Prescription Panic

How the anthrax scare challenged drug patents.

Mike Godwin from the February 2002 issue

(Page 2 of 3)

Thompson also stated, somewhat controversially, that the government lacks current statutory authority to sidestep Bayer's patent. James Love and Ralph Nader promptly co-authored a public letter to Thompson arguing that current law -- specifically Title 28, Section 1498, of the United States Code -- was more than adequate authority for such a move. That law provides for "reasonable and entire compensation" to the patent holder when the United States "uses" a patented invention without a license. Compensation is, however, the only remedy -- the patent holder can't sue to stop the government from using his patent.

PhRMA's Grayson disputes this reading of the law. He calls the statute a provision for "eminent domain" compensation, and says it does not trump the U.S.'s obligation as a WTO/TRIPS signatory to try to work with the patent holder first before even considering breaking the patent.

Complicating matters even more was the question of supply. If the U.S. didn't break its patent, could Bayer's limping pharmaceutical division produce hundreds of millions of Cipro doses on a short timeline? Sen. Charles Schumer (D-N.Y.), a longtime critic of the pharmaceutical industry, didn't think so. On October 16, he issued a press release calling for Thompson's Department of Health and Human Services to go ahead and order up generics. "First, Bayer can only produce so much Cipro," said Schumer. "And we should not put our best response to anthrax in the hands of just one manufacturer. Second, buying Cipro only from Bayer -- who charges a lot more than generic manufacturers would -- means we spend a lot more and receive a lot less."

In Grayson's view, this was "political grandstanding," an opportunistic use of the anthrax scare to promote Schumer's longstanding efforts to make generic drugs more available. Schumer had introduced a bill to increase access to generic drugs last May, along with Sen. John McCain (R-Ariz.).

Grayson says he is more inclined to forgive Thompson his early "I'm a tough negotiator" rhetoric. Nicolas Barzoukas, a partner in the Houston office of the law firm Howrey, Simon Arnold & White, insists that the beleaguered HHS secretary "was never planning to break the patent." Barzoukas' firm represents Merck & Company, the country's second-largest drug company in terms of sales. He argues that breaking the Bayer patent would have had hugely negative consequences in the long term. "The problem," says Barzoukas, "is that you can do it [break a patent] one time, but that kills the incentive for drug companies down the road." The pharmaceutical companies responsible for innovative new drugs need to have control of their patents in order to make the kind of profits necessary to subsidize new research. "Forty percent to 50 percent of pharmaceutical innovation takes place in the U.S.," says Barzoukas.

What's more, Barzoukas says, if Bayer really is unable to produce enough Cipro, the fix is still to contract with Bayer. The company can meet new demand by licensing the patent to other manufacturers. This is the kind of resolution that allows Bayer to maintain the long-term value of its patent, and set prices for Cipro in private transactions, while still meeting the demands of the government during a public health crisis.

Such considerations did not shake the skepticism of some U.S. officials about Bayer's ability to produce Cipro. This feeling was echoed by at least some Canadian officials. In Canada, the campaign against Bayer's Cipro patent rights took a radical turn when Health Canada, the Canadian public health agency, placed an order for generic supplies of Cipro with another company.

What prompted Canada's response? According to Neil Belmore, a partner in the Toronto law firm Gowling, LaFleur & Henderson, the real issue in Canada was less one of a public-policy change than one of a lower-level Health Canada functionary who jumped the gun in placing an order. Belmore represents Bayer AG's Canadian subsidiary and attended an October negotiating session with officials of Health Canada in the agency's Ottawa offices. In the course of discussions it became clear that the Health Canada official who ordered the generic Cipro had departed from longstanding Canadian practice. Canadian law regarding compulsory licensing requires, among other things, prior approval of the ministry of industry's patent commissioner. No such prior approval had been sought, no official emergency had been declared, and the record of communications between Health Canada and Bayer was sufficiently muddled that the agency quickly backed off its order.

In fact, by the end of the negotiating session, the agency had agreed to publish a joint press release with Bayer, acknowledging the validity of the company's Canadian patent (due to expire in 2004). The press release also reaffirmed that Bayer would be Canada's sole supplier of emergency Cipro and would soon provide 900,000 tablets for that country's emergency stockpile. Why, if the government backed down so fast, had it ordered generic Cipro in the first place? Nobody knows for sure, says Belmore, since no senior official will take responsibility for the decision. "I can only speculate as to what internal pressures there were within the government" that might have led to the order, Belmore says. "It was an extremely fluid situation."

The same week Canada announced its resolution, over in the U.S. Thompson proclaimed a negotiating victory. The U.S. would buy Cipro from Bayer at just under $1 per dose, or close to half of the previous standard-to-the-government price. Bayer presented itself as equally upbeat. "We had a professional and satisfactory meeting today with HHS Secretary Thompson and his staff," said Bayer Corp. president Helge Wehmeier just before Thompson's announcement. "Within 10 minutes we came to a handshake agreement," Wehmeier now says.

"It took some time for contracts to be worked out," he adds. "It took 24 hours, and that may sound like a long time, but as [HHS] smilingly told us, it was the fastest time in living memory that they actually drew up a contract." Bayer Corp. also announced that it was tripling its production of Cipro tablets, and that it would ship 200 million tablets over the next three months, with 100 million of those tablets to be purchased outright by the U.S. government at the new negotiated price, and as many as 300 million total set to be purchased by the government.

Did the same factors underlie the apparent turnabouts in both Canada and the U.S.? Perhaps. Bayer AG's assurances that it could meet increased demand for its anthrax drug surely played a role. "We can fully cover the demand for Cipro tablets as defined by the Canadian and the U.S. governments," said Bayer AG chief executive Manfred Schneider on October 23. Schneider acknowledged that even with the discount, the transaction would be profitable for Bayer, whose per-unit manufacturing cost of Cipro is estimated by the Amsterdam-based Health Action International, a drug-policy watchdog group, to be under 5 cents U.S. (Schneider makes a point of adding that Bayer's drug division will still end the year in the red.)

That the drug division is still limping along in spite of what could have been a much larger Cipro windfall is ironic, since the U.S. and Canadian governmental policy has been to use the patent system to create the very possibility of such a windfall -- that is, to make profits that subsidize long-term research and development of new drugs by the pharmaceutical companies. So much for policy, though -- when the anthrax panic gripped Washington and Ottawa, the result was that in both countries Bayer had to give up a huge amount of profit. Put bluntly, Bayer was told -- directly and indirectly -- to cut the government price and get some profit or keep it at its pre�September 11 price and risk losing what are likely to be the two most profitable years of the patent.

Another calming factor: We now know that Cipro isn't the only anthrax remedy out there. Amoxycillin and doxycycline are now known to be equally effective, and some public officials have gone so far as to say that just about every antibiotic currently known will work. But perhaps the primary reason for the governments' sudden turn was the prospect of an important upcoming WTO conference, scheduled for mid-November in Doha, Qatar. On the top of the agenda was the question of abiding by pharmaceutical patents. Western nations planned to argue for upholding their pharmaceutical industries' patents under TRIPS. African nations planned on arguing their right to produce or purchase cheaper generic drugs in response to the AIDS crisis in Africa.

The "Declaration on the TRIPS Agreement and Public Health" that emerged from the Doha meeting had one foot squarely on each side of the dispute. Member nations were reminded that TRIPS permits nations to engage in compulsory licensing of drug patents during public health emergencies. Developing nations were also assured that developed nations would provide them with the technology necessary to take advantage of TRIPS's compulsory-licensing provisions -- such as when a developing nation needs to build a pharmaceutical factory to manufacture its own generic AIDS drugs.