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From the President's Desk

President Weakens Prescription Drug Patent Protection 

Table of Contents

Effective Patent Life
President Addresses Wrong Problem  
Savings Of Generic v. Brand Names 

Incentives Reduced 
Hatch-Waxman Act
Profitability Must Be Maintained
Prescription Drugs Reduce Cost 
Blockbuster Medicines Allow Further R&D 
How A Drug Makes It To Market 
Politically Motivated Resolution 

On October 21, 2002, in a reversal of longstanding policy, President George W. Bush announced that the Food And Drug Administration (FDA) would propose rules to limit the ability of brand-name drug companies to delay or block the sale of generic drugs, which typically cost much less.  Through the President’s actions, the use of patent law to limit brand-name pharmaceutical companies to one 30-month stay per generic application can actually have a negative effect on the long-term health care of Americans.  Although it is expected that Congress will take the issue up next year, agency officials said they did not require Congressional approval for the rules.  A measure to speed approval of generic drugs was approved by the Senate by a 78 to 21 vote in July; the House of Representatives did not take the issue up this session.  (1) 

In a Rose Garden appearance the President said, “By this action we will reduce the cost of prescription drugs in America by billion of dollars and ease a financial burden for many citizens, especially our seniors.” (2) 

Unfortunately, once again the President is doing as he did with steel tariffs — interfering with the free market.    During his remarks the President said that his reforms will yield cost savings of more than $3 billion annually.  But long-term costs are not figured in his equation.  As in the case of steel tariffs, when he micromanaged the steel industry, the price of steel did not go down but instead increased.  Pharmaceutical companies should have the protection of the law on their new and innovative medicines in order to create an opportunity to earn capital to continue further research.  With the President’s plan, the law would favor a generic drug manufacturer who invests very little capital in the production of new medicines.  Furthermore, the majority of drugs that are researched by pharmaceutical companies are unsuccessful and never make it to market.  An enormous expense to pharmaceutical companies is the research and development required to bring brand-name medicines to the market place.  For example, for each successful medicine that makes it to the marketplace the initial research, testing protocols, and the subsequent, often arduous FDA approval process takes an average eight to twelve years.  Currently drug patents last for just 20 years but the period it takes for the FDA approval process amounts to more than 50 percent the effective “lifetime” of existing patent protections. (3)  Generic drug companies are allowed by the 1984 Drug Price Competition and Patent Restoration Act (Hatch-Waxman) to use and test patented drugs and avoid repeating the FDA approval process.  Wrongly, the President’s plan would allow, after just 30 months, generic companies the ability to manufacture a similar drug to the brand-name drug.   

It is unlikely that the President’s proposal or more restrictive legislation that passed the Senate will accomplish the desired results of reducing the cost of prescription drugs to the consumer.  Instead these actions will most likely harm public health and medical progress because they limit the ability of biotech and pharmaceuticals firms to protect products from being replaced by generic versions prior to the patent’s expiration. (4) 

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Effective Patent Life  

Biotech and pharmaceutical companies are not getting an additional 30 months of patent life contrary to the perception of the President’s remarks.  For innovators the average effective patent life or monopoly in fact is only eleven years.  Compared to other industries, even with the 30-month stays that are common, the effective patent life is far less than the 18.5 years afforded.  For example, Paxil an antidepressant, was identified as having five 30-month stays in the Federal Trade Commission (FTC) report but even then it will have less than 15 years of effective patent life. (5) 

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President Addresses Wrong Problem  

Wrongly, the President has placed America’s focus on how brand name manufacturers respond to generic firms that seek to market a copycat product prior to the patent’s expiration.  In the President’s views, he unfortunately has pitted brand-name manufacturers against generic manufactures and has sided with the generic producers  Generic companies are just not allowed to obtain innovator drug trade secrets in order to test, manufacturer and warehouse copycats prior to a patent’s end according to current drug-patent law.  (6)  Generic drug firms are allowed to get an early start in the FDA approval process prior to the original patent expiring by the Bolar provision which refers to an amendment included in the 1884 Hatch-Waxman Act.  (7)  As a result, an incentive is given since it gives a monopoly of its own to the first company to successfully challenge a patent early and the winner gets 180 days in which no other can bring to the market a generic competitor. (8) 

