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HAI Seminar on GATT and Essential Drugs .. CPT comments
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- Subject: HAI Seminar on GATT and Essential Drugs .. CPT comments
- From: James Love <firstname.lastname@example.org>
- Date: Wed, 9 Oct 1996 22:33:37 -0400 (EDT)
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
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
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
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 SÃ£o Paulo, Brazil, where a
similar dispute over pharmaceutical patents was unfolding. In SÃ£o 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
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
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
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
Thank you for the opportunity to appear today.
1 P.O. Box 19367, Washington, DC 20036. Voice 1.202.387.8030; Fax
188.8.131.5276; Email email@example.com; 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 AsociaiÃ³n Latinoamericana de Industrias
FarmacÃ©uticas, San Carlos de Bariloche - RÃo Negro - Argentina, 11 al 13 de
mayo de 1994., Remarks delivered on May 12, 1994. Available from
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 / firstname.lastname@example.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