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HAI Seminar on GATT and Essential Drugs .. CPT comments

  There were the comments I presented in Bielefeld, Germany last friday
  at the Health Action International forum on GATT & Essential Drugs.
                 Comments on Trade and Pharmaceutical Policies:
                 A Perspective from the U.S. Consumer Movement
                  HAI Seminar: World Trade Organization/GATT,
                  Pharmaceutical Policies and Essential Drugs
                                October 4, 1996
                               Bielefeld, Germany
                                   James Love
                     Center for Study of Responsive Law (1)
  I would like to take this opportunity to explain some of the activities in
  the United States which concern international policies toward the
  development of new health care technologies, and to suggest a very
  particular public policy approach with respect to the promotion of research
  and development.
  I will begin with an introduction. My name is James Love. I am an economist..
  Since 1990 I have worked for the Center for Study of Responsive Law (CSRL)
  in Washington, DC. The CSRL was created by Ralph Nader in 1968 as a public
  interest research organization. In 1991, Mr. Nader asked me to review a
  contract between Bristol-Myers Squibb (BMS) and the National Cancer
  Institute (NCI), regarding the development of Taxol, an important cancer
  drug. The United States government had funded all of the important research
  on Taxol, and had sought a firm to commercialize the invention. After a
  "competitive" solicitation, BMS was chosen by NCI to bring the drug to
  With Taxol, as with many other cancer drugs, the federal government had been
  responsible for bearing the costs and risks of the discovery and development
  of the drug. The government had used a private contractor, Hauser Chemical,
  to manufacture the drug. BMS simply hired a key member of the NCI research
  team, an NCI employee named Dr. Robert Wittes, and Hauser, the NCI
  contractor, and agreed to provide the NCI less than $5 million of Taxol for
  use in the final stages of testing on the drug, which was done in a number
  of NCI sponsored clinical trials. There was very little risk for BMS,
  because NCI had already conducted very successful human use clinical trials
  on Taxol.
  After public outcry in the United States over the pricing of the drug AZT,
  the Bush Administration had adopted a policy of requiring some firms to sign
  "reasonable pricing" clauses in return for exclusive contracts for federal
  government research on pharmaceuticals. Taxol was covered by such an
  agreement, and when the drug was approved for marketing in the United
  States, I was asked by a member of our Congress to evaluate the price that
  BMS had negotiated with the NCI.
  We found that BMS had entered into a contract with Hauser (the former NCI
  contractor), to produce 400 kilos of Taxol for approximately $.25 per
  milligram. BMS was reselling the drug to cancer patients for $4.87 per
  milligram, more than 19 times the company's costs. Put another way, BMS was
  paying $100 million to purchase Taxol that it would sell for $1.95 billion.
  I did not think the prices that BMS charged cancer patients for Taxol were
  reasonable, given the company's negligible role in the discovery and
  development of the drug.
  Our work on Taxol led to a much broader investigation to the pricing of
  drugs developed with federal government support. We found that the U.S.
  government had funded clinical trials and other research for 34 of the 37
  cancer drugs approved for marking in the U.S. between 1955 and 1992. We
  found that half of all FDA "priority drugs" approved for marketing between
  1987 and 1991 had benefited from a significant federal government role in
  funding research on the drug.(2) We found that the government focuses its
  research investments on drugs which represent largest gains in therapeutic
  value and which treat the most severe illnesses. The private sector often
  develops "me too" drugs that target the most profitable markets.
  We also investigated the U.S. Orphan Drug Act, which was passed to support
  the development of uneconomic drugs for rare diseases. The law had been
  amended and transformed into a new intellectual property right that is
  routinely used for highly profitable drugs, including drugs which serve
  large client populations.(3)
  In the course of these investigations, we were asked to testify before the
  United States Congress on several occasions. Some members of the U.S.