The number of lawsuits seeking to end patents early soared in response to an increase in the number of innovative drugs.  Currently 20 percent of all generic drugs now enter the market through legal attacks on a patent’s life.  In many cases, as soon as a drug hits the market, generic firms are attacking with multiple challenges of the same patent.   As a result, companies like Barr Labs make most of their money from suing drug companies and settling cases instead of selling medicines. (9) 

The FTC ability to find seven products, or eight cases where innovator companies may have received multiple 30-month stays is almost astounding in this litigation-rich environment.  What the President and the Senate have failed to realize is the incentive to sue for early patent termination: the 180-day monopoly of generic drugs is a problem.  (10) 

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Savings Of Generic v. Brand Names 

In the President’s Rose Garden remarks he indicated that generic drugs make America’s health care far more affordable. And generic drugs offer, in the words of the FTC ”significant cost savings over brand name products.”  However, suspect are those assertions.  For example, the reason generic medicines are preferred by HMOs and large corporations is that they are less expensive than newer medicines.  Unfortunately, what is overlooked by this view is the impact on patient health and on total cost of care.  For example, compared to patients who used newer medicines, patients restricted to older generic asthma and anti-depressant medicines become sicker and spend more on hospitals, physicians, and emergency rooms. (11) 

The President’s actions most likely will reduce the number of newer medicines that offer a variety of benefits and fewer side effects to people while enriching HMOs and big corporations. (12) 

Furthermore, consumers often do not experience cost savings as many would like them to believe by purchasing generic drugs.  A thirty-day supply of the generic Prozac, for example, is a prescription that costs drugstores just $2.16 or less.  However, at some retail stores it can cost between $72 and $100.  Also, wholesaling for about $6 is the generic form of the calcium channel blocker Vasotec.  Often marking up the drug to an astounding $40 is Wal-Mart which is a member of a business coalition supporting speedier generic-drug approval. (13) 

The process for generic drugs to reduce the patent of new drugs might be made easier by the President’s proposal.  However, this will not result in significant savings or lead to better health for the consumer.  Investing in additional uses and different forms of new medicines which are increasingly more expensive to develop will be riskier and costlier still as long as the law encourages generic firms to sue early and often take breakthrough biotech and pharmaceutical products off the market.  If the President truly wanted to help the pharmaceutical industry to continue to provide new and innovative life-saving medicines, he would eliminate the 180-day period that generic companies and their attorneys have to pursue new drugs. 

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Incentives Reduced 

Incentives to develop the next generation of medicines would be reduced by weakening drug patents.  A strong environment must be provided for new pharmaceuticals to be developed because innovative drugs can do far more to hold down escalating health care costs and improve the quality of life. 

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Hatch-Waxman Act 

Many generic drug firms were hampered by requirements that their copycat medicines undergo the same extensive FDA process as original brand-name drugs prior to the 1984 Hatch-Waxman Act.  By specifying that generic versions would only have to demonstrate “bioequivalence” to the brand-name drug, a far less costly process, the act changed that.  Ever since the generic industry has thrived.   

The passage of the 1984 Hatch-Waxman Act, which was meant to provide a system of checks and balances in the pharmaceutical industry resulted from the growing importance of pharmaceuticals in medical care and the desire to encourage more competition from the generic industry. (14)   

In retrospect, it is one of those laws that worked well.  Fortunately, enough incentive to continue to invest in research and developing new drugs has been retained by the “innovator” drug companies that create new drugs. For example, in 1985, domestic

R&D spending was $3.4 billion and grew to about $23.9 billion in 2001 representing a seven-fold increase. ( 15)   

However, under Hatch-Waxman the generic industry prospered as well.  According to IMS Health, in 1984 its share of the prescription drug market was 19 percent of the volume and grew to 47 percent in 2000. (16)  Poised to win more than 50 percent of the market are generic drug manufacturers since many brand-name medicines are soon coming off patent.  (17) 

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Profitability Must Be Maintained 

If brand-name manufacturers are to continue the research and development that yields breakthrough medicines, they must remain highly profitable. Only one out of 5,000 compounds that are tested will make it to market making new drug development a high-risk proposition. (18) As a result, in order to attract venture capital, greater risk demands a higher return on investment. 

