PHARMA REFORM AND WORLD TRADE

There is an industry that in the past has been more profitable than the commercial banking sector.  Can you guess which one?  It has been the pharmaceutical industry. You can’t have meaningful health care reform without pharma reform. From the never-ending search for the elusive "Blockbuster Drug", to the ongoing need for more increasing shelf space, we have allowed the capital markets and the patented medicine model to dominate decision-making when it comes to our health care. The pursuit of finding remedies for the human illness is a noble cause and one that has made life bearable and some diseases curable. But if we continue with this same model unchecked it may very well end how the capital markets work as we know it, giving them an incurable disease that could be terminal. Capital that flows into drug research and development is obsessed with a couple of issues that are mostly monetary in nature. The industry is failing to notice something far more menacing just over the horizon. The global HIV/AIDS crisis, already striking at the very thing the capital markets need to survive market players.

As the epidemic rips into Africa, China, and India, will the U.S. be able to continue its low level support for this crisis of the developing world? Or will the threat to the labor force of our major trading partners provide the shock necessary to remind us that illness prevention and cure is a social service that does not fit well into the confines of 20 to 30 year patent monopolies.  Will the exponential growth of HIV/AIDS in Eastern Europe and the former Soviet states, right on the doorstep of the European Union, wake up the rest of the West to the need to either act now, or risk losing their global marketplace? There are many arguments both for and against the patent model for pharmaceutical development; I shall touch on just a few.

As in most industries, the capital markets drive the classic predator-prey dynamics; the pharmaceutical sector is no different. As the fictional character of Gordon Gecko of Wall Street fame said, “You either eat or you get eaten!” Let's go back to 1995 when much of the mega-merger business in the pharmaceutical industry was just getting underway;

• Glaxo Holdings gobbled up Wellcome Plc to form Glaxo-Wellcome
• Novartis was formed out of the merger of Ciba-Geigy and Sandoz
• 1998 saw the creation of Aventis out of the fusion of smaller drug companies
• AstraZeneca from Astra and Zeneca
• Pharmacia & Upjohn scooped up Monsanto, the controversial agribusiness
• In 1999 Pfizer swallowed Warner-Lambert Glaxo-Wellcome
• Smith-Kline-Beecham were fused together to form GlaxoSmithKline in 2000.
• Pfizer and Pharmacia then announced their merger, to outsize  GlaxoSmithKline, to become the biggest kid on the block. 

There are still more rumours of even bigger mergers yet to come.

The pharmaceutical industry of today started in the late 1800s when it became possible to mass-produce compounds such as morphine and cocaine. By the early twentieth century drugs and compounds were patented by various companies to protect their discoveries. A patent on a branded drug or chemical gives the company a monopoly on sales of that chemical for a specified period, enabling them to set high prices in the absence of competition. The argument for patent protection is that it enables the developer to recover their investment in R&D plus a profit, hence providing incentive to private industry to find new cures. However, in order for the company to lure customers into buying such a high priced product, they also need to spend a lot of money on advertising and marketing to convince people that its products are the best.

Today, the brand name drug companies look nothing like their chemical ancestors of the 1800s. New products require large investments in R&D and take a long time to bring to market. The drug giants are dependent on patents, marketing and branding to make a profit. Consequently, the pharmaceutical sector has more in common with the movie industry than with any public service provider.  A new drug must become a profitable "Blockbuster", or it will not be worth the cost of development. In contrast, generic drug companies spend comparatively little on R&D and advertising, existing primarily to compete for market share based on price once a patent on a brand name drug has expired. Once such a patent expires, generic companies can copy the drug and can afford to sell it at a lower price since they don't have as much R&D and advertising costs to recoup. 

After successes and record high profit levels throughout the 1990s, all is not well in the pharma world of blockbuster remedies.  The looming patent expires, resulting in competition from generic companies, a drug R&D pipeline that is drying up, and angry governments, corporations, consumers and managed-care companies tired of high drug prices.  With health reform there are calls to reform the pharmaceutical industry throughout the U.S.

These common enemies are forcing all these unions amongst the drug giants who hope that consolidation will allow them to do more of their two favourite things at lower cost. These two things are (1) Advertise and (2) Produce Blockbusters. The future dangers to the general public of all this consolidation is even higher drug prices and more seriously, the lowered ability of the pharmaceutical sector to respond to real illnesses, which are not getting much attention. The latter is reflected not only in the untreated epidemics haunting the developing world, but even here in the U.S., with increasing reports of shortages of basic medicines and vaccines at many hospitals. These problems are all compounded by the fact that drug companies are fighting every way they can to counter the 'Attack of the Generics'.