  Congress were interested in the ways the government could protect consumers
  from excessive prices on drugs, including drugs protected by the U.S. Orphan
  Drug Act, or drugs developed with public support. At one such hearing, in
  February, 1993, before the United States Senate Special Committee on the
  Aging, Ralph Nader and myself were asked if the government should use
  compulsory licensing as a tool to protect consumers.(4) Mr. Nader told the
  Committee that the U.S. government's ability to do so would be severely
  constrained by the pending North American Free Trade Agreement (NAFTA). This
  was the first time I understood that international trade agreements would
  limit our national sovereignty with respect to policies on pharmaceutical
  In 1994 I was invited to attend a meetings on trade policies and
  pharmaceutical drug development in Buenos Aires and San Carolos de Barioche,
  Argentina.(5) Here I was surprised to learn first hand the extent to which
  the United States government was pressuring countries to rewrite national
  legislation on pharmaceutical patents. At the time, Argentina did not
  recognize patents on pharmaceutical drugs, and it had a large domestic
  pharmaceutical drug industry. The Argentine Congress was considering
  legislation to create a system of patents for pharmaceutical drugs, in order
  to conform to the TRIPS section of the new GATT. The United States
  government wanted terms significantly different than those the Argentine
  Congress was willing to approve, and the President of Argentina was
  threatening to impose a new patent law by executive fiat. The U.S. was
  asking for terms in the legislation which exceeded the country's
  responsibilities under the new GATT. I was asked by members of the Argentine
  Congress about the authority exercised by the U.S. Presidents under
  Executive Orders. There was a great deal of concern over this issue in
  Argentina, because the government had only recently become a democracy, and
  the U.S. was pressuring the President to exceed his constitutional powers.
  Later that year I had the opportunity to visit São Paulo, Brazil, where a
  similar dispute over pharmaceutical patents was unfolding. In São Paulo, the
  multinational pharmaceutical industry trade associations were simultaneously
  arguing that research and development were too costly and complex for the
  Brazilian government, and that the industry would bring many new research
  and development facilities to Brazil, if the country would strengthen its
  domestic pharmaceutical patent laws. I was appalled by the misinformation
  about drug development costs, much of it taken out of context from footnotes
  in U.S. government reports on the topic. At one point the Brazilian
  representative for the multinational pharmaceutical firms told the audience
  that the U.S. government said it cost $359 million to develop a new drug,
  and each drug was a 5,000 to 1 proposition - implying an expected
  development cost of $1.795 trillion dollars per drug.
  How absurd are these figures on R&D costs? Nearly all current estimates of
  the costs of the development of new drugs are based upon a 1991 industry
  funded study by several academic economists who work with the drug
  industry.(6) According to this study, which used data supplied by the
  Pharmaceutical Manufactures Association (PMA), the average out-of-pocket
  costs of clinical trials for new drug approvals was $20.4 million. The
  industry made this number seem more impressive by adjusting the
  out-of-pocket costs for the "dry-hole" risks of failure and for the cost of
  capital. This gave the researchers a number of about $75 million. It took
  wild guesses about investments in the pre-clinical stage of research to get
  the number to $231 million, and none of this took into account who actually
  pays for the research. The U.S. government funds much of the pre-clinical
  research on drugs.
  This 1991 study has subsequently become the basis for most estimates of drug
  development costs. The estimate took on a new life in 1993, when the U.S.
  Office of Technology Assessment (OTA) published a report on the costs of
  drug development.(7) Since OTA wasn't able to obtain its own data on drug
  development costs, it hired Joseph DiMasi from Tufts University, one of the
  authors of the 1991 study sponsored by PMA, and recalculated his estimate
  using new assumptions for the cost of capital for drug development. To
  establish the "upper bound" for the cost of drug development, OTA assumed a
  14 percent real rate of return(8) for the investments in the early
  pre-clinical research, and obtained a number of $359 million for the cost of
  developing a new drug. Now the industry had succeeded in getting its own
  analysis inserted into an official U.S. government report. Few persons
  understand how this number was developed, and what it represents.