These profits are often the focus of discussion for opponents of the pharmaceutical industry.  However, there will be less risk taking, and profit margins would have to be even greater over the shorter patent period if drug patents are weakened. 

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Prescription Drugs Reduce Cost 

Prescription medications are the most effective health-care spending done in the United States (U.S.).  As a result of more medicines being available to treat more illnesses, prescription drug utilization has been increasing across all segments of the population. (19)  Increased utilization is responsible for most of the increase that has been the focus of pundents of the pharmaceutical industry in which double-digit percentage increases in drug spending not prices has occurred.  Furthermore, the growing costs and time required to create and develop a drug and get it to market are reflected in the higher prices of many newly patented drugs. But, what is overlooked by many is a much larger reduction in other health-care spending that has resulted from increased drug utilization. 

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Blockbuster Medicines Allow Further R&D 

The additional dollars that are spent on newer brand-name medicines reduced other health-care spending by more than seven times according to the findings of Columbia University professor Frank Lichtenberg who analyzed three years of data from 1996-1998.  And nearly 18 cents of each dollar spent was for research and development (R&D). (20)  Extremely important to the drug industry is profitability of the top-selling “blockbuster” medicines.  To recoup their costs only about three out of 10 drugs brought to market earn enough revenue.  A large share of profits from blockbuster medicines are used to finance continued R&D. 

However, in the near future, researchers will be able to study how certain genes affect an individual’s drug response with the mapping of the human genome.  Physicians will be able to customize individual treatments and avoid deadly reactions to drugs by factors in a patient’s genetic profile. (21) 

As a result, the market for drugs will become more segmented and “blockbuster” drugs may become scarcer as “pharmcogenomics” becomes more developed.  If blockbuster medicines become less common, strong patent protection will be essential. 

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The annual report identifying companies awarded patents in 2001 was recently released by the U.S. Patent and Trademark Office (PTO). (22)  A number of drug companies were on the PTO’s list since patents are essential to maintain the pharmaceutical industry as a provider of life-saving medicines.  In 2001 Bayer, for example, topped the list for pharmaceutical manufacturers having been granted 362 patents. The fewest on the list with 40 patents was AstraZeneca. And Merck was awarded 185 patents, Pfizer 172 and Eli Lilly 115. 

Twenty years is the lifetime of a patent for a new prescription medicine.   Prior to the General Agreement on Tariffs and Trade (GATT) agreement, which created an international standard for patent life, it was 17 years.  However, in drug manufacturing, until a new medicine has gone through clinical trials and has been approved by the FDA, a manufacturer cannot sell it.  The first eight to twelve years of the twenty-year patent life can be used for the research and approval process.  Thus, the drug company that procured the patent and invested the research money has exclusive right to sell the drug, assuming the drug ever makes it to market, and has maybe 10 years or less of useful patient life. 

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How A Drug Makes It To Market 

A new medicine must go through the 10 to 12 year discovery, development and approval process at a cost of more than $800 million to arrive for sale on the market according to studies cited by the pharmaceutical industry. (23) 

Annually, billions of dollars are invested into new, innovative drugs.  Costs are increased as new medicines face numerous hurdles moving from inception to the marketplace. (24) 

First, people are afflicted by medical conditions.  Scientists identify a chemical compound that they believe will be an effective treatment.  Once this is done, a patent is applied for which can take a couple of years prior to being issued.  A deliverable form of the medicine must be found by researchers, and it is tested in animals in most cases.     

