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Better copy: HAI Seminar on GATT and Essential Drugs .. CPT comments

  The last version was formated kinda funny... so here is another try.
                 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 market. 
  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). Thi= s was the first time I
  understood that international trade agreements would limit our national
  sovereignty with respect to policies on pharmaceutical drugs. 
  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 Sao Paulo, Brazil, where a
  similar dispute over pharmaceutical patents was unfolding. In Sao 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
  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
  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 Congress. 
  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 rating. 
  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 Asociaion Latinoamericana de Industrias
  Farmaceuticas, San Carlos de Bariloche - Rio 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
  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