  Most important, few persons understand the difference between "out of
  pocket" costs, which are a tiny fraction of the final number, and the
  numbers which are adjusted for risk and capital costs. And, few persons
  understand that most of the final number is mostly based upon heroic
  estimates of the costs of pre-clinical research, much of which is paid for
  by the government, and conducted in government and university
  There is one source of publicly available data on industry drug development
  costs from the United States which is particularly instructive. In the
  United States, there is a 50 percent tax credit for expenditures on clinical
  trials for Orphan drugs. Between 1989 and 1993, the drug companies claimed
  $86.6 million in Orphan Drug tax credits, for an implicit industry cost of
  clinical trials on Orphan Drugs of $173.2 million.(10) During that same 5
  year period, the FDA approved for marketing 60 Orphan Drugs. This works out
  to $2.9 million per drug approved for marketing. Of course, not all drugs
  that are tested receive FDA marketing approval, so the $2.9 million number
  is adjusted for the "dry-hole" risk. These are interesting figures, and give
  lie to the more dramatic assertions by the industry regarding the costs of
  drug development.
  In Argentina and in Brazil, I took the position that it would be futile to
  suggest that there would be no international agreements on pharmaceutical
  drug development. It is necessary to develop an intellectually sound
  framework for such agreements, which place public health considerations
  front and center. It is a fact that the U.S. and other developed countries
  will seek broader sharing of the costs of R&D for new drugs.
  In our view, the first task is to frame the R&D question as a public health
  issue. Increased levels of R&D on pharmaceuticals are a good thing for
  public health. Policies which enhance the public's access to new health care
  inventions are also a good thing for public health.
  Increased profits to pharmaceutical companies are not an end, but rather one
  of several mechanisms which may or may not contribute to the size and
  efficacy of the R&D effort. This is an important point.
  We have proposed three basic ways that national policies can increase
  pharmaceutical R&D.
  1. Award patents on new pharmaceutical inventions, thereby creating
  financial incentives for firms to develop new drugs. This is the focus of
  the current TRIPS accord and much of the U.S. government lobbying on this
  issue. There are obvious shortcomings and limits to a policy of awarding
  monopolies on important health care discoveries. Monopolies seek to charge
  high prices, and high prices prevent many consumers from obtaining access to
  the new technologies. This is a contradiction which will not disappear, and
  which will become even more obvious to citizens in developed countries as
  the new health care technologies are increasingly aggressively priced. When
  a new start-up company decides to charge more than $500,000 for a single
  year of Ceredase, a drug used to treat Gaucher's disease, we can see the
  kinds of barriers to access that lie ahead. There is also the problem of
  research priorities. For example, in South America, there is very little
  research on Chagas' disease, because most persons who suffer from this
  terrible illness are poor.
  2. A country can fund research on health care directly from its own budget.
  Government funding of health care R&D has worked well in the United States.
  The government has focused research efforts on important public health
  issues. If the government wants to, it can place the inventions in the
  public domain, broadening access to the technology.(11)
  3. The government can also require pharmaceutical companies to reinvest in
  health care R&D. The money can be invested directly by the companies
  themselves, it can be diverted to a national R&D fund, to be administered by
  public health authorities, or there can be a combination of the two. There
  are many advantages to the mandatory reinvestment approach. The country can
  determine the aggregate level of R&D, and this can be done without regard to
  the private sector's views on patent policies, price controls or other areas
  where we frequently see a form of blackmail by the industry. It is, after
  all, the consumers who fund the pharmaceutical companies, and this approach
  simply guarantees that an acceptable amount of the revenues from drug sales
  are actually spent on R&D. This is not simply an idea for developing
  countries, although I have proposed this in Argentina and Brazil. It is an
  idea that we are also trying to promote in the United States.
  In our experience, efforts to protect consumers from high prices for
  pharmaceutical drugs are resisted on the grounds that price controls,
  compulsory licensing or other practices lead to reduced R&D investments.
  Patient groups are often cynically manipulated by these threats. This is a
  way out of that dilemma. This is a way to reconcile the public health
  interest in the development of new therapies with the broadest access to the
  new technologies.
  The initial proposal for a mandatory reinvestment requirement was made by a
  pharmaceutical company, Andrulis, when it was seeking a non-exclusive
  license to sell cisplatin, a government funded cancer drug, which was
  marketed by Bristol-Myers. Bristol-Myers said if it could not make large
  profits from the exclusive license it would not be able to invest in R&D on
  new drugs. The Bristol-Myers argument was specious, since the profits on a
  drug already developed by the government is not a forward looking incentive..