Next, the medicine will start proceeding through the human testing process if it appears promising in the animal tests.  Human testing involves a series of three or four clinical trials that may be tested on thousands of patients at various medical centers throughout the nation and in some cases internationally. 

Thousands of medical personnel are involved in these trials that can take six to eight years.  Failure can occur at anytime throughout this process.  Furthermore, to determine if a drug’s active ingredient is effective and if the side effects are acceptable, often it is not until the end of the clinical trials that enough patients are involved.  However, despite the fact that the medicine is not yet on the market, the time on the patent continues to diminish. 

Scientists may be able to adjust the formulation if patients are not responding as researchers had thought.  However, the project sometimes has to be terminated, and researchers have to start all over losing money that is invested as well as time. 

Then, the manufacturer sends thousands of pages documenting the research to the FDA for approval if the medicine makes it through the clinical trails and exhibits to researchers that it is more effective than an inactive substance or placebo.  Although there are ways to expedite the process, it can take more than two years. 

For every 5,000 drugs that appear promising enough to be on animals, only five make it to human clinical trials and only one will actually be approved indicates a 2001 study by economist Joseph DiMasi of the Tufts Center for the Study of Drug Development at Tufts University. 

Just as the price of products for sale in retail stores must reflect the cost of damaged, lost and stolen goods the cost of a medicine that actually reaches the market must incorporate the cost of those that failed. 

To take a new drug from creation to approval, including the cost of other drug failures and the interest lost had the money been invested rather than used for experiments it costs about $231 million (in 1987 dollars) according to a paper published in the Journal of Health Economics by DiMasi in 1991.  Also, it was concluded that it costs about $500 million to get a new drug to market by the Boston Consulting Group (BCG) that extrapolated the DiMasi study a few years later. 

That figure was updated recently by BCG. To get a single drug to market, it was concluded that it takes about $880 million and 15 years based on the BCG firm’s interview of 60 scientists and executives from nearly 50 companies and academic institutions. 

In a new estimate, an average drug takes about 12 years to move through the approval process and costs $802 million per approved drug according to calculations released year in the DiMasi study produced for the Tufts Center. 

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Politically Motivated Resolution 

Once again President Bush is taking action with the pharmaceutical industry as he did with steel tariffs and is interfering with the free market.  And there is no doubt that once the drug patent is weakened, the cost of prescription drugs will increase just like the price of steel.  In the short-term, the President’s actions may lower the cost of some prescription drugs, may clam emotionally-charged individuals (especially seniors) concerned about lower prescription drug cost and may have also helped his party members win office this November.  But in the long-term it will harm the same people it was intended to help.  For example, this action would prevent pharmaceutical companies from recouping the costs of medications that people really need.  Unfortunately the President does not realize that these medicines reduce medical costs like hospitalization.  Furthermore, this action in the long-term would discourage pharmaceutical companies from pursuing life-saving state-of the-art medicines.  On average, each new drug approved during the period 1970 to 1991 saved 11,200 life-years in 1991 estimated Columbia University’s Frank Lichtenberg.   (25).  In fact, less reinvestment in the intensive research and development that creates new and improved drug treatments would result, current drug supplies would tighten, and future breakthrough medicines and treatments might either slow or, in some case never materialize because of the potential loss of revenue and smaller profits margins found in a recent analysis.  (26) 

A rapid erosion of prescription drug innovation and investment will result because of the President’s efforts to erode patent protection.  Patented drug prices will be lowered by accelerating generics to the market but only by simultaneously lowering the return on R&D for new pharmaceutical medicines.  Unfortunately, President Bush has focused on short-term expense to the exclusion of the individual’s long-term health. 

