, more

than 19 times the cost of the drug from Hauser.

 

To appreciate the magnitude of the markup, consider that the 400 kilos of Taxol

produced by Hauser for $100 million had a wholesale value of $1.94 billion. (The

difference between the cost of the drug from Hauser and the wholesale value of

the product was greater than the entire cost of all drug company investments in

human use clinical trials in 1989, the latest year for which data are

available.)

 

For a patient taking Taxol, who responds to the treatment, the cost of the drug

may exceed $10,000 -- while Bristol-Myers Squibb's costs of manufacturing the

drug are about $500. Based upon the available data, it is unlikely that BMS

spent more than $5 million manufacturing Taxol for NCI sponsored clinical trials

prior to receiving FDA approval.

 

The company has defended its pricing of Taxol by making sweeping assertions of

the huge investments that it has made to secure " future supplies " of Taxol or

Taxol analogues. But these " investments " appear to consist primarily of

" commitments " for long-term contracts, such as the Hauser contract, which are

related to obtaining supplies for its commercial sales of Taxol, or to secure

alternative sources of Taxol.

 

Thus while the invention of Taxol was in the public domain, and an important

source of the drug was found on public lands, NCI was able to create substantial

barriers that would discourage other firms from entering the Taxol market.

 

The Taxol CRADA also illustrates the lengths to which the government will go to

enhance monopoly power in the marketing of new drugs, even when technologies are

not patent-able. Taxol sales are expected to exceed $800 million per year, which

are large, even by industry standards.

 

The technology transfer acts of the 1980s have also made it easier for nonprofit

institutions doing government-funded research to obtain property rights.

Non-government organizations, however, have few incentives to manage R & D

property rights in the public interest.

 

In 1990, 84 percent of the NIH's $7.14 billion R & D budget was used by nonprofit

institutions, including $4.18 billion by universities and $1.8 billion by other

nonprofit institutions. With billions of dollars at stake, universities and

their faculties have pursued the licensing and marketing of new medical

technologies, looking only at the potential marketing profits.

 

According to the National Science Board, academic patents on health and

biomedical related inventions have increased particularly rapidly, constituting

about 24 percent of all academic patents received in the late 1980s -- double

their share a decade ago. There is also considerable speculation that many

important federally funded health care inventions are patented privately, by

firms with ties to faculty members who want to avoid sharing royalties and

licensing fees with their university employers.

 

There are also substantial problems concerning conflicts of interest. For

example, the Scripps Research Institution has had a first right of refusal

contract with Johnson & Johnson to commercialize certain chemical and

pharmaceutical research, while several members of the Scripps faculty, including

the president, have independent consulting agreements with Johnson & Johnson.

 

The president of Scripps, who must negotiate the royalty and profit-sharing

agreements between Johnson & Johnson and Scripps, is on the payroll at both

institutions. Scripps has just signed a ten-year contract with Sandoz, the Swiss

pharmaceutical firm, which gives this foreign-owned company the rights to

commercialize an estimated billion dollars in federal health care research -- a

kind of reverse industrial policy.

 

 

 

Pharmaceutical Orphanages

 

In those cases where academic researchers do publish findings in journals and

enter the public domain, pharmaceutical firms are able to obtain seven years of

exclusive marketing rights under the provisions of the federal Orphan Drug Act,

regardless of whether or not the company contributed to the research that led to

the drug's discovery or knowledge of its efficacy in treating particular

diseases.

 

The law, originally enacted to encourage the development of drugs that would be

unprofitable due to small markets, has been repeatedly modified to the advantage

of pharmaceutical companies.

 

Today the only condition imposed on companies seeking orphan drug designation is

that a drug must serve a client population of under 200,000. But this number is

deceptive.

 

For example, an estimated 6.8 million Americans suffer from cancer, but, a firm

can distinguish particular types of cancer for orphan designation. Thus, for

example, ovarian cancer, the fifth-leading cause of death among women victims of

cancer, has an estimated client population of 164,000, well under the 200,000

limit.

 

Under the Orphan Drug Act, the FDA has become an ad hoc rival to the Patent and

Trademark Office. While that office allocates exclusivity marketing rights to

inventors, the FDA awards exclusivity to the first firm that obtains FDA

marketing approval. In some instances, one orphan blocks entrance by other drugs

that have their own patents and arguably different medical characteristics.

 

For many drugs, the Orphan Drug Act actually adds a new element of risk to the

development process, as it is possible to be barred from marketing a drug with a

valid patent. Firms with patents have even been beaten to the punch by firms

that don't hold patents, creating cases where the firm that holds the FDA orphan

drug exclusivity must license the patent from the firm barred from the market.

 

The Orphan Drug Act has vastly increased the monopoly pricing power for many

drugs, and it has created special challenges for drugs developed with public

funds. The first firm to obtain FDA approval to market a drug that can qualify

as an orphan is automatically granted marketing exclusivity, regardless of the

company's role in the drug's development.

 

 

 

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