  But the Andrulis counter proposal was an important innovation.
  Andrulis asked the government to provide non-exclusive licensing of the
  drug, but to require each license holder to make contributions to a fund for
  R&D. Andrulis pointed out that the government could set any level of
  contribution it wanted, making the level of R&D investment a variable
  completely under the control of the government.
  On September 27, 1996, Representative Bernie Sanders (R-VT) introduced
  legislation in the U.S. Congress (HR 4270, 104th Congress) that would
  require a minimum level of R&D reinvestment for each drug sold in the United
  States.(12) The Sanders proposal, which we support, would require each firm
  to create a fund for R&D, based on a percentage of the company's sales. The
  contribution levels would depend on patent protection, orphan drug status,
  and the magnitude of sales.(13) The investments themselves would be made by
  the companies, so the government would make the macro decision regarding the
  minimum level of R&D investment, and the companies would make the micro
  decisions regarding the specific projects to receive funding. The Sanders
  bill did not pass this year, but it will be reintroduced in the next
  Our proposal for a new framework for trade agreements on pharmaceuticals
  focuses on international efforts to share the costs of R&D, while leaving
  each country the flexibility to choose the particular mechanisms to promote
  R&D. Any combinations of the options described above would be acceptable.
  The level of expected effort should depend upon measures of ability to pay,
  such as per-capita income.
  Finally, I would like to encourage this audience to consider the importance
  of better collection of economic data on pharmaceutical development costs.
  The industry has far too tight a control over statistics on drug development
  costs, and they use this control to deter independent research on
  pharmaceutical policies. The Sanders proposal (HR 4270, 104th Congress)
  outlines many of the statistics that should be collected, and we hope that
  organizations such as Health Care International will support such data
  collection efforts.
  Thank you for the opportunity to appear today.
  1 P.O. Box 19367, Washington, DC 20036. Voice 1.202.387.8030; Fax; Email love@tap.org; http://www.essential.org/cpt.
  2 Until 1991, the FDA rates drugs on the basis of efficacy and the severity
  of the illness. Our sample included all FDA "A," "AA" and "E" drugs. These
  were the codes used by the FDA to identify drugs that offered significant
  improvements over existing therapies, drugs to treat AIDS, or drugs for the
  treatment of severe illnesses. In 1992 the FDA eliminated it's efficacy
  3 James Love, "The Orphan Drug Act and Government Sponsored Monopolies for
  Marketing Pharmaceutical Drugs," Comments Submitted to the Subcommittee on
  Antitrust, Monopolies and Business Rights of the Committee on the Judiciary,
  U.S. Senate. January 21, 1992.
  4 The prepared testimony presented at this hearing is available on the World
  Wide Web (WWW), at http://www.essential.org/cpt/pharm/pryor.txt .
  5 James Love, "Pharmaceutical Drugs, Intellectual Property Rights and Public
  Health: A Consumer Perspective from the United States," 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. Available from
  http://www.essential.org/cpt/pharm/bariloche.html .
  6 DiMasi, Hansen, Grabowski and Lasagna, "Cost of innovation in the
  pharmaceutical industry, "Journal of Health Economics, 10, 1991, pages
  7 Pharmaceutical R&D: Costs, Risks and Rewards, OTA-H-522, February 1993.
  8 14 percent plus the rate of inflation.
  9 The researchers did not have project level data for pre-clinical research..
  10 The most recent 5 year period for which data exist.
  11 The United States government often assigns exclusive rights to government
  funded inventions, even when the commercial marketing of the drug would take
  place without the assigned of exclusive rights.
  12 A copy of this legislation is available from
  13 Section 7.
  James Love / love@tap.org / P.O. Box 19367, Washington, DC 20036
  Voice: 202/387-8030; Fax 202/234-5176
  Center for Study of Responsive Law
     Consumer Project on Technology; http://www.essential.org/cpt
     Taxpayer Assets Project; http://www.tap.org