In 2001, health care spending per capita increased at a double digit rate growing 10 percent, for the first time in more than 10 years.  Also, in 2001 reflecting increases in both hospital payment rates and use of hospital service spending on hospital services both inpatient and outpatient escalated by 12 percent.  Accounting for more than 50 percent of the total increase, hospital spending was a key driver of overall cost growth.  Furthermore, overtaken by spending on outpatient hospital services which is the fastest-growing component of total spending was prescription drug spending growth which declined for the second straight year. (27) 

By weakening the prescription drug patent protection, the President fails to realize that federal medical and tax policies that encourage third-party payments is the real problem because insurer’s lack accountability to patients. (28) For example, employees would select from a range of low through high drug-coverage options if they, rather than their employer, purchased their health insurance.  If the individual was satisfied with a generic, they could pay less.  And if they wanted the newest and latest medicines, they could pay more. 

Companies, to reduce costs, prefer to spend less than more and as a result most insurers are beholden to employers.  Therefore, even though it is to the long-term disadvantage of the people it formally insurers, the insurance industry emphasizes lowering short-term costs. (29) 

President Bush in weakening drug patents has only focused on reducing costs that eventually degrades patient care and sacrifices the individual’s health.  Although this effort will benefit the employers and insurers in the long-term, it is detrimental to the patient seeking treatment from an afflicting disease. 

There is no doubt that generic medicines play an important and vital role in America’s health care system, but it should not be at the expense of brand-name medicines.  These drugs continue to make America’s pharmaceutical industry the world’s leader in providing state-of-the art medicines that pro-long the life of many that in the past would have died while simultaneously reducing the cost of treatment to those afflicted by disease.

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1.Steve Mitchell, Senate passes generic drug bill,” United Press International, July 31, 2002. 

2. Robert Pear, “Bush Seeks Faster Generic Drug Approval,” The New York Times,” October 22, 2002. 

3. Merrill Matthews, Jr., Ph.D., “ Patient Protection for Me, But Not for You,” Institute for Policy Innovation, June 14, 2002. 

4. Robert M. Golberg,” Patently Absurd No panacea from the White House,” National Review Online, October 24, 2002. 

5.  Ibid. 

6. Ibid. 

7. Nina Owcharenko, “Why Patchwork Senate Drug Bills are No Substitute for Medicare Reform, WebMemo#128, The Heritage Foundation, July 18, 2002. 

8. Robert M. Golberg,” Patently Absurd No panacea from the White House,” National Review Online, October 24, 2002. 

9. Ibid. 

10. Ibid. 

11. Ibid. 

12.     Ibid. 

13.     Ibid. 

14.     Merrill Matthews Jr., Ph.D.,  “Patent Protection For Me, But Not For You,” Institute for Policy Innovation, June 14, 2002. 

15.     Ibid. 

16.      Ibid. 

17.     Tom Abate, “Drug Industry Wants to Protect Patents, Avoid Price Controls,” The Washington Post, April 25, 2002. 

18.     Chris Middleton, “Weakening Drug Patents Will Kill Off Medicines And Patients,” Health Policy Prescriptions, Vol1, No.9, Pacific Research Institute, September 2002. 

19.     Merrill Matthews Jr. , Ph.D., “Patent Protection For Me, But Not For You,” Institute for Policy Innovation, June 14, 2002. 

20.     Chris Middleton, “Weakening Drug Patents Will Kill Off Medicines And Patients,”  Health Policy Prescriptions, Vol1, No.9, Pacific Research Institute, September 2002. 

21.     Ibid. 

22.     Merrill Matthews Jr., Ph.D., “Patent Protection For Me, But Not For You,” Institute for Policy Innovation, June 14, 2002. 

23.     Merrill Matthews Jr., Ph.D., “From Inception To Ingestion: The Cost Of Creating New Drugs,” Institute For Policy Innovation, September 9, 2002. 

24.     Ibid. 

25.     Doug Bandow, “Fighting the Patent Wars,” The Washington Times, July 12, 2002. 

26.      Nina Owcharenko, “Why Patchwork Senate Drug Bills are No Substitute for Medicare Reform, WebMemo#128, The Heritage Foundation, July 18, 2002. 

27.     Doug  Bandow, “Interest-Group Battles. Of drugs and patents,” National Review Online, November 13, 2002. 

28.     Ibid. 

29.     Ibid.

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