THE MIRACLE DRUG

Miracle drugs and pervasive drug advertising has been a part of the American diet for both the body and the mind for over a hundred and fifty years.

After more than 30 years of pressure for food and drug safety laws, the year 1906 finally ushered in the landmark Pure Food and Drug Act, amid shocking disclosures of the use of poisonous food additives and cure-all claims for worthless and dangerous patent medicines. In 1927 the Food and Drug Administration (FDA) was formed as the regulatory arm of the government charged with enforcing food and drug law. The pharmaceuticals lost their battle against an overhaul in drug regulation in 1937, after a drug known as the Elixir or Sulfanilamide killed over a 100 people, including many children. This paved the way for the passage of the 1938 Food, Drug and Cosmetic Act, which, among other things, required new drugs to be shown safe before they could be marketed. The Thalidomide scare of the early 1950s put pressure on Congress to further strengthen drug regulation. Still, the brand-name companies continued to prosper because they could set whatever price they wanted on patented drugs.

The year was 1984 when pharmaceutical companies first started seeing trouble on the way, with the passage of the landmark Hatch-Waxman Act. Prior to this, generic drug companies had to perform the same rigorous testing on generic drugs that the companies with the initial patent had to perform. This made competition from generics virtually a non-issue because the investment required to get regulatory approval could only reasonably be recovered where the producer could charge a sufficiently high price for the drug once approved. In practice, this meant that the pre-Hatch-Waxman regulatory structure was heavily biased in favor of the companies with drug patents - that is, the brand name drug companies.

The 1984 Drug Price Competition and Patent Term Restoration Act (often referred to as the Hatch-Waxman Act) changed the drug competition landscape drastically by lowering the regulatory hurdles for generic companies. It said that rather than the generic companies performing all the safety tests, the original company with the patent carried out, just had to show that the generic drug was chemically the same as the original drug, which had already been tested. Finally, there was a feasible economic model for the generic industry. Once a patent expired on a drug, they could replicate and sell that drug for a lower cost and still make a profit, because their initial costs to get the drug to market were now much lower.

That part of the 1984 law sounds pretty good for the consumer right? But wait. This is one of the oldest tricks in the book! Create a law that looks pretty good to the general public, but with some twists and turns that are not obvious until many years later when the law did more harm than good. I currently experience this personally with our NAFTA Chapter 11 challenge against the Government of Canada. This Trojan horse was allowed into the 1984 regulatory regime. There were a number of methods for the brand-name companies to fight the generics:

1. Extension of patent protection to make up for time lost in the FDA regulatory approval process (hence the term "Patent Restoration"). 
2. Ability to get multiple patents on drugs covering not only the chemical itself, but also all kinds of preparation methods and techniques, making it harder for the generics to prove they had the same drug. These patents could be staggered, such that when the patent on the main chemical expired yet the patents on various methods and techniques were still in force. This equals wide-ranging abilities to challenge generic companies in the courts for patent infringement.

These are back door methods available to keep patents going from a major strategy used by the brand-name companies to ward off the threat from generics. It is these very loopholes that coalitions such as "Business for Affordable Medicine" and many congressional representatives were trying to close.

The World Trade Organization and associated revisions to international trade law further strengthened patent protection of pharmaceuticals. Then, starting in about 1994, the brand name companies launched into exponential growth by way of direct-to-consumer advertising of prescription drugs for reasons that probably have to do with increasing pressure from generic competition and managed-care companies. Meanwhile, in some industrialized nations, provisions of universal healthcare mean that drug prices are largely controlled by those corresponding governments. Drug companies in those countries have not been allowed such freedom to either set prices for patented drugs or to advertise directly to the consumer. Consequently the U.S. consumer ends up not only paying for the privilege of being advertised to by the drug companies at home in the U.S., but  also subsidize lower drug costs abroad where prices are regulated by those corresponding governments. Put all these factors together and there's little mystery as to why prescription drug costs are spiralling out of control in this country.

About The Author

Melvin J. Howard is Principal of the Howard Group a family office that specialize in Foundations, Trusts, Limited Partnerships, Private Equity, Capital Markets, and Health Care Trade Issues. We are registered federal lobbyist that pursues economic and international public policy initiatives on behalf of U.S. companies with interest abroad, more specifically international global health and trade issues.  He can be reached at Melvin J. Howard  mho wardthehowardgroup@ilike2invest.com

thehowardgroup@ilike2invest.com