Pharmaceutical Drugs, Intellectual Property Rights and Public Health:
A Consumer Perspective from the United States

James Packard Love *

Presented at

XV Asamblea General de la Asociaión Latinoamericana de Industrias Farmacéuticas
San Carlos de Bariloche - Río Negro - Argentina
11 al 13 de mayo de 1994
Remarks delivered on May 12, 1994.

I am pleased to appear today to discuss the issue of intellectual property rights for pharmaceutical inventions. My name is James Love. I work for the Center for Study of Responsive Law, where I am the Director of Economic Research, and also the Director of its Taxpayer Assets Project (TAP).

The Center for Study of Responsive Law is a non-profit organization which was created in 1968 by Ralph Nader to conduct research on a wide range of public policy issues. TAP is a project of the Center, which investigates the management and sale of government property, including property rights from government funded R&D.

Mr. Nader is the best known advocate for consumers in the United States, and he is widely known throughout the world. Mr. Nader played an instrumental role in the development of a vast array of U.S. initiatives to protect the environment, and to advance the welfare of the public in their roles as consumers, workers and citizens.

Today Mr. Nader is actively engaged in the present U.S. debate over GATT, and was actively involved in debates over NAFTA and the battle over the Canadian system of compulsory licensing of pharmaceutical inventions. Mr. Nader and myself are also deeply involved in efforts to control prices for drugs in the United States.

My own involvement in this issue dates from 1991, when I was asked by Representative Ron Wyden, a member of the U.S. House of Representatives, to provide testimony on an agreement between Bristol-Myers Squibb (BMS) and the National Cancer Institution (NCI), which is an agency of the U.S. federal government. NCI had developed a new cancer drug named Taxol, which was the product of decades of federal research into the cancer fighting properties of natural substances. Taxol, which is used to treat ovarian, breast and lung cancer, was produced from the bark of the Pacific Yew, a small tree that was mostly found on government owned lands in the Pacific Northwest of the United States.

Because researchers had published more than 130 articles about taxol in scientific journals, it was impossible for anyone to patent the drug under U.S. law. The government paid for all of the pre-clinical research on Taxol, and it also sponsored a large number of human use clinical trials, including the so-called Phase I, II and III trials which are required for FDA approval in the United States. The government also developed the methods for manufacturing the drug, which was done through a private contractor named Hauser Chemical.

In the United States the government plays a huge role in funding pharmaceutical research and development (R&D), but it rarely, if ever, becomes the agent that sells the drug to the public. Here the federal government entered into a contract with the large Multinational firm, Bristol-Myers (now Bristol-Myers Squibb). The government agency NCI gave BMS a contract which provided the private firm with exclusive rights to use the data from government funded human use clinical trials, and also gave the firm an exclusive "first right of refusal" to harvest the bark of the Pacific Yew tree from federal lands. In return for these privileges and benefits, BMS only agreed to provide the government with a few kilos of Taxol for use in research that BMS would "own," and to use BMS's "best efforts" to commercialize Taxol, a drug with world wide sales of hundreds of millions of dollars per year. BMS was not obligated to pay the government any money in royalties for the exclusive use of its research data, but it did agree to a vaguely written "fair pricing" clause in the contract.

When Taxol entered the U.S. market it was priced at a wholesale price of $4.87 per milligram, or more than $9,000 for a completed treatment for some types of cancer. We investigated the pricing of Taxol and found that BMS was acquiring clinical grade Taxol from Hauser Chemical, the firm that was once the government's contractor, for less than $.25 per milligram. In other words, BMS was charging U.S. consumers about 20 times its cost of production for the drug.

In response to our criticisms of the price, BMS made a number of what appears to be rather common exaggerations about its role in the development of Taxol. For example, BMS claimed that it had spent more than $114 million to "develop" Taxol, but the company refused to provide any specific accounting of how this was calculated. It turned out that most of this money was simply the long term drug supply contracts that BMS had signed with Hauser and other companies, it would be highly misleading to refer to these production contracts as R&D investments.

Several Congressional hearings were held on Taxol and on many other high priced drugs which benefited from government funding. Based upon our experience with Taxol, we initiated a number of new studies. We found, for example, that of the 37 cancer drugs which were invented after 1955 (the beginning of the modern NCI drug screening program), 34 were developed with significant funding by the government. This high degree of government funding was true for many other drugs as well.

Another TAP study looked at all of the "important" new drugs approved by the FDA from 1987 to 1991. During this 5 year period the FDA issued 2,270 drug approvals, but most were for generic drugs or new combinations of existing compounds. Only 117 of the new drug approvals involved so called "New Molecular Entities" (NMEs), which is the name given to drugs which are distinctly different from drugs already on the market. Of these 117 NMEs, only 30 were judged by the FDA to be drugs that were used in the treatment of severe illnesses (FDA class E drug) or to represent a substantial gain in therapeutic value (FDA efficacy rating of A).

Of these 30 "important" new drugs approved by the FDA, 15 benefited from significant funding by the U.S. government. But when one considers the country where the drug was first discovered the government's role is even more important. 17 of the "important" new drugs were discovered in the U.S. Of these drugs, 12 were developed with significant government funding - that is, 71 percent were developed with significant government funding.

The U.S. government spends an enormous amount of money on health care research, and this investment has been very productive. On the basis of our research, we have concluded that while the private sector's R&D investments are also large, they tend to be directed at the lower risk ventures, and often are directed the development of so called "me too" drugs, which do not represent significant improvements in therapy, but rather are marginally different methods of treating illnesses which represent large markets, as measured by the companies in the dollars they will receive from consumers.

One of the more interesting findings of our research was the fact that the drugs which were developed with government funds were much more expensive than the drugs developed with only private funding. For the 30 drugs in our study, the median cost of the NMEs which were developed with government funding was $4,854, while those drugs that were developed without government funding were priced at $1,626. That is to say, the drugs developed with government funding were about 3 times more expensive than the drugs developed with private funding. Clearly the drug companies were not "passing" on the benefits of government funding to the U.S. consumers, who pay for the research.

Over the past several years there have been many news reports about investigations into particular government drugs which are excessively priced. One of the most interesting cases concerns the drug Ceredase, which is used to treat Gaucher's disease, a rare affliction which affects only a few thousand persons in the United States. The U.S. National Institutes of Health (NIH) spent several million dollars to develop Ceredase. The original research was funded at Tufts University. The scientists at Tufts University closed down the program at the University and created a new start-up company, named the Genzyme corporation, which became the marketing company for Ceredase. The "roll-out"price for the drug was extremely high -- some patients were required to pay as much as $550 thousand for a single year of treatment. The company was able to generate more than $100 million in revenue for one year from about 300 patients. Because the U.S. has no program for controlling drug prices, nothing could be done about the enormous burden this high price placed on the patients who received the drug. Many of the stories from patients who suffer from Gaucher's disease were heart breaking. Genzyme employees a number of "reimbursement specialists," who met with individual patients to help them find ways to pay for the drug. One women testified before Congress that the company salesman recommend such procedures as getting a divorce so the patient could become eligible for welfare payments. Some patients were asked to sell homes, and in some cases the umbrella benefits from private insurance were exhausted, leaving the entire family without health insurance.

Another case which received wide attention was the drug Levamisole, which is used to treat cancer of the colon. Levamisole was first used to remove worms from sheep, and was priced at $.06 per bill for that purpose. An NIH funded study found a way that the drug could be used to treat colon cancer. However, the "patent" rights to the "idea" of using Levamisole to treat cancer were owned by the drug company Johnson and Johnson (J&J), even though the principal researcher on the project described the company's contribution to the research as trivial - just supplying the drugs for the clinical trials. When Levamisole entered the market for humans, it was priced at $6 per pill, a 100 fold increase in the price, and a difficult burden for many of the patients who take the drug regularly, many without the benefit of health insurance coverage.

One of my favorite case studies involves the drug cisplatin, which is a widely used cancer drug. Cisplatin is one of many drugs which is marketed by BMS (the world's largest seller of cancer drugs, even though it has never discovered a cancer drug on its own). Cisplatin was discovered at Michigan State University on a government grant. The University licensed the drug to BMS on an exclusive basis for 5 years. When the exclusive license expired in 1983, several companies wanted to obtain non-exclusive licenses to manufacture and sell the drug. At that time the federal government could decide whether or not to use the exclusive license, or to allow competition to drive the price down. BMS argued that if it was forced to compete there would be no profits to fund R&D. At that time Andrulis Research Corporation told the government that there was a simple way to solve the R&D program. Andrulis suggested that the government fix a royalty of the drug that would be used solely for R&D. Andrulis suggested that the money be given to NIH or a special foundation set up to receive the money. We thought that this was a very good suggestion. Instead, however, the U.S. government allowed BMS to have the exclusive license, on the condition that the company lower its prices by 30 percent, and fund $35 million in cancer research, which was carried out under the direction of the NIH.

I was reminded of the Andrulis proposal several times over the past few years, because it seems to offer countries a way to avoid the company black-mail over the R&D issue. A similar proposal was made by Eastman Commission in Canada in 1985, although it was never implemented. More recently, several members of the U.S. Senate have proposed that 1 percent of the entire U.S. health care expenditure be devoted to health care R&D. This proposal was made in response to criticisms that the cost control features of the Clinton Health care bill would reduce company R&D efforts. It is important to consider how mandatory contributions to an R&D fund, managed by the government, change the dynamics of negotiations over drug pricing policies. If companies want to criticize the impact of a policy on R&D, it becomes obvious how to address the problem - simply increase the size of the R&D contribution. It is also important to remember that it is really consumers, and not the companies, which are the source of this revenue under any scheme including systems which fund R&D through monopoly profits.

In the United States people are proud of the government's role in the funding of new medical technologies, and private industry is very anxious to be partners or beneficiaries of government funded R&D efforts. In Argentina it would clearly make sense for the government to use the approach suggested by Andrulis in 1983. That is, if the Argentina government adopts a system of compulsory licensing and or/and price controls to protect the Argentina consumers, it could easily deal with the R&D by setting aside a portion (any portion) of the drug sales for R&D investment. But rather than allow the companies to control or "own" these R&D investments, it would be better for the funds to be invested by the government, through its own Universities, or in partnerships with the private sector, where the government would negotiate contracts that would address such important issues as allocations of property rights, pricing, and local production.

Indeed, this is precisely the approach which we believe the U.S. should take. Compulsory licensing is an attractive option for a government, because it does not require the government to estimate items such as the costs of manufacturing or marketing a drug. But the concern over R&D is a real one that must be addressed. However, the current U.S. approach of give-a-ways and windfalls to the drug companies, with no price controls, is highly inefficient, and I doubt that it will survive for long. Indeed, it is our judgment that the U.S. pharmaceutical industry has achieve its current status in the U.S. by spending millions of dollars to fund U.S. congressional campaigns, rather than by any thoughtful analysis of the alternatives. Of course, this is a very powerful method of achieving legislative results in the U.S., but the soaring costs of new drugs will eventually sour even this relationship.

We are now seeing new drug prices which are far above anything we have seen before, and things are only getting worse. The new high tech medical technologies are very important, but it is even more important that we find ways to control their costs. Indeed, prices for many of the new drug technologies are so high that many counties may be denied access to treatments altogether if they cannot address important pricing issues.

One important issue which requires additional world wide attention is the availability of information about the pharmaceutical industry. It is becoming more and more important for nations to work together to share information about basic industry economics, on issues such as drug sales, prices, R&D and manufacturing costs, marketing costs and other items. Today the pharmaceutical companies control the flow of industry information much too closely, and it is difficult for governments to negotiate without better facts. It is a measure of our ignorance, for example, that we look toward countries with compulsory licensing or no patent protection in order to obtain information on the costs of drug manufacturing. The U.S. still does not collect data on industry R&D expenditures, and indeed, the U.S. government really does not even organize data on its own R&D efforts in ways that make it clear how much the private sector relies upon government funded research.

Lastly, I would like to say that the issue of drug pricing in Argentina and elsewhere is not only about economics. As members of the Argentine Congress have pointed out, there are important ethical issues involved. Pharmaceutical drugs are necessary for good health, and high prices will deprive many persons throughout the world of the benefits of these technologies. Policies which make medicines more readily available to consumers can be justified on moral grounds, and policies which will deny consumers access to medical treatments should be questioned on moral grounds.

I was surprised and saddened to learn that the U.S. government is so aggressively protecting a handful of large corporate interests, and that it is opposing many reasonable proposals to resolve the current dispute over patents.

One area of the negotiations between the U.S. and Argentina which deserves special discussion is the question of the retroactive nature of a change in the patent law. It is my understanding that the U.S. wants Argentina to provide immediate patent rights to drugs already on the market. This, of course, would not do anything to promote innovation in new products. It would only represent a transfer of income from the Argentine consumers to the shareholders of the large drug companies. Firms act on incentives which are forward looking. Patent protection on new drugs will indeed provide incentives to develop new products. But investments in existing technologies are sunk costs, and the availability of that technology will not be influenced by retroactive changes in the patent law. This would be a windfall to the drug companies, but would not benefit consumers. Moreover, the higher prices for drugs which received the retroactive patent protection would become a barrier for many patients, including children, who would be effectively denied access to the treatment. There is no moral high ground in pressing for retroactive patent protection, only an effort to enrich the large drug companies for products that were already developed under a given set of rules.

I am also surprised to learn that the U.S. is not satisfied with the provisions that it has just agreed to in the GATT negotiations, since the government is working so hard to achieve approval of the GATT before the U.S. Congress.

Finally, it is important for you to know that many of the very mechanisms that you are considering -- compulsory licensing and price controls -- are also under active consideration in the U.S., and will likely be the focus of reform in future years. Of course, one of the great victories that the PMA wants to achieve is to obtain foreign trade agreements which not only strip your country of its freedom to protect your consumers, but which would also prevent us from obtaining protection for consumers in our country as well. Indeed, the U.S. public is just waking up to the fact that NAFTA and GATT place important constraints on what can be done in the U.S. on important questions such as software patents and drug prices. Consumers in every country have a stake in the development of policies which insure that medical technologies are widely available and affordable.

Thank you very much for the opportunity to appear today.

* Center for Study of Responsive Law. P.O. Box 19367, Washington, DC 20036. Voice 1.202.387.8030; Fax